When a surrender is made to resolve a discrepancy, the provisions of section 115BBE are not applicable

Fact and issue of the case

Briefly, the facts on record are that the appellant is an individual engaged in the business of trading of furniture and the appellant had filed return of income for the AY 2019-20 on 30.10.2019 at a total income of Rs. 1727530/- and that a survey operation u/s 133A was conducted on 26.02.2019 and stock of Rs.54,94,959/- was found as against stock of Rs. 48,68,459/- as per Books of Account. Thus, an excess stock of Rs.6,26,500/- was found. The assessment for the Ay 2019-20 was completed u/s 143(3) by invoking the provisions of section 115BBE on excess stock amounting to Rs. 6,26,500/- as alleged by the department. Further, the assessee has also offered Rs. 10,00,000/- on account of noting’s in respect of repair to building for which is not under dispute.

The appellant has preferred an appeal before the CIT(Appeals) on the limited issue of whether provisions of section 115BBE can be invoked on the alleged excess stock. The CIT(Appeal) dismissed the appeal of the assessee vide order dated 13.10.2021 passed u/s 250(6) on the ground that the assessee has himself offered a sum of Rs. 626500/- in the balance sheet and as such, the stand of the department was correct. The CIT(A) confirmed the action of AO invoking provisions of section 115BBE by observing that once the assessee has voluntarily surrendered the income, and included the same in ITR and paid taxes. This act of the assessee validates the action of department that the assessee was having undisclosed income offered for tax at Rs 6,26,500/-.

The Ld. AR explained before us that in reality, there was no excess stock and in fact, there was shortage of stock. The AR submitted that the Department prepared total stock inventoried at Rs.54,04,959/- including stock of sister concern Prabhat Traders to the tune of Rs.13,87,700/- and thus, the actual stock related the appellant was only to the tune of Rs.4107259/-. Therefore, this is a case of shortage of stock to the tune of Rs. 7,61,200/- [Stock as per books of accounts Rs.48,68,459/- Less stock found Rs.41,07,259/-].

The Ld. AR contended that the CIT(A) has erred in confirming the order of the AO as there was no excess stock and entries made in the books of accounts cannot be taken as conclusive to invoke the provisions of section 115BBE. It was also clarified by the AR that the appellant had offered a sum of Rs. 626500/- in the return of income as against the GP element worked out at 32% on shortage of stock of Rs. 761200/- which comes out to Rs. 243584/-. Therefore, it can be a case of shortage of stock and the balance amount of Rs. 382416/- i.e. Rs. 626500 (-) Rs. 243584 at the most can be said to be offered to cover any other discrepancy and by no stretch of imagination the provisions of section 115BBE can be invoked.

Observation of the court

We have heard the rival submissions, perused the material on record, written submission and impugned order. Admittedly, it is undisputed fact on record that the total stock as inventoried by the department at Rs.54,94,959/- includes the stock of sister concern ‘M/s Prabhat Traders’. Therefore, the physical stock found during the survey, pertaining to the appellant was amounting to Rs.41,07,259/- and not Rs.54,94,959/-. Thus, it is a case of shortage of stock to the tune of Rs.7,61,200/- as contended by the AR and not objected by the department. It was also submitted by the AR that the assessee had offered Rs.6,26,500/- in the return of income under the head ‘profit and gains from business and profession’ which is evident from copy of trading account (APB, Pg. 20).

The Ld. CIT(A) has confirmed the action of AO on the ground that once the assessee has voluntarily surrendered the income and also included the same in ITR and paid taxes and therefore, the AO has rightly made the addition by applying the provisions of section 115BBE on the alleged excess stock of 626500/-. In response to the same, the AR submitted that the provisions of section 69 is not applicable in the present case, as the three jurisdictional conditions required for the purpose of invoking the provisions of section 69 were not satisfied by the AO.

During the hearing, the AR drew the attention of the bench on the fact that the CIT(A) has nowhere contradicted the stand of the assessee that there was actual shortage of stock of Rs 7,61,200/- instead of excess stock of Rs 6,26,500/- as computed by the AO. The AR relied upon the circular issued by CBDT dated 11-4-1955, 14(XL-35) wherein the Board ordered that the officers of the Income-tax should not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist the taxpayers in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard, the officer should take the initiative in guiding a taxpayer, where proceedings or other particulars before them indicate that some refund or relief is due to him. The circular is enclosed at page no. 143-146 of paper book.

In the case of ‘M/S BAJAJ SONS LTD. VERSUS THE DCIT’, CENTRAL CIRCLE-III LUDHIANA 2021 (5) TMI 956 it has been held that provisions of section 115BBE are not applicable where Surrender is made to cover any discrepancy.

Considering the factual matrix and judicial precedent cited, the action of the lower authorities in invoking provisions of Section 115BBE on the surrender income is perverse to the facts on record and held to be bad in law. Therefore, the AO is directed to compute the said surrendered income under normal provisions as applicable to the business income of the assessee. 22. In the result, the appeal filed by the assessee is allowed.