Unaccounted Stock Commingled with Business Inventory

Unaccounted Stock Commingled with Business Inventory Is Business Income, While Unreconciled Excess Cash Remains Unexplained Money

Issue

Whether excess physical stock of traded goods found during a survey and commingled with regular inventory should be assessed as business income or as unexplained investment under Section 69, and whether Section 115BBE applies?
Whether unreconciled excess cash found during a survey remains taxable as unexplained money under Section 69A subject to Section 115BBE, even if the assessee has only one source of business income?

Facts

Assessee Profile: The assessee is a partnership firm engaged in the trading of lungis.
Survey Action: A survey under Section 133A was conducted at the business premises, revealing discrepancies in stock, cash, and sales.
Surrender & Return Filed: The assessee’s partner initially agreed to offer additional income of ₹3.37 crores, but the firm filed its return of income declaring ₹10.44 lakhs.
AO Disallowances: The Assessing Officer (AO) made additions for profit on suppressed sales, unaccounted stock, unexplained creditors, and excess cash.
CIT(A) Relief & Telescoping: The Commissioner (Appeals) confirmed the profit on suppressed sales and unexplained creditors, but reduced the unaccounted stock addition after granting telescoping benefit.
Surviving Stock Characteristics: The surviving addition towards unaccounted stock represented lungis—the exact commodity traded by the assessee—found commingled with regular inventory without separate registers.
Unreconciled Cash Details: An excess cash amount of ₹1.66 lakhs remained unaccounted for even after adjusting for unrecorded physical cash expenses and reconciling the physical balance against book records.

Decision

On Unaccounted Stock: The surviving addition for unaccounted stock is to be assessed as business income, not as unexplained investment under Section 69. Consequently, higher tax rates under Section 115BBE do not apply to this stock.
On Unreconciled Excess Cash: The excess cash of ₹1.66 lakhs was rightly assessed as unexplained money under Section 69A (attracting Section 115BBE).
Distinction Between Assets: Excess stock commingled with business inventory forms part of business operations, whereas unreconciled physical cash represents a distinct residual asset that remains unexplained money even if the assessee has a single source of income.

Key Takeaways

Commingled Inventory as Business Income: Unaccounted stock of goods regularly traded by an entity and found mixed with regular inventory at business premises represents business income rather than unexplained investment under Section 69.
Exclusion from Section 115BBE: When excess stock is characterized as business income, the penal tax rate under Section 115BBE cannot be invoked.
Strict Characterization of Residual Cash: Excess cash that remains un-reconciled after physical verification and accounting adjustments retains its character as unexplained money under Section 69A, regardless of whether the business is the assessee’s sole source of income.

IN THE ITAT CHENNAI BENCH ‘C’

Duraisamy Baskarraj

Deputy Commissioner of INcome-tax

Manu Kumar Giri, Judicial Member
and Ms. Padmavathy S, Accountant Member

IT Appeal Nos. 4217, 4227, 4228 and 4229 (CHNY) OF 2026
[Assessment years 2020-21]

SEPTEMBER 17, 2026

S. Sridhar, Adv. for the Appellant. K. Shivalingam, Addl. CIT for the Respondent.

ORDER

1. These appeals by different assessees are against the separate orders of Commissioner of Income-tax (Appeals) (in short “CIT(A)”), Chennai-20, passed u/s. 250 of the Income-tax Act, 1961 (in short “the Act”) all dated 08.07.2026 for AYs 2020-21. The issues contended by all the assessees’ are common and hence these appeals are heard together and disposed of by this common order for brevity.

2. For the purpose of adjudication, we will consider the appeal of the assessee in ITA No. 4227/Chny/2026. The assessee is a firm engaged in trading in Lungi. A survey u/s. 133A of the Act was conducted in the group concerns on 06.02.2020 in their business premises including the assessee. During the course of survey statement of Shri. Baskarraj Duraisamy, one of the partners of the assessee was recorded. During the survey certain discrepancies were noticed with respect to the stock, sales etc. For the assessment year 2020-21, the assessee filed the return of income on 30.11.2020, admitting a total income of Rs.10,44,100/-. During the course of statement recording, Shri. Baskarraj Duraisamy has stated a sum of Rs.3,37,15,107/- will be offered as income for the assessment year 2020-21 over and above the income from business as admitted already. The Assessing Officer based on the findings during the course of survey and based on the statements recorded made the following additions while completing the assessment.

