ITAT Ahmedabad: Rectification under Section 154 cannot change business income into Section 69A income

Overview of the Decision

The Ahmedabad Bench of the Income Tax Appellate Tribunal in Sudarshan Status Corporation Vs DCIT has clarified that the rectification powers under Section 154 of the Income Tax Act 1961 cannot be employed to alter the nature and head of income already accepted in a regular scrutiny assessment.

The Tribunal held that reclassifying income disclosed in a Section 133A survey from business income to unexplained money under Section 69A, taxable under Section 115BBE, involves a debatable and contentious issue, which goes beyond the narrow scope of a “mistake apparent from the record” permitted under Section 154.

The rectification order passed by the Assessing Officer (AO) was therefore held to be invalid and was quashed, and the assessee’s appeal was allowed.

Factual Background

Business profile and filing of return

• The assessee, Sudarshan Status Corporation, is a partnership firm engaged in real estate development and construction.
• For A.Y. 2017-18, the assessee filed its return of income on 06.10.2017, declaring a total income of Rs. 1,51,89,070.
• This income figure included additional income of Rs. 1,25,10,000 which had been surrendered during a survey under Section 133A.

Survey under Section 133A and disclosure of income

1. A survey under Section 133A was conducted at the assessee’s business premises on 07.09.2016, which concluded on 08.09.2016.
2. During the course of the survey:
   • The statement of a partner, Shri Vishal Jagdishbhai Patel / Shri Prashant Shah, was recorded under Section 131 read with Section 133A.
   • Certain documents, including Annexure-A/1 (diary pages), were impounded and examined.
3. In his statement, the partner:
   • Admitted additional income of Rs. 1,25,10,000.
   • Explained that the amount represented on-money receipts from the firm’s real estate project.
   • Clarified, in reply to specific questions (notably Question Nos. 19 to 24), that this was business-related income, being receipts over and above amounts recorded in the books.

Treatment of disclosed income in books and original assessment

• Following the survey:
  • The assessee credited the disclosed amount of Rs. 1,25,10,000 to its regular books of account as business receipts.
  • The income was offered as “business income” in the return for A.Y. 2017-18.
• The case was selected for compulsory scrutiny, and the AO:
  • Examined the survey material, including the statement and impounded diary.
  • Completed the assessment under Section 143(3).
  • Accepted the returned income, including the additional survey disclosure, as business income, without invoking Section 69A or Section 115BBE.

Post-Assessment Rectification Proceedings under Section 154

Initiation of rectification

Subsequently, the AO issued a notice under Section 154, alleging a mistake apparent from the record in the earlier assessment order passed under Section 143(3).

The AO’s core contention was:

• The amount of Rs. 1,25,10,000 disclosed during the survey was not recorded in the books at the time of survey.
• Hence, according to the AO, it should have been assessed as:
  • Unexplained money under Section 69A, and
  • Taxed at the special rate as per Section 115BBE,
  • Instead of being treated as normal business income taxable at regular slab/rate.

Assessee’s objections to Section 154 proceedings

In response to the Section 154 notice, the assessee filed detailed objections, contending that:

1. No mistake apparent from the record
   • The issue of proper head and character of income is debatable and cannot be equated with an obvious or patent error.
   • A change of head from “business income” to “unexplained income under Section 69A” demands fresh fact-finding and interpretation of law, which lies beyond the scope of Section 154.