2025 (11) TMI 36 - AT - Income Tax

Section 263 revision set aside: twin conditions of error and prejudice lacking; banking evidence negated s.69C, s.115BBE, s.271AAC penalties

ITAT MUMBAI - AT allowed the appeal, setting aside the PCIT's revision under s.263. The Tribunal held s.263 is supervisory, requiring the impugned order ... Revision u/s 263 - Disallowance of purchases as unexplained expenditure u/s 69C r.w.s. 115BBE - penalty u/s 271AAC - HELD THAT:- The jurisdiction under section 263 is supervisory and not appellate. For valid exercise of that power, two conditions must co-exist: the order must be both erroneous and prejudicial to the interests of the Revenue. An order cannot be termed erroneous if the Assessing Officer has taken one of the possible views after due inquiry. Here the Assessing Officer, having examined the trading results and the purchases, made a conscious disallowance of the entire expenditure treating it as non-genuine. That view, though perhaps harsh, is within the bounds of law and does not render the order erroneous. PCIT, by merely substituting his own interpretation that section 69C should have been applied, travelled beyond the permissible confines of section 263. Once it is found that all payments are routed through banking channels, recorded in the accounts, and form part of the trading results out of which the net income has been computed and offered to tax, the source of expenditure stands fully explained. The legislature never intended that every business disallowance should ipso facto be taxed as unexplained expenditure under section 69C and further subjected to the penal rate u/s 115BBE. Such an approach would obliterate the distinction between a disallowance of business expenditure and a deemed income, leading to double jeopardy. The impugned order of the PCIT proceeds on an erroneous assumption of law and fact. The Assessing Officer’s view was legally tenable; the twin conditions of section 263 are not satisfied. Appeal filed by the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Principal Commissioner of Income-tax (PCIT) correctly exercised revisionary powers under section 263 to direct re-characterisation of a disallowance of business purchases and wages as 'unexplained expenditure' under section 69C read with taxability at deeming rate under section 115BBE and consequential penalty under section 271AAC. 2. Whether section 69C is attracted where alleged non-genuine expenditures are recorded in the regular books of account and payments are routed through banking channels (i.e., whether the source of expenditure is 'unexplained'). 3. Whether an Assessing Officer's decision to disallow claimed business expenditure as non-genuine under section 37(1) can be set aside as 'erroneous and prejudicial to the interests of the Revenue' under section 263 merely because the PCIT prefers to apply a different statutory provision (section 69C and related penal provisions). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of exercise of revisionary powers under section 263 to re-characterise a disallowance as unexplained expenditure under section 69C (and consequential tax/penalty). Legal framework: Section 263 confers supervisory revisionary power when an order of the Assessing Officer is found to be 'erroneous' and 'prejudicial to the interests of the Revenue.' Section 69C deems unexplained expenditure to be income where the assessee incurs expenditure and fails to satisfactorily explain the source; section 115BBE prescribes special taxation of income from unexplained sources; section 271AAC imposes penalty for concealment or furnishing inaccurate particulars where such deemed income arises from unexplained expenditure. Precedent treatment: The Court reiterates settled principles that supervisory powers under section 263 are not appellate and cannot be exercised merely because a revisional authority prefers a different view; an AO's plausible view after inquiry is not ipso facto 'erroneous.' Deeming provisions must be strictly construed and applied only in situations the statute contemplates. Interpretation and reasoning: The Tribunal reasons that both limbs of section 263 must co-exist; an order is not 'erroneous' if the AO has legitimately exercised judgment and taken a permissible view after examining books and evidence. Here the AO disallowed expenditure as non-genuine under the rubric of business disallowance (section 37(1)), having regard to the entries and limited time for further verification. The PCIT's substitution of his view that section 69C should have been invoked transgresses the supervisory limit because it replaces one plausible statutory interpretation with another without demonstration that the AO's order was legally untenable or prejudicial in the statutory sense. Ratio vs. Obiter: Ratio - section 263 cannot be used to supplant one reasonable view with another; both 'erroneous' and 'prejudicial' conditions are required. Obiter - comments on administrative expediency in time-limited verification were