If source of income is provided than deeming section 115BBE provision not applicable

Gandhi Ram Vs PCIT (ITAT Chandigarh)

Held that deeming provisions of section 115BBE doesn’t apply as source of income clearly explained and established by the assessee

Facts-

PCIT examined the assessment records of the assessee and held the assessment order as erroneous as well as prejudicial to the interest of the Revenue and the same has been set aside to the file of the AO for passing a fresh order after giving sufficient opportunity to the assessee. Against the said order and findings, the assessee is in appeal before Tribunal.

Notably, PCIT hold that income so surrendered during the course of survey is covered as per the provisions of section 68, 69, 69A, 69B, 69C and 69D and the income referred is chargeable to tax at the rate prescribed u/s. 115BBE.

Conclusion-

Held that merely stating that excess cash is clearly covered u/s 68 or 69A, excess stock is covered u/s 69 or 69B, construction of Shed/Godown is covered u/s 69B or 69C and advances made to Sundry Parties is covered u/s 69, 69B or 69D is like an open ended hypothesis which is not supported by any specific finding that the matter shall fall under which of the specific sections and how the conditions stated therein are satisfied before the said provisions are invoked.

We therefore find that the Assessing officer has duly taken cognizance of statement of the assessee recorded during the course of survey, the surrender letter and the return of income, and after examination thereof and due application of mind has not drawn any adverse inference and income has been rightly assessed under the head “business income”. In light of the same, we are of the considered view that the order so passed by the Assessing officer cannot be held as erroneous due to lack of enquiry or for that matter, requisite enquiry on the part of the Assessing officer. Where the Assessing officer after due appreciation of facts and circumstances of the case, assessed the income under the head “business income” and didn’t invoke the deeming provisions as so suggested by the ld PCIT.

FULL TEXT OF THE ORDER OF ITAT CHANDIGARH

This is an appeal filed by the assessee against the order of Learned Principal Commissioner of Income Tax, Pat iala [in short the ‘Ld. PCIT] passed u/s 263(1) of the Income Tax Act, 1961 (in short ‘the Act’) dated 28.03.2021 wherein assessee has raised the following grounds of appeal :-

1. “On the facts and circumstances of the case and in law, the PCIT, Patiala has erred in initiating proceedings u/s 263 of the Income Tax Act, 1961 by wrongly assuming jurisdiction u/s 263 and hence, the order passed by the ld. PCIT u/s 263 of the Income Tax Act, 1961 is bad in law and void authorities below-initio.

2. Without prejudice to ground no. 1 above, on the facts and circumstances of the case and in law, the ld. PCIT Patiala has erred in assuming jurisdiction and passing the revisionary order u/s 263 of the Income Tax Act, 1961 in spite of the fact that the ld AO has made adequate inquiries and verification of documents, books of accounts were also sought from the assessee during the course of assessment proceedings and AO has taken one permissible view. The order passed by the AO is neither erroneous nor prejudicial to the interest of revenue, hence the order of PCIT Patiala should be set aside.

3. The survey was conducted by the Income Tax Department on 21.09.2016 and the income was surrendered under the head Business Income and the relevant advance tax cheques were also taken by the AO to be deposited against the advance tax. Section 115BBE vide the Taxation Laws (Second Amendment) Act, 2016 (No. 48 of 2016) was passed by the Hon’ble Lok Sabha of India on 29.11.2016. The Second Amendment Act, 2016 received the assent of the President on the 15^th December, 2016 and is published for general information. The survey was conducted and income was surrendered much before the date of amendment, hence the cognizance of PCIT Patiala is not tenable in the eyes of law.”

2. Briefly the facts of the case are that the assessee has filed his return of income declaring total income of Rs. 1,08,53,110/- on 07.11.2017 which was selected for scrutiny and thereafter the assessment was completed at an assessed income of Rs. 1,09,03,261/-. Thereafter, the assessment records were called for and examined by the ld. PCIT and a show cause notice under section 263 dated 08.11.2019 was issued to the assessee. Thereafter, after considering the submissions so filed by the assessee, the ld. PCIT has held the assessment order as erroneous as well as prejudicial to the interest of the Revenue and the same has been set aside to the file of the AO for passing a fresh order after giving sufficient opportunity to the assessee. Against the said order and findings of the ld PCIT, the assessee is in appeal before us.

