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Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
Before: Shri Waseem Ahmed & Shri Siddhartha Nautiyal
आदेश/ORDER
PER BENCH:- This assessee’s appeal for A.Y. 2015-16, arises from order of the Pr. CIT-3, Rajkot dated 24-03-2020, in DIN & Order No.
Page No 2 M/s. Dharti Estate vs. Pr. CIT ITBA/REV/F/REV5/2019-10/1026883782(1), in proceedings under section 263 of the Income Tax Act, 1961; in short “the Act”.
The assessee has raised the following grounds of appeal:-
“1. The learned Principal Commissioner of Income-tax - 3, Rajkot erred in assuming jurisdiction u/s 263 of the Act, particularly in the light of reasons stated by him in the show cause notice and in the order passed u/s 263 of the Act and hence the impugned order is bad in law.
2. The learned Principal Commissioner of Income-tax - 3, Rajkot erred in setting aside the assessment order framed u/s 143(3) of the Act by holding that assessment was made by assessing officer in a very causal and mechanical manner and without any corroborative evidence obtained in respect of receipts noted in the partner's diary or in respect of the subsequent WIP expenses claimed by the appellant.
3. The learned Principal Commissioner of Income-tax - 3, Rajkot failed to appreciate that necessary inquiries were made by the assessing officer during assessment proceedings u/s 143(3) in respect of claim of remuneration and interest paid to partners and hence the order could not have been considered as erroneous u/s 263.
4. The appellant craves leave to add, amend, alter and withdraw any ground of appeal anytime up to the hearing of this appeal.”
The brief facts of the case are that the Principal Commissioner of Income Tax noticed from the records that a survey under section 133A of the Act was conducted at the premises of the assessee firm during the year under consideration. During the course of survey, a disclosure of � 75,15,000/- has Page No 3 M/s. Dharti Estate vs. Pr. CIT been made by the assessee. The PCIT noted that in verification of computation of income, it is seen that the assessee has claimed an amount of � 3,53,280/- as interest to partners and � 44,85,820/- as remuneration of partners which are not permissible deductions as per the provisions of section 115BBE of the Act. Therefore, show cause notice was issued to the assessee under section 263 of the Act in response to which the assessee submitted letter dated 11-03-2020 wherein the assessee contended that the AO had made inquiries during the assessment proceedings and allowed the claims of the assessee after examining details furnished and documents submitted. The assessee further submitted that the amount disclosed during survey constituted “business income” and has been rightly assessed under section 28 of the Act and cannot be hit by the provisions of section 68/69/69C of the Act, and accordingly provisions of section 115BBE of the Act cannot be invoked. The PCIT however rejected the assessee’s submission and held that the assessment order is erroneous and prejudicial to the interests of the revenue, and accordingly set aside the same for fresh adjudication, with the following observations:
“7.3 It was further stated that the said amount of sales revenue was applied as investment in the project. This statement appear to have been made by the assessee to explain its claim of application of the said amount in project expenses (i.e. WIP) but another side of this statement can be analyzed as under • Number of units (i.e. flats in this case) is always pre-decided before starting the construction of any project. • In the present case, during the survey, a diary of partner came in picture and disclosure of an amount is made. Because of this disclosure, the application of those receipts in the WIP Page No 4 M/s. Dharti Estate vs. Pr. CIT expenses of the project has also come on record. Now, this will increase the projected cost of the project and resultantly cost of every unit of the project proportionally. However, on the other side, the number of units to be constructed and sold is already fixed (as decided before starting the construction). Thus, if the sale price of each unsold units is not increased to match the proportional increase in the cost, any unit sold next would result in lesser profits. • No prudent businessman would act in a manner that would result in less profit. Therefore, if the sale deeds registered prior to survey and post survey are of the same sale consideration then a strong possibility of having received on- money on sale of the units comes to surface (which could be correct explanation of the amounts noted on the partner’s diary) • Had the survey not happened at the premises of the assessee- firm, the diary of partner would never have come in light and the receipts mentioned therein remained undisclosed forever. Consequently, the expenses incurred from it would also remained undisclosed forever and the cycle of suppressing the profits this way would go on for long.
Without verifying all these possibilities, the AO has finalized the assessment accepting the claims of the assessee without any corroborative evidence either in respect of the receipts noted in the partner's diary or in respect of the subsequent WIP expenses claimed by the assessee. As explained above, accepting these claims without culling out exact facts may result in lower profitability in subsequent sale which is not desirable either for the Assessee or for the Revenue.
