KANEIYALAL RAMJIBHAI & SONS,BHAVNAGAR vs. THE PRINCIPAL COMMISSIONER OF INCOME TAX, AHMEDABAD-1, AHMEDABAD

Kaneiyalal Ramjibhai & Sons vs. PCIT Asst.Year –2017-18 - 2– 3. The subject order u/s. 263 passed by ld. PCIT is illegal and bad in law in the absence of any finding of the ld. PCIT as to how the alleged error of the AO has resulted in loss of revenue particularly when tax has been duly paid on the impugned income.

6. Ld. PCIT has erred in not considering various facts and in not appreciating the facts and law in their proper perspective.

7. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal

at the time of or before the hearing of the appeal.”

3. The brief facts of the case are that the assessee firm, which is operating under the name M/s Kaneiyalal Ramjibhai & Sons, filed its return of income on October 27, 2017, for the assessment year 2017-18, declaring a total income of Rs. 3,94,98,230/-. This return was selected for scrutiny following a survey conducted by the Department on September 23, 2016, under Section 133A of the Income Tax Act. The assessment, was completed on December 18, 2019, under Section 143(3), which confirmed the declared income without any changes. However, Principal CIT upon reviewing the case of the assessee, observed that during the survey, the assessee had disclosed an unaccounted income of Rs. 4,29,81,942/-, which was not recorded in the firm's regular books of accounts and thus not taxed as required under Section 115BBE of the Act. The firm’s reported income of Rs. 3,94,98,230/- was calculated after accounting for expenses against this unaccounted income. This resulted in a reported business loss of Kaneiyalal Ramjibhai & Sons vs. PCIT Asst.Year –2017-18 - 3– Rs. 34,83,712/-, which, according to Section 115BBE(2), is not allowable for set-off against the undisclosed income. The Assessing Officer (A.O.) did not address these significant issues during the assessment process, leading to an erroneous order that was detrimental to the Revenue's interests. Consequently, a show cause notice under Section 263 of the Income Tax Act was issued to the assessee on February 7, 2022, requesting a written response by February 11, 2022. In the notice, the assessee firm was asked to demonstrate the connection between the unaccounted income and the firm’s business, provide journal entries related to this income, and justify why the business loss should not be disallowed under Section 115BBE(2). In response, the assessee submitted arguments on February 9, 2022, contending that the assessment order was not erroneous or prejudicial to the Revenue. The assessee submitted that the A.O. had conducted adequate inquiries and that the unaccounted income had been properly disclosed during the survey. The assessee firm claimed that the figures disclosed were genuine, and the current year's business loss should not be considered as it was merely an expense against gross profit. However, Principal CIT found the assessee's arguments unconvincing for several reasons. The firm failed to submit required journal entries and could not substantiate the nature of the unaccounted income. The stock revealed during the survey was classified as undisclosed and treated as unexplained investments under Section 69 of the Act. The reported income and investment in stock, recorded after the survey, could not be treated as regular business income. Additionally, the firm did not provide details regarding the source of the unaccounted stock purchases. In light of these findings, Principal CIT held that the undisclosed income was liable to be Kaneiyalal Ramjibhai & Sons vs. PCIT Asst.Year –2017-18 - 4– taxed under Section 115BBE, and the current year’s business loss could not be set off against it due to the provisions of Section 115BBE(2). Principal CIT was of the view that the A.O. had not conducted the necessary verification of the claims made by the assessee, leading to an assessment order being both erroneous and prejudicial to the revenue's interests under Section 263. The order was therefore directed to be set aside, directing the A.O. to conduct a fresh assessment while providing the assessee an opportunity to be heard.

