2025 (3) TMI 522 - AT - Income Tax

Assessee wins appeal as revision under section 263 fails when AO adopts permissible legal view on disclosed income treatment

Banarsi Das Shyam Sunder Bazaza Bazar, Alwar Versus PCIT, Income Tax Department

ITAT Jaipur allowed the assessee's appeal against revision u/s 263. The assessee disclosed undisclosed income during survey proceedings, which the AO ... Revision u/s 263 - undisclosed income declared during survey proceedings - treated as business income or as unexplained income - assessee has accepted the disclosure made in the survey which was also considered ld. AO and he has not invoked the provision of section 68 of the Act while passing the order - HELD THAT:- The phrase ‘prejudicial to the interest of the revenue’ has to be read in conjunction with an erroneous order passed by the AO. Every loss of Revenue as a consequence of the order of the AO cannot be treated as prejudicial to the interest of the Revenue. If the AO has adopted one of the two or more courses permissible in law and it has resulted in loss of revenue, or where two views are possible and AO has taken one view with which the ld. PCIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the Revenue, unless the view taken by the AO is totally unsustainable in law. See MALABAR INDUSTRIAL CO. LTD. VERSUS COMMISSIONER OF INCOME-TAX [2000 (2) TMI 10 - SUPREME COURT] Thus, invoking of sec.263 was not legally justified when the ld. AO considered the income offered as sourced from the business of the assessee. Thus, 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. Appeal of the assessee is allowed. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment were:Whether the order passed by the Assessing Officer (AO) under Section 143(3) of the Income Tax Act, 1961, was erroneous and prejudicial to the interest of the revenue, thereby justifying the Principal Commissioner of Income Tax's (PCIT) invocation of Section 263 of the Act.Whether the undisclosed income declared during survey proceedings should be treated as business income or as unexplained income subject to special tax rates under Section 115BBE of the Act.Whether the PCIT had the authority to revise the AO's order based on the interpretation of the nature and tax treatment of the undisclosed income.ISSUE-WISE DETAILED ANALYSIS1. Erroneous and Prejudicial Order under Section 263Relevant Legal Framework and Precedents: Section 263 of the Income Tax Act allows the PCIT to revise an order if it is erroneous and prejudicial to the interest of the revenue. Key precedents include the Supreme Court's rulings in Malabar Industrial Co. Ltd. v. CIT and CIT v. Max India Ltd., which clarify that an order is erroneous if it involves an incorrect assumption of facts or incorrect application of law.Court's Interpretation and Reasoning: The Tribunal noted that for Section 263 to be invoked, both conditions-erroneous order and prejudice to revenue-must be satisfied. The Tribunal emphasized that a mere disagreement with the AO's view does not render the order erroneous unless it is unsustainable in law.Key Evidence and Findings: The AO had treated the undisclosed income declared during the survey as business income, which was challenged by the PCIT as erroneous. The Tribunal found that the AO's treatment was a plausible view, supported by the context of the income being related to business activities.Application of Law to Facts: The Tribunal applied the principles from the cited precedents, determining that the AO's order was not erroneous as it was based on a possible view of the facts and law.Treatment of Competing Arguments: The Tribunal considered the PCIT's argument that the AO failed to apply special tax rates under Section 115BBE but found that the AO's classification of income as business income was not unsustainable.Conclusions: The Tribunal concluded that the order was not erroneous and prejudicial to the revenue, and thus, the invocation of Section 263 was not justified.2. Classification of Undisclosed IncomeRelevant Legal Framework and Precedents: Section 115BBE of the Act imposes a higher tax rate on unexplained income. The Tribunal referenced the case of Hema Raman vs. PCIT and PCIT vs. Deccan Jewellers (P) Ltd. to support the AO's classification of the income as business income.Court's Interpretation and Reasoning: The Tribunal reasoned that the income, declared during a survey at the business premises, was inherently linked to business operations, thus supporting its classification as business income.Key Evidence and Findings: The Tribunal noted the partner's statements during the survey and post-survey proceedings, which indicated the income was related to business activities.Application of Law to Facts: The Tribunal applied the principle that the nature and character of income are contextual and that the AO's classification was a plausible view.Treatment of Competing Arguments: The PCIT's argument for treating the income under Section 115BBE was countered by the Tribunal's finding that the AO's view was sustainable and not erroneous.Conclusions: The Tribunal upheld the AO's classification of the income as business income, rejecting the PCIT's revision under Section 263.SIGNIFICANT HOLDINGSVerbatim Quotes of Crucial Legal Reasoning: 'The power of review cannot be exercised to collect more taxes merely owing to the reason that the law now provides for penal and steep rate of taxation by bringing such income within the ambit of S. 68/ 69 etc.'Core Principles Established: The Tribunal reinforced the principle that an order is not erroneous if the AO has taken a plausible view, even if it results in a revenue loss, provided the view is sustainable in law.Final Determinations on Each Issue: The Tribunal quashed the PCIT's order under Section 263, ruling that the AO's classification of the income as business income was not erroneous or prejudicial to the interest of the revenue.