2025 (4) TMI 855 - AT - Income Tax

Addition of undisclosed income as per the provisions of Section 69C r.w.s. 115BBE - HELD THAT - In the Income Tax Return also it was shown separately for fair and transparent disclosure only. But in the computation of income the same is forming part of normal business income under the profit and gains of business. Thus the disclosure of sum in the Profit and Loss and ITR by no means can leave to a conclusion that there is some unexplained or undisclosed income which has been invested in stocks. Therefore AO accepted the above 30 lakhs as business income and made addition which was not offered to tax by the assessee in the regular assessment. Further it is a fact that the stocks physically found in the premises were out of purchases duly accounted in books identified with purchase bills and value was also determined based on the same which are already on record. Thus there is no case of any investment in stocks out of undisclosed sources. But the contention of the Ld. CIT to treat the same undisclosed income u/s. 69C of the Act also not valid in law. Since section 69C deals with incurrence of expenditure for which source is not explained or the explanation offered is not to the satisfaction of the A.O. In the instant case there is no issue of unexplained expenditure because the excess stock found was out of purchases duly accounted for in the books. Thus the question of invocation of Section 69C does not arise in the facts of the present case. Applicability of provisions of Section 115BBE - Amendment to Section 115BBE of the Act substituting a higher rate of 60% for the erstwhile 30% was made with effect from 15-12-2016 and therefore the contention of the assessee is said that the amendment is not applicable in its case as the disclosure was made during the survey on 29-09-2016. Per contra the contention of the PCIT is the amended provisions of section 115BBE of the Act are applicable w.e.f. 01-04-2017 i.e. from the A.Y.2017-18 and accordingly applicable from 01-04-2016. Undisputedly survey action taken place in the business premises of the assessee on 29-09-2016 and the alleged unaccounted stocks purchased from 01-04-2016 till the date of survey. Thus respectfully following the above Judgement of the Madras High Court S.M.I.L.E Microfinance Limited. 2024 (11) TMI 1444 - MADRAS HIGH COURT there is no question of invoking provisions of section 115BBE of the Act. Thus the grounds of appeal of the assessee on the issue of Section 115BBE of the Act is hereby allowed and the revision order passed by Ld.PCIT is hereby quashed. Decided in favour of assessee.

ISSUES PRESENTED and CONSIDERED

The primary issues considered in this judgment were:

Whether the undisclosed income identified during a survey should be treated as "undisclosed expenditure" under Section 69C of the Income Tax Act, 1961.
The applicability of Section 115BBE, which imposes a higher tax rate on certain undisclosed incomes, to the assessment year 2017-18.
The validity of the Principal Commissioner of Income Tax's (PCIT) invocation of Section 263 to revise the assessment orders, deeming them erroneous and prejudicial to the interests of the revenue.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Treatment of Undisclosed Income as Undisclosed Expenditure under Section 69C

Relevant legal framework and precedents: Section 69C deals with unexplained expenditure, which if not satisfactorily explained, is deemed to be the income of the assessee.
Court's interpretation and reasoning: The Tribunal found that the undisclosed income was not due to unexplained expenditure but rather due to a discrepancy in stock accounting. The physical stock found was out of purchases duly accounted for in the books.
Key evidence and findings: The Tribunal noted that the stock was accounted for in the books, and the valuation was based on purchase bills. There was no unexplained expenditure, as the stock discrepancy was due to accounting treatment rather than unaccounted purchases.
Application of law to facts: The Tribunal concluded that Section 69C was not applicable as there was no unexplained expenditure or investment in stocks.
Treatment of competing arguments: The assessee argued that the stock discrepancy was due to accounting practices, not unaccounted purchases. The PCIT's contention that the income should be treated under Section 69C was rejected.
Conclusions: The Tribunal held that the income should be treated as business income, not under Section 69C.

Issue 2: Applicability of Section 115BBE

Relevant legal framework and precedents: Section 115BBE imposes a higher tax rate on certain incomes, including those under Section 69C, from the assessment year 2017-18 onwards.
Court's interpretation and reasoning: The Tribunal referred to the judgment of the Madras High Court in S.M.I.L.E Microfinance Limited vs. ACIT, which clarified that the amendment to Section 115BBE applies prospectively from April 1, 2017.
Key evidence and findings: The Tribunal noted that the survey occurred before the amendment's effective date, and the income pertained to transactions before April 1, 2017.
Application of law to facts: The Tribunal determined that the higher tax rate under the amended Section 115BBE could not be applied to the income in question.
Treatment of competing arguments: The PCIT argued for the application of the higher tax rate, while the assessee contended that the amendment was not applicable retrospectively. The Tribunal sided with the assessee.
Conclusions: The Tribunal ruled that the amended Section 115BBE did not apply to the income disclosed during the survey.

Issue 3: Invocation of Section 263 by PCIT

Relevant legal framework and precedents: Section 263 allows the PCIT to revise an assessment if it is erroneous and prejudicial to the interests of the revenue.
Court's interpretation and reasoning: The Tribunal found that the PCIT's invocation of Section 263 was not justified, as the original assessment was neither erroneous nor prejudicial.
Key evidence and findings: The Tribunal noted that the AO had considered the income as business income and made necessary additions, which were not erroneous.
Application of law to facts: The Tribunal held that the PCIT's direction to revise the assessment was unwarranted.
Treatment of competing arguments: The PCIT argued the assessment was erroneous due to the treatment of income, while the assessee maintained the original assessment was correct. The Tribunal agreed with the assessee.
Conclusions: The Tribunal quashed the PCIT's revision order under Section 263.

SIGNIFICANT HOLDINGS

Core principles established: The Tribunal reaffirmed that Section 69C applies only to unexplained expenditures, not to discrepancies arising from accounting practices. Additionally, amendments to tax provisions imposing higher rates are prospective unless explicitly stated otherwise.
Final determinations on each issue: The Tribunal concluded that the income should be treated as business income, not under Section 69C, and that the amended Section 115BBE did not apply retrospectively. The PCIT's order under Section 263 was quashed, and the original assessment was upheld.

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