ITAT dismisses firm's appeal, upholds tax on undisclosed income from cash and stock discovered in survey [Read Order]

The Income Tax Appellate Tribunal (ITAT), Pune bench, has dismissed an appeal filed by a partnership firm and upheld a tax demand concerning undisclosed income that came to light during a survey operation. The tribunal agreed with the Principal Commissioner of Income Tax that the original assessment order was flawed and prejudicial to the revenue's interests, confirming the need for a fresh assessment to properly tax the unaccounted money and stock.

The case involved Manmandir Cloth Centre, a partnership firm based in Kannad, Aurangabad. A survey action conducted by the Income Tax Department on March 6, 2019, led to the discovery of excess cash and stock totaling Rs. 19,44,000, which was not recorded in the firm's books of account. During the survey, the firm declared this amount as additional income, comprising Rs. 7,81,127 in unexplained cash and Rs. 11,62,879 in unexplained stock. The firm subsequently filed its return for the 2019-20 assessment year, declaring a total income of Rs. 9,78,800.

The Assessing Officer initially completed the assessment, making an addition of only the cash component of Rs. 7,81,127 under section 69A of the Income Tax Act, which deals with unexplained money. However, the PCIT later reviewed the case and found this assessment to be erroneous. The PCIT noted that the officer had failed to add the entire declared amount of Rs. 19,44,000 to the firm's total income. Crucially, the Assessing Officer had not applied the provisions of sections 69 for unexplained investments (the stock) and 69A for unexplained money (the cash) together, nor had he taxed the total sum under the special provision of section 115BBE, which mandates a higher tax rate for such unexplained income.

Issuing a show-cause notice, the PCIT set aside the original assessment order under section 263 of the Act, directing the Assessing Officer to re-do the assessment after properly considering the entire undisclosed sum. Manmandir Cloth Centre appealed this decision to the ITAT, arguing that the cash declared was from its business operations and should be treated as normal business income, not unexplained money. The firm also contended that the PCIT erred in setting aside the assessment order.

The ITAT, however, was not convinced by the firm's arguments. It observed that the declaration of additional income was a direct consequence of the survey; without the survey action, this income would have remained undisclosed. The tribunal found that the Assessing Officer had indeed failed to conduct proper inquiries and verification during the original assessment, rendering the order erroneous. The bench noted that the PCIT was correct in invoking revisionary powers to protect the interest of the revenue.

The appeal was heard by a bench comprising R. K. Panda (Vice President) and Vinay Bhamore (Judicial Member) . With the ITAT's dismissal of the appeal, the case will now go back to the Assessing Officer, who is directed to frame a fresh assessment order, bringing the full Rs. 19,44,000 to tax under the applicable sections of the law after giving the firm a proper hearing.

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