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Facts
During a survey, the assessee admitted unaccounted excess stock of Rs. 1,01,16,156/- and offered it as current year's business income. The Assessing Officer (AO) completed the assessment under Section 143(3) by accepting this income as regular business income. Subsequently, the PCIT invoked revisional powers under Section 263, contending that the AO's order was erroneous and prejudicial to the revenue for not taxing the excess stock under Section 115BBE of the Act, which imposes a higher tax rate.
Held
The Tribunal found that the AO had conducted proper inquiries and taken a plausible view by taxing the excess stock as regular business income, as the stock pertained to the assessee's business activity, and the assessee had explained its nature and discrepancy. Citing the Malabar Industries case, the Tribunal ruled that the AO's order was neither erroneous nor prejudicial to the revenue, thus the jurisdictional conditions for invoking Section 263 were not met. Therefore, the PCIT's order was quashed.
Key Issues
Whether the PCIT was justified in invoking revisional powers under Section 263 on the grounds that the Assessing Officer erred by not taxing admitted excess stock under Section 115BBE instead of as regular business income, and whether the AO's order was erroneous and prejudicial to the revenue.
Sections Cited
263, 143(3), 115BBE, 69, 69D, 133A, 142(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
Before: DR. ARJUN LAL SAINI & SHRI DINESH MOHAN SINHA
O R D E R PER DR. A. L. SAINI, AM: By way of this appeal, the assessee has challenged the correctness of the order passed by the Learned Principal Commissioner of Income Tax (in short ‘the PCIT’), under Section 263 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’), dated 21.02.2024, for the Assessment Year (in short ‘A.Y.’) 2019-20.
The grievances raised by the assessee are as follows:
The learned Pr. CIT has erred in law and on facts in holding that the order u/s. 143(3) dt. 16-09-2021 is erroneous in so far as it is prejudicial to revenue on the ground that tax was not charged u/s. 115BBE of the Act and in setting aside the said assessment with a direction to revise the same after giving proper opportunity to the appellant.
2. The learned Pr. CIT has also erred in law and on facts disregarding the facts available on record that the assessment dt. 16-09-2021 was made after specific inquiry and after obtaining the appellant's explanation as regards applicability of S. 115BBE of the Act, and therefore S.263 of the Act was not attracted.
3. The learned Pr. CIT has further erred in law and on facts in invoking the revisionary jurisdiction u/s.263 of the Act ignoring the fact that the record of the case available for perusal did not show assessment of income that warranted charging of tax u/s. 115BBE of the Act.
4. On the facts and in the circumstances of the case and in law the learned Pr. CIT ought to have dropped the proceedings u/s. 263 of the Act, and ought not to have set aside the assessment.
5. It is therefore prayed that the order u/s. 263 may be cancelled. 6. Your appellant craves leave to add, amend, alter or withdraw any ground of appeal at the time of hearing.”
Brief facts, as discernible from the orders of lower authorities are that assessee has filed return of income on 19/09/2019, declaring total income of Rs. 1,07,90,090/-, (which includes the amount of Rs. 1,01,16,156/- disclosed during the survey proceedings as unaccounted excess stock under business head) for the assessment year under consideration. Thereafter, assessment order u/s 143(3) of the Income-tax Act (in short 'the Act') was passed on 16/09/2021, by accepting returned income, that is, Rs. 1,07,90,090/-.
Later on, Learned Principal Commissioner of Income Tax (in short ‘the PCIT’), has exercised his jurisdiction under Section 263 of the Income-tax Act, 1961. The Ld Principal Commissioner of Income Tax, on verification of records of the assessee, for the assessment year, under consideration, it was noticed that during the previous year, a survey proceedings u/s 133A of the Act was conducted at the business premises of the assessee. As on date of survey, difference in the valuation of stock was found in physical stock and as recorded in the books of account of the assessee. Accordingly, in the statement recorded during the survey proceedings, conducted u/s 133A of the Act, the partner of the assessee- firm, has admitted the same excess stock, as unaccounted income which was not recorded in the books and accounted as on the date of survey, and agreed to offer this income as current year's income over and above the regular business income of the current year. However, the manner of earning of the same has not been admitted / explained by the assessee at the time of survey proceedings u/s 133A of the Act and as also during the course of assessment proceedings. As such unaccounted excess stock was required to be taxed as per the provisions of section 69 r.w.s. 115BBE of the Act. However, the assessing officer has failed to do so and has taxed such additional income as regular income of the assessee. The assessing officer failed to examine these aspects of the assessee's case while finalizing the assessment order. Such failure on the part of assessing officer rendered the assessment order passed u/s 143(3) of the Act, on 16/09/2021, for the AY 2019-20, erroneous in so far as it is prejudicial to the interest of the revenue within the meaning of the provisions of section 263 of the Act.
