As AO failed to apply the right and correct section of the Income Tax Act, proceedings under Section 263 were upheld

Fact and issue of the case

This appeal filed by the Assessee is directed against the order of ld. Principal Commissioner of Income Tax, Pune-1dated 22.11.2022emanating from the order of the Assessing Officer dated 27.11.2017 under section 143(3) of the Income Tax Act, 1961 for the A.Y.2015-16. The Assessee has raised the following grounds of appeal

On the facts and circumstances of the case and in law the Ld. PCIT in his order u/s 263, while giving effect to the order dtd.31.05.2022 of the honorable ITAT, erred in making the following additions to the income determined vide assessment order dated 27.11.2017 and directing the assessing officer to accordingly give effect to his order

Addition of income declared during the source of survey on account of excess stock of Rs.30,01,449

Disallowance on account alleged cash payments in violation of Section 40A(3)

even though, as was substantiated in the submission to the Ld. PCIT, there isneither any violation of S.40A (3) nor the excess income declared during surveyhas remained to be disclosed, which fact was duly examined by the AO duringthe assessment proceedings u/s 143(3). The appellant therefore prays that the order of the PCIT be annulled. The appellant craves leave to add to amend, alter, modify, delete or add a new ground of appeal before or at the time of hearing

As per the assessment order and the paper book of the assessee, the assessee is in the business of Manufacturing, trading of Gold & Silver Ornaments. The assessee is a firm. It had filed return of Income for A.Y. 2015-16 on 16/10/2015 declaring total income of Rs.15,06,560/-. The assessee’s case was selected for scrutiny assessment. The assessment order u/s 143(3) for AY 2015-16 was passed on27/11/2017 accepting the returned income

The Pr.CIT Pune after verification of records issued notice u/s.263 dated 16/2/2021 and then passed order u/s 263 dated 18/03/2021. This order was challenged by the Assessee before the ITAT. The ITAT in ITA 115/Pune/2021 vide order dated 31/05/2022 set aside the order u/s 263 to the Pr.CIT for denovo adjudication after giving opportunity to the assessee. The Pr.CIT passed an order u/s 263 after giving opportunity to the assessee on 22/11/2022. The relevant part of the Order u/s 263 is reproduced here as under

Quote

In compliance with the order of the Hon’ble ITAT, a fresh notice was issued by the undersigned on 10.11.2022 calling the submission and supporting material, if any. In compliance with this notice, the assessee submitted its written submission on 13.11.2022, which is brought on record. In this written submission, the assessee admitted that there was excess stock found during the course of survey u/s 133A of the Income-tax Act, 1961 to the tune of Rs. 30.01,449/- which was declared by the assessee as unexplained. The assessee further stated that this unexplained stock has duly been added in the stock while finalizing the Balance Sheet and Profit & Loss account

Thus, it is undisputed fact that there was unexplained stock of Rs.30,01,449/- which was disclosed by the assessee as additional income of the year. The treatment given to this excessstock in theProfit & Loss account is not correct. The unexplained stock found in the survey is to be taxed under section 69/69B of the Income-tax Act, 1961 and it would be in addition to the regular income of the assessee as is held in the following cases

Vimla Stores vs CIT (2009) 308 ITR 89 (Pat)

Dhanush General Stores vs CIT (2011) 339 ITR 651 (CG)

Fakir Mohd Haji Hasan vs CIT, 249 ITR 290 (Guj)

In view of the law laid down in these cases, the amount of excess stock found during the survey viz. Rs. 30,01,449/- is to be added back in the assessee’s regular income. The tax on this amount is to be computed u/s 115BBE of the Income-tax Act, 1961

The assessee has made purchases to the tune of Rs.8,23,642/- from Un-Registered Dealers and that too in cash. Thus, it is to be added u/s 40A(3) of the Income-tax Act, 1961. On this issue, the assessee submitted that the Assessing Officer in the order passed u/s 143(3) r.w.s. 263 has not made any addition on this issue and hence it stands deleted which is evident from the assessment order. Since the order of the Assessing Officer has become infructuous in view of the order of the Hon’ble ITAT and hence, the stand taken by the Assessing Officer cannot be pleaded against this addition. Nothing else has been submitted by the assessee on this issue and hence, I presume that the assessee has nothing to submit further. I, therefore, add Rs.8,23,642/- in the returned income of the assessee.” Unquote

Observation of the court

In this case the AO has failed to apply proper and correct section of Income Tax Act to the “Investment in the Undisclosed Stock”. The undisclosed investment in the unaccounted stock needs to be taxed separately as Income of the assessee as per the deeming provision of the Act. The tax liability is calculated as per section 115BBE of the Act .Hon’ble Madras High Court in the case of SVS Oil Mills vs ACIT 418 ITR 442 has upheld the addition of excess stock found during survey u/s69B.The AO has failed to verify this aspect. Hence, we are of the opinion that the Assessment Order is erroneous and prejudicial to the interest of the revenue. This is not the case where two plausible views are possible and the AO has adopted one plausible view. Hence, the order u/s 263 is upheld qua ‘the investment in the undisclosed stock

The Pr. CIT has also observed that the Assessee has made URD purchases in cash. However, the assessee had submitted before the AO that the assessee has accepted old gold ornaments and given the new ornaments. The Assessee had submitted this fact before the AO during the Assessment Proceedings u/s 143(3) r.w.s. 263. The AO had not made any addition on this issue in the order u/s 143(3) r.w.s. 263. The Assessee has filed copies of the bills raised by the assessee for the so called URD purchases before the ITAT. We have observed that the assessee had accepted old ornaments and then converted them into new ornaments by adding some gold. Thus, the assessee has not made any actual purchases. Therefore, the order u/s 263 qua “URD Purchases” is annulled

Thus, we are upholding the order u/s 263, only qua “investment in the unaccounted stock found during survey

Accordingly the appeal of the assessee is Partly Allowed

Order pronounced in the open Court on 03rd May, 2023