2025 (10) TMI 1009 - AT - Income Tax

Rectification under s.154 cannot recast recorded business receipts as unexplained income under s.69A and attract s.115BBE

ITAT held the AO's rectification under s.154 to recast disclosed survey receipts from business income to unexplained money (s.69A) and apply special rate ... Scope of rectification u/s 154 - unexplained money u/s 69A - special rate u/s 115BBE - HELD THAT:- We find force in the contention of the assessee that the issue whether the disclosed income during the course of survey represents business income or unexplained money u/s 69A is a debatable issue and, therefore, cannot fall within the limited scope of rectification u/s 154 of the Act. AO’s action in changing the character of the income from business receipts to unexplained money amounts to review or reappraisal of facts, which is impermissible u/s 154 of the Act. We also find merit in the reliance placed by the assessee on the decision in Mohit Sukhija [2025 (6) TMI 156 - ITAT DELHI] wherein it has been held that when the assessee has already declared the source for cash deposits in its books of account, the AO or the Commissioner (Appeals) cannot invoke the deeming provisions of sections 68 or 69A. Similarly, in S. Balaji Mech[2024 (12) TMI 490 - ITAT DELHI] it was held that where cash sales have been recorded in the regular books and accepted as part of business results, there remains no scope for treating such receipts as unexplained cash under section 68 of the Act, as the explanation of the assessee already forms part of its audited accounts. In the present case, it is undisputed that the assessee has duly accounted for the said receipts in its books of account and offered them as business income, which has been accepted in the regular assessment. The source of the receipts, being from the assessee’s professional activity, stood duly declared in the return and books. Therefore, the provisions of section 69A or section 115BBE could not have been invoked by way of rectification under section 154 of the Act, as such exercise requires fresh verification and determination of facts, which lies outside the scope of a “mistake apparent from record.” Applying the settled law to the present case, it is clear that the rectification order passed by the AO involves a debatable issue and, hence, is beyond the jurisdiction conferred by section 154 of the Act. We hold that the rectification order passed by the Assessing Officer under section 154 is unsustainable in law. ISSUES PRESENTED AND CONSIDERED 1. Whether omission to tax receipts admitted during a survey as unexplained money under section 69A and to apply special rate under section 115BBE, when such receipts were thereafter offered and assessed as business income, constituted a 'mistake apparent from record' capable of rectification under section 154. 2. Whether income declared during a survey as consultancy/professional receipts but with no satisfactory explanation of source may be recharacterised as unexplained money under section 69A and taxed under section 115BBE. 3. Whether invocation of sections 69A/115BBE by way of rectification (section 154) constitutes an impermissible review/re-appraisal of facts when the assessee has already included the receipts in regular books and return and the assessment has been completed accepting them as business income. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Scope of section 154: whether change in character of income is rectifiable as a 'mistake apparent from record' Legal framework: Section 154 allows rectification of mistakes apparent from the record; settled judicial principle limits rectification to patent, obvious errors and excludes debatable points of law or re-appraisal of facts. Precedent treatment: Supreme Court authorities (T.S. Balaram/Volkart Brothers and ACIT v. Saurashtra Kutch Stock Exchange Ltd.) establish that only an obvious and patent error is amenable to rectification under section 154 and that debatable legal issues are excluded. Tribunal decisions cited by parties (e.g., Mohit Sukhija; S. Balaji Mech-Tech) reinforce that where facts are already recorded in books and accepted, treating those receipts as unexplained by rectification is impermissible. Interpretation and reasoning: The Court examined whether the Assessing Officer's recharacterisation from assessed business income to unexplained money involved mere clerical or patent error or required fresh factual and legal determination. The Court concluded that recharacterising the nature of receipts after acceptance in the regular assessment entails re-appraisal of facts and legal position, which is a debatable matter and outside the limited ambit of section 154. Reliance on authorities excluding debatable points from rectification was applied to the present factual matrix where receipts were entered in books and offered in return. Ratio vs. Obiter: Ratio - rectification under section 154 cannot be used to change the character of income accepted in the regular assessment where the issue involves debatable factual/legal considerations; such change amounts to review/re-appraisal and is not a 'mistake apparent from record.' Obiter - references to particular tribunal decisions interpreting analogous factual scenarios (e.g., cash deposits recorded in books) serve illustrative value but are not core ratio beyond the general principle applied. Conclusions: The rectification order under section 154 purporting to reclassify assessed business receipts as unexplained money was unsustainable. The Court allowed the appeal and set aside the rectification because the question was debatable and required re-examination beyond the scope of section 154. Issue 2 - Application of sections 69A and 115BBE to receipts disclosed during survey but entered in books as business income Legal framework: Sections 69A (unexplained money) and 115BBE (special rate for unexplained income) operate where an assessee fails to satisfactorily explain both the nature and source of receipts not recorded in books; deeming provisions apply if ownership and unexplained nature are established. Precedent treatment: Several High Court and Tribunal authorities (including Mrs. Rupal Jain; Gautham Chand Jain; Manoj Aggarwal; Dr. Prakash Tiwari; Namdev Arora; Rajmeet Singh; Shri Arif) were cited by the Revenue/CIT(A) to support that when source is not satisfactorily explained, deeming provisions apply and special rate under section 115BBE is attracted. Assessee relied on decisions (Hussain Mohideen Ibrahim Sha; Mohit Sukhija; S. Balaji Mech-Tech; SMILE Microfinance; Naranbhai Bharwad) to argue inapplicability where nature is explained or entries exist in books or where temporal applicability of section 115BBE is contested. Interpretation and reasoning: The Court accepted that where both nature and source are not satisfactorily explained, deeming provisions can be invoked; however, in the present factual scenario the receipts were admitted during survey and subsequently recorded and offered as business income in the regular assessment. The Court emphasized that invocation of sections 69A/115BBE by way of rectification was impermissible where the regular assessment had accepted the entries - because application would require reassessment of facts and verification inconsistent with section 154. The Court distinguished precedents relied upon by Revenue that support taxation under deeming provisions but held that those authorities do not override the limitation on rectification where the matter is debatable and already subject to assessment acceptance. Ratio vs. Obiter: Ratio - although deeming provisions can apply where source is unexplained, their application cannot be effected by section 154 to reclassify receipts already accepted as business income without fresh factual determination; the legal test for applying sections 69A/115BBE remains whether both nature and source are satisfactorily explained. Obiter - detailed commentary on the factual distinctions of various authorities (e.g., temporal application of section 115BBE, factual findings in other cases) assists reasoning but is ancillary to the principal holding on rectification scope. Conclusions: The Court did not find it appropriate to permit invocation of sections 69A/115BBE by rectification in the facts before it, despite authorities supporting deeming provisions in suitable circumstances. The absence of satisfactory explanation of source remains the substantive test for sections 69A/115BBE, but the mode chosen (section 154 rectification) was improper where receipts had been recorded and accepted in assessment. Interrelationship of Issues 1 and 2 - Cross-reference The Court's disposition on Issue 1 controls Issue 2 in this case: even accepting the legal principle that unexplained receipts may be taxed under sections 69A/115BBE when source is not explained, the corrective measure employed (rectification under section 154) was procedurally impermissible because it required re-appraisal of facts and resolution of a debatable legal issue after acceptance in assessment. Thus the applicability of sections 69A/115BBE was not adjudicated to the extent of permitting reclassification via section 154; the determination of substantive applicability would require appropriate proceedings beyond rectification.