2024 (11) TMI 1118 - AT - Income Tax

Revision u/s 263 - AO failed to conduct proper verification regarding the nature and source of the undisclosed income admitted during the survey u/s 133A - CIT observed that the undisclosed income was taxed at the normal rate of 30%, instead of the higher rate of 60% u/s 115BBE which applies to income covered under Sections 68 to 69D and by failing to tax the undisclosed income u/s 69A and at the higher rate prescribed by Section 115BBE AO's omission led to a potential revenue loss, which renders the assessment order prejudicial to the interests of the Revenue HELD THAT - We find that the AO made sufficient inquiries during the original assessment proceedings. The undisclosed income admitted during the survey was included in the profit and loss accounts of the assessee firms, and the submission before PCIT clearly indicated that the receipts related to business activities (i.e., extra work, development charges, and maintenance charges). The cash receipts were in multiple transactions, each of which did not exceed Rs. 2 lakh per transaction, as required by Section 269ST - assessees had already provided this information to the PCIT during the revisionary proceedings, confirming that the receipts did not violate Section 269ST - PCIT did not present any evidence to contradict the assessee s explanation, and therefore, the invocation of Section 263 on the ground of potential Section 269ST violations was based on conjecture rather than facts. Reliance placed by the AR on judgement in the case of Dharti Estate 2024 (1) TMI 1197 - GUJARAT HIGH COURT is valid. In that case, the court held that if the AO has made adequate inquiries and treated the undisclosed income as business income, the revisionary powers u/s 263 cannot be invoked simply because the PCIT holds a different view. This legal principle applies here, where the AO took a plausible view after considering the evidence and treating the undisclosed income as business income. Application of Section 115BBE - AO correctly assessed the undisclosed income at the normal rate since it was explained and connected to business receipts. There was no basis for taxing the income at the higher rate of 60% under Section 115BBE of the Act, as the income was neither unexplained under Section 69A nor considered unexplained investments. AO exercised a plausible and legally valid view in treating the undisclosed income as business income and taxing it at the normal rate. The revisionary jurisdiction under Section 263 of the Act cannot be invoked merely because the PCIT holds a different view. Decided in favour of assessee.

Summary

Issues:
Challenge to revision orders under Section 263 of the Income Tax Act regarding scrutiny assessment orders for AY 2017-18 by the PCIT.

Analysis:
The appeals were filed against revision orders by the PCIT, Vadodara-1, under Section 263 of the Income Tax Act, concerning scrutiny assessment orders for AY 2017-18 of two assessee-firms engaged in real estate development. The PCIT observed that the AO failed to verify the nature and source of undisclosed income admitted during a survey, leading to potential revenue loss. The PCIT set aside the assessment orders, directing fresh assessments considering Sections 69A, 115BBE, 269ST, and 271DA of the Act. The assessees challenged the PCIT's orders, arguing that the AO had correctly treated the undisclosed income as business income. The core issue was whether the AO erred in not further investigating the source of the undisclosed income.

During the hearing, the AR emphasized that the undisclosed receipts were related to business activities, fully explained during the survey, and incorporated into the profit and loss accounts. The AR argued that the AO's view was plausible, citing a relevant High Court judgment. The DR contended that the AO failed to inquire into the source of cash receipts, relying on the PCIT's order.

After considering the contentions and evidence, it was found that the AO had made sufficient inquiries during the original assessment. The undisclosed income was connected to business activities, and the cash receipts were within the prescribed limits of Section 269ST. The PCIT's invocation of Section 263 was based on conjecture. The AR's reliance on the High Court judgment was valid, as the AO's treatment of the income was reasonable. The undisclosed income was correctly taxed at the normal rate, as it was explained and connected to business receipts.

The PCIT erred in invoking Section 263, as the AO's actions were valid, and the accounts were audited without adverse comments. The undisclosed income was properly accounted for, and the cash transactions were compliant with the Act. The appeals were allowed, and the revision orders were quashed, as the assessment orders were not erroneous or prejudicial to revenue interests.

In conclusion, the appeals challenging the revision orders under Section 263 of the Income Tax Act were allowed for both assessee-firms for AY 2017-18, as the assessment orders were deemed appropriate and in compliance with the Act.