2024 (7) TMI 1649 - AT - Income Tax

Addition u/s 69C r.w.s 115BBE - as per AO assessee firm had failed to prove the sources of the expenditure which was declared in the course of survey - HELD THAT - We find merit in the assessee s arguments. We note first of all that the clinching facts herein have gone unrebutted from the Revenue s side that the assessee was never put to any question or a suggestion even regarding source of its alleged cash expenditure detected during survey. This tribunal s various co-ordinate benchesmore particularly in Ashok kumar Kesharchand Pande 2023 (7) TMI 1498 - ITAT PUNE has already decided the very issue in assessee s favour. We adopt the foregoing detailed discussion mutatis mutandis to accept the assessee s instant sole substantive grievance in very terms that the impugned section of its work-in-progress is civil construction deserves to be assessed under normal business head only. Assessee appeal allowed.

Summary

The core legal question considered in this judgment is whether the addition of undisclosed cash expenditure made during a survey operation should be treated as deemed income under section 69C read with section 115BBE of the Income Tax Act, 1961, attracting a higher rate of taxation, or whether it should be assessed as business income under the normal tax rate. The issues revolve around the nature and source of the expenditure discovered, the applicability of the provisions relating to unexplained income, and the burden of proof on the assessee to explain the source of such expenditure.

Regarding the first issue-the applicability of section 69C read with section 115BBE to the undisclosed cash expenditure-the legal framework involves the provisions of the Income Tax Act that treat unexplained investments, money, bullion, and expenditure as deemed income if the assessee fails to satisfactorily explain their nature and source. The judgment extensively discusses precedents from various High Courts and Tribunals. Notably, the Gujarat High Court's ruling in a case involving gold found during a search held that if the source of acquisition is not explained, the value is deemed income under sections 69 and 69A and cannot be treated as business income with corresponding deductions. This principle was reaffirmed, emphasizing that the onus lies on the assessee to explain the source; failure to do so results in the income being taxed as deemed income at a special rate under section 115BBE.

Conversely, other decisions, including those from the Rajasthan High Court and various Tribunals, have held that if the assessee satisfactorily explains the source and nature of the undisclosed income, such income should be treated as business income and taxed under the normal rates. For instance, where excess stock found during survey was clearly linked to regular business stock, the income was assessed as business income. Similarly, if the surrendered income is reflected in the books and linked to business activities, the provisions of sections 68 to 69D and the higher tax rate under section 115BBE do not apply.

The Court's interpretation hinges on the distinction between "deemed income" under sections 68 to 69D and income assessable under the regular heads specified in section 14 of the Act. The Court emphasized that the provisions of sections 69, 69A, 69B, and 69C apply only when the nature and source of the income or expenditure are not explained or satisfactorily explained. If the source is satisfactorily explained, the income is assessed under the appropriate head, and the special provisions do not apply.

In the present case, the undisputed facts show that during the survey, a notebook containing cash expenditure entries amounting to Rs. 1,00,05,000 for the assessment year 2017-18 was found. The authorized partner of the assessee firm voluntarily declared this amount as additional income in the return filed. The expenditure was claimed to be business expenses related to labour payments, material purchases, and site expenses for the contracting business. The assessee contended that these expenses were part of the firm's work-in-progress (WIP) and were incurred out of business income, thus should be taxed as business income under normal rates.

The Revenue's position, as upheld by the lower authorities, was that since the source of this cash expenditure was not satisfactorily explained, it should be treated as deemed income under section 69C attracting the higher tax rate under section 115BBE. The lower authorities relied on the principle that unexplained expenditure found during survey without evidence linking it to business income warrants addition as deemed income.

The Court's detailed analysis noted that the assessee was never questioned during the survey or assessment proceedings regarding the source of the cash expenditure. The Court found that the assessee had declared the amount as additional income and treated it as business income in the return and accounts. The Court referred to a recent coordinate bench decision where similar facts led to the conclusion that income offered during survey and credited to profit and loss account should be presumed to be business income, thus excluding the applicability of section 115BBE.

The Court reasoned that taxing such expenditure as deemed income without proof that the source is unexplained would allow taxpayers to convert undisclosed income from other sources into business expenses and avoid higher tax rates, which would contravene the legislative intent. The Court held that the onus to explain the source is on the assessee, but in this case, the assessee had voluntarily declared the amount as business income and was never challenged on the source during survey or assessment.

Consequently, the Court concluded that the addition under section 69C read with section 115BBE was not justified. The undisclosed expenditure formed part of the business's work-in-progress and was properly assessable as business income under normal tax rates. The Court allowed the appeals, directing that the income be assessed as business income and not as deemed income attracting the higher tax rate.

In summary, the judgment establishes the principle that where the assessee voluntarily declares undisclosed income during survey and treats it as business income, and where the Revenue does not challenge the source during survey or assessment, the provisions of sections 69C and 115BBE for deemed income and higher tax rates do not apply. The burden remains on the assessee to explain the source satisfactorily; however, if the assessee meets this burden by declaration and accounting treatment, the income should be assessed under the normal heads of income.

Key holdings include the verbatim observation that "the onus of explaining the specific source from which such unexplained income is flowing, is on the assessee and not on the department," and that "acceptance of such contention [that unexplained expenditure should be taxed as business income without proof] may lead to a situation... clearly against the intentions of legislature." However, in the present facts, since the source was not challenged and the income was declared as business income, "the action of the assessing officer of treating the income corresponding to cash expenses, as deemed income u/s 69C of the Act is upheld" was reversed by the Tribunal.

The Court thus clarifies the application of sections 69C and 115BBE, emphasizing the necessity of a factual determination of whether the source of income or expenditure is satisfactorily explained, and that mere discovery of cash expenditure during survey does not automatically attract deemed income provisions if the assessee has declared the same as business income and the Revenue has not disputed the source.