Therefore, the Ld. PCIT issued a show -cause notice u/s. 263 of the Act, dated 05.02.2024, to the assessee, to explain the transaction, the contents of the said show -cause notice is reproduced by ld. PCIT, at page No.2 to 4 of his revision order, wherein PCIT stated that assessee has not explained the nature and source of the excess stock, and assessing officer has failed to examine the nature and source of the excess stock.
In response to the show -cause notice of the Ld. PCIT, the assessee has submitted online reply on 10/02/2024, which is reproduced below:
"With respect to the above referred notice we would like to submit that during the course of assessment proceedings we have made all the submissions with the assessing officer which the assessing officer has called for. The Ld. assessing officer has in his Show cause notice taken the point of taxing the income disclosed during the course of survey u/s 115BBE. In response to the same we have replied and the Ld. assessing officer has considered the reply and after satisfying with reply he has come to the conclusion and taxed the income at normal rates as regular business income. The Ld assessing officer has relied on the facts that the assessee is in the business of buying and selling of jewellary and whatever stock disclosed during the course of survey has direct connection with the business of assessee only. When income is specifically has connection with business so it should be taxed under the head business and profession only and can not be taken to residual head or special provisions of Sec 68 to 69D. We have rightly shown income as regular business income and assessing officer has during assessment proceedings considered the reply of the assessee and has rightly passed order taxing it as regular income. Further to invoke Sec 263 there should be two conditions to be satisfied: 1. The order of the assessing officer should be erroneous and 2. It should be prejudicial to the revenue In this case the order of the assessing officer is not erroneous as he has followed all the procedures. The assessing officer had fulfilled all necessary legal requirements and had taken a reasonable and prudent view in accepting the taxpayers' explanation. Every loss of Revenue as a consequence of the order of the assessing officer cannot be treated as prejudicial to the interest of the Revenue. For example, if the assessing officer has adopted one of the two or more courses permissible in law and it has resulted in loss of revenue, or where two views are possible and assessing officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the Revenue. Kindly refer Malabar Industrial Co. Ltd. v/s CIT (2000) 243 ITR 83 (SC). Here in the instant case the assessing officer has in his SCN questioned why the unaccounted income of Rs. 10611156/- should not be taxed u/s 115BBE. We have in response to the same made a detailed submission with clarification alongwith pronouncements of various Tribunals and Courts and the assessing officer has after verification and after considering out of two possible views i.e. to tax this income u/s 115BBE or to tax it as regular business income at normal rates, has taken view after applying his mind to tax it as regular business income at normal rates. Hence as per the above pronouncement of court this order can not be said to be erroneous and prejudicial to interest of revenue. Further When due verification and examination of records made, the order can not be said to be erroneous. facts being admittedly available on record before the assessing officer showing his complete application of mind and a reasonable basis of reaching satisfaction by a quasi- judicial authority. Thus, the assessing officer did all what he was supposed to do under law and took a possible view Further It is not a case of lack of inquiry In CIT v/s Rajasthan Financial Corporation (1996) 134 CTR 145 (Raj) held that: "Once Assessing Officer has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation by a letter in writing and the Assessing Offer allowed the claim being satisfied with the explanation of assessee, the decision of the Assessing Officer cannot be held to be erroneous simply because in his order not make an elaborate discussion in that regard." The Tribunal Mumbai Bench in Mrs. Khatiza S. Oomerbhoy vs. ITO (reported at (2006) 101 TTJ (Mumbai) 1095-Ed.) addressed this issue elaborately after referring to number of cases on revisionary powers vested in the CIT under s. 263 of the Act and summed up the fundamental principles emerging from several cases as under- "(1) The CIT must record satisfaction that the order of the assessing officer is erroneous and prejudicial to the interest of the Revenue. Both the conditions must be fulfilled. (i) 263 of the Act cannot be invoked to correct each and every type of mistake or error committed by the assessing officer and it was only when an order is erroneous that the section will be attracted. (iii) An incorrect assumption of facts or an incorrect application of law will suffice the requirement of order being erroneous. (iv) If the order is passed without application of mind such order will fall under the category of erroneous order. (v) Every loss of revenue cannot be treated as prejudicial to the interests of the Revenue and if the assessing officer has adopted one of the courses permissible under law or where two views are possible and the assessing officer