The above discussion makes it clear that the assessment order is passed without making inquiries or verification which should have been made. Resultantly, the order passed by the Assessing Officer is left erroneous in so far as it is prejudicial to the interests of the revenue. Thus, the order deserves to be revised under section 263 of the Income-tax Act, 1961.
It is the bounden duty of the Assessing Officer to collect and appreciate the facts and to properly apply the law while making the Page No 5 M/s. Dharti Estate vs. Pr. CIT
assessment. It can be seen from the above that assessment made by the Assessing Officer is in a very casual and mechanical manner. Under these circumstances, it would be appropriate to set aside the assessment order so far as the issue of invoking provisions of section 115BBE of the Act is concerned after obtaining explanation regarding exact nature of the receipts on which disclosure is made during the Income-tax survey.
Thus, in the interest of justice And since the twin conditions namely, (i) the order of the Assessing Officer sought to be revised is erroneous: and (ii) it is prejudicial to the interest of the revenue are satisfied, the impugned assessment order is set aside for fresh assessment only to the extent of the issue discussed supra.”
During the course of proceedings before us, the counsel for the assessee drew our attention to show cause notice issued under section 263 of the act by the PCIT at page 1 of the paper book and submitted that the 263 notice does not specify as to how/why interest and remuneration paid to partners of the Assessee is not permissible under section 115 BBE of the Act. He further submitted that the assessee firm is having business from sale of property and since the disclosed income was added on the basis of diary found at the project site of the assessee, it has to be presumed that the income qualifies as “business income”. The assessee had filed its return of income disclosing the aforesaid receipts as its “business income”. Thus, the income so disclosed was to be treated as “business income” and not as “income from other sources”. The counsel for the assessee further mentioned that the notice under section 263 issued by the PCIT does not make any mention of section 68 of the Act. The counsel for the submitted that the assessing officer during the course of assessment proceedings had made detailed enquiries regarding the remuneration paid to partners (reference Page No 6 M/s. Dharti Estate vs. Pr. CIT Page 10 and 13 of the paper book) and accordingly after detailed enquiry accepted the position taken by the assessee. He further drew attention to page 16 of the paper book wherein the income of 75 lakhs disclosed during survey was declared as “business income” in the return of income by the assessee for the impugned assessment year. The counsel for the assessee drew our attention to the Gujarat High Court decision in the case of Babulal K. Daga 387 ITR 114 (Gujarat High Court) to contend that if assessee can point out that even on unaccounted receipts, expenditure was incurred for purpose of business, it would be only reasonable profit on such receipts which should be taxed. In response, the Ld. DR relied upon the observations made by the PCIT in the 263 order.
We have heard the rival contentions and perused the material on record. What can be seen from the assessee’s facts is that the survey was done at the premises of the assessee in which diary was found in survey conducted under section 133A of the Act, during which a disclosure of � 75,15,000/-was made by the assessee. In the return of income, the assessee disclosed the above amount as “business income” and against the same claimed an amount of � 3,53,280/- as interest paid to partners and � 44,85,820/- as remuneration paid to partners. The PCIT passed order under section 263 of the Act holding that the above income should have been assessed as undisclosed income of the assessee, and accordingly taxed under section 115BBE of the Act and without allowing deduction of interest/remuneration paid to partners. Accordingly, the order passed by the assessing officer was erroneous and prejudicial to the interests of the revenue.
