BHAJAN LAL SURESH CHANDRA SARRAF,AJMER vs. PCIT (CENTRAL), JAIPUR

This is an appeal filed by the assessee against the order of ld. Principal Commissioner of Income-tax, (Central), Jaipur dated 29.03.2022 for the assessment year 2018-19 passed u/s 263 of the Income Tax Act, 1961. The assessee has raised the following grounds of appeal :-

2. Confirming the Trading Additions for stock difference Rs. 2,22,83,653/-, cash Rs. 30,65,700/- & trading addition u/sec. 145(3) of Rs. 15,03,114/- u/sec. 69A is bad in law (when AO has nowhere mentioned these as unexplained)

3. Applicability of provision of section 115BBE of Income Tax Act, 1961.

4. Any other matter with prior permission of the chair.

Notice under section 143(2) was issued on 13.09.2019 and duly served upon the assessee. A query letter along with notice under section 142(1) was issued on 15.11.2019. In response to these queries, the assessee filed written submissions, produced books of accounts etc. and the AO examined as per the details given in the return, documents supplied during the course of hearing and seized material.

The AO completed the assessment for the year under consideration under section 153A read with section 143(3) of the Act on 31.12.2019 determining total income at Rs. 2,98,04,833/- after making additions on account of stock difference, unexplained cash found and trading addition for Rs. 2,22,83,653/-, Rs. 30,65,700/- and Rs. 15,03,114/- respectively. The Assessing Officer had made an addition of Rs. 1,95,33,008/- on account of excess (unaccounted) stock found during search.

However, while completing assessment, the Assessing Officer had not applied provisions of section 69A of the Act. The AO while proposing addition of Rs. 1,95,33,008/- on account of excess (unaccounted stock found during search) he has calculated at his own excess/shortages of stock (item-wise); no set-off to excess/shortage granted. After applying GP % on such shortages of stock (8.22% on shortage & evaluated at Rs. 3,34,62,834/- is Rs. 27,50,645/-) + excess of stock Rs. 1,95,33,008 = Rs. 2,22,83,653/- addition made. Aggrieved by the order of AO, the assessee preferred appeal before ld. CIT (A) raising the above additions.

“10. I have examined the facts at hand, I have studied the position of law and have considered the submissions of the taxpayer. It is clear that the income which has been found as a result of search action and the consequential assessment action has been hitherto undisclosed income. Income which has been hitherto undisclosed can be assessed only as income under the sections 68 till 690. As such, it is clear that income of Rs. 1,95,33,008/- needed to have been assessed as per provisions of section 69A of the I T Act, 1961. Furthermore, when taxability of such undisclosed / unexplained income has been specified under provisions of section 115 BBE of the Income Tax Act 1961, then this specific section needs to be triggered to bring to tax the hitherto undisclosed/ unexplained income. if this is not done, then the Parliamentary intent of legislating section 115 BBE will be nullified. This cannot be the intent of legislature. Accordingly, since the income needed to be taxed under section 115 BBE and the same has not been done, to this extent, the action of the Assessing Officer is erroneous and has caused prejudice to the interests of revenue.

Commissioner of Income Tax, reported in 67 ITR 84, Supreme Court. (third last paragraph thereof may be seen for this proposition). I wish to make it clear that I am not disturbing the assessment that has already been made. I am only passing an order for taxability of income as above, as per provisions of section 115BBE of the Income Tax Act, 1961 (as the income is undisclosed income within the meaning of provisions of section 69A of the I.T. Act, 1961, that too after giving due opportunity to the taxpayer.”

Against this order of ld. PCIT, the assessee is in appeal before us.

“ That further while making such addition of Rs. 2,22,83,653.00 (Rs. 1,95,33,008.00 + Rs. 27,50,645.00) the A.O. has no where invoked the provisions of section 69A or any other section of Act thus applicability of rates of Income Tax in terms of section 115BBE nowhere applies; nor warranted till the CIT(A)'s appeal decided on the ground. Further vide para 4.3 of AO's order the A.O. has further applied the provisions of section 145(3) of Act by Rejecting the books of accounts being not reliable (Sales estimated at Rs. 35.00 crore against declared sales at Rs. 34,22,94,595.00 & applying G.P.% at 12.13% against declared G.P.% at 11.96% & thus making trading addition of Rs. 15,03,114.00 (Rs. 4,24,55,000.00 — Rs. 4,09,51,886.00).