4. The assessee is in appeal before us against the aforesaid order passed by Ld. CIT(Appeals). Before us, the first contention of the Counsel for the assessee is that the matter was examined in detailed during assessment proceedings and the Assessing Officer took a legally plausible view. It was submitted that the assessee's case for the assessment year 2017-18 was selected for scrutiny by way of issuance of notice issued on September 18, 2018, under Section 143(2) of the Act. Following this, the Assessing Officer (A.O.) sent a notice dated July 29, 2019, under Section 142(1), requesting various details and documents from the assessee, which included inquiries regarding the nature of the business, sources of income, computation of income, Tax Audit Report, audited annual accounts, books of accounts, and the stock register. In response to this notice, the assessee filed letter dated August 7, 2019, giving details of their business activities. The assessee firm submitted that it is engaged in the retail sale and purchase of gold ornaments, jewelry, and silver articles, and submitted that its only source of income was from trading in these items. Additionally, the assessee submitted several documentation for the year under consideration, which Kaneiyalal Ramjibhai & Sons vs. PCIT Asst.Year –2017-18 - 5– included the computation of income, the Tax Audit Report, and the audited financial statements. The assessee also provided its cash book and ledger for the financial year, giving details of recorded excess gold stock valued at Rs. 3,95,24,694/- and excess silver stock valued at Rs. 34,57,248/- that were found during the survey. The evidence supporting these claims was backed by documents such as the day book and daily activity reports. Subsequently, on November 30, 2019, the A.O. issued another notice under Section 142(1), again calling for further details, particularly a reconciliation of the physical stock and book stock as of the survey date, as well as evidence establishing the accuracy and allowability of the purchases and other expenses claimed by the assessee. In response, the assessee filed a detailed submission dated December 4, 2019, and reiterated the findings from the earlier survey under Section 133A of the Act, confirming the excess physical stock of gold and silver that had been identified. The total value of the excess stock was confirmed as Rs. 4,29,81,940/-, which included the previously noted amounts of gold and silver. The valuation of this excess stock had been conducted by Government-approved valuer during the survey, and a copy of the valuation report was provided to the A.O. Additionally, the partner of the firm, Pareshkumar Vavadia, also made a statement during the survey that was also submitted for review. The assessee submitted that tax on the disclosed amount of Rs. 4,29,81,943/- related to the excess stock had already been paid as advance tax for the assessment year, with copies of all relevant challans and documentation included in the submission. Finally, the A.O. framed the assessment on December 18, 2019, under Section 143(3) of the Act, accepting the returned income of the assessee without any adjustments or modifications, Kaneiyalal Ramjibhai & Sons vs. PCIT Asst.Year –2017-18 - 6– concluding that the documentation and explanations provided were satisfactory and in compliance with the legal requirements. Therefore, once the matter has been examined in detailed during assessment proceedings and the Assessing Officer took a legally plausible view, the assessment order cannot be held to be erroneous and prejudicial to the interests of the Revenue.

5. The second contention of the Counsel for the assessee is that the matter was examined in detailed even during the course of 263 proceedings and various details were submitted by the assessee during 263 proceedings, which were omitted to be considered by Principal CIT from a correct perspective. The Counsel for the assessee submitted Principal Ld. CIT(Appeals), during the course of 263 proceeding noted that an unaccounted income amounting to Rs. 4,29,81,942/- had not been routed through the regular books of accounts, which should have led to its taxation under Section 115BBE of the Act. Furthermore, the Principal CIT pointed out that the current year's business loss was improperly set off against this unaccounted income declared during the survey. Consequently, the assessee was called upon to provide evidence demonstrating that the unaccounted income of Rs. 4,29,81,942/- was indeed related to the firm’s business for the year in question. They were also requested to submit all journal entries associated with this unaccounted income and relevant ledgers. Additionally, the Principal CIT sought an explanation as to why the current year's business loss of Rs. 34,83,712/- should not be disallowed, as the income calculated by the CIT after adjusting expenses against the unaccounted income left no room for this loss to be considered allowable Kaneiyalal Ramjibhai & Sons vs. PCIT Asst.Year –2017-18 - 7– under Section 115BBE(2). In response, the assessee furnished a detailed letter on February 9, 2022, addressing the concerns raised in the show cause notice. The assessee clarified that during the survey, excess stocks of gold and silver were discovered, and the partner of the firm had made a statement recorded by the authorized officer. The disclosure of Rs. 4,29,81,942/- made during the survey was accepted as genuine by the survey team. The assessee confirmed that this amount had been credited to the Profit & Loss account. The response also included the partner's statement recorded during the survey and emphasized that the current year's business loss of Rs. 34,83,712 had not been set off against any income. The firm declared a gross profit of Rs. 3,20,82,598/- and reported the survey disclosure as a separate line item. Furthermore, the assessee listed the deductions claimed, which included business expenses amounting to Rs. 38,55,964/- and interest and remuneration to partners totalling Rs. 3,18,48,395/-. This resulted in a net profit of Rs. 3,93,60,181/-, leading the total of net profit and partner remuneration to Rs. 7,12,08,576/-. Since this final profit exceeded the disclosure of Rs. 4,29,81,942/-, the assessee argued that there was no basis for adjusting the current year’s loss. The response was supported by a certificate from their Chartered Accountant, Maheshbhai Godani, and all requested details of the survey proceedings were provided to the A.O. The assessee contended that there was no error in the A.O.’s order and that the assessment order was neither erroneous nor prejudicial to the revenue's interest. Thus, the asessee submitted that the proceedings under Section 263 were unwarranted and amounted to a mere change of opinion. Despite the detailed response, Principal CIT was not satisfied with the explanations provided by the assessee. Therefore, the Counsel for the assessee argued Kaneiyalal Ramjibhai & Sons vs. PCIT Asst.Year –2017-18 - 8– that Principal CIT had omitted to appreciate the facts from a correct perspective, and assessment order was neither erroneous nor prejudicial to the interests of the Revenue.

