Declaring surrendered income in PL Account as “Indirect Income” and reflected it in closing stock does not indicate any tax evasion.
In a recent judgment, the Chandigarh ITAT has held that declaring surrendered income in PL Account as “Indirect Income” and enhancing closing stock does not indicate any tax evasion. it is a settled law that when the assessee surrenders undisclosed income in creation of a business asset, he is entitled to enhance the value of that business asset
ABCAUS Case Law Citation:
4598 (2025) (06) abcaus.in ITAT
In the instant case, the assessee had challenged the order passed by the Pr.CIT in passing revisionary order u/s 263 of the Income Tax Act, 1961 (the Act) directing AO to do a fresh assessment.
The assessee was a builder and property developer. The assessee, earned income from house property and salary as a sitting MLA. He had filed his income tax return for the relevant Assessment Year inter alia declaring agricultural income.
The case of the assessee was selected for Manual (compulsory) Scrutiny and notice under Section 143(2) was issued and a requisition under Section 142(1) were issued to the assessee.
During the scrutiny, key issues examined included deductions claimed under Section 24(b) for interest on borrowed capital, motor car expenses, loans and advances, unsecured loans, and additional income surrendered post a survey under Section 133A.
The assessee had surrendered Rs.1.25 crore during survey u/s 133A. This income was duly included by assessee in the Profit & Loss account under the head “Indirect Income”. Since the surrender had been made and income has been enhanced, the assessee enhanced its stock. This he did by enhancing the closing stock on credit side of P&L A/c and balancing it by enhancing the construction cost. In effect, there was one entry of Rs. 1.25 cr on debit side and 2 entries of same amount on credit side which meant that one extra entry of Rs. 1.25 crore on credit side, the assessee had declared the income and also enhanced its stock by that amount. But ultimately the income for the year was enhanced.
After reviewing the necessary details, the Assessing Officer assessed the assessee’s total income by making several disallowances. However, the AO accepted the treatment in the books of account of the income surrendered.
Subsequently, against the order passed by the AO, the Pr. CIT issued a revision order under Section 263 of the Act. One of the issues picked up by the PrCIT was with respect to the surrender made, the objection of the PrCIT was that by enhancing the stock of this year and taking the enhanced value of stock to next year, the assessee had nullified the impact of surrender as it will be allowed the deduction of enhanced stock in the next year.
Before the Tribunal, with respect to the amount surrendered, the assessee submitted that the closing stock of one year automatically becomes the opening stock of the subsequent year. Merely carrying forward stock does not amount to claiming any deduction against surrendered income. In fact, assessee had neither reduced any expense nor claimed any set-off against this amount in the subsequent year also. Further, the subsequent year is a separate unit of assessment and objection for next year can not be examined in a preceding year.
It was contended that the apprehension of the Pr.CIT that the amount will be claimed as opening stock in the next year was speculative and pertains to a separate assessment year and the same cannot be added in the year in question. If necessary, action can be taken in that year under applicable provisions.
It was further argued that it is a well settled law that the AO is the final fact finder and it is his prerogative to exercise his judgment regarding the extent of enquiry required in a case. The Pr. CIT does not have the authority to dictate how detailed the enquiry should be or compel the ld. AO to make additions based on his suspicion. It is only when some evidence is found by the Pr. CIT that he can direct further enquiry. Or he must show that what further enquiry made would have led to definite different result.
It was further argued that as held by the Co-ordinate Bench of ITAT Mumbai, once the AO calls for details, examines them and takes a view, it is not open to the Pr. CIT to conclude that the order is erroneous simply because he would have taken a different approach. It was held herein that the Pr. CIT can not expect an AO to conduct enquiry to the hilt, the Pr.CIT should only expect AO to function like a prudent assessing officer and not like a forensic officer.
It was pointed out that the Hon’ble Supreme Court has held that the assessee cannot be faulted for the conclusions drawn by the AO once investigation is carried out. The Court emphasized that section 263 cannot be invoked where the AO has made enquiries and drawn conclusion with which the Pr.CIT disagrees. It was further held that where the Pr.CIT feels that further enquiries were required by the AO, the Pr.CIT should himself do those enquiries and then himself make addition and not remand the matter.
The Tribunal noted that the revision was based on the claim that the AO did not properly inquire into two issues among which one was the accounting of amount surrendered during a survey.
The Tribunal noted that the surrendered income was declared in the Profit & Loss Account as “Indirect Income” and properly reflected in closing stock under construction costs. This treatment was explained during the assessment and does not indicate any tax evasion. There is no dispute that the surrender made during the survey had been honoured by the assessee by declaring this income as indirect income in his Profit & Loss account. Further, it is a settled law that when the assessee surrenders undisclosed income in creation of a business asset, he is entitled to enhance the value of that business asset.
The Tribunal observed that Pr. CIT’s only objection was that the assessee would claim deduction of enhanced closing stock in subsequent years. The Tribunal opined that this objection was totally incorrect. Firstly, on merits, the assessee was infact entitled to claim the deduction of expenditure on account of enhanced closing stock in future years. Secondly, the allowability of expenditure of an item in a subsequent year can not make the assessment order for an earlier year to be subject to revision u/s 263. Thirdly, the Pr. CIT’s concern about future deduction is speculative and outside the scope of Section 263, which applies only when the order is both erroneous and prejudicial to revenue in the same year.
Accordingly, the appeal of the Assessee was allowed and the revisionary order under Section 263 was held as invalid and set aside.
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