Legal Facts:- (1) Section 69A states "Where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewellery or valuable article is 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 acquisition of the money, bullion, jewellery or other valuable article, or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the assessee for such financial year."

5 M/s. Bhajan Lal Suresh Chandra Sarraf, Beawar. Thus the legal question arise after summarizing the facts that (a) Whether when A.O. has not applied / mentioned the provisions of section 69A applicability & the whole of the "ADDITION AS MADE" is ground of appeal before CIT(A) C.C. Udaipur, can the same issue can be covered u/sec. 263 of Act. (b) When provisions of section 145(3) of Act applied, books & books result rejected under these circumstances also can the Principal Commissioner of Income apply the applicability of provisions of section 69A of Act.

(c) Can "BUSINESS INCOME" be considered as "OTHER SOURCES". (d) Can the PCIT Can invoke provision of section 263; when on same issue appeal with CIT(A) is pending.

(e) Explanation 1(c) to section 263 of Act further states as under:- (f) "where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the** Principal Commissioner or Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal".

(1) Thus when the issue involved is a subject matter of appeal with CIT(A) the "Doctrine of merger" applies Refer:- RITZ India Ltd. V/s Union of India (1990) 83 CTR (Born.) "Explanation (c) — Explanation (c) to section 263(1) requires to be construed harmoniously. Only in cases where action under section 263 is taken after the ft June, 1988, the merger of the assessment order will be treated as confined to issues actually considered and decided in appeal in terms of the explanation (c) — Ritz Ltd. V. Union of India (1990) 83 CTR (Born.) 177. The consequence of the amendment made in section 263 with retrospective effect from 01.06.1988 is that the powers under section 263 of the Commissioner shall extend and shall be deemed to have always extended to such matters as had not been considered and decided in an appeal — CIT V. Shri Arbuda Mills Ltd., (1998) 231 ITR 50(SC) / CIT v. Jaykumar B. Patil (1999) 236 ITR 469 (SC)." It has further been decided in case of Dy. CIT V/s Varma Industrial Ltd., (2001) 250 ITR 472 (Kar.) that u/sec. 263 Principal Commissioner of Income Tax has no power / jurisdiction to revise orders of the appellate authorities thus your jurisdiction u/sec. 263 of those issues which are already forming part of appeal with CIT(A), Udaipur; is against the provisions of law & ULTRAVIRUS / Natural Justice. As recently decided case Abdul Hamid V/s ITO (2020) 195 DTR 321 (Gau.) Tribunal it has been held that:-

Business Activity Related income does not ordinarily fall u/sec. 68 to 69D — Since when the A.O. as well as Principal Commissioner of Income Tax have treated the undisclosed amount in bank account as undisclosed business receipt or turnover of the assessee provision of section 115BBC are not attracted to the facts of case & thus the order as passed by A.O. is neither erroneous not prejudicial to the interest revenue. Since here the A.O. has calculated the business excess stock as income & on shortage of stock applied G.P.% & later books rejected u/sec. 145(3); the said addition is part of business activity & thus the provisions of section 69A cannot be invoked nor the provision of section 115BBE can be applied. Looking to aforesaid facts / legal aspects it is requested to kindly drop the proceedings or keep in abeyance till the decision of first appeal.

Further an ITO while passing an order of assessment; perform & judicial function. Thus an order passed by the A.O. is erroneous as well as prejudicial to the interest of revenue. Thus the position of CIT in terms of section 263(1) is in the nature of supervisory jurisdiction and same can be exercised only if the circumstances specified therein Viz. (1) The order is erroneous (2) by virtue of the order being erroneous, prejudice has been caused to the interest of the revenue, exist. An order of assessment by the ITO, therefore, it should not be interfered with only because another view is possible.

CIT v/s Greenworld Corporation (2009) 181 taxmanlll (SC)

If in given facts and circumstances of a case, two views are possible and one view has been adopted by assessing officer, then that view alone would not be sufficient to exercise powers under section 263 by Commissioner — CIT v. Gokuldas Exports (2011) 333 ITR 214 (Kar).

