2024 (10) TMI 430 - HC - Income Tax

Revision u/s 263 - Addition u/s 69 and 115BBE - unexplained investment - HELD THAT - A careful perusal of Section 263 (1) of the IT Act would show that it is the essential condition to invoke Section 263 that the Commissioner must find that the order of assessment is erroneous firstly and secondly, that the order of the assessing authority is prejudicial to the interests of the revenue. The Commissioner of Income Tax has power to take into consideration all records available at the time of examination by him. Record would mean all records relating to proceeding available at the time of examination with the Commissioner. See Shree Manjunatheaware Packing Products Camphore Works 1997 (12) TMI 4 - SUPREME COURT The phrase prejudicial to the interests of the Revenue has to be read in conjunction with an erroneous order passed by the AO . Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests of the Revenue, for example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income Tax Officer is unsustainable in law. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the Revenue. AO has issued specific show cause notice to the assessee as to why the excess stock be treated as unexplained investment under Section 69 of the IT Act which the assessee replied stating that the said excess business stock was found during survey proceedings under the IT Act during the year under consideration in the business premises of the assessee Company and duly recorded in the books of accounts of the concerned year and thus, Section 69 would not be attracted to the assessee Company, as excess stock would not be treated as undisclosed income within the meaning of Section 69, which the AO has accepted and taken it as one of the possible views and which the ITAT has accepted holding to be the correct view. We are of the considered opinion that both the twin conditions, namely, the order of the AO sought to be revised is erroneous and it is prejudicial to the interests of the Revenue, are not satisfied at all to invoke the jurisdiction u/s 263 as the AO has passed the order of assessment after conducting inquiry. As such, the PCIT is absolutely unjustified in invoking the jurisdiction u/s 263 of the IT Act which has rightly been set-aside by the ITAT. Decided in favour of assessee.

Summary

Issues Involved:

1. Whether the Tribunal was correct in holding that there was no tangible material before the revisional authority for directing the Assessing Officer to make inquiries regarding the applicability of Sections 69 and 115BBE of the Income Tax Act, 1961, in connection with unexplained investment.

Detailed Analysis:

Issue 1: Applicability of Sections 69 and 115BBE of the Income Tax Act, 1961

The primary issue in this case was whether the Tribunal was correct in its decision that there was no tangible material for the revisional authority to direct the Assessing Officer (AO) to investigate the applicability of Sections 69 and 115BBE concerning an unexplained investment of Rs. 2,25,75,951/-. The case arose from a survey action on the assessee, a company engaged in trading gold and diamond ornaments, where excess stock was found and surrendered as income. The AO taxed this income at the standard rate, which was contested by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the IT Act, arguing that it should have been treated as unexplained investment and taxed at a higher rate under Section 115BBE.

The PCIT found the AO's assessment order erroneous and prejudicial to the interests of the Revenue, as it did not verify the claim of excess purchase or apply Section 69, which deals with unexplained investments, and Section 115BBE, which imposes a higher tax rate on such income. The PCIT set aside the AO's order and directed a fresh assessment. However, the Tribunal overturned the PCIT's decision, stating that the conditions for invoking Section 263 were not met, as the AO had conducted an inquiry and the view taken was a possible one under the law.

The Tribunal relied on precedents from the Rajasthan and Calcutta High Courts, which held that undisclosed business income does not automatically attract the penal provisions of Section 115BBE. The Tribunal found that the AO had issued a specific show cause notice regarding the treatment of the excess stock and accepted the assessee's explanation that it was business income, duly recorded in the books, and not unexplained investment under Section 69.

The High Court, reviewing the Tribunal's decision, emphasized the two conditions for invoking Section 263: the order must be erroneous and prejudicial to the interests of the Revenue. Citing the Supreme Court's decisions in Malabar Industrial Co. Ltd. and Max India Limited, the High Court noted that not every loss of revenue due to an AO's order can be deemed prejudicial if the AO adopted a legally permissible view. The High Court agreed with the Tribunal that the AO's decision was a possible view and thus not erroneous or prejudicial to the Revenue's interests.

Conclusion:

The High Court concluded that the twin conditions for invoking Section 263 were not satisfied, as the AO had conducted an inquiry and adopted a permissible view. Therefore, the Tribunal's decision to set aside the PCIT's order and restore the AO's assessment was upheld. The appeal by the Revenue was dismissed, affirming the Tribunal's findings and supporting the assessee's position.