Income Tax--Current Issues

Practice Update

V.K. Subramani

TAX CONSEQUENCE OF INVENTORY ADMITTED IN A SURVEY UNDER SECTION 133A

One of the weapons used by tax administration to detect tax evasion by the taxpayers is conducting survey in exercise of the powers conferred by section 133A. The taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 has substituted the proviso w.e.f. 1-11-2020 such that no survey under section 133A could be made without the approval of the Pr. DGIT or DGIT or Pr. CCIT or CCIT. This in a way puts the responsibility for justifying a survey action with very high tax official which would mean that it would be resorted to in deserving cases only.

Invariably when survey is conducted in business premises, cash and inventory are verified besides any significant transaction about which the Department may have some specific information. Conclusion of survey is signified by recording a sworn statement which the courts have repeatedly held that they have no evidentiary value [CIT v. S. Khader Khan Son (2013) 352 ITR 480 (SC) : 2012 TaxPub(DT) 3088 (SC)]. There are also decisions to say that an addition cannot be made merely relying on the admission given during survey.

One of the possible areas of controversy is about inventory. The difference in inventory could be ascertained comfortably if the books of account are kept up to date and actual inventory is compared with those reflected in the books of account. However, in many cases there could be stock for which inventory records are not updated and Revenue to justify their survey action take admission from the taxpayer that there is difference in inventory.

Assessees have to be cautious about the statement recorded in a survey under section 133A in spite of the legal position that the statement has no legally binding force. If there is a definite finding of (paid) stock which is not accounted in the books, it is well justified to admit the same as income. On the other hand, if there is no definite finding of unaccounted inventory, it is better to admit in the statement by stating that there could be discrepancy in valuation of inventory or a factual statement that there is no unaccounted inventory. This would benefit the taxpayer in the later stages of assessment, in case, Revenue assesses the inventory so admitted under section 115BBE and whereas the assessee would have agreed for the admission in belief that it would be taxed as regular business income liable to tax at the normal rates.