(i)	Profit estimated at 1.75% on supressed sales	– Rs. 2,50,514/-
(ii)	Unaccounted stock	– Rs.57,95,627/-
(iii)	Unexplained creditors	– Rs.32,35,870/-
(iv)	Unexplained cash	– Rs. 1,65,593/-

3. Aggrieved the assessee filed further appeal before the CIT(A). The CIT(A) confirmed the profit estimated on supressed sales and unexplained creditors. With regard to addition towards unaccounted stock, the CIT(A) held that the profit estimated and the amount treated as unexplained creditors are to be considered as source for acquiring unaccounted stock and accordingly, the CIT(A) reduced the addition to Rs.23,09,243/- (Rs.57,95,627/- – Rs.32,35,870/- – Rs.2,50,514/-). With regard to cash found during the time of survey, the CIT(A) sustained the addition. The assessee is in appeal before the Tribunal against the order of the CIT(A).

4. During the course of hearing, the ld.AR submitted that the only issue contended by the assessee with regard to the various additions made is that the entire addition is made out of the discrepancies found in the books of accounts during survey and therefore, the addition cannot be treated as unexplained. The ld.AR further submitted that the assessee has offered the business income on estimated basis without considering the books of accounts and therefore, the addition could at best be made u/s. 28 of the Act and not u/s. 68 of the Act. The ld.AR also submitted that the only source of income for the assessee is from the business and therefore, the unaccounted stock, sales etc pertain to the business of the assessee. The ld.AR therefore, argued that since the entire findings of the survey are arising from the business of the assessee, the addition made u/s. 68/69 of the Act to levy tax u/s. 115BBE of the Act is not justified.

5. The Ld. DR on the other hand argued that the additions made by the AO is based on the survey and hence the treatment of the unaccounted items as unexplained to taxed u/s.115BBE is rightly done by the AO. Accordingly, the Ld. DR relied on the orders of the lower authorities.

6. We heard the parties and perused the material on record. The sole contention urged before us is that the additions sustained by the CIT(A) ought to be assessed as business income of the assessee, since the assessee has no source of income other than its trading business in lungis. We notice that the practical effect of this contention, if accepted, is that the additions would fall outside the special rate of tax prescribed u/s.115BBE of the Act which applies specifically to income referable to Sections 68, 69, 69A, 69B, 69C and 69D, and the assessee’s plea would instead have such income taxed as ordinary business income. We are of the view that this contention cannot be accepted as a blanket proposition applicable uniformly to every addition. Further each addition must be examined on its own facts, to see whether it genuinely represents unaccounted income of the very business carried on, or a distinct asset or liability that happens to have surfaced during the survey of that business. In this regard, the principle that would be applied is that where an excess asset found during survey is of the same nature as the goods regularly traded by the assessee and is commingled with the regular stock without any means of separating what is disclosed from what is not, then such excess may be regarded as unaccounted business income. However, this reasoning cannot be extended to every item merely because the assessee carries on only one business, or because a part of its income has been estimated. In our view where an item is capable of independent identification and verification as a discrete asset or liability, distinct from the ordinary trading stock, the existence of a single business does not by itself convert an otherwise unexplained item into business income.

6.1 When we apply the above narrated principles to the facts before us in assessee’s case, we notice that the addition towards unaccounted stock, to the extent it survives after the telescoping already granted by the Ld. CIT(A), represents excess stock of lungis, the very commodity traded by the assessee. This stock was found commingled with the regular stock at the business premises, where no separate stock register was maintained to distinguish disclosed from undisclosed stock. We further notice that the Ld. CIT(A) has himself recognised a business nexus for this addition, by treating the unexplained credits and the profit on suppressed sales as a source for part of the unaccounted stock. We are therefore of the view that the surviving addition of Rs.23,09,243/- is to be assessed as business income and not as unexplained investment u/s.69 of the Act, and consequently, Section 115BBE of the Act would have no application to this sum.

