2025 (1) TMI 610 - AT - Income Tax

Revision u/s 263 - amount disclosed during the survey proceedings as unaccounted excess stock under business head - As per CIT tax was not charged u/s. 115BBE - HELD THAT - AO has asked details regarding valuation of closing stock and discrepancy of stock - AO made enquiry during the assessment proceedings, therefore, the order passed by the assessing officer should not be erroneous. After considering the assessee s reply in respect of the showcause notice issued by the assessing officer, dated 08.09.2021, wherein the assessing officer specially asked about the valuation of the closing stock and discrepancy of stock, and the assessing officer has also asked the assessee to explain that how assessee has accounted this discrepancy in his books of accounts. Therefore, we find that during the assessment proceedings, the assessing officer has conducted necessary enquiries. During the course of hearing, assessee has also agreed that the assessee has not explained the source of the excess stock, as it was not required to explain, because the assessing officer did not raise this question. We find merit in the submission of ld. Counsel that it was not required to explain, the source by the assessee, once the assessee has explained the causes of excess stock and the causes of discrepancy in the stock and this excess stock and the discrepancy in the stock were related to the assessee s business, which are sufficient to hold, that stock pertains to the assessee s business. We note that no doubt the excess stock found and the discrepancy in the stock found during the survey proceedings is related to the business activity of the assessee, and the excess stock and the discrepancy in stock pertains to the business of the assessee, therefore, no addition u/s.115BBE of the Act, at the higher rate of taxation be imposed on the assessee. We note that assessee has submitted the relevant details and documents regarding closing stock and causes of discrepancy in the stock, considering, these facts, the assessing officer has taken a possible view and framed the assessment order. Therefore, no addition should be made u/s 115BBE of the Act The present order of assessing officer passed u/s 143(3) cannot be termed as erroneous, since enquiry was, in fact, carried out by assessing officer, on the issue on which the ld PCIT has found fault with and has taken a plausible view. Thus, we note that the assessing officer enquired during assessment proceedings and the assessee had filed details before him. So, we find that the assessing officer s action cannot be termed erroneous . Since not only enquiry was carried out by the assessing officer on the issue under consideration and based on the evidence gathered, assessing officer has taken a plausible view, which at any rate cannot be called as an unsustainable view. When the Assessing Officer adopted one of the courses permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue unless the view taken by the Assessing Officer is unsustainable in law . Therefore, we are of the considered opinion that assessing officer s order cannot be termed as erroneous as well as prejudicial to the interest of the revenue and therefore, jurisdictional condition precedent as prescribed by statute for invoking revisional jurisdiction is absent and therefore, we quash order of the Learned Principal Commissioner of Income Tax and allow the appeal of the assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions addressed in the judgment are as follows:

1. Whether the order passed by the Assessing Officer under Section 143(3) of the Income-tax Act, 1961, was erroneous and prejudicial to the interest of the revenue, thereby justifying the invocation of Section 263 by the Principal Commissioner of Income Tax (PCIT).

2. Whether the unaccounted excess stock discovered during the survey proceedings should be taxed under the special provisions of Section 115BBE or as regular business income.

3. Whether the Assessing Officer conducted adequate inquiries and applied the correct legal standards in assessing the income declared by the assessee.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Invocation of Section 263 by the PCIT

Relevant legal framework and precedents: Section 263 of the Income-tax Act empowers the PCIT to revise an order passed by the Assessing Officer if it is erroneous and prejudicial to the interest of the revenue. The Supreme Court in Malabar Industrial Co. Ltd. v. CIT established that both conditions must be satisfied for invoking Section 263.

Court's interpretation and reasoning: The Tribunal examined whether the order by the Assessing Officer was erroneous and prejudicial to the revenue. It considered whether the Assessing Officer had adopted a permissible course of action and whether the PCIT's disagreement constituted an error.

Key evidence and findings: The Tribunal found that the Assessing Officer had conducted inquiries and considered the assessee's explanations regarding the excess stock. The Assessing Officer's decision to tax the income as regular business income was based on the connection of the stock to the business activities.

Application of law to facts: The Tribunal applied the principles from Malabar Industrial Co. Ltd. to determine that the Assessing Officer's order was not erroneous, as it was based on permissible legal interpretations and inquiries.

Treatment of competing arguments: The Tribunal acknowledged the PCIT's argument that the excess stock should be taxed under Section 115BBE but found that the Assessing Officer's view was a plausible interpretation of the law.

Conclusions: The Tribunal concluded that the conditions for invoking Section 263 were not met, as the Assessing Officer's order was neither erroneous nor prejudicial to the interest of the revenue.

Issue 2: Taxation under Section 115BBE vs. Regular Business Income

Relevant legal framework and precedents: Section 115BBE imposes a higher tax rate on certain unexplained income, such as those covered under Sections 68 to 69D. The determination of whether income falls under these sections involves assessing the nature and source of the income.

Court's interpretation and reasoning: The Tribunal considered whether the excess stock was unexplained investment under Section 69 or part of the regular business income. It evaluated the explanations provided by the assessee and the inquiries made by the Assessing Officer.

Key evidence and findings: The Tribunal noted that the excess stock was related to the business activities and was accounted for in the books, supporting the view that it was regular business income.

Application of law to facts: The Tribunal found that the excess stock was sufficiently explained as part of the business operations, and thus, the Assessing Officer's decision to tax it as regular income was justified.

Treatment of competing arguments: The Tribunal addressed the Revenue's argument that the source of the stock was unexplained, but found that the nature of the stock was adequately linked to the business.

Conclusions: The Tribunal concluded that the excess stock should be taxed as regular business income, not under the higher rate of Section 115BBE.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning:

"When the Assessing Officer adopted one of the courses permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue unless the view taken by the Assessing Officer is unsustainable in law."

Core principles established:

- The invocation of Section 263 requires that the order is both erroneous and prejudicial to the revenue.

- A permissible legal interpretation by the Assessing Officer, even if resulting in less tax, cannot be deemed erroneous if it is a plausible view.

Final determinations on each issue:

- The Tribunal quashed the PCIT's order under Section 263, finding the original assessment order neither erroneous nor prejudicial to the revenue.

- The Tribunal upheld the taxation of excess stock as regular business income, rejecting the application of Section 115BBE.

In conclusion, the Tribunal allowed the appeal of the assessee, emphasizing the importance of the Assessing Officer's discretion in adopting legally permissible views and the necessity of meeting both conditions for invoking Section 263.