ITAT Quashes PCIT’s Revision as AO’s View on Survey Income Was Plausible & Verified

ITAT Pune detailed order Quashing PCIT’s Revision u/s 263 — Treatment of Survey Disclosure as Business Income Valid

Akashdeep Cloth Centre Vs PCIT (ITAT Pune); ITA No.959/PUN/2024; 04/11/2025; 2019-20

Key Issue:-

Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking section 263 of the Income-tax Act, 1961, on the ground that the Assessing Officer (AO) failed to tax the additional income (excess cash and stock found during survey) under sections 69/69B read with section 115BBE, instead of treating it as business income taxable at normal rates.

Brief facts:

Factual Matrix:-Survey under section 133A conducted on 06.03.2019.

• Excess cash: ₹2,04,120
• Excess stock: ₹73,21,080
• Total disclosure: ₹75,25,200 as additional income.
• The assessee, a partnership firm engaged in cloth trading, disclosed this amount in the return for AY 2019–20 as business income.
• Assessment u/s 143(3) r.w.s. 144B dated 26.08.2021 accepted the returned income (₹43,62,190) without invoking section 115BBE.

Proceedings before PCIT

• PCIT held that the AO failed to apply section 115BBE on the alleged unaccounted stock/cash.
• According to PCIT, the excess stock and cash represented unexplained investments/money taxable u/ss 69/69B at 60%.
• The assessment order was therefore erroneous and prejudicial to the interest of the revenue, and was set aside for fresh assessment under section 263.

Assessee’s Submissions

1. Full disclosure and verification:

The AO had specifically called for details under section 142(1). The assessee explained that both excess stock and cash were generated from unrecorded sales and business operations, duly reflected in books post-survey.

2. Plausible and judicially supported view:

The AO’s acceptance of such income as business income is a possible view, supported by judicial precedents.

3. No error, no prejudice:

Since the AO made due enquiry and adopted a legally tenable view, revision under section 263 is unjustified.

Key Judicial Reliance:

• Malabar Industrial Co. Ltd. v. CIT (243 ITR 83, SC)
• CIT v. Gabriel India Ltd. (203 ITR 108, Bom.)
• PCIT v. Deccan Jewellers (P.) Ltd. (438 ITR 131, AP)
• PCIT v. Mahavir Ashok Enterprises (P.) Ltd. (167 taxmann.com396, Chhattisgarh)
• CIT v. Vegetable Products Ltd. (88 ITR 192, SC)

Department’s Contentions

• AO failed to verify the true source of excess cash and stock.
• Excess stock may not necessarily arise from business receipts; could be unexplained investment under sections 69 or 69B.
• Thus, AO’s order was erroneous in law and caused revenue loss.

Case Law Relied Upon:

• PCIT v. Khushi Ram & Sons Foods (P.) Ltd. (P&H HC)
• Kim Pharma (P.) Ltd. v. CIT (258 CTR 454, P&H)
• Dhanush General Stores v. CIT (248 CTR 166, Chhattisgarh)
• Svetlana Gorodinskaia v. ACIT (Chandigarh ITAT, 2024)

Tribunal’s Findings & Analysis

1. Enquiry by AO Established:

• AO issued specific notices under section 142(1) seeking explanation regarding survey disclosure.
• Assessee explained that excess stock and cash represented unrecorded business sales.
• AO accepted the explanation after due verification.
• Hence, it was not a case of “no enquiry” or “lack of application of mind.”

2. Two Possible Views Exist:

• Judicial precedents recognize that excess stock relatable to business can be taxed as business income rather than as unexplained investment.
• AO’s view was one of the two legally sustainable interpretations.

3. No Jurisdiction under Section 263:

• Following Malabar Industrial Co. Ltd. and Gabriel India Ltd., the PCIT cannot invoke section 263 merely because he prefers another view.
• Both conditions — “erroneous” and “prejudicial to the interests of revenue” — must co-exist, which is not the case here.

4. Consistent High Court Authority:

• PCIT v. Deccan Jewellers (P.) Ltd. (AP HC): AO’s acceptance of business income treatment for excess stock is valid.
• PCIT v. Mahavir Ashok Enterprises (P.) Ltd. (Chhattisgarh HC): Similar view upheld.
• CIT v. Vegetable Products Ltd. (SC): Where two interpretations are possible, the one favourable to assessee should prevail.

Tribunal’s Conclusion

• AO made due enquiry and adopted a plausible, judicially supported view.
• The order was not erroneous, even if perceived prejudicial by the PCIT.
• Hence, jurisdiction under section 263 could not be validly exercised.

Result: PCIT’s revision order under section 263 quashed. Appeals allowed in favour of the assessee.

References :-

Section 263 can be invoked only when the order is both erroneous and prejudicial to the interest of revenue.

Malabar Industrial Co. Ltd. v. CIT (243 ITR 83, SC)

If AO has made due enquiries and taken one possible view, PCIT cannot substitute his opinion.

CIT v. Gabriel India Ltd. (203 ITR 108, Bom.)

Excess stock relatable to business activity can be taxed as business income, not u/s 69B.

PCIT v. Deccan Jewellers (P.) Ltd. (438 ITR 131, AP)

When two views are possible, the one favourable to the assessee must prevail.

CIT v. Vegetable Products Ltd. (88 ITR 192, SC

Sections Involved — Brief Context

• Section 263 – Revision by PCIT/CIT of erroneous orders prejudicial to revenue.
• Sections 69 / 69A / 69B – Unexplained investments or money not recorded in books.
• Section 115BBE – Special rate of tax (60%) applicable to incomes under ss. 68–69D.