12. Our attention was also drawn to judicial pronouncements to the effect that where the assessee has no other source of income, other than the business income and the AO had conducted inquiry and perused the details submitted, and taken a decision to accept the explanation provided by the assessee after proper application of mind, the provision of section 115BBE of the Act could not be invoked to tax the income as deemed income. That therefore the view of the ld.Pr.CIT invoking the provisions of section 263 on this aspect was not justified. Reference in this regard was made to the decision of ITAT, Bangalore Bench in the case of Karthik Estate v. Pr.CIT, [ITA No. 432/Bang/2022 dated 24.8.2022). Copy of the order was placed before us.

9. After hearing both the parties and perusing the record, we find that there is no dispute about the fact that AO while making the addition of Rs. 13 lacs by disallowing claim of the assessee of this amount in respect of partner's remuneration u/s. 40(b) of the Act against the income disclosed at the time of survey has placed reliance only on the statement of the partner of the assessee's firm at the time of survey. While going through this statement, we find that disclosure was made of Rs. 39,96,537/- as income from business. The AO however treated the sum of Rs. 3,93,537/- as income from business and the disclosure of Rs. 36,03,000/- on account of unaccounted net job work income was treated by him as income from other sources only on the ground that assessee has never shown income form job work in earlier years or till the date of survey during the year under appeal, therefore this disclosed income cannot be treated as income from business and profession. To verify this fact, assessee was directed to file details of job work income if any in earlier and subsequent years and it was found that assessee has shown income of Rs. 2,01,215/- and Rs. 48,551/- under the head Veran Majoori income" during the assessment years 2008-09 and 2010-11 respectively. The finding of AO being on wrong facts is not sustainable. We also agree with the contention of the assessee that if statement of the partner at the time of survey was to be relied for making this addition/disallowance, the statement should not be relied in part and should have Kaneiyalal Ramjibhai & Sons vs. PCIT Asst.Year –2017-18 - 13– been relied in full. Since at the time of survey, assessee disclosed the entire income as business income, the AO was not justified in bifurcating the same into income from other sources and income from business or profession. In view of this, the order passed by Ld. CIT(A) treating the disclosed income of the assessee as business income and allowing the partner's remuneration amounting into Rs. 13 lacs u7s. 40(b) of the Act is hereby upheld. Ground No. 1 & 2 of revenue's appeal are dismissed.”

8. We note that case of the assessee, under consideration is that the amendment in section 115BBF, came into force only on 15.12.2016 whereas the search was conducted on 16.08.2016 and the assessee has paid tax @ 30%. Since the search in the case of the assessee was carried out before the amendment the addition ought to have been made in terms of the prevailing provision and therefore, the addition made by the assessing officer invoking section 115BBE, provision of which came into force only on 01.04.2017. is not sustainable. Therefore, we note that assessee's issue is squarely covered by the aforesaid precedents, hence we allow the appeal of the assessee.