Thus when A.O. has considered looking to shortages / excess of stock applicability of provisions of section 145(3) of Act; has considered the additions as "BUSINESS INCOME" & thus section 69A not invoked. Thus was based on past history of the case & nature of additions & thus the A.O. had a different view; whereas CIT(CC) has another view that since additions ocade in a search case; hence the provisions of section 69A / 115BBE should apply.

As held in case of PCIT V/s Bairangan Traders (2017) 86 Taxman.com 295 (Raj). That the investment is the excess stock is to be brought to tax under the head "BUSINESS INCOME" and not under the head income from other sources here (The assessee is dealer in foodgrains, rice & oil seeds etc.).

Similarly as held in case of Shri Lovish Singhal V/o ITO (ITA No. 142 to 143/JODH/2018).

Applying the decision of Rajasthan High Court in case of Bajargan (Supra) surrender for excess stock, excess cash found cannot be taken or justified as taxing such income u/sec. 115BBE.

Similarly in case of Dy. CIT v/s Ram Narayan Birla (ITA No. 482/JP/2015 dated 30.09.2016 A.Y. 2011-12) it has also been held that where in respect of surrender of stock during search and survey when the revenue has not pointed out that excess stock had any nexus with any other receipts found, the surrender excess stock to be considered at par with the other business stock.

The department consistently in past has taken such shortages, excess of stock; trading addition u/sec. 145(3) as “Business Income” and thus the principle of consistency must be followed.

CIT vs. Escorts Ltd. (2011)198 taxman 324, 9 taxman.com 222 (Delhi)

Thus any “Business Income” cannot be taken as “Unexplained” u/sec. 69A & thus the order as passed by the CIT (CC) is bad in law & deserve to be quashed.”

5.1. The ld. D/R further submitted that from the record, it is seen that addition on account of excess stock amounting to Rs. 1,95,33,008/- is separate from GP Addition. GP addition is Rs. 15,03,114/-. The AO noted discrepancies in stock and cash in hand etc. so AO rejected book & made separate addition on the book of GP. As GP addition is business income, addition has not been made under section 69. As per order u/s 263, addition u/s 69A is to be made only with respect to excess stock.

5.2. The ld. D/R also submitted that the assessee appellant has also raised legal issue that whether business income be treated as income from other sources. The appellant has argued that the excess stock represents business income and therefore addition cannot be made u/s 69A. In this regard, the provisions of section 69A are relevant. The provisions are reproduced below :

“ Unexplained money, etc.

69A. Where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewellery or valuable article is 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 acquisition of the money, bullion, jewellery or other valuable article, or the explanation offered by him is not, in the opinion of the (Assessing) Officer, satisfactory, the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the assessee for such financial year.]”

In the case under consideration, the appellant was found owner of the excess stock in form of jewellery and the explanation offered by him was not, in the opinion of the AO, satisfactory therefore addition was made. Thus the addition squarely falls under the provisions of section 69A.

He has assessed such income as business income. On this issue the ld. A/R of the assessee has referred to the decision of Hon’ble Rajasthan High Court in case of PCIT vs. Bairangan Traders (2017) 86 Taxman.com 295 (Raj.) wherein it has been held that excess stock is to be brought to tax under the head Business Income and not under the head Income from Other Sources. This bench of the ITAT in case of DCIT vs. Ram Narayan Birla in has also held that when in survey revenue has not pointed out that excess stock had any nexus with any other receipts found, the surrender of excess stock is to be considered at par with other business stock and to be assessed as Business Income. We note that section 115BBE applies only when there is any income of the nature referred to in sections 68, 69, 69A, 69B or 69C. The AO in the assessment order has nowhere held that excess stock is of the nature of income referred to in any of the above sections. As against this, the Courts have held that in the absence of any nexus of excess stock with any other receipts, the same is to be considered as Business Income. Thus the source of excess stock is Business Income and, therefore, section 115BBE is not applicable. Therefore, to this extent the ld. PCIT has erred in holding that order of the AO is erroneous and prejudicial to the interests of the revenue since he has not considered the applicability of section 115BBE. Thus this contention of the ld. A/R of the assessee is allowed.

Order pronounced in the open court on 7/12/2022.