2025 (11) TMI 409 - AT - Income Tax

Revision under s.263 set aside; AO's treatment of survey-found cash and stock as business income deemed reasonable

ITAT, Pune held the Principal Commissioner's revision under s.263 unjustified and set aside the revision order. The Tribunal found the AO plausibly ... Revision u/s 263 - Excess cash and excess stock found during survey - Revision initiated on non-taxing of such additional income by invoking the provisions of section 115BBE - HELD THAT:- We find in the case of PCIT vs. Deccan Jewellers (P.) Ltd. [2021 (9) TMI 424 - ANDHRA PRADESH HIGH COURT] while upholding the order of the Tribunal has held that where nature and source of excess stock found during search was not specifically identifiable from profits which had accumulated from earlier years, the AO was justified in holding that said excess stock was not undisclosed investment of assessee and no case of perversity or lack of enquiry on part of Assessing Officer was made out so as to render his decision erroneous under Explanation 2 to section 263 of the Act. We find in the case of PCIT vs. Mahavir Ashok Enterprises (P.) Ltd [2024 (10) TMI 430 - CHHATTISGARH HIGH COURT] has held that where Assessing Officer accepted claim of assessee that excess stock found during survey proceedings and duly recorded in books of account of concerned year should be taxed as business income of assessee, Principal Commissioner was not justified in invoking jurisdiction under section 263 on ground that excess stock found during survey proceedings should have been declared as unexplained investment by assessee under section 69 particularly when Assessing Officer had passed order of assessment after conducting inquiry. Since the Assessing Officer in the instant case during the course of assessment proceedings has raised specific queries to which the assessee has duly replied and it has been explained that the only source of income of the assessee is from business, therefore, such excess cash and excess stock found during the course of survey has to be treated as business income. Therefore, the order passed by the AO cannot be held to be erroneous although it may be prejudicial to the interest of Revenue in the opinion of the Ld. PCIT on account of not invoking the provisions of section 115BBE of the Act. It has been held in various decisions that for invocation of jurisdiction u/s 263 of the Act, the twin conditions viz. (a) the order is erroneous and (b) order is prejudicial to the interest of Revenue must be fulfilled. However, as stated earlier, the order passed by the Assessing Officer cannot be held to be erroneous since the Assessing Officer has taken a plausible view although the order may be prejudicial to the interest of Revenue. Therefore, the twin conditions are not satisfied. Therefore, the Ld. PCIT in our opinion is not justified in invoking the provisions of section 263 of the Act. We find the Hon’ble Supreme Court in the case of CIT vs. Vegetable Products Ltd [1973 (1) TMI 1 - SUPREME COURT] has held that when two views are possible, the view which is in favour of the assessee has to be adopted. In this view of the matter, we are of the considered opinion that the Ld. PCIT was not justified in invoking his revisionary powers u/s 263 of the Act for not invoking the provisions of section 115BBE of the Act on the additional income declared during the course of survey on account of excess cash and excess stock found. We, therefore, set aside the order of the Ld. PCIT and the grounds raised by the assessee are accordingly allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the revisional jurisdiction under section 263 can be validly invoked where the Assessing Officer, after issuing specific queries under section 142(1), accepted the assessee's explanation that amounts (excess cash and excess stock found during survey) constitute business income and assessed them accordingly rather than treating them as unexplained investment under section 69 read with section 115BBE. 2. Whether the provisions of section 115BBE (penal tax rate) are mandatorily attracted to amounts declared during survey proceedings as excess cash/stock when the assessee offers an explanation and the Assessing Officer accepts and taxes the amount as business income. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of invoking section 263 where AO accepted assessee's explanation after enquiry Legal framework: Section 263 permits revision by the Principal Commissioner/Commissioner if an assessment order is 'erroneous in so far as it is prejudicial to the interests of the revenue.' Explanation 2 to section 263 enumerates circumstances amounting to such erroneousness, including orders passed without making inquiries or verification which should have been made and orders allowing relief without inquiry. Precedent treatment (followed/distinguished): The Court followed Supreme Court authority (principle that where two views are possible and AO has adopted a legally permissible view, section 263 cannot be invoked) and multiple High Court and Tribunal decisions holding that accepted