3. During the course of hearing, the ld. A/R has submitted that the ld. PCIT has erred in holding that the AO has passed the assessment order without making requisite enquiry. In this regard our reference was drawn to the assessment order so passed by the AO where at para 3 of the order, he has taken due cognizance of the income offered by the assessee in the return of income which includes the surrendered income of Rs. 1,02,00,000/- surrendered during the course of survey. It was submitted that the matter has been duly examined by the AO and the returned income has been accepted wherein the amount surrendered has been offered as part of the business income and due taxes have been paid thereon. It was further submitted that the ld. PCIT has erred in holding that the income so surrendered during the course of survey is covered as per the provisions of section 68, 69, 69A, 69B, 69C and 69D read with section 11 5BBE of the Act. It was submitted that the assessee is carrying on the business for past many years and the return of income has been filed on the basis of audited books of account and there has been no dispute with regard to the mode and manner of earning the income which is none other than the income derived from the activity of carrying on the business. It was submitted that during the course of survey, the assessee was found to be carrying on the same business as per the regular books of account and no other activity other than the activity as per books of account have been noticed and, therefore, the amount which have been offered during the survey is on account of income derived from the same business activity as noticed during the course of survey. It was accordingly submitted that there cannot be any dispute that the nature of income so offered is in the nature of business income and which cannot be brought to tax under the aforesaid deeming provision read with section 11 5BBE of the Act. It was submitted that it is a settled law that the burden is on the Department to prove that the income so derived has to be assessed under the deeming provision. However, there is no iota of evidence with the Department to prove the same. It was submitted that by ignoring the documentary evidence found during the course of survey that the assessee was only engaged in the business as per regular books of account, the ld. PCIT has given a finding that the deeming provisions are applicable in the case of the assessee. It was further submitted that the letter filed during the course of survey states “The above said surrender is made over and above my regular income for the current year” and the facts as mentioned therein have not been disputed so far and letter filed by the assessee has been accepted and taxes were paid to Income Tax Officer through advance cheques mentioned in the surrender letter on 21.10.2016 have been accepted, thus, there is no dispute. Even the surrender of Income was declared under the head business Income and the same has been accepted. The amendment was inserted by Finance Act, 2016 on 21.11.2016 w.e.f. 01.04.2017 which is again after the date of survey. Hence now, no dispute can be raised without any evidence since no new facts have emerged.

4. As regards to the fact as to why the provisions of section 115BE of the Act are not applicable to the facts of the assessee, in this regard, it is submitted that Section 115BBE are applicable only where the income can be classified under the provisions of the section 68 to 69C of the Act. However, in this case, the findings of the survey team, impounded documents/records, statements of the Proprietor recorded by the survey team during the survey and even post survey, clearly point out to the fact that during the course of the survey proceedings, the nature of surrendered income of the assessee firm was duly probed by the department officials and based on the evidence on record and statement of the Proprietor, such income has been duly accepted as the business income of the assessee firm over and above the regular business income.

5. It was submitted that it is not a case where unexplained credits, assets, investment or expenditure has been found to have been made by the assessee firm by the survey party. As such there remains no question of any income to be adjudicated under section 68 to 69C of the Income Tax Act in case of the assessee, as the nature and source of the income surrendered by the assessee clearly stands explained. Where the nature and source of the income offered by the assessee firm clearly stands explained, no addition can be made under section 68 to 69C of the Act and the provisions of section 115BBE cannot be invoked. Further reliance has been placed on various Hon’ble High Court and Coordinate Benches decisions.

6. Per Contra, the ld. CIT D/R has vehemently argued the matter and submitted that the onus is on the assessee to explain the source of income so surrendered and further, even the AO has failed to enquire about the source of income so surrendered and has accepted the returned income as so filed by the assessee. Further, the ld CIT/DR relied on the findings of the ld. PCIT and our reference was drawn to the relevant findings which read as under:-

“ (x) In the case of the assessee, survey u/s 133A was conducted on 21.10.2016 i.e. relevant assessment year 2017-18. The following discrepancies were found, confronted and accepted by the assessee during the course of survey proceedings.

