2025 (2) TMI 437 - AT - Income Tax

Revision u/s 263 - income surrendered during survey action should be treated as if the assessee is in possession of unexplained money and treatment of tax liability thereon should be under the provisions of section 69B and tax needs to be calculated as per section 115BBE of the Act on the surrendered income - HELD THAT - Proper enquiry was made by the AO and it is not the case where no enquiry was made. It is settled law that this power of revision can be exercised only where there is no enquiry as required under the law is done. It is not open to enquire in case of inadequate inquiry. The revisionary powers under section 263 allow the Principal Commissioner of Income Tax (PCIT) to revise an order if it is deemed erroneous and prejudicial to the interests of revenue. However in this instance the PCIT s revision order contradicts the facts and circumstances of the case duly supported by documentary evidence. Stock of goods that has been found in excess by the survey team are the same nature and type of goods i.e. Cosmetics which is regularly traded by the assessee in her usual course of business and in course of survey the department has not been able to unearth any other documents or papers to arrive at any different conclusion that the assessee has any other source of income earning activity other than the business of cosmetics. Excess STOCK has not been separately identified and the loose papers and documents diaries impounded as per Annexure - 1 and 2 (of impounded documents) points to the fact that there has been unrecorded transactions of purchase and sales outside books of accounts pertaining to the same business of cosmetics in which the assessee transacts in usual course of her business and as such the nexus or the link in between the excess stock found and the assessee business is established and whatever excess that has been found is the excess stock that is rolling in the same business and it has no independent identity of its own and is part and parcel of the normal business stock and what is not declared to the department is the receipt from business (and not any investment) because it cannot be co-related with any specific assets. Valuation of the stock as done by the survey team it is seen that the assessee in course of assessment proceedings has specifically demonstrated with supporting sales invoices and calculation of the entire inventory of stock that if the said excess stock is valued at COSTS the difference will only be of an amount of Rs. 17 lakhs (approx) and not Rs. 50 lakhs as it is has been made out to be . Neither the AO nor the Ld PCIT in course of proceedings before them has been able to counter the said argument of the assessee nor could they find any fault in the computation and calculation put forth by the assessee as regards the stock value at cost as claimed by the assessee. In course of hearing before us the DR also did not raise any counter arguments regarding the process of valuation of the stock at cost and did not find any fault in respect of such valuation. Leading through the said calculation in respect of valuation of the stock at costs the assessee proceeded a step further to demonstrate by way of an alternate argument that if the stock value is taken at costs and tax is imposed as per provisions of section 115BBE even then also the tax so arrived at will be covered by the tax actually paid by the assessee and as such there is no prejudice to Government revenue. Whether proper enquiry was made by the AO? - Source of the amount required for purchase of excess stock is well explained to the satisfaction of the AO to have come out of sale proceeds of cosmetics and he has accepted the same after examination of the purchase and sales invoice vis a vis impounded documents and stock inventory of identical goods. As such under the circumstances it cannot be said that there has not been any enquiry on the part of the AO. In fact the AO has conducted enquiry and has applied his mind by raising queries and examining the documentary evidences produced before him and after conducting necessary enquiry has taken a possible view in the matter which is a legally acceptable view and as such there cannot be any basis to invoke the provisions of section 263 to revise the assessment. Neither the survey team in course of survey nor the AO in course of assessment proceedings has brought any adverse material on record to prove the fact that the assessee had any income other than the business of cosmetics and the assessee has also explained the source of the income so surrendered before the survey team to have arisen out of business of cosmetics itself and the said explanation has also been accepted by the AO after adequate enquiry and verification of documents produced before him and he has arrived at a logical conclusion which a prudent person would have arrived under the circumstances. AO after careful examination of the submissions made by the assessee and after conducting detail enquiry has taken a plausible view that the provisions of section 115BBE is not applicable in the instant case and the said assessment cannot be set aside merely on the ground of inadequacy of enquiry by the AO with respect to source of surrender of income. There is no perversity or lack of enquiry on the part of the assessing officer to render the decision erroneous under explanation 2 to section 263 of the Act 61 and the order passed by the AO is neither erroneous nor prejudicial to the interest of revenue and we hold that the assumption of jurisdiction u/s 263 by the Ld PCIT in the instant case is not legally justified and the consequential order passed u/s 263 of the Act 61 is hereby set aside. Appeal filed by assessee is allowed.

Summary

Issues Presented and Considered

The primary issues considered in this judgment are:

1. Whether the order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961, was illegal, without jurisdiction, and whether it was erroneous and prejudicial to the interests of revenue.

2. Whether the income disclosed by the assessee during the survey as excess stock should be treated as business income or as deemed income under Section 69 read with Section 115BBE of the Act.

3. Whether the Assessing Officer (AO) conducted adequate inquiries and verification regarding the source of the excess stock and the funds used for its purchase.

4. Whether the valuation of the excess stock at Maximum Retail Price (MRP) instead of cost price was appropriate and whether it affected the tax liability.

Issue-wise Detailed Analysis

1. Legality and Jurisdiction of the PCIT's Order under Section 263

The legal framework under Section 263 allows the PCIT to revise an assessment order if it is deemed erroneous and prejudicial to the interests of revenue. The Tribunal examined whether the twin conditions of the order being erroneous and prejudicial were satisfied. The Court noted that the AO had conducted detailed inquiries and accepted the assessee's explanation regarding the excess stock as business income, thus fulfilling the requirement of inquiry. The Tribunal emphasized that merely because the PCIT disagreed with the AO's conclusion does not render the order erroneous.

2. Treatment of Disclosed Income as Business Income or Deemed Income

The Tribunal considered whether the excess stock found during the survey should be treated as business income or as deemed income under Section 69. The Tribunal referred to various precedents and concluded that since the excess stock consisted of the same nature and type of goods regularly traded by the assessee, it should be treated as business income. The Tribunal highlighted that the nexus between the excess stock and the business was established, and there was no evidence of any other source of income.

3. Adequacy of Inquiry by the AO

The Tribunal reviewed the inquiries conducted by the AO, which included examining the purchase and sales invoices, impounded documents, and the explanation provided by the assessee. The Tribunal found that the AO had made a reasonable inquiry and had taken a plausible view by treating the excess stock as business income. The Tribunal held that the AO's order could not be revised merely because the PCIT believed a more detailed inquiry was necessary.

4. Valuation of Excess Stock at MRP

The Tribunal examined the valuation of the excess stock at MRP and the assessee's contention that it should be valued at cost price. The Tribunal noted that the assessee had demonstrated with supporting invoices that the correct valuation at cost would result in a lower excess stock value. The Tribunal found that neither the AO nor the PCIT had countered this argument, and the valuation at MRP did not affect the tax liability as the tax paid on the disclosed income was higher than what would have been payable under Section 115BBE.

Significant Holdings

The Tribunal held that the AO's order was neither erroneous nor prejudicial to the interests of revenue. It emphasized that the AO had conducted adequate inquiries and that the PCIT's revision under Section 263 was not justified. The Tribunal concluded that the excess stock should be treated as business income and not as deemed income under Section 69, as there was no evidence of any other source of income.

The Tribunal set aside the PCIT's order under Section 263, allowing the appeal filed by the assessee. The judgment reinforces the principle that the powers of revision under Section 263 cannot be exercised merely because the PCIT disagrees with the AO's conclusion, especially when the AO has conducted a reasonable inquiry and taken a plausible view.