2024 (1) TMI 970 - AT - Income Tax

Revision u/s 263 - income surrendered during survey operation was not verified in pursuance to the provision of section 69 r.w.s. 115BBE - PCIT held that the assessment has been framed u/s 143(3) of the Act without verification with respect to undisclosed income offered by the assessee in pursuance to the provisions of section 69 r.w.s. 115BBE of the Act which is erroneous and causing prejudice to the interest of revenue - whether there was any inquiry conducted by the AO during the assessment proceeding qua the income offered by the assessee during the survey operation? - HELD THAT - It is transpired that there was application of mind by the AO during the assessment proceedings. Accordingly, it cannot be said that the assessment has been framed by the AO without conducting inquiries. As such, we hold that the AO framed the assessment after necessary inquiries with respect to the income surrendered by the assessee during the survey operation conducted u/s 133A of the Act. The assessee in the statement recorded during the survey operation has also accepted that it has received onmoney for its real estate project - Due application of mind by the AO during the assessment proceedings and therefore assessment cannot be held as erroneous in so far prejudicial to the interest of revenue on account of non-verification. PCIT in his order has referred the explanation 2 to section 263 of the Act, in holding that the necessary inquiries were not carried out by the AO during the assessment proceedings. However, we find that the Ld. PCIT in the notice issued u/s 263 of the Act has nowhere made any reference to the explanation 2 to section 263 of the Act, and therefore we hold that the Ld. PCIT erred in holding assessment order as erroneous and prejudicial to the interest of Revenue after referring to the explanation 2 of section 263 of the Act. To tax any item of income/ expenditure, unaccounted investment at the specific rate r.w.s. 115BBE of the Act, it is necessary to classify the income under the head deeming provision under section 69, 68, 69B etc. In the present case, the income surrendered was to be classified u/s 69 - As per the direction of the Ld. PCIT, however, we find that the Ld. PCIT has nowhere pointed out any contravention that the income surrendered by the assessee falls within the provision of section 69 of the Act. As such, the assessee in the present case was able to justify the source of income surrendered during survey operation and therefore we are of the view that the same cannot be treated as deemed income u/s 69 of the Act. Once the income goes out of the preview of the deeming provision, the provision of section 115BBE of the Act, cannot be applied. We note that the AO has taken one of the impossible view by treating the income offered during survey operation as income under the head business and profession. The Ld. PCIT cannot substitute the view taken by the AO as per his understanding of facts of the case - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the assessment framed under Section 143(3) of the Income Tax Act was erroneous and prejudicial to the interest of revenue.
2. Whether the income surrendered during the survey operation should be taxed under Section 69 and at the special rate specified under Section 115BBE of the Income Tax Act.

Summary:

Issue 1: Erroneous and Prejudicial Assessment
The assessee, a partnership firm engaged in the real estate business, was subjected to a survey operation under Section 133A. During the survey, the assessee admitted to receiving on-money and surrendered an unexplained income of Rs. 1,77,66,000/-. This income was offered in the income tax return under the head "business and profession" and accepted by the AO in the assessment framed under Section 143(3). The Principal Commissioner of Income Tax (PCIT) later found that this income should have been taxed under Section 69 and at the special rate under Section 115BBE, without allowing any deductions. The PCIT held the assessment as erroneous and prejudicial to the interest of revenue, directing a fresh assessment.

Issue 2: Taxation under Section 69 and Section 115BBE
The assessee contended that the AO had raised queries regarding the surrendered income during the assessment proceedings, which were duly answered. The income was accepted as business income, not falling under the deeming provisions of Section 69. The Department Representative argued that the income should be treated as deemed income under Section 69 and taxed at the special rate under Section 115BBE, without any permissible expenses. It was emphasized that the AO failed to read the provisions of Section 69 with Section 115BBE(2) and permitted expenses, making the assessment order erroneous.

Tribunal's Findings:
The Tribunal found that the AO had conducted necessary inquiries during the assessment proceedings, as evidenced by the queries raised and answered. The assessee had established that the surrendered income was on-money received in relation to its real estate project, treated as business income. The Tribunal noted that the PCIT did not reference Explanation 2 to Section 263 in the notice and thus erred in holding the assessment order as erroneous and prejudicial. The Tribunal also observed that for Section 69 to apply, there must be a finding that the investments were not recorded in the books, which was not the case here. The surrendered income was justified and could not be treated as deemed income under Section 69, making Section 115BBE inapplicable.

Conclusion:
The Tribunal held that the assessment order was not erroneous or prejudicial to the interest of revenue and quashed the PCIT's order under Section 263. The appeal filed by the assessee was allowed.