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Treatment of Excess stock found in survey

What would be the treatment given to value of excess stock found during survey conducted In the business premises, if there is loss in business during the year? This question haunts the minds of the tax officers. Many assessees adjust the value of excess stock found in survey against business loss at the same year and do not pay any tax as no net income is left. Sometimes the assessee makes investment in plant or machinery in the current year and adjusts the value of excess stock against the depreciation on such assets. Whether this kind of adjustment is in accordance with the provisions of the Income-tax Act? For giving an answer to this question. it is necessary to read certain provisions of the Act more carefully. 
2. Value of unaccounted assets is subject to tax under the deeming provisions of the income tax Act. Attention is drawn to the provisions of section 69 which reads as under: 
“Where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him or any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not in the opinion of the Assessing Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year”. 
it may be mentioned here that the value of unaccounted stock found during survey is chargeable to tax as deemed income of the Financial Year in which such stock is detected under the provisions of section 69 and not under section 69B. Under section 69B the assets in question are money, bullion, jewellery, etc. 
3 The next question is whether income disclosed on account of value of excess stock can be adjusted against business loss of the same year or can it be set off against brought forward business loss of the earlier years And whether, such income can be adjusted against loss under any other head Income? 

The answer to this question can be found in the Income-tax Act Itself Adjustment of loss of one head against income under another head is governed by the provisions of section 71 of the Income-tax Act. This section lays down the procedure for setting off of loss suffered under one head against income under another head. However, the deemed Income is not an income computed under any particular head of income. Therefore, the question of adjusting deemed income against loss of the current year or even the brought forward loss of earlier years is not in accordance with the provisions of the Act and, therefore, it is not permissible. Such claims should be rejected accordingly. 
4. This interpretation is also supported by the provisions of section 14 of the Income-tax Act which enumerates the heads of income. Under this section income for the purpose of incom-tax is to be computed under heads marked a to f under Ch. IV. However, the opening words of this section provides that there may be income chargeable to tax beyond these heads of income. This Issue was discussed at length by the Gujarat High Court in the case of Fakir Mohamed Haji Hasan vs. CIT [2001] 247 ITR 290. 
5. In this case, unaccounted gold was seized by the income-tax department. This gold was subsequently confiscated by the Department of Customs. The Assessing officer brought to tax the value of unaccounted gold as deemed income. The assessee claimed that since the entire quantity of unaccounted gold was confiscated by the Department of Customs, the assessee should be allowed deduction of the entire amount leaving no income for charging income-tax. The assessing officer did not agree to this contention. The taxability of Income was in respect of unaccounted investment. The entire amount of investment was chargeable to tax as deemed income. The matter went to the Gujarat High Court. The High Court held as under
'The opening words at section 14 ' save as otherwise provided by this act' clearly leave scope tor “deemed income” of the nature covered under the schema of sections 69, 69A, 69B 
income is not Income from salary, or profits and gains at business or profession or capital gains nor is it Income from other sources” because the provisions of sections 69 69A 69B and 690 treat unexplained investments, unexplained money  bullion, etc , and unexplained expenditure as deemed income where the nature and source of investment, acquisition or expenditure, as the case may be, have not been explained or satisfactorily explained. Therefore, in these cases, the source not being known, such income wilI not fall even under the head 'income from Other Sources'. Therefore, the corresponding deductions which are applicable to the incomes under any of these various heads, will not be attracted in the case of deemed incomes which are covered under the provisions of sections 69, 69A, 69B and 69C of the Act in view of the scheme of those provisions". 
6. Similar issue arose before the Chhattisgarh High Court recently. Survey action was conducted in the business premises of M/s. Dhanush General Stores and excess stock valued at Rs.89.000 was detected. The Assessing Officer brought to tax this amount as deemed income under section 69B of the Income-tax Act. The matter went to the High Court. The High Court observed 'If there is undisclosed investment in bullion, jewellery or other valuable articles, which are not fully disclosed in the books of accounts case would fall under the ambit of section 69B of the Income-tax Act, 1961. In the case on hand, there was excess stock, which can be held as unexplained investment, not investment in building bullion, jewelry or other valuable articles. In the entire survey, it was not found that any bullion, jewellery or other valuable articles has been found. The common articles cannot be heId as other valuable articles' The court further held 'The surrendered income ought to have been treated as deemed income under the provisions of section 69 of the Income-tax Act, 1961, however, on the wrong provision applied in the assessment order though the effect is one and the same the surrendered income cannot be held that it was not an income under the provisions of section 69 of the I. T. Act. 1961.‘ 
7 The assesses had credited the value of excess stock to the tracing account. ‘The Assessing Officer has not considered the value of excess stock as business income The ITAT approved the AO's decision The High Court held 
'Since the Income surrendered was shown in the trading account but not in the computation of income for the purpose of taxation. It cannot be held that the observations of the Income-Tax Appellate Tribunal that the amounts should not be treated as business Income is unsustainable' 
Dhanush General Stores vs. CIT [2011] 339 ITR 651 [Chhattisgarh] 
The court thus approved the action of the Assessing Officer who deducted the value of excess stock from net profit as shown in P&L A/c and made addition of this amount separately in the computation of total income. 
8. Thus. on careful perusal of sections 14,69 and 71 of the Income-tax Act following conclusions would follow. 
a) The value of excess stock found during survey is chargeable to tax as deemed income at the Financial Year in which it is detected. 
b) This deemed income is not to be computed under any heads of income mentioned in section 14 of the Act. This deemed income is to be shown separately In the computation of total income. 
c) The deemed Income brought to tax u/s.69. 69A. 69B and 69C is not computed under any particular head of Income and it cannot be adjusted against business loss or loss suffered under any other head of 
Income. Deemed income also cannot be set all against brought forward losses or brought forward depreciation. 
9. It may also follow that the addition made u/s 68 of the I. T. Act, 1961 would also deserve similar treatment as this section is also not included in any particular head of income and is at par with sections 69. 69A. etc. The Assessing Officer may make addition in respect of unproved cash credit separately in the computation of total income.