2024 (8) TMI 1641 - AT - Income Tax

Revision under s.263 affirmed: unexplained excess stock treated as investment hit under s.68 and taxed under s.115BBE

ITAT JAIPUR - AT affirmed the PCIT's revision under s.263, holding that excess stock disclosed by the assessee but shown as investment in the profit and ... Revision u/s 263 - As per PCIT excess stock found during the course of survey proceedings which has been disclosed by the assessee in his return of income has been charged by the AO at normal rates instead of at the rate provided u/s 115BBE - HELD THAT:- As is evident from the above profit and loss account that the assessee has separately offered income to the extent investments made in the excess stock as other income. Thus, that income is not disclosed as excess stock in the trading account. Since it is separate income earned and invested in the excess stock it has not been demonstrated that the income so disclosed is the same as of the business carried out by the assessee. The contentions raised by the assessee is different and the case laws relied upon the ld. AR of the assessee is different in the set of facts same are not applicable to the present facts of the case. Thus, when the assessee has disclosed the income for which there is no explanation about its source the said income is subjected to tax as per provision of section 68 of the Act and the accordingly provision of section 115BBE is applicable. Since, that aspect of the matter has not been considered while assessing the income of the assessee and even the question no quoted in the order being 21 is also not correct income is disclosed based on the question no. 19. All these aspects suggest the order of assessment has been passed in a mechanical manner without appreciating the facts and explanation offered with that of the record is not verified we confirm the view of the ld. PCIT. Based on these observation ground no. 2 raised by the assessee is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the order of the Assessing Officer (AO) is 'erroneous and prejudicial to the interests of revenue' within the meaning of section 263 where the AO accepted an amount surrendered during survey as income in the return but did not examine/apply provisions of sections 68/69 and 115BBE while computing tax. 2. Whether excess stock discovered during survey, subsequently reflected in books and the profit & loss account, constitutes business income (taxable under normal provisions) or requires classification as unexplained money/income chargeable under sections 68/69 and taxed under section 115BBE. 3. Whether invocation of section 263 is impermissible where the AO made enquiries and took a possible view, such that the Principal Commissioner's revision simply reflects a differing view. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of section 263 revision where AO accepted surrendered income but did not invoke sections 68/69 and 115BBE Legal framework: Section 263 permits revision where an assessment order is erroneous and prejudicial to the interests of revenue. Explanation 2 (clauses (a) & (b)) treats an order as erroneous if passed without making enquiries or verifications which should have been made or allowing relief without enquiries. Precedent Treatment: The PCIT relied on Supreme Court authority recognizing that an incorrect assumption of facts or incorrect application of law satisfies the threshold for invoking section 263. Tribunal jurisprudence was cited by the assessee to the effect that revision cannot be exercised where AO has made enquiries and taken a plausible view. Interpretation and reasoning: The Tribunal examined the assessment record and observed that the AO accepted the surrender and the amount was shown separately in profit & loss as 'Income Surrender During Survey.' The AO did not make a finding that the surrendered amount was assessable under section 69 nor did he apply section 115BBE; no verification about source or applicability of sections 68/69/115BBE was recorded. The Principal Commissioner concluded that the AO failed to apply his mind, made incorrect assumptions of fact/law and passed the order mechanically, thereby rendering the order erroneous and prejudicial. Ratio vs. Obiter: Ratio - An assessment order lacking application of mind to whether surrendered survey income is unexplained (sections 68/69) and whether 115BBE is attracted can be held erroneous under section 263 where necessary enquiries/verification were not made. Obiter - General observations on case law distinguishing plausible views. Conclusion: The Tribunal affirmed the Principal Commissioner's conclusion that the AO's order was erroneous under section 263 because material aspects (source, applicability of sections 68/69/115BBE) were not considered/verified, and remitted the matter to AO for fresh assessment after affording opportunity to the assessee. Issue 2: Characterisation of excess stock - business income vs unexplained income attracting section 115BBE Legal framework: Excess stock found on survey may be assessed either as business income (if clearly identifiable and related to regular business operations) or as unexplained cash/income under sections 68/69 (if source not explained), with section 115BBE prescribing a special tax rate for certain undisclosed incomes arising from specified sections. Precedent Treatment: Decisions exist to the effect that where excess stock is identifiable and relates to regular business and is incorporated in books (with purchase entries and closing stock), the amount is business income taxable under normal provisions (ITAT/Rajasthan High Court precedents). Conversely, authorities also hold that where the assessee offers an amount as 'other income' without explaining its source, the AO may treat it as unexplained income attracting sections 68/69 and apply section 115BBE. Interpretation and reasoning: The Tribunal analysed the profit & loss account which showed the surrendered amount separately as 'Income Surrender During Survey' under the by-column (i.e., treated as other income) rather than reflected in trading account/closing stock. The bench found no demonstration that the surrendered amount represented the same character as regular business income. Because the assessee did not explain source or correlate the excess stock with suppressed business profits year-wise, the factual matrix did not permit automatic classification as business income. Thus, applicability of sections 68/69 and 115BBE required verification which AO failed to undertake. Ratio vs. Obiter: Ratio - Characterisation depends on factual matrix: where excess stock is clearly identifiable as regular business stock and appropriately reflected in books (purchase and closing stock entries), it is business income taxable normally; where the amount is shown separately as other income without explanation of source/correlation to business, it may be treated as unexplained income under sections 68/69 attracting 115BBE, subject to verification. Obiter - Discussion of specific earlier decisions in different factual settings. Conclusion: On the facts, since the assessee recorded the surrendered amount as other income and did not establish nexus with regular business stock, the Tribunal held that AO ought to have examined applicability of sections 68/69 and 115BBE; absence of such examination justified revision under section 263. Matter remitted for fresh enquiry and verification. Issue 3: Whether mere existence of an alternative plausible view by AO precludes exercise of section 263 jurisdiction Legal framework: It is settled that section 263 cannot be invoked where AO has considered relevant material and taken a plausible view; however, where AO fails to make required enquiries or misapplies law/facts, section 263 jurisdiction can be exercised. Precedent Treatment: Assessee relied on authorities holding that if AO made enquiries and took a view, difference of opinion does not warrant section 263. Revenue relied on authorities affirming Commissioner's power where AO's order is erroneous or prejudicial due to non-application of mind. Interpretation and reasoning: The Tribunal distinguished these lines by focusing on whether enquiries/verifications were actually made and recorded. Where enquiries were made and a reasoned, tenable view is taken, section 263 is inappropriate. Where enquiries were absent or AO did not consider applicability of relevant statutory provisions, revision is justified. On the present facts, the AO did not address sections 68/69/115BBE and did not record necessary verification; therefore the mere availability of an alternative view did not immunize the assessment from revision. Ratio vs. Obiter: Ratio - Section 263 is improper where AO has made verifications and taken a tenable view; conversely it is proper where AO neglected necessary enquiries or misapplied law. Obiter - Citations of earlier authorities were discussed and distinguished on facts. Conclusion: The Tribunal confirmed that the AO's failure to verify and apply the relevant provisions meant section 263 was rightly invoked; a mere alternative plausible view would have precluded revision only if the AO had actually made the requisite enquiries and recorded a sustainable reasoning, which was not so here. Overall Disposition The Tribunal dismissed the assessee's appeals against the section 263 order, upheld the Principal Commissioner's view that the assessment was erroneous and prejudicial for lack of necessary enquiries/appreciation of law (sections 68/69/115BBE), and directed fresh adjudication by the AO after allowing reasonable opportunity to the assessee. Related appeals with identical facts were disposed of by applying this decision mutatis mutandis.