2025 (6) TMI 398 - AT - Income Tax

Revision u/s 263 - treatment to undisclosed income declared during the survey - whether the AO erred in not treating the amount of undisclosed income disclosed during the survey and offered to tax as business income can be considered as per the provisions of Section 69A r.w. 115BBE or not? - HELD THAT - PCIT correctly held that since the undisclosed income admitted during the course of survey was found to have been received by the assessee in cash the Assessing Officer failed to examine the applicability of provision of Section 69A r.w.s. 115BBE and of Section 269ST and of Section 271DA of the Act hence to that extent the order is erroneous and prejudicial to the interest of Revenue. Just disclosing and paying tax does not protect the assessee from the clutches of Section 69A of the Act unless the source is satisfactorily explained and backed by evidence. Since in the instant case the specific facts prove that the Assessing Officer has not conducted any independent inquiry about the nature and source the Explanation 2 (a) to Section 263 is squarely applicable to the facts of this case. Hence the PCIT is well within his jurisdiction in invoking the provisions of Section 263 of the Act. We therefore uphold the order of the Ld. PCIT and dismiss both the appeals of the assessee.

Summary

The core legal questions considered in this judgment are:

1. Whether the Assessing Officer (AO) erred in not treating the undisclosed income declared during the survey as unexplained income under Section 69A read with Section 115BBE of the Income-tax Act, 1961 ("the Act").

2. Whether the order passed by the AO under Section 143(3) accepting the returned income without inquiry into the nature and source of the undisclosed income is erroneous and prejudicial to the interest of revenue, thereby justifying revision under Section 263 of the Act.

3. Whether the provisions of Section 269ST (prohibition on cash transactions exceeding prescribed limits) apply to the undisclosed income declared during the survey.

4. Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking revisionary powers under Section 263 without providing an opportunity of personal hearing to the assessee, thereby violating principles of natural justice.

5. The scope and applicability of Section 263, particularly Explanation 2(a), regarding the AO's failure to make inquiries or verification which should have been made.

Issue-wise Detailed Analysis:

1. Applicability of Section 69A read with Section 115BBE to undisclosed income declared during survey:

The legal framework involves Section 69A, which deems any money, bullion, jewellery, or other valuable article found to be owned by the assessee but not recorded in books of account, as unexplained income if the assessee fails to satisfactorily explain its nature and source. Section 115BBE prescribes a special tax rate for unexplained income.

The undisclosed income of Rs. 1.01 crore was admitted during a survey under Section 133A and declared under "Other Income" in the return. The AO accepted the returned income and taxed it at the normal rate without invoking Section 69A.

The PCIT noticed that the AO did not make any inquiry regarding the nature and source of this undisclosed income or verify whether it fell within Section 69A. The PCIT held that mere declaration and payment of tax at normal rates does not absolve the assessee from the requirement to satisfactorily explain the source, and the AO's acceptance without inquiry was erroneous and prejudicial to revenue.

The assessee contended that the income was business income, supported by statements recorded under Section 131, explaining the cash receipts as income from booked houses and net profits, with an intention to pay tax. However, the AO did not seek confirmations from persons from whom the cash was received, nor did he conduct further verification.

The Court emphasized that the AO acts both as investigator and adjudicator. The failure to conduct inquiries or verification, especially when circumstances warrant it, renders the order erroneous under Section 263. The explanation offered by the assessee was accepted summarily without minimal enquiry, which was improper.

Thus, the Court upheld the PCIT's view that Section 69A was applicable, and the AO should have treated the undisclosed income accordingly.

2. Invocation of Section 263 for erroneous and prejudicial order:

Section 263 empowers the PCIT to revise an order if it is erroneous and prejudicial to the interest of revenue. Explanation 2(a) to Section 263 clarifies that an order is erroneous if passed without making inquiries or verification which should have been made.

The Court relied on precedents holding that the AO's failure to investigate or verify facts when circumstances demand it amounts to an erroneous order. It cited authoritative rulings stating that the AO cannot remain passive if the return calls for inquiry, and the PCIT's revisionary power is justified to correct such errors.

In the instant case, since the AO accepted the undisclosed income without verifying the source or nature, the order was erroneous and prejudicial. The PCIT's direction to reassess the income under appropriate provisions was within jurisdiction.

3. Applicability of Section 269ST:

Section 269ST prohibits cash transactions exceeding prescribed limits. The PCIT observed that the undisclosed income admitted during the survey was received in cash, and the AO failed to examine the applicability of Section 269ST and Section 271DA (penalty for failure to furnish information regarding specified transactions).

The assessee argued that the AO had verified documents and accepted the income. However, the PCIT held that the AO's failure to examine these provisions rendered the order erroneous and prejudicial.

The Court did not elaborate extensively on this issue but endorsed the PCIT's view that the AO was required to consider these provisions.

4. Denial of personal hearing and principles of natural justice:

The assessee contended that the PCIT did not provide an opportunity of personal hearing despite specific requests, violating natural justice.

The Court noted the contention but did not find sufficient grounds to quash the PCIT's order on this basis. The PCIT had given an opportunity to be heard, and no substantial prejudice was shown to have resulted from the mode of hearing.

5. Treatment of competing arguments and application of law:

The assessee relied on multiple judgments to argue that the income declared during survey should be taxed as business income unless contrary evidence emerges. The Court acknowledged these but distinguished the facts, emphasizing that the AO's failure to verify or inquire was the critical flaw.

The Revenue relied on judgments emphasizing the AO's dual role and the wide ambit of Section 263 to correct erroneous orders. The Court agreed with the Revenue's position, underscoring that acceptance of returned income without inquiry when circumstances demand it is legally untenable.

Conclusions:

The Court concluded that the AO's order under Section 143(3) was erroneous and prejudicial to the interest of revenue for failing to invoke Section 69A and related provisions, and for not making necessary inquiries into the nature and source of the undisclosed income admitted during the survey. The PCIT rightly exercised revisionary powers under Section 263 to direct reassessment.

Significant Holdings:

"The expression 'prejudicial to the interest of the Revenue' is of wide import and is not confined to merely loss of tax. The term 'erroneous' means a wrong/incorrect decision deviating from law. This expression postulates an error which makes an order unsustainable in law."

"The Assessing Officer is both an investigator and an adjudicator. If the Assessing Officer as an adjudicator decides a question or aspect and makes a wrong assessment which is unsustainable in law, it can be corrected by the Commissioner in exercise of revisionary power. As an investigator, it is incumbent upon the Assessing Officer to investigate the facts required to be examined and verified to compute the taxable income. If the Assessing Officer fails to conduct the said investigation, he commits an error and the word erroneous includes failure to make the enquiry."

"The Income Tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct."

"Explanation 2(a) to Section 263 is squarely applicable where the Assessing Officer has not conducted any independent inquiry about the nature and source of income."

The Court upheld the PCIT's order revising the assessment and dismissed the appeals, emphasizing that mere declaration and payment of tax on undisclosed income without satisfactory explanation and verification does not preclude invoking Section 69A and related provisions. The AO's failure to investigate justified revision under Section 263.