THE PR COMMISSIONER OF THE INCOME TAX (CENTRAL) vs. M/S DECCAN TOBACCO COMPANY

THE HON’BLE SRI JUSTICE JOYMALYA BAGCHI AND THE HON’BLE SRI JUSTICE K.SURESH REDDY

I.T.T.A. Nos.8, 9 and 14 of 2021 (Taken up through video conferencing)

COMMON JUDGMENT: (Per Hon’ble Sri Justice Joymalya Bagchi)

These appeals involve similar issues and are taken up for hearing analogously for the purpose of admission.

The appeals are proposed to be admitted on the following substantial questions of law: “1. Whether on the facts and in the circumstances of the case, the Tribunal is correct in law in endorsing the erroneous order of the A.O as an order after taking one of the possible views?

In ITTA No.8 of 2021, the assessee is doing business in Gold, Diamond jewellery and Silver Articles. Search and seizure operation under Section 132 of the Income Tax Act, 1961 (‘the Act’, for brevity) were conducted in the case of assessee and group concern and excess stock of Rs.6,12,46,284/- was declared during the course of search. Notice under Section 142(1) of the Act was issued upon the assessee. In response to such notice, revised return was filed admitting the income under the head “Profits and gains of business or profession”. During the course of assessment proceedings, the Assessing Officer called for

JB J & KSR, J ITTA Nos.8, 9 & 14 of 2021 2

explanation of the assessee as to why additional income admitted by the assessee should not be treated as ‘undisclosed investment’ under Section 69 of the Act and provision under Section 115BBE of the Act be not applied. The assessee filed explanation, which reads as follows:- “We submit that the excess stock found during the search operation is not separately and clearly identifiable but is part of mixed lots of stock found at the premises which included declared stock as per books and also the excess stock as computed by the Authorized Officers during the search operation at the premise. Since excess stock is a result of suppression of profit from business over the years and has not been kept identifiable separately but is the part of overall physical stock found, the provisions of Section 69 cannot be made applicable as primary condition for invoking the provisions of the section is that the asset should be separately identifiable and it should have independent physical existence of its own. Since excess stock is result of suppression of profit from business over the years and has not been kept identifiable separately but i.e., the part of overall physical stock found and therefore the investment in the excess stock has to be treated as business income.” The Assessing Officer duly considered and accepted such explanation and taxed the additional income as ‘business income’ @ 30%, which was approved by the Joint Commissioner, Income Tax, Central Range under Section 153D of the Act.

In ITTA No.9 of 2021, pursuant to search under Section 132 of the Act, notice was issued upon the assessee under Section 142(1) of the Act and the assessing officer filed return of income declaring total income of Rs.34,47,92,320/- inclusive of additional income of Rs.7,60,53,000/- declared during search. During the assessment proceedings, the Assessing Officer called for explanation as to why the additional income

JB J & KSR, J ITTA Nos.8, 9 & 14 of 2021 3

admitted by the assessee should not be treated as ‘undisclosed investment’ under Section 69 of the Act and taxed under Section 115BBE of the Act. The assessee filed explanation claiming as follows: “Our firm has brought excess stock value to the books of account by passing the necessary entries in the P & L Account as well. An amount of Rs.7,60,53,000/- was accordingly admitted as ‘other income’ in Schedule L – ‘other operating income’ and the same was also shown in the return filed in the relevant columns under the head ‘Profits and Gains of the Business’ in Part A of the Return filed for the impugned year. The same can also be verified from the P & L Account as well as from the Return filed. Copies of the above were already filed with your good self on 17/12/2018. Thus, it is submitted that there is no need to bring the excess stock once again to tax as that would result in double addition.

It is further submitted that our company is involved in the export of un-manufactured tobacco and has no other income generating activity. The excess stock found is nothing but our business stock, and accordingly, the same was offered as income from business only.” The Assessing Officer duly considered and accepted such explanation and taxed the additional income as ‘business income’ @ 30%, which was approved by the Joint Commissioner, Income Tax, Central Range under Section 153D of the Act.

