The Income Tax Appellate Tribunal (ITAT) Indore bench ruled that surplus cash discovered during a survey should not be categorized as taxable under the business income. Instead, it falls under the purview of a higher tax rate as specified in Section 1158BE of the Income Tax Act, 1961.

The taxpayer, Brij Mohandas Devi Prasad, operates as a partnership firm engaged in the retail trade of gold and silver items. Following a survey on the assessee’s premises, and after obtaining a statement from the partner, the tax authority determined both excess stock and surplus cash.

Subsequently, while filing the return for the relevant assessment year, the assessee dutifully adhered to the partner’s disclosure and reported an additional income of Rs 3,03,37,828/-. This income was categorized as “Business Income” under Section 28 of the Income Tax Act, and taxes were paid at the standard applicable rate for business income.

In the course of the assessment proceedings, the Assessing Officer (AO) noted that the assessee had not categorized the surplus cash as unexplained funds according to section 694 of the Income Tax Act. Subsequently, the AO applied a higher tax rate under Section 1158BE of the Income Tax Act, determining that the cash should not be taxed under the category of Business Income.

Displeased with this decision, the assessee raised objections with the Commissioner of Income Tax (Appeals) [CIT(A)], who upheld the AO’s ruling. Following this, the assessee appealed the decision once again, this time before the tribunal.

In front of the tribunal, Kunal Agrawal, the Counsel for the assessee, presented the argument that the excess cash uncovered during the survey was promptly acknowledged by the assessee’s partner. They had also confessed to an additional undisclosed income alongside the regular income for the fiscal year 2017-18, and the appropriate taxes had been duly paid.

Furthermore, the counsel contended that the survey officer simply requested the assessee to clarify the variance, and the partner readily acknowledged it as ‘additional undeclared income’ alongside regular earnings. This doesn’t necessarily imply that the ‘additional undeclared income’ originated from undisclosed or unfamiliar origins.

In opposition, Ashish Parwal, representing the Revenue, asserted that during the survey, the assessee’s partner did not affirm that the surplus cash represented earnings from their business.

The tribunal noted that during the survey, the partner explained the disparity in connection with purchases and confessed his inability to account for the remaining difference of Rs. 5,82,644/-, which is evident from his initial statement.

After careful examination of the facts and arguments presented by both parties, the two-member bench comprising 8 M. Biyani (Accountant Member) and Vijay Pal Roo (Judicial Member) affirmed the validity of the lower authorities’ decision to categorize the surplus cash as deemed income under Section 694. This action invoked a higher tax rate as per Section 115BBE of the Income Tax Act. Consequently, the excess cash cannot be categorized under the umbrella of business income.

Therefore, the bench’s judgment landed unfavorably for the assessee, tipping the scales against their favor.

Verdict Against Assessee

~Navneet Shukla