Page No 7 M/s. Dharti Estate vs. Pr. CIT 5.1 A perusal of the assessment records show that the assessing officer had made inquiries in respect of the assessment amount of � 3,53,280/- paid as interest to partners and � 44,85,820/- as remuneration paid to partners during the course of assessment proceedings. It is settled law that if the assessing officer has taken one of the views which is possible in law, the assessment order cannot be said to be erroneous and prejudicial to the interest of the revenue. The Gauhati Tribunal in the case of Abdul Hamid v. ITO [2020] 117 taxmann.com 986 (Gauhati - Trib.)held that where Department had itself accepted undisclosed amount of assessee in his bank account as undisclosed “business receipts/turnover”, section 115BBE would not attract. In the case of Babulal K. Daga 387 ITR 114 (Gujarat High Court), the respondent-assessee who was engaged in the business of transportation was subjected to survey proceedings during which he had admitted an expenditure of Rs. 77.01 lakhs out of undisclosed source. In the return filed by the assessee for the relevant assessment year, the Assessing Officer though took note of such income, allowed set off against the business expenditure. The Commissioner however was of opinion that such expenditure would be covered under section 69C and hence the business expenditure could not be set off against such income. He accordingly set aside the assessment by invoking section 263. The Gujarat High Court held that even in case of unaccounted receipts of a businessman, it is only the profit element embedded in the business which can be taxed and not the entire amount. In other words, if the assessee can point out that even on unaccounted receipts, expenditure was also incurred for the purpose of business, it would be only the reasonable profit on such receipts which should be taxed. Thus, revision order was not sustainable. In the case of Page No 8 M/s. Dharti Estate vs. Pr. CIT Deccan Jewellers (P.) Ltd [2021] 132 taxmann.com 73 (Andhra Pradesh), the High Court held that where nature and source of excess stock found during search was not specifically identifiable from profits which had accumulated from earlier years, AO was justified in holding that said excess stock was not undisclosed investment of assessee and 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. The ITAT Chandigarh in the case of Bajaj Sons Ltd. [2021] 128 taxmann.com 406 (Chandigarh - Trib.) held that where director of assessee-company surrendered a certain sum during search, and Assessing Officer treated said sum as income from unexplained sources and invoked provisions of section 115BBE and charged tax at a higher rate, since Assessing Officer had not pointed out any unexplained credit in books of account, provisions of sections 68, 69, 69A, 69B, 69C and 69D were not attracted on surrendered amount and aforesaid surrender not being covered under provisions of sections 68, 69, 69A, 69B, 69C and 69D, provisions of section 115BBE were not attracted. The ITAT Jaipur in the case of Hari NarainGattani [2021] 123 taxmann.com 8 (Jaipur - Trib.) held that where assessee surrenders undisclosed income during search action for relevant year, it is not necessary that tax rate has to be charged as per provision of section 115BBE. The facts of the case were that Assessing Officer completed assessment in case of assessee under section 143(3) at assessed income of Rs. 41.78 lakhs which included income surrendered pursuant to search of Rs. 22.19 lakhs as current year's business income offered to tax, by charging tax and interest at normal rates and raised nil demand. Thereafter, Assessing Officer issued notice under section 154 on ground that tax rate on Page No 9 M/s. Dharti Estate vs. Pr. CIT surrendered income was to be charged as per provision of section 115BBE. However, it was found that there was nothing stated in either pre-amended or post-amended provisions of section 115BBE that where assessee surrenders undisclosed income during search action for relevant year, tax rate has to be charged as per provisions of section 115BBE. The ITAT held that there was no finding that provisions of section 115BBE had been invoked by Assessing Officer during assessment proceedings and tax rate had been charged at rate of 30 per cent on surrendered income under section 115BBE and thus, action of Assessing Officer in rectifying and increasing rate of taxation from 30 per cent to 60 per cent on undisclosed income in view of amended section 115BBE did not come within purview of section 154. The ITAT accordingly held that the action of Assessing Officer in invoking jurisdiction under section 154 was not legally tenable. Again, the ITAT Jaipur in the case of Sudesh Kumar Gupta [2020] 117 taxmann.com 178 (Jaipur - Trib.) held that where while completing assessment under section 143(3), Assessing Officer did not invoke provisions of section 69, provisions of section 115BBE which were contingent on satisfaction of requirements of section 69, could not be independently applied by invoking provisions of section 154.
5.2 In a considered view, during the course of assessment proceedings, the assessing officer had made due enquiries and was aware of the fact that assessee had disclosed the amount as “business income” in his return of income in respect of which it had claimed expenditure in relation to interest/remuneration paid to partners. After making due enquiries, the assessing officer allowed the claim of the assessee by treating the Page No 10 M/s. Dharti Estate vs. Pr. CIT undisclosed income found during survey as assessee’s “business income” and allowing corresponding expenditure against the same in the assessment proceedings. Therefore, in light of the facts of the case and the judicial precedents on the subject as discussed above, in our view, Ld. PCIT has erred on facts and in law in invoking section 263 provisions in the instant facts, to hold that the order passed by the assessing officer is erroneous and prejudicial to the interests of the revenue. In the result, the appeal of the assessee is allowed.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 13-07-2022