has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order, unless the view taken by the assessing officer is unsustainable under law. (vi) If while making the assessment, the assessing officer examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income, the CIT of IT, while exercising his power under s. 263 of the Act is not permitted to substitute his estimate of income in place of the income estimated by the assessing officer. (vii) The assessing officer exercises quasi-judicial power vested in him and if he exercises such power in accordance with law and arrives at a conclusion, such conclusion cannot be termed to be erroneous simply because the CIT does not feel satisfied with the conclusion. (viii) The CIT, before exercising his jurisdiction under s. 263 of the Act must have material on record to arrive at a satisfaction, and (ix) If the assessing officer has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation by a letter in writing and the assessing officer allows the claim on being satisfied with the explanation of the assessee, the decision of the assessing officer cannot be held to be erroneous simply because in his order he does not make an elaborate discussion in that regard." Further recently ITAT Rajkot Bench in the matter of Shri Vijubha Jitubha Jadeja, Prop. Of Shree Raj Security Service vs. The Principal Commissioner of Income Tax-1, Rajkot has upheld the proceedings u/s 263 valid to the extent addition made u/s 68 because the assessing officer has in his order made addition u/s 68 and then taxed it. at normal rates and accordingly to that extant ITAT, Rajkot found it erroneous. However as discussed in our case the assessing officer has not made addition u/s from 68 to 69D and treated it as regular business income only so such order can not be said to be erroneous. Also HIGH COURT OF ANDHRA PRADESH in case of Principal Commissioner of Income-tax v. Deccan jewellera (P.) Ltd. AUGUST 2, 2021 held: Section 69 read with section 263, of the Income-tax Act, 1961 Unexplained investments (Stock) - Assessee was engaged in business of gold and diamond jewellery and silver articles - Search and seizure operation under section 132 was conducted in case of assessee and group concern and excess stock was found to be declared and assessee submitted that excess stock was result of suppression of profit from business over years and had not been kept identifiable separately and, therefore, investment in excess stock had to be treated as business income - Assessing Officer duly considered and accepted such explanation and taxed additional income as 'business income' at rate of 30 per cent, which was approved by joint Commissioner However, 'Principal Commissioner invoked revisional powers under section 263 purportedly on ground that decision of Assessing Officer was erroneous and prejudicial to interest of revenue Whether in view of consistent view of various judicial authorities that where excess stock found in course of search is neither separately identifiable nor has independent physical existence, it cannot be treated as 'undisclosed investment' under section 69 and since explanations offered by assessee were fortifiable by said consistent view, no case of perversity or lack of enquiry on part of Assessing Officer was made out so as to render his decision erroneous under Explanation 2 to section 263 - Held, yes Considering the above facts and position of the law we request your honour to drop the revisionary proceedings initiated u/s 263 of the Income tax Act."
7.However, the Ld. PCIT rejected the contention of the assessee and observed that during the course of survey proceedings u/s 133A of the Act, conducted at the business premises on 28/02/2019, the partner of the assessee, in the statement recorded, has admitted unaccounted excess stock, amounting to Rs. 1,01,16,156/-, being difference in the valuation of physical stock found and as recorded in the books of account of the assessee, as on date of survey and agreed to offer this income as current year's income over and above its regular business income of the current year. Accordingly, the assessee has declared the same stock difference of an amount of Rs. 1,01,16,156/- in the return of income filed for the assessment year under consideration. However, the manner of earning of the same has not been admitted/explained at the time of survey proceedings u/s 133A of the Act and as also during the course of assessment proceedings. As such unaccounted stock of Rs. 1,01,16,156/- was required to be taxed as per the provisions of section 69 r.w.s. 115BBE of the Act. However, the assessing officer has failed to do so and has taxed such additional income as regular income of the assessee. The assessing officer failed to examine these aspects of the assessee's case while finalizing the assessment order. Such failure on the part of assessing officer rendered the assessment order passed u/s 143(3) of the Act, on 16/09/2021 for the assessment year 2019-20, erroneous in so far as it is prejudicial to the interest of the revenue within the meaning of the provisions of section 263 of the Act. Therefore, Ld. PCIT set- aside the assessment order, to the extent of the issues mentioned and directed the assessing officer to revise the assessment order after giving proper opportunity of being heard to the assessee.
Aggrieved by the order of the Ld. PCIT, the assessee is in appeal before us.
