2022 (7) TMI 682 - AT - Income Tax

Revision u/s 263 - income should have been assessed as undisclosed income of the assessee, and accordingly taxed under section 115BBE and without allowing deduction of interest/remuneration paid to partners - income so disclosed was to be treated as business income and not as income from other sources - HELD THAT - As found that there was nothing stated in either pre-amended or post-amended provisions of section 115BBE that where assessee surrenders undisclosed income during search action for relevant year, tax rate has to be charged as per provisions of section 115BBE. ITAT held that there was no finding that provisions of section 115BBE had been invoked by AO during assessment proceedings and tax rate had been charged at rate of 30 per cent on surrendered income u/s 115BBE and thus, action of AO in rectifying and increasing rate of taxation from 30 per cent to 60 per cent on undisclosed income in view of amended section 115BBE did not come within purview of section 154. ITAT accordingly held that the action of AO in invoking jurisdiction under section 154 was not legally tenable. Again, the ITAT Jaipur in the case of Sudesh Kumar Gupta 2020 (6) TMI 463 - ITAT JAIPUR held that where while completing assessment under section 143(3), Assessing Officer did not invoke provisions of section 69, provisions of section 115BBE which were contingent on satisfaction of requirements of section 69, could not be independently applied by invoking provisions of section 154. During the course of assessment proceedings, the assessing officer had made due enquiries and was aware of the fact that assessee had disclosed the amount as business income in his return of income in respect of which it had claimed expenditure in relation to interest/remuneration paid to partners. After making due enquiries, AO allowed the claim of the assessee by treating the undisclosed income found during survey as assessee s business income and allowing corresponding expenditure against the same in the assessment proceedings. Therefore, in light of the facts of the case and the judicial precedents on the subject as discussed above, in our view, Ld. PCIT has erred on facts and in law in invoking section 263 provisions in the instant facts, to hold that the order passed by the assessing officer is erroneous and prejudicial to the interests of the revenue. In the result, the appeal of the assessee is allowed.

Issues Involved:

1. Jurisdiction under Section 263 of the Income Tax Act.
2. Validity of deductions claimed under Section 115BBE.
3. Assessment order's alleged erroneous nature and prejudice to revenue interests.

Issue-wise Detailed Analysis:

1. Jurisdiction under Section 263 of the Income Tax Act:

The Principal Commissioner of Income Tax (PCIT) assumed jurisdiction under Section 263 of the Income Tax Act, 1961, to revise the assessment order for the assessment year 2015-16. The PCIT issued a show cause notice to the assessee, stating that the assessment order was erroneous and prejudicial to the interests of the revenue. The PCIT's primary contention was that the assessment was made in a "casual and mechanical manner" without proper verification of receipts noted in the partner's diary and subsequent Work-in-Progress (WIP) expenses.

2. Validity of Deductions Claimed under Section 115BBE:

The PCIT observed that the assessee had claimed deductions for interest and remuneration paid to partners, which were not permissible under Section 115BBE of the Act. The PCIT argued that the income disclosed during the survey should be treated as "undisclosed income" and taxed under Section 115BBE without allowing any deductions. The assessee contended that the disclosed income constituted "business income" and was rightly assessed under Section 28 of the Act, making the provisions of Section 115BBE inapplicable.

3. Assessment Order's Alleged Erroneous Nature and Prejudice to Revenue Interests:

The PCIT held that the assessment order was erroneous and prejudicial to the interests of the revenue because the Assessing Officer (AO) finalized the assessment without proper inquiries or verification. The PCIT noted that the AO accepted the assessee's claims without corroborative evidence regarding the receipts noted in the partner's diary or the subsequent WIP expenses. The PCIT argued that this could result in lower profitability in subsequent sales, which was undesirable for both the assessee and the revenue.

Tribunal's Findings:

The tribunal examined the facts and legal precedents and found that the AO had made due inquiries during the assessment proceedings. The AO was aware that the assessee had disclosed the amount as "business income" and claimed corresponding expenditures for interest and remuneration paid to partners. The tribunal noted that the AO's decision to treat the undisclosed income found during the survey as "business income" and allow corresponding expenditures was a possible view in law.

The tribunal referred to several judicial precedents, including the Gujarat High Court's decision in the case of Babulal K. Daga, which held that only the profit element embedded in unaccounted receipts should be taxed, not the entire amount. The tribunal also cited other cases where courts held that if the AO had taken a possible view in law, the assessment order could not be considered erroneous and prejudicial to the interests of the revenue.

Conclusion:

The tribunal concluded that the PCIT erred in invoking Section 263 provisions to revise the assessment order. The tribunal held that the AO had made due inquiries and properly applied the law while making the assessment. Therefore, the assessment order was neither erroneous nor prejudicial to the interests of the revenue. The appeal of the assessee was allowed, and the PCIT's order under Section 263 was set aside.

Final Judgment:

The appeal of the assessee was allowed, and the order pronounced in the open court on 13-07-2022.

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