When AO Has Taken a Plausible View, Revision Under Section 263 Cannot Be Invoked: ITAT Pune Quashes PCIT’s Order on Taxing Survey Disclosure Under Section 115BBE

“The Assessing Officer issued specific queries, considered replies, and taxed the disclosed income as business income – PCIT’s interference merely due to a change of opinion is impermissible under Section 263” – ITAT Pune

In a significant ruling Income Tax Appellate Tribunal (ITAT), Pune Bench ‘A’, comprising Shri R.K. Panda (Vice President) and Ms. Astha Chandra (Judicial Member), allowed the appeals filed by Akashdeep Cloth Centre and Manmandir Cloth Centre, and set aside the revisionary orders passed by the Principal Commissioner of Income Tax (PCIT), Nashik under Section 263 of the Income-tax Act, 1961.

The Tribunal held that since the Assessing Officer (AO) had conducted detailed inquiries during assessment and accepted the assessee’s explanation that the surrendered excess stock and cash arose from business operations, the PCIT’s invocation of Section 263 on the ground that Section 69 read with Section 115BBE should have been applied was unjustified. The ITAT emphasised that both conditions – the order being erroneous and prejudicial to revenue – must be satisfied for Section 263 to apply, and in the present case, the AO had taken a legally sustainable view.

“Surrendered Income Explained as Business Income – No Justification for Treating It as Deemed Income Under Section 69”

“Merely because PCIT disagrees with AO’s conclusion does not render the assessment erroneous – when AO adopts one of the possible views, it is not open for revision” – ITAT Pune

Introduction

On 04.11.2025, the Pune Bench of the Income Tax Appellate Tribunal delivered a common order in ITA No. 959/PUN/2024 (Akashdeep Cloth Centre) and ITA No. 1012/PUN/2024 (Manmandir Cloth Centre) for the Assessment Year 2019–20, quashing the orders passed under Section 263 by the PCIT, Nashik. The dispute revolved around whether the amount of ₹75.25 lakhs surrendered during survey – comprising excess cash and stock – should be treated as business income or as unexplained investment/income under Section 69 r.w.s. 115BBE, attracting a higher rate of tax.

The AO had accepted the assessee's treatment of the surrendered amount as business income taxable at normal rates, based on replies and documents furnished. However, the PCIT, holding the assessment as “erroneous and prejudicial to the interest of Revenue”, invoked Section 263 and directed a fresh assessment under Section 69 and 115BBE.

The Tribunal categorically rejected the PCIT’s stand and ruled that the assessment was neither erroneous nor prejudicial, thereby setting aside the revisionary orders.

AO Had Conducted Due Inquiry and Applied His Mind – Tribunal Emphasises Adherence to Section 263’s Twin Conditions

The Tribunal recorded that the AO had specifically raised queries under Section 142(1) regarding the excess stock and cash surrendered during survey under Section 133A. The assessee, in response, clarified that the excess cash represented unrecorded sales during the festival season, while the excess stock was due to cumulative non-reconciliation in inventory records over the years – all linked to the assessee's regular business activities.

The Tribunal observed:

“The Assessing Officer issued notice under Section 142(1) and asked the assessee to substantiate the source of excess cash and stock. The assessee explained that the amounts arose from the business and were duly disclosed in the return of income. The AO accepted this explanation and taxed the income under normal provisions.”

In this context, the ITAT invoked the well-established principle laid down by the Supreme Court in Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC):

“Where two views are possible and the AO adopts one which is legally plausible, the order cannot be considered erroneous merely because the Commissioner prefers a different view.”

“Not Mere Surrender – Income was Explained and Accounted for in Business Books”: Tribunal Distinguishes Revenue’s Reliance on Contrary Precedents

The PCIT had argued that the surrendered income, being unaccounted at the time of survey, ought to be taxed under Section 69/69B read with Section 115BBE, relying on High Court rulings such as Kim Pharma Pvt. Ltd. and Khushi Ram & Sons Foods Pvt. Ltd.. However, the Tribunal held these decisions inapplicable, since in the present case:

• The source of income was explained as arising from the business;
• The surrendered amount was offered in the return of income;
• The amount was included in the audited accounts as business income;
• The AO conducted proper inquiry and took a conscious view.

The Tribunal clarified:

“In Kim Pharma, the source of cash was not explained. In Khushi Ram, the surrender related to building renovation and other assets with no business nexus. But in the present case, the surrender comprises stock and cash arising from the assessee’s trading activity. Therefore, these precedents do not apply.”

The Tribunal preferred the view adopted in Deccan Jewellers (P) Ltd. (2021) 438 ITR 131 (AP) and Mahavir Ashok Enterprises Pvt. Ltd. (2024) 167 taxmann.com 396 (Chhattisgarh), where excess stock declared in survey was accepted as business income when a business nexus was explained and no unexplained investment could be inferred.

“When Two Views Exist, View Favorable to Assessee Must Be Adopted”: Tribunal Applies Supreme Court’s Ratio in Vegetable Products Ltd.

Recognising that different High Courts have taken divergent views on how to treat surrendered stock or cash in survey proceedings, the Tribunal referred to the landmark ruling of the Supreme Court in CIT v. Vegetable Products Ltd. (1973) 88 ITR 192 (SC), holding:

“When two reasonable views are possible, the one favourable to the assessee must be adopted.”

Consequently, the Tribunal noted:

“Given that the AO adopted a view supported by judicial decisions and after due inquiry, even if the PCIT disagreed, it cannot substitute the AO’s view with its own under Section 263.”

The Pune Bench concluded that the revisionary jurisdiction exercised by the PCIT was without basis, as the AO had applied his mind, conducted inquiry, and taken a legally sustainable view. Therefore, the foundational conditions under Section 263 – that the order must be both erroneous and prejudicial to Revenue – were not fulfilled.

“The AO’s view that the surrendered cash and stock arose from business was based on facts, evidence, and accepted legal position. The PCIT’s contrary stand amounts to mere difference of opinion and cannot justify invoking Section 263.”

Date of Decision: 04 November 2025