In this regard, it is noted that the case of the assessee is squarely covered under provisions of Sections 68, 69, 69A, 69B & 69C as under :-

a. Excess cash is clearly covered u/s 68 or 69A.

b. Excess stock is covered u/s 69 or 69B.

c. Construction of Shed/Godown is covered u/s 69B or 69C.

d. Advances made to Sundry Parties is covered u/s 69, 69B or 69D.

(xi) In view of the above discussion, the discrepancies found during the survey proceedings attract provisions of Section 115BBE of the Income Tax Act, 1961, as per amendments made by the Taxation Laws (Second Amendment) Act, 2016, which entail tax rate of 77.25%.

(xii) Furthermore, the Hon’ble Kerala High Court in its recent judgment dated 23.09.2020 in the case of Maruthi Babu Rao Jadav v s. ACIT (2021) 430 ITR 504 has held as under :-

“ A major misdemeanor leading to assessment of income as accrued under section 69A invites the consequences of section 115BBE and surcharge provided under section 2(9) of the Finance Act, 2016. When it stands enhanced from April 1, 2017, for every assessment carried out in that year, related to the previous year, the rates as applicable on April 1, 2017 have to be applied.”

5. As is seen from the assessment order, the AO has passed the assessment order without even asking about the source of the aforesaid income. The requisite enquiry as required under law, to assess this income under the chargeable ‘Head of Income’ as per section 14 of The Income Tax Act, or chargeable to tax under any other provision of the Act viz. from Sections 68 to 69D has not been made. No question for income offered, whether falls under any head of income defined in section 14 or deemed income under the provisions of sections 69 to 69D, has been asked. Hence the assessment order passed is erroneous as income is not assessed under the respective provision of the Act.

Further as already discussed above, as per the provisions of section 115BBE, income referred to in Section 68 to Section 69D are chargeable to tax at specific rate of tax. As the above incomes of the present assessee is income referred to in these sections the same is chargeable to tax at the rate prescribed under section 115BBE of the Income Tax Act. Hence the assessment order is prejudicial to the revenue.

Under the aforesaid circumstances, the order of the AO is both erroneous as well as prejudicial to the interests of the revenue.”

Further reliance has been placed on various Hon’ble High Court and Coordinate Benches decisions.

7. We have heard the rival contentions and purused the material available on record. For exercise of jurisdiction u/s 263 of the Act, the order passed by the Assessing officer should satisfy the twin tests of being erroneous as well as prejudicial to the interest of the Revenue. As per ld PCIT, the discrepancies found, confronted and accepted by the assessee during the course of survey attract the deeming provisions of section 68, 69, 69A, 69B & 69C and the income referred therein is chargeable to tax at rate prescribed under section 115BBE Act. As per ld PCIT, the Assessing officer has failed to enquire about the source of income in order to assess the income under the appropriate head of income or the relevant deeming provisions and accordingly, the order so passed has been held as erroneous and prejudicial to the interest of Revenue. Thereafter, the ld PCIT has gone ahead and held that income of the assessee is income referred in the aforesaid deeming provisions and chargeable to tax under section 115BBE of the Act.

8. Firstly, how the ld PCIT has arrived at a conclusive finding that the discrepancies found, confronted and accepted by the assessee during the course of survey attract the deeming provisions of section 68, 69, 69A, 69B & 69C is not apparent from the impugned order. Merely stating that excess cash is clearly covered u/s 68 or 69A, excess stock is covered u/s 69 or 69B, construction of Shed/Godown is covered u/s 69B or 69C and advances made to Sundry Parties is covered u/s 69, 69B or 69D is like an open ended hypothesis which is not supported by any specific finding that the matter shall fall under which of the specific sections and how the conditions stated therein are satisfied before the said provisions are invoked. It is like laying a general rule, which to our mind is beyond the mandate of law, that wherever there is a survey and some income is detected or surrendered by the assessee, the deeming provisions are attracted by default and by virtue of the same, provisions of section 115BBE are attracted. The ld PCIT has to record his specific findings as to the applicability of the relevant provisions and how the explanation called for and offered by the assessee is not acceptable in the facts of the present case which is clearly absent in the instant case. Therefore, where the ld PCIT himself is not clear about the applicability of relevant provisions and in the same breath holding the Assessing officer to task by not invoking the said provisions is clearly shooting in the dark which cannot be sustained in the eyes of law and the order so passed therefore cannot be held as erroneous in the eyes of law.