explanations that treat surrendered amounts as business income preclude revisional interference. Decisions holding to the contrary (that surrendered amounts absent documentary source must be treated as unexplained investment) were examined and distinguished on facts where AO had made inquiries and accepted explanation. Interpretation and reasoning: The Court examined the assessment record and noted that the AO issued a specific notice under section 142(1) asking the assessee to substantiate treatment of excess cash and stock with documentary evidence. The assessee replied explaining that the excess cash arose from unrecorded festival sales and excess stock resulted from the nature of textile trading, and that these were reflected in accounts and the return. The AO considered these explanations and accepted the returned income. Applying the principle that where two views are possible and the AO adopts one permissible view after enquiry, the revisional authority cannot substitute its opinion, the Court held that the twin conditions for section 263 (order erroneous AND prejudicial to revenue) were not satisfied. The Court emphasised that mere loss of revenue is insufficient; the AO's view must be unsustainable in law or perverse to justify revision. Ratio vs. Obiter: Ratio - Where the AO issues specific queries, considers explanations and accepts a plausible view to treat declared survey amounts as business income, the revisional power under section 263 cannot be exercised merely because the revisional authority prefers a different view. Obiter - Observations distinguishing cases where no inquiry was made or explanations were factually unsupported. Conclusion: Invocation of section 263 was unjustified; the assessment order could not be treated as erroneous merely because the Principal Commissioner would have taxed the amounts under section 69/115BBE. The revisional order was set aside. Issue 2 - Applicability of section 115BBE/section 69 to excess cash/stock declared in survey Legal framework: Section 69 treats unexplained investments as income where investments are not recorded and no satisfactory explanation is offered; section 115BBE prescribes a special (penal) rate for certain undisclosed incomes (including unexplained investments) found in searches/surveys. The taxing classification depends on (i) whether the amount is an undisclosed investment/unexplained cash or (ii) whether it represents business income duly accounted for and reflected in computation. Precedent treatment (followed/distinguished): The Court relied on authorities holding that where excess stock/cash is not separately identifiable, is explained as accumulated business profits and is recorded or included in the computation as business income, it cannot be treated as 'undisclosed investment' under section 69 to attract section 115BBE. Contrasting authorities holding unexplained surrendered amounts taxable under section 69/115BBE were distinguished on facts where no satisfactory explanation or accounting linkage existed. Interpretation and reasoning: The Court analysed whether the surrendered amounts were reflected in books and whether the AO's enquiries were adequate. Given that the assessee explained the nature and source, accepted by the AO, and the amounts were disclosed in the return and/or computation as business income, the conditions for invoking section 69 (investment not recorded; no satisfactory explanation) were not fulfilled. Therefore, the penal provisions of section 115BBE did not automatically apply. The Court reiterated that the factual matrix determines applicability: absence of documentary/support or non-inclusion in computation may attract section 69/115BBE; presence of plausible explanation and acceptance by AO supports treatment as business income at normal rates. Ratio vs. Obiter: Ratio - Section 115BBE is not mandatorily attracted to survey-surrendered amounts where the assessee offers a satisfactory explanation that the amounts constitute business income and the AO, after enquiry, accepts and taxes them as such. Obiter - Comments on distinguishing factual scenarios where the penal provisions would apply (e.g., amounts not recorded, no satisfactory explanation). Conclusion: On the facts, excess cash and excess stock declared during survey-having been explained as business-derived and accepted by the AO after specific enquiry-were properly assessable as business income and not as unexplained investment taxed under section 115BBE; hence the revisional invocation to impose section 115BBE was unsustainable. Cross-references and final holding Where the Assessing Officer issues specific enquiries, considers the assessee's explanations and adopts a plausible, legally tenable view that surrendered amounts constitute business income, the revisional authority cannot overturn the assessment under section 263 merely because it views the matter differently or would have treated the amounts under section 69/115BBE. The twin conditions for valid exercise of section 263 must be satisfied; absence of perversity or lack of enquiry by the AO precludes revision.