2023 (8) TMI 525 - AT - Income Tax

Characterization of income - income surrendered during the course of survey u/s 133A - deemed income u/s 69 and 69A or business income - HELD THAT - Foundational requirement before invoking the deeming provisions is not that there were certain survey operations u/s 133A and some undisclosed income has been detected and surrendered by the assessee and thus, the deeming provisions are automatically attracted. Rather the foundational requirement is whether the assessee has made the investment/has been found to be owner of cash and the explanation offered by the assessee explaining the nature and source of such undisclosed income and the reasonability of the explanation so offered by the assessee keeping into account the facts and circumstances of the relevant case. The mere fact that survey/search proceedings have been initiated at the business premises of the assessee doesn t mandate the Assessing officer to automatically invoke the deeming provisions and before invoking the deeming provisions, he has to call for the explanation of the assessee and only where the explanation so offered is not found satisfactory, he can proceed and invoke the deeming provisions. In the instant case as well, we find that the difference in stock so found out by the authorities has no independent identity and is part and parcel of entire stock, therefore, it cannot be said that there is an undisclosed asset which existed independently and thus, what is not declared to the department is receipt from business and not any investment as it cannot be co-related with any specific asset and the difference should thus be treated as undeclared business income. Following the said decision of DCIT Vs . Shri Ram Narayan Birla 2016 (9) TMI 1354 - ITAT JAIPUR has taken a similar view holding that the excess stock so found during the course of survey was part of the stock and the Revenue has not pointed out the excess stock has any nexus with any other receipts other than the business being carried on by the assessee. The surrender on account of advances were relating to the business being carried on by the assessee. The ld CIT(A) has also returned a finding that the advances were admitted as being related to business activity of the assessee. Where the same has been found unrecorded in the books of accounts, the same has to be brought to tax under the head business income . Thus the income surrendered during the course of survey cannot be brought to tax under the deeming provisions of section 69 and 69A of the Act and the same has been rightly offered to tax under the head business income . In absence of deeming provisions, the question of application of section 115BBE doesn t arise for consideration. Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the Commissioner of Income Tax (Appeals) erred in passing an ex-parte order.
2. Whether the surrendered income of Rs. 84,80,000/- should be treated as deemed income under Sections 69 and 69A or as business income.
3. Whether the tax rate of 60% under Section 115BBE is applicable.

Summary:

1. Ex-Parte Order by CIT(A):
The assessee contended that the Commissioner of Income Tax (Appeals) erred in passing an ex-parte order without considering the submissions on record, deeming it arbitrary and unjustified. The Tribunal noted that the CIT(A) had sustained the additions made by the Assessing Officer (AO) based on discrepancies noticed during the survey and the subsequent surrender by the assessee.

2. Treatment of Surrendered Income:
The core issue was whether the surrendered income of Rs. 84,80,000/- during the survey should be treated as deemed income under Sections 69 and 69A or as business income. The AO treated the surrendered amounts as unexplained investments and cash, thus taxable under Sections 69 and 69A, and applied a tax rate of 60% under Section 115BBE. The assessee argued that the surrendered income was business income, as it was related to business advances, stock discrepancies, and cash differences, all linked to the business operations of M/s Singla Wire & Allied Products. The Tribunal emphasized that the foundational requirement for invoking Sections 69 and 69A is the failure to explain the nature and source of the income. It was found that the assessee had provided explanations during the survey, linking the discrepancies to business activities. The Tribunal concluded that the surrendered income should be treated as business income, not deemed income under Sections 69 and 69A.

3. Applicability of Section 115BBE:
The AO applied a tax rate of 60% under Section 115BBE, which the assessee contested, arguing that the rate applicable at the time of the survey was 30%. The Tribunal noted that Section 115BBE is a machinery provision applicable only when income is assessed as deemed income under Sections 69 and 69A. Since the Tribunal determined that the surrendered income was business income, Section 115BBE was not applicable. The Tribunal referenced several judicial precedents supporting the view that business-related discrepancies should be taxed as business income, not under the deeming provisions.

Conclusion:
The Tribunal ruled in favor of the assessee, holding that the surrendered income of Rs. 84,80,000/- should be taxed as business income and not under Sections 69 and 69A. Consequently, the provisions of Section 115BBE were not applicable. The appeal was partly allowed, and the ex-parte order by the CIT(A) was deemed erroneous.