9. Now, coming to the findings of ld PCIT that the Assessing officer has failed to enquire about the source of income in order to assess the income under the appropriate head of income or the relevant deeming provisions of the Act. In this regard, we find that there are documents in form of statement of the assessee recorded u/s 133A during the course of survey and the surrender letter dated 21.10.2016 submitted by the assessee at the time of survey and these documents are very much part of the records which is available at the time of assessment as well as at the time of examination by the ld PCIT. In the statement so recorded at the time of survey, the assessee was specifically asked about the source of his income and in response, he has submitted that he is getting income from Gandhi General Store and share of profit from partnership firm, M/s Gandhi Soap and Detergent Industries. Thereafter, in respect of excess cash found at the time of survey, the assessee was asked a specific question to explain the difference and in response, he has submitted that the difference or the excess cash is on account of sales realization during the previous days which he offers over and above his normal business income. Thereafter, in respect of difference in stock of Rs 25,50,000/-, he has submitted that the difference is on account of higher gross margins in the earlier period and which he surrenders in addition to his normal business income. Similar questions have been raised regarding nature and source of cost of construction of building amounting to Rs 25,00,000/- and advances given to various persons. We therefore find that the assessee has been asked specific questions regarding not just the discrepancy but the nature and source thereof during the course of survey and it is clearly emerging that the source of such income is his business income.

Further, the said fact is corroborated by the surrender letter dated 21.10.2016. Apparently, the ld PCIT has failed to take into consideration these documents which are very much part of the records. Following the surrender so made, the assessee has offered the additional income as business income in his return of income and paid due taxes thereon. During the course of assessment proceedings, the Assessing officer has specifically taken cognizance of these facts, as apparent on the face of the assessment order, that assessee has voluntarily surrendered Rs 1,02,00,000/- over and above the normal business income in his return of income and has accordingly not drawn any adverse inference. We therefore find that the Assessing officer has duly taken cognizance of statement of the assessee recorded during the course of survey, the surrender letter and the return of income, and after examination thereof and due application of mind has not drawn any adverse inference and income has been rightly assessed under the head “business income”. In light of the same, we are of the considered view that the order so passed by the Assessing officer cannot be held as erroneous due to lack of enquiry or for that matter, requisite enquiry on the part of the Assessing officer. Where the Assessing officer after due appreciation of facts and circumstances of the case, assessed the income under the head “business income” and didn’t invoke the deeming provisions as so suggested by the ld PCIT, we do not believe that there is any error on part of the Assessing officer and the order so passed by him cannot be held as erroneous. As we have stated above, the ld. PCIT without recording any specific findings as to the applicability of deeming provisions has gone ahead and held that the deeming provisions are applicable in the instant case. Even for sake of argument, where such a view is taken on face value, it would be a case where a different view has been expressed by the ld PCIT, however, the same doesn’t lead to the conclusion that the view taken by the Assessing officer as erroneous as the AO has taken into consideration the entirety of facts and circumstances of the case, the explanation offered by the assessee during the course of survey regarding the source of such income and thereafter, has assessed the income under the head “business income”. The view so taken by the Assessing officer is after due application of mind and therefore cannot be held as unsustainable in the eyes of law. In the facts and circumstances of the present case, where there are specific questions asked during the course of survey regarding the nature and source of income and which has been adequately responded to by the assessee and thereafter acted upon in terms of disclosing the income in the return of income under the appropriate head of income and where the same is duly examined and taken into consideration by the Assessing officer during the course of assessment proceedings, the order so passed by the Assessing officer cannot be held as erroneous in nature.

10. In light of aforesaid discussions and in the entirety of facts and circumstances of the case, the order so passed by the ld PCIT u/s 263 cannot be sustained in the eyes of law and is hereby set-aside and that of the Assessing officer is sustained.

In the result, the appeal of the assessee is allowed.

Order pronounced on 04.08.2022.