In ITTA No.14 of 2021, in the course of search under Section 132 of the Act, the excess stock valued at Rs.4,41,46,445/- was declared by the assessee. In return of income, the assessee claimed the additional income was declared under the heading ‘other operating income’, which was nothing but ‘business income’. Upon show-cause notice being served upon it calling for explanation as to why the additional income was not treated as ‘undisclosed investment’ under Section 69 of the Act

JB J & KSR, J ITTA Nos.8, 9 & 14 of 2021 4

by applying provision under Section 115BBE of the Act, the assessee explained that the additional income was admitted in Schedule L under the heading, ‘other operating income’ in the relevant columns under the head “Profits and Gains of the Business” in Part A of the Return filed for the relevant Assessment Year. Excess stock found was business stock which accumulated and brought forward for many years. Hence, the additional income was ‘business income’.

In support of their explanations, the assessees have relied on the following judgments of various High Courts as well as different Benches of the Income Tax Appellate Tribunal, a) Chokshi Hiralal Moganlal Vs. DCIT1; b) ACIT Vs. Sanjay Bairathi Gems Ltd.,2; c) DCIT Vs. Ram Narayan Birla3; (d) M/s. Kim Pharma (P) Ltd. Vs. CIT4,; and, (e) CIT another Vs. S.K.Srigiri and Bros.5.

The Assessing Officer duly considered and accepted such explanation and taxed the additional income as ‘business income’ @ 30%, which was approved by the Joint Commissioner, Income Tax, Central Range under Section 153D of the Act.

In all the aforesaid cases, the Principal Commissioner invoked revisional powers under Section 263 of the Act purportedly on the ground that the decision of the Assessing Officer was erroneous and prejudicial to the interest of the revenue and assessment orders were set aside with a direction to review the assessment orders as per law.

The said orders were appealed before the Income Tax Appellate Tribunal (for short, ‘the Tribunal’), which set aside the orders of Principal Commissioner in all these cases holding the decision of the

1 (2011) 141 TTJ (AHD.) 1 2 (2017) 189 TTJ (JP) 487 3 2017 Tax Pub(DT) 4439 (Jp-Trib)

JB J & KSR, J ITTA Nos.8, 9 & 14 of 2021 5

Assessing Officer was a possible view on the matter and could not have been revised under Section 263 of the Act.

Challenging the said orders, Ms.M.Kiranmayee, learned Senior Standing Counsel for Income Tax, argues that the additional excess stock found in the course of search in these cases ought to have been treated as ‘undisclosed investment’ under Section 69 of the Act. The Assessing Officer did not consider such fact and assessed the additional income as business income @ 30% instead of 60% by applying Section 115BBE of the Act. Thus, the assessment orders being erroneous were rightly revised by the Principal Commissioner. Hence, the appeals ought to be admitted on the aforesaid substantial questions of law.

When there are two possible views on the matter and one view has been accepted by the Assessing Officer after inviting explanation from the assessee and upon being satisfied on such explanation such view cannot be said to be erroneous.

As discussed above, explanations had been given by the assessees with regard to the additional income, which were considered and duly accepted by the Assessing Officer. Assessees relied upon various authorities in support of their explanations which had been duly accepted by the Assessing Officer. Views of the Assessing Officer appear to have been approved by the Joint Commissioner, Income Tax, Central Range, under Section 153D of the Act. In this factual matrix, it cannot but be accepted that a possible view on the matter had been followed by the Assessing Officer. In doing so, the Assessing Officer, in fact, followed the consistent view of various judicial authorities binding on him, namely, where excess stock found in the course of search is

4 (2013) 258 CTR (P & H) 454 5 (2008) 298 ITR 13 (karn)

JB J & KSR, J ITTA Nos.8, 9 & 14 of 2021 6

neither separately identifiable nor had independent physical existence, it cannot be treated as ‘undisclosed investment’ under Section 69 of the Act.