7. As regards the addition of Rs.1,65,593/- towards unexplained cash, we notice that the Ld. CIT(A) has recorded a specific finding that books of account were in fact being maintained by the assessee. The CIT(A) has further recorded that the excess cash was arrived at through an actual reconciliation of the physical cash found against the book balance, after allowing for cash expenses not recorded in the books. Therefore, we are of the view that this is not an asset commingled with and indistinguishable from the regular business holdings, but a specific, quantified residual that could not be reconciled even after this exercise. In such a scenario the assessee having only one source of income does not, by itself, convert this residual into business income. We accordingly hold that this addition continues to be rightly assessed as unexplained money u/s.69A of the Act.

8. As regards the addition of Rs.32,35,870/- towards unexplained creditors, we notice that this does not represent an asset acquired for the business, but a liability appearing in the books. It is relevant to mention here that on the assessee’s own admission during the survey, part of these liabilities had already been discharged outside the books. We are of the view that such credit entries require independent explanation as to their nature and source, regardless of how the assessee’s trading profit has been computed or estimated. Further the fact that a part of the income stands estimated does not absolve the assessee of explaining specific credit entries in its books, and we accordingly hold that this addition continues to be rightly assessed u/s.68 of the Act. In view of these discussions, we hold that to the extent of the addition of Rs.23,09,243/- towards unaccounted stock, is to be assessed as business income of the assessee. With regard to the additions of Rs.1,65,593/-u/s.69A and Rs.32,35,870/- u/s.68 of the Act, we see no infirmity in the decision of the CIT(A) in holding that both are to be governed by Section 115BBE of the Act. The grounds raised by the assessee are partly allowed.

ITA Nos.4217, 4228 and 4229/Chny/2026

9. The additions sustained by the CIT(A) in the case of other assessees is tabulated as under –

Nature of Addition	Duraisamy Baskarraj (ITA No.4217/Chny/2026)	Subraaniam Duraisamy (ITA No.4228/Chny/2026)	SRS Trading Company (ITA No.4229/Chny/2026)
Suppressed sales (profit on undisclosed sales)	Rs.77,889/-	—	Rs.2,96,245/-
Unaccounted stock u/s.69 (after telescoping)	Rs.1,96,602/-	Nil (fully telescoped against unexplained creditors)	Rs.33,01,257/-
Unexplained creditors u/s.68	Rs.5,31,300/-	Rs.12,16,930/-	Rs.1,07,34,790/-
Unexplained cash u/s.69A	Rs.23,023/-	Rs.27,166/-	Rs.4,09,504/-

10. We notice that the additions arising in ITA Nos.4217, 4228 and 4229/Chny/2026 emanate from the very same survey conducted in the SRS group of concerns. Further from the perusal of the above table, it is clear that the nature of the additions considered by us in ITA No.4227/Chny/2026, are identical where the Ld. CIT(A) has granted telescoping on the same basis in each case. The assessees in these three appeals also have not challenged the quantum of any addition, and have confined their submission, as in ITA No.4227/Chny/2026, to the limited plea that the additions ought to be assessed under the head business, since none of them has any other source of income. Considering the overall facts and circumstances we are of the view that our decision in ITA No.4227/Chny/2026, is mutatis mutandis applicable to the other three assessee’s case also. Therefore, we hold that the addition towards unaccounted stock surviving after telescoping, being Rs.1,96,602/- in the case of Duraisamy Baskarraj and Rs.33,01,257/- in the case of SRS Trading Company, is to be assessed as business income of the respective assessee. As regards the additions towards unexplained creditors u/s.68 and unexplained cash u/s.69A sustained in each of the three appeals, we see no infirmity in the decision of the Ld. CIT(A) in sustaining the same, for the reasons already recorded by us in ITA No.4227/Chny/2026, and these additions shall continue to be governed by Section 115BBE of the Act. The grounds raised by the appellants in ITA Nos.4217, 4228 and 4229/Chny/2026 are accordingly partly allowed.

11. In the result, the appeals of all the assessees are partly allowed.