2022 (9) TMI 584 - AT - Income Tax

Unaccounted cash payments / expenditure - unaccounted cash receipts from patients - Addition u/s 69C - levy of tax u/s 115BBE at higher rate of tax - proof of source of income - set off the current year loss against the additional income offered to tax as business income - test of reasonableness - AO treated the additional income as a separate item of income and taxed the same as per the provisions of section 115BBE and therefore recomputed the business loss to be carried forward without adjusting the additional income - CIT(Appeals) while upholding the order of the AO observed that the source for unaccounted cash payments is unaccounted cash receipts and that the assessee has not provided the details of patients from whom cash receipts were received - HELD THAT - When an assessee offers no explanation or the explanation offered is not satisfactory in the opinion of the AO, then the amount of such expenditure is to be taxed as income u/s. 69C of the Act. The satisfaction to be recorded by the AO should not be objective satisfaction exercised at his discretion, but a subjective satisfaction based on the facts of the case. It would then mean that justification for exercise of the power has to be found by the authority by making a subjective satisfaction on the basis of objective material and such satisfaction must be reflected in the reasons recorded in writing while exercising the power. (Vide Dee Vee Projects Ltd. v/s. Union of India Ors. 2022 (2) TMI 569 - BOMBAY HIGH COURT In the present case, the assessee is in the business of running a diagnostic centre and the only source of income is the receipts from patients which is stated to be the source for unexplained expenditure. That being the case the AO has not brought any contrary material on record to state that the source for the expenditure was other than from business income and has formed the opinion based on conjectures and surmises. While exercising the quasi-judicial functions, the administrative authorities have to reach satisfaction on the basis of material available and not on conjectures and surmises. The test of reasonableness has to be satisfied which in our view failed in the case under consideration. Therefore, we are of the view that the additional income offered cannot be taxed u/s. 115BBE and the impugned addition is hereby deleted. Accordingly the assessee is allowed to set off the current year loss against the additional income offered to tax as business income.Appeal by the assessee is allowed.

Summary

Issues:
1. Tax treatment of additional income declared during search proceedings.
2. Application of section 69C for taxing undisclosed income.
3. Justification of tax assessment under section 115BBE.

Analysis:
1. The appellant, a private limited company operating a medical diagnostic center, declared a loss in the return of income for the relevant year. During a search under section 132 of the Income-tax Act, additional income of Rs. 5,39,50,000 was agreed upon to be spread over multiple assessment years. However, an amount of Rs. 53,85,000 related to the assessment year in question was inadvertently omitted from the return.

2. The Assessing Officer (AO) treated the additional income as a separate item and taxed it under section 115BBE, without adjusting it against the business loss. The Commissioner of Income Tax (Appeals) upheld this decision under section 69C, deeming the amount as undisclosed income. The appellant contended that the additional income was not undisclosed but part of the agreed amount during search proceedings, attributing the omission to the sickness of their tax-related personnel.

3. The Tribunal analyzed the provisions of section 69C, emphasizing that the AO's satisfaction must be based on objective material, not conjectures. The Tribunal found that the unexplained expenditure was sourced from the business receipts of the appellant, and the AO did not present contrary evidence. Consequently, the Tribunal held that the additional income should not be taxed under section 115BBE. The appellant was allowed to set off the current year loss against the additional income offered as business income.

In conclusion, the Tribunal allowed the appeal, ruling in favor of the appellant and deleting the impugned addition. The decision highlighted the importance of objective satisfaction by tax authorities and the need to base assessments on concrete evidence rather than assumptions or conjectures.