2025 (7) TMI 320 - HC - Income Tax

Revision u/s 264 - Assessee said that addition to the total income of the assessee for alleged shortage of stock found at the time of survey by Central Excise Authority is unjust and bad in law and at the most GP if any could be added and not the amount of whole shortage worked out by the Excise Authorities - HELD THAT - As perusing the impugned order and the finding recorded by the learned Single Judge while dismissing the writ petition that there is no violation of natural justice or competency of jurisdiction. Even otherwise bare perusal of the record it is manifest that while dismissing the revision the Revisional Authority has noted that the petitioner/Company has not submitted any satisfactory explanation regarding the discrepancy at the time of assessment proceedings or at the time of penalty proceedings. It has also been found that discrepancy of stock found at the time of Central Excise survey was accepted by the petitioner Company as the sales outside books of accounts and the petitioner has also paid excise duty on that amount. Further it has been noted that entire sale done outside books of accounts is income to be added as the raw material cost has been accounted for in the regular books of accounts. Thus the petitioner s contention that only GP should be added to income could not be accepted. It is settled that penalty proceedings are separate from assessment proceedings and therefore filing of revision petition under Section 264 of the Act 1961 against quantum addition would not be of any help to the petitioner in the Appellate proceedings against the penalty u/s 271 (1) (c) of the Act 1961.

Issues Presented and Considered

1. Whether the addition of Rs. 57,41,353/- representing the value of shortage in stock found during a Central Excise survey can be added in full to the total income of the assessee, or whether only the gross profit on such alleged sales should be considered as income.

2. Whether the Assessing Officer and Revisional Authority acted within their jurisdiction and complied with principles of natural justice in making the addition and dismissing the revision petition.

3. Whether the writ jurisdiction can be invoked to interfere with the order passed under Section 264 of the Income Tax Act, 1961, particularly when no appeal was filed against the original assessment order.

4. The legal distinction and effect of penalty proceedings under Section 271(1)(c) vis-`a-vis assessment proceedings under Section 143(3) and revision under Section 264 of the Income Tax Act.

Issue-wise Detailed Analysis

Issue 1: Quantum of Addition to Income - Full Value of Shortage vs. Gross Profit

Legal Framework and Precedents: The Income Tax Act, 1961 empowers the Assessing Officer to make additions to income where undisclosed income or discrepancies are found during assessment or survey. The valuation of unaccounted stock or sales is a matter of fact and law. The general principle is that only the net profit or gross profit arising from undisclosed sales should be added as income, not the entire value of stock or sales, unless the raw material cost is not accounted for.

Court's Interpretation and Reasoning: The Court noted that the Central Excise Authority conducted a survey and found a shortage of finished goods and raw materials, valuing the under-valuation at Rs. 57,41,353/-. The Assessing Officer added this amount to the total income, as the petitioner had not disclosed this in the books of account. The petitioner contended that only the gross profit should be added, not the entire value of the shortage.

Key Evidence and Findings: The Revisional Authority found that the petitioner had accepted the discrepancy as sales outside the books of account and had paid excise duty on the amount. The raw material cost was accounted for in the regular books, meaning the entire sale amount represented income. The petitioner failed to provide any satisfactory explanation for the discrepancy during assessment or penalty proceedings.

Application of Law to Facts: Since the raw material cost was accounted for, the entire value of unaccounted sales represented income to the petitioner. The Court upheld the addition of the full amount as income rather than limiting it to gross profit.

Treatment of Competing Arguments: The petitioner's argument that only gross profit should be added was rejected on the basis that the raw material cost was already accounted for, and the sales outside books represented undisclosed income. The Court relied on the Revisional Authority's findings and the petitioner's acceptance of the discrepancy before the Excise Authority.

Conclusion: The addition of the full value of shortage found during the survey to the total income was justified and lawful.

Issue 2: Jurisdiction and Natural Justice in Assessment and Revision Proceedings

Legal Framework: The Assessing Officer's jurisdiction under Section 143(3) of the Income Tax Act includes making additions to income based on survey reports. Revision under Section 264 is discretionary and can be invoked to rectify errors apparent from the record. Principles of natural justice require that the assessee be given an opportunity to explain discrepancies before adverse orders are passed.

