Unexplained Investment Admitted During Survey But Not Declared in Return Taxable Under S.69 & S.115BBE: ITAT Allahabad - 2025-05-05

ITAT Upholds Penal Tax on Undisclosed Property Investment Despite Later Payment; Allows Depreciation on Rental Income Treated as Business

Allahabad: The Income Tax Appellate Tribunal (ITAT), Allahabad Bench, comprising Sh. Subhash Malguria (Judicial Member) and Sh. Nikhil Choudhary (Accountant Member), has ruled that an investment admitted as undisclosed during a survey but omitted from the income tax return is liable for addition under Section 69 of the Income Tax Act, 1961, and subject to the higher tax rate under Section 115BBE, even if tax was paid later suo moto but after scrutiny proceedings began. However, the Tribunal provided partial relief by directing depreciation allowance on rental properties whose income was reclassified as business income.

The ruling came in the appeal filed by Mr. Rajesh Kumar Jaiswal against the order of the Commissioner of Income Tax (Appeals) [CIT(A)] for the Assessment Year 2018-19.

Case Background

A survey under Section 133A was conducted on Mr. Jaiswal , a trader, on January 18, 2018. During the survey, it emerged that a property purchased for a stated consideration of Rs. 1.15 Crores was actually bought for Rs. 3 Crores. Mr. Jaiswal admitted this difference of Rs. 1.85 Crores in statements recorded during and after the survey.

However, this Rs. 1.85 Crores was not recorded in his books of account nor included in his income tax return filed on October 10, 2018. After his case was selected for scrutiny (notice issued Sept 20, 2019), Mr. Jaiswal paid tax of Rs. 57.16 Lakhs on this amount on October 22, 2019, before any specific query regarding this investment was raised by the Assessing Officer (AO) (query issued Jan 23, 2021).

The AO treated the Rs. 1.85 Crores as unexplained investment under Section 69 and applied the penal tax rate under Section 115BBE. The AO also reclassified income from two properties (rented daily to pilgrims with managers employed) from 'Income from House Property' to 'Business Income', disallowing the standard deduction under Section 24(a). Additionally , an addition of Rs. 3.96 Lakhs was made under Section 68 for unexplained sundry creditors. The CIT(A) largely upheld the AO's order, except for allowing the deduction of house tax paid.

Key Arguments

Assessee's Contentions: * The Rs. 1.85 Crore investment was admitted during the survey itself. * Its omission from the return was an "inadvertent mistake". * Tax was paid suo moto before any specific query, demonstrating bona fides. * The conditions for invoking Section 69 (no explanation or unsatisfactory explanation) were not met, and no opportunity was given to explain, violating natural justice. * Consequently, the penal rate under Section 115BBE should not apply. * Rental income was from investments, not business, thus eligible for Section 24(a) deduction. Alternatively, if treated as business income, depreciation should be allowed. * Sundry credits were genuine business transactions and had been repaid.

Revenue's Contentions: * The undisclosed investment was discovered only due to evidence from the seller. * The assessee attempted to partially retract the disclosure initially. * Failure to include the amount in audited books or the return, despite knowledge from the survey, showed intent to conceal. * Tax was paid only after scrutiny was initiated, not truly voluntarily. Reliance placed on MAK Data Private Limited vs. CIT . * The explanation offered for the source (undisclosed business/rental income) was vague. * Section 115BBE applies to income determined under Section 69, regardless of when tax is paid, especially if the source remains unexplained. * The organised manner of renting properties (daily basis, managers) constituted a business activity. * Initial lack of confirmation for sundry creditors justified the Section 68 addition.

Tribunal's Analysis and Decision

1. Rental Income Classification (Ground 7): The ITAT agreed with the authorities below that the nature of letting out two properties (daily rentals, employing managers) constituted an organised activity, correctly classified as 'Business Income'. Therefore, the disallowance of Section 24(a) deduction was upheld. However, accepting the assessee's alternative plea, the Tribunal ruled: "since the assessee is entitled to deduction on business assets, we accept the alternative argument of the ld. AR that the assessee must be allowed the depreciation on WDV on these buildings annually, in accordance with explanation 5 of section 32 of the Act."

2. Unexplained Investment (Sec 69/115BBE) (Grounds 1-6, 10, 12, 13 & Addl Grounds 1-4): The Tribunal confirmed the addition under Section 69 (or potentially 69B, invoking Section 292B for technical correctness) and the application of Section 115BBE. Key reasons cited:

* Lack of Bona Fides: Failure to