Shri K. C. Thaker, Learned Counsel for the assessee, argued that during the course of assessment proceedings, assessee has made all the submissions with the assessing officer. The assessing officer has in his Show cause notice taken the point of taxing the income disclosed during the course of survey u/s 115BBE of the Act and in response to the same, the assessee has replied with documentary evidences. The assessing officer has considered the reply and after satisfying with reply the assessing officer has come to the conclusion and taxed the income at normal rates as regular business income. The assessing officer has relied on the facts that the assessee is in the business of buying and selling of jewellery and whatever stock disclosed during the course of survey has direct connection with the business of assessee only, therefore, assessee has explained the nature and source also. When income is specifically has connection with business so it should be taxed under the head business and profession only and cannot be taken to residual head or special provisions of Sec 68 to 69D of the Act. Moreover, whatever income offered during the survey proceedings, have been offered by the assessee for taxation. Therefore, there should not be double taxation on the assessee. Therefore, ld. Counsel contended that order passed by the assessing officer is neither erroneous nor prejudicial to the interest of revenue, therefore order passed by the ld. PCIT may be quashed.
10.On the other hand, the Ld. DR for the Revenue submitted that the assessee has explained the ‘nature’ only and not the ‘source’ of the difference in stock and discrepancies in the stock. Under Section 115BBE of the Act, the addition is made by the assessing officer, if the assessee failed to explain the ‘source’ and the ‘nature’ of the transaction, and in this case, the assessee has explained the ‘nature’ of the activity only and not the ‘source’ of difference in stock and the discrepancies in the stock. The Ld. DR for the Revenue further submitted that in assessee’s paper book page No.221 to 222, the answer- questions, taken during the course of survey, relates to only nature, wherein only the nature was explained by the assessee and not the source, therefore, the Ld. PCIT was correct in invoking the provisions of Section 115BBE of the Act. Therefore, the assessing officer has not examined this aspect correctly and, hence, the Ld. PCIT is right in exercising the jurisdiction u/s.263 of the Act.
In rejoinder, the Ld. Counsel for the assessee, submitted that Section 68 and 69D of the Act, are deeming provision, where no doubt, the source of investment is to be explained, however, there was no question before the assessing officer about the ‘source’, and rather the assessing officer did not raise this issue about the ‘source’ of investment.
We have heard both sides in detail and also perused the records of the case including the paper book filed by the assessee. The necessary facts of the case have already been discussed in paragraphs above. On examination of the facts and circumstances of the case, we find that assessment order dated 16.09.2021, u/s.143(3) of the Act was passed by the assessing officer, after considering the reply of the assessee, dated 20th February, 2021, as the assessing officer issued notice u/s.142(1) of the Act dated 18.02.2021 for calling information for A.Y. 2019-20, which is placed at Annexure-E of paper-book page no.16, wherein the assessing officer has asked details regarding valuation of closing stock and discrepancy of stock, vide paper book page no.19 of the assessee’s paper book. In response to the said notice u/s.142(1) of the Act, the assessee submitted its reply on 20th February, 2021, which is mentioned in paper book page No.21, the reply submitted by the assessee is reproduced below:
“8. Valuation of Closing Stock We have attached herewith working of valuation of Closing Stock based on the method of valuation consistently followed by us. The working of closing stock also includes stock difference found during the course of survey. ………………………………………………… ………………………………………………… 11. Detailed note on how accounting is done for discrepancy of stock and cash found during the course of survey u/s. 133A During the course of survey the physical stock of Gold jewellery was found for 9422.810 Gms as against the stock as per books was for 8937.245 Gms. The difference for 485.565 Gms calculated @ Rs.3123.50 per gram (which is average purchase price during the year under survey) and valued for Rs.15,16,662/- have been offered as income and the same is included in the closing stock as on 31.03.2019. In the same way in Silver physical stock was found for 26931.00 gms as against 20073.515 gms. The difference for 6857.485 Gms calculated @ Rs.34.00 per gram (which is average purchase price during the year under survey) and valued for Rs.2,33,155/- have been offered as Income and the same is included in the closing stock as on 31.03.2019. As per the physical verification Cash balance was found for Rs.8,18,525/- whereas as per the books the same was Rs.8,55,002/. The difference of Rs.36,477/ was on account of pending accounting entries for purchase of Misc. Packing items and have been accounted during and cash difference was explained.”
Therefore, we find that assessing officer made enquiry during the assessment proceedings, therefore, the order passed by the assessing officer should not be erroneous.
We also find that the assessee has explained the nature of the transaction and also explained the discrepancy in the stock, which is related to assessee`s business, therefore, difference in stock and discrepancies in stock should not be taxable u/s.115BBE of the Act, as it pertain to the assessee`s business. We find that the assessing officer issued notice u/s.142(1) of the Act, wherein the assessing officer has asked the assessee about the nature and source of excess stock sold in respect of gold and silver. However, the assessee has explained the nature of the discrepancy in the closing stock and also explained the difference in closing stock and it was also stated that closing stock pertain to assessee`s business. Therefore, after considering the assessee’s reply in respect of the show- cause notice issued by the assessing officer, dated 08.09.2021, wherein the assessing officer specially asked about the valuation of the closing stock and discrepancy of stock, and the assessing officer has also asked the assessee to explain that how assessee has accounted this discrepancy in his books of accounts (vide paper book page no.19 of the assessee). Therefore, we find that during the assessment proceedings, the assessing officer has conducted necessary enquiries.
During the course of hearing, the Ld. Counsel for the assessee has also agreed that the assessee has not explained the ‘source’ of the excess stock, as it was not required to explain, because the assessing officer did not raise this question. We find merit in the submission of ld. Counsel that it was not required to explain, the ‘source’ by the assessee, once the assessee has explained the causes of excess stock and the causes of discrepancy in the stock and this excess stock and the discrepancy in the stock were related to the assessee’s business, which are sufficient to hold, that stock pertains to the assessee`s business. We note that no doubt the excess stock found and the discrepancy in the stock found during the survey proceedings is related to the business activity of the assessee, and the excess stock and the discrepancy in stock pertains to the business of the assessee, therefore, no addition u/s.115BBE of the Act, at the higher rate of taxation be imposed on the assessee. We note that assessee has submitted the relevant details and documents regarding closing stock and causes of discrepancy in the stock, considering, these facts, the assessing officer has taken a possible view and framed the assessment order. Therefore, no addition should be made u/s 115BBE of the Act. For that learned Counsel for the assessee, relied on the following case laws: i. Lovish Singhal vs. ITO in ii. Mohan Singh vs. CIT, 229 TTJ 0352 iii. Abdul Hamid & Anr., 183 ITD 0711
According to us, the present order of assessing officer passed u/s 143(3) dated 16.09.2021 of the Act cannot be termed as erroneous, since enquiry was, in fact, carried out by assessing officer, on the issue on which the ld PCIT has found fault with and has taken a plausible view. Thus, we note that the assessing officer enquired during assessment proceedings and the assessee had filed details before him. So, we find that the assessing officer’s action cannot be termed “erroneous”. Since not only enquiry was carried out by the assessing officer on the issue under consideration and based on the evidence gathered, assessing officer has taken a plausible view, which at any rate cannot be called as an un- sustainable view.
The Hon’ble Apex Court in Malabar Industries Ltd. vs. CIT [2000] 243 ITR 83(SC) wherein their Lordship have held that twin conditions need to be satisfied before exercising revisional jurisdiction u/s 263 of the Act by the CIT. The twin conditions are that the order of the Assessing Officer must be erroneous and so far as, prejudicial to the interest of the Revenue. In the following circumstances, the order of the assessing officer can be held to be erroneous order, that is (i) if the Assessing Officer’s order was passed on incorrect assumption of fact; or (ii) incorrect application of law; or (iii)Assessing Officer’s order is in violation of the principle of natural justice; or (iv) if the order is passed by the Assessing Officer without application of mind; (v) if the assessing officer has not investigated the issue before him; then the order passed by the Assessing Officer can be termed as erroneous order. Coming next to the second limb, which is required to be examined as to whether the actions of the assessing officer can be termed as prejudicial to the interest of Revenue. When this aspect is examined, one has to understand what is prejudicial to the interest of the revenue. The Hon’ble Supreme Court in the case of Malabar Industries (supra) held that this phrase i.e. “prejudicial to the interest of the revenue’’ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Their Lordship held that it has to be remembered that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. When the Assessing Officer adopted one of the courses permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue “unless the view taken by the Assessing Officer is unsustainable in law”. Therefore, we are of the considered opinion that assessing officer’s order cannot be termed as erroneous as well as prejudicial to the interest of the revenue and therefore, jurisdictional condition precedent as prescribed by statute for invoking revisional jurisdiction is absent and therefore, we quash order of the Learned Principal Commissioner of Income Tax and allow the appeal of the assessee.
In the result, the appeal of the assessee is allowed.
Order is pronounced in the open court on 01/01/2025