In the present cases, explanations have been offered by the assessees that excess stock was a result of suppression of profits from business over the years and is a part of the overall stock found. In ITTA Nos.9 & 14 of 2021, the assessees concerned gave further clarification that the excess stock had been admitted in Schedule ‘L’ under the heading, ‘other operating income’ under the head “Profits and Gains of the Business” in Part A of the Return filed for the relevant Assessment Year. Hence, the excess stock could not have been treated as ‘undisclosed investment’ under Section 69 of the Act.

Section 69 of the Act reads as follows: “69. Unexplained investments.—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 for 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.” The above section provides investments would fall within the definition of ‘undisclosed investment’ in the event the following conditions are satisfied: (a) Such investment is made in the course of the financial year and not reflected in the books of account, if any, maintained by the assessee for any source of income, (b) No explanation is offered by the assessee about the nature and source of investments, and

JB J & KSR, J ITTA Nos.8, 9 & 14 of 2021 7

(c) Such explanation is not found to be satisfactory in the opinion of the Assessing Officer. As explanations pursuant to the Show-cause notices issued by the Assessing Officer had been submitted claiming that the nature and source of the excess stock fell under the heading ‘Profits and Gains of the Business’ and such stock was not specifically identifiable from the profits which had accumulated from earlier years and such explanations being considered and accepted by the Assessing Officer, which came to be approved by the Joint Commissioner, Income Tax, it cannot be said that the condition precedents for holding that the excess stock as ‘undisclosed investment’ under Section 69 of the Act are satisfied.

Relying on the decision of this Court in Spectra Shares and Scrips P.Ltd. Vs. CIT6, the Tribunal held non-recording of reasons cannot be a ground to come to a conclusion that the opinion of the Assessing Officer was erroneous for the purposes of Section 263 of the Act. Explanation (2) of Section 263 of the Act elucidates cases where the opinion of the Assessing Officer can be treated to be erroneous and prejudicial to the interest of the revenue. Explanation (2) reads as follows:

“Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,— (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim;

6 36 Taxmann.com 348 (HC AP)

JB J & KSR, J ITTA Nos.8, 9 & 14 of 2021 8

(c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.” In the present cases, the Assessing Officer had issued show-cause notices calling for explanations from the assessees whether excess stock be not treated as ‘undisclosed investment’ under Section 69 of the Act. In response to the notices, elaborate explanations were offered by the assessees, which were fortifiable by consistent views by various Benches of the Tribunal as well as the High Courts. The Assessing Officer, upon consideration, accepted the explanation and taxed the additional income as ‘business income’ @ 30% instead of 60% as per Section 115BBE of the Act. No contrary view either of any High Court or the Apex Court has been placed before us to demonstrate that the explanations offered by the assessees in the course of assessment were either perverse or contrary to law. In view of such matter, we are constrained to hold no case of perversity or lack of enquiry on the part of the Assessing Officer is made out so as to render his decision erroneous under Explanation 2 of Section 263 of the Act. Thus, the revisional powers under the said provision were illegally invoked by the Principal Commissioner and his order was rightly set aside by the Tribunal. For the aforesaid reasons, we are of the opinion that no substantial question of law is made out in the factual matrix. Hence, we are not inclined to admit the appeals.

JB J & KSR, J ITTA Nos.8, 9 & 14 of 2021 9

Accordingly, the Appeals are dismissed. There shall be no order as to costs. As a sequel, Miscellaneous Petitions, if any, pending in these Appeals shall stand closed. _________________ JOYMALYA BAGCHI, J ________________ K.SURESH REDDY, J

Dt.02.08.2021 Ivd

JB J & KSR, J ITTA Nos.8, 9 & 14 of 2021 1 0

THE HON’BLE SRI JUSTICE JOYMALYA BAGCHI AND THE HON’BLE SRI JUSTICE K.SURESH REDDY

I.T.T.A. Nos.8, 9 and 14 of 2021 (Per Hon’ble Sri Justice Joymalya Bagchi)

Dated: 02.08.2021

Ivd

JB J & KSR, J ITTA Nos.8, 9 & 14 of 2021 1 1