Court's Interpretation and Reasoning: The Court observed that the petitioner had been issued notices and had opportunities to explain the discrepancy but failed to do so satisfactorily. The Revisional Authority recorded that the petitioner did not submit any satisfactory explanation during assessment or penalty proceedings.

Key Evidence and Findings: The petitioner admitted the discrepancy before the Excise Authority and paid excise duty on the unaccounted sales. Notices were issued in the assessment proceedings, but no satisfactory explanation was furnished by the petitioner.

Application of Law to Facts: The Court held that there was no violation of natural justice or jurisdictional error. The Assessing Officer and Revisional Authority acted within their competence and followed due process.

Treatment of Competing Arguments: The petitioner contended that the order suffered from illegality and perversity, but the Court found no merit in these contentions given the procedural compliance and substantive findings.

Conclusion: The authorities acted within their jurisdiction and complied with natural justice; hence, no interference was warranted.

Issue 3: Scope of Writ Jurisdiction Against Revision Order Under Section 264

Legal Framework: Writ jurisdiction under Article 226 of the Constitution is discretionary and limited, especially where alternative remedies exist. However, where no appeal or other remedy is available, the scope of writ jurisdiction may be wider. Section 264 provides for revision of orders by the Commissioner of Income Tax, but it is not an appellate remedy.

Court's Interpretation and Reasoning: The petitioner argued that the writ petition had a wider scope as no appeal was filed against the assessment order. The Court noted that penalty proceedings under Section 271(1)(c) are separate from assessment proceedings and that revision under Section 264 against quantum addition does not aid in penalty proceedings.

Key Evidence and Findings: The petitioner did not file an appeal against the assessment order but filed a revision petition which was dismissed. The Court found that the writ petition challenging the revision order did not disclose any jurisdictional error or violation of natural justice.

Application of Law to Facts: The Court held that the writ jurisdiction was not to be exercised to re-examine factual findings or to substitute the Court's opinion for that of the tax authorities absent any illegality.

Treatment of Competing Arguments: The petitioner relied on a precedent from another High Court to contend that the revisional jurisdiction was wide enough to entertain the grievance. The Court distinguished the facts and held that the revisional authority had rightly dismissed the revision petition.

Conclusion: Writ jurisdiction was not invoked appropriately to interfere with the revision order, and the petitioner's challenge failed.

Issue 4: Distinction Between Assessment and Penalty Proceedings

Legal Framework: Assessment proceedings under Section 143(3) determine the quantum of income and tax liability. Penalty proceedings under Section 271(1)(c) are separate and deal with imposition of penalty for furnishing inaccurate particulars of income.

Court's Interpretation and Reasoning: The Court reiterated that penalty proceedings are distinct and filing revision under Section 264 against the quantum addition does not affect penalty proceedings. The petitioner's contention that the revision petition would impact penalty proceedings was rejected.

Conclusion: The petitioner's attempt to use revision proceedings to challenge penalty was legally untenable.

Significant Holdings

"It was found that discrepancy of stock found at the time of Central Excise survey was accepted by the petitioner Company as the sales outside books of accounts and the petitioner has also paid excise duty on that amount. It was further noted that entire sale done outside books of accounts is income to be added, as the raw material cost has been accounted for in the regular books of accounts. Thus the petitioner's contention that only GP should be added to income could not be accepted."

"Penalty proceedings are separate from assessment proceedings and, therefore, filing of revision petition under Section 264 of the Act 1961 against quantum addition would not be of any help to the petitioner in the Appellate proceedings against the penalty under Section 271 (1) (c) of the Act 1961."

"Considering the scope of writ jurisdiction and the fact that the petitioner has failed to establish any violation of natural justice or competency of jurisdiction, this Court is not inclined to interfere with the aforesaid findings recorded by the Revisional Authority."

The Court affirmed the principle that undisclosed sales outside books of accounts, where raw material cost is accounted for, represent income in full and not merely gross profit. It upheld the jurisdiction and procedural propriety of the Assessing Officer and Revisional Authority. The Court clarified the separate nature of penalty proceedings and limited the scope of writ jurisdiction in tax matters where alternative remedies exist or no jurisdictional error is shown.

Accordingly, the Court dismissed the writ appeal, affirming the addition of the full value of shortage to income and the dismissal of the revision petition, with no interference in penalty proceedings.

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