contextual but not central to the legal ratio. Conclusions: The PCIT's exercise of revisionary power to direct re-characterisation was invalid; the twin conditions of section 263 were not satisfied and the revisionary order is quashed on this ground. Issue 2 - Applicability of section 69C where disputed expenditures are recorded in books and payments are through banking channels (whether the source is 'unexplained'). Legal framework: Section 69C applies where expenditure has been incurred and the assessee offers no explanation as to the source of such expenditure, or the explanation is unsatisfactory in AO's opinion; it operates as a deeming fiction to treat unexplained outgoings as income. Deeming provisions require strict construction and are exceptional in character. Precedent treatment: The Tribunal relies on established doctrine that deeming provisions are legal fictions to be sparingly applied and only to facts squarely within the statutory premise - namely, outgoings incurred outside the books or from undisclosed sources. Interpretation and reasoning: The Tribunal finds as an admitted fact that receipts were received by account-payee cheques from credible clients, and that purchases and wages were debited in the regular trading and profit & loss accounts with payments routed through banking channels. These matters demonstrate that the source of funding for the outgoings is explained by the books themselves. Section 69C presupposes expenditures incurred outside the regular books or from unexplained sources; it is not attracted where the expenditure and its source are reflected in the books. To apply section 69C in such circumstances would amount to taxing the same disclosed outlay again by invoking a deeming fiction, which is contrary to legislative intent and the distinction between business disallowance and deemed income. Ratio vs. Obiter: Ratio - Section 69C is not attracted where expenditure is recorded in regular books and funded through disclosed banking channels; the source is not 'unexplained.' Obiter - observations that invoking section 69C to convert every business disallowance into deemed income would create double jeopardy and subvert statutory distinctions. Conclusions: Section 69C does not apply to expenditures already reflected in the books and funded from disclosed bank accounts; the PCIT's direction to re-characterise the disallowance under section 69C is legally unsound. Issue 3 - Characterisation of disallowance as business disallowance under section 37(1) versus unexplained expenditure under section 69C; permissibility of AO's view. Legal framework: Section 37(1) allows deduction of expenditures incurred wholly and exclusively for business except those expressly disallowed; AO has discretion to disallow non-genuine or not wholly and exclusively business expenses. Distinction between a business disallowance (which adjusts taxable profit) and deemed income under section 69C (which treats unexplained outgoings as income) is legally significant. Precedent treatment: The Tribunal reiterates that if the AO examines books and accepts the existence of entries but regards them as non-genuine business expenses, that treatment is a permissible view under section 37(1) and cannot be invalidated under section 263 unless shown to be legally untenable. Interpretation and reasoning: The AO reproduced supplier details and wage statements in the assessment order, and having limited time, made a complete disallowance treating expenditures as non-genuine business expenses. The Tribunal treats this as a plausible interpretative exercise under section 37(1). Since the AO's conclusion was based on material and within permissible legal bounds, it does not amount to an error justifying revision under section 263. The revisional authority's preference for applying section 69C does not convert an otherwise tenable AO view into an erroneous one. Ratio vs. Obiter: Ratio - An AO's bona fide and legally permissible disallowance under section 37(1) is not rendered erroneous for purposes of section 263 merely because a revisional authority would have applied section 69C instead. Obiter - remarks on the need to avoid double taxation when conflating business disallowance and deemed income. Conclusions: The AO's treatment of the disputed amounts as business disallowance under section 37(1) was legally tenable; the PCIT erred in substituting that view with a direction to treat the sums as unexplained income under section 69C and impose consequential special tax and penalty. Cross-reference Issues 1-3 interrelate: the correctness of the PCIT's exercise under section 263 (Issue 1) depends on the proper statutory characterization of the expenditures (Issue 2) and whether the AO's alternative view under section 37(1) was a permissible exercise of discretion (Issue 3). The Tribunal's conclusion that section 69C is inapplicable (Issue 2) and that the AO's view was tenable (Issue 3) collectively underpin the finding that the revision under section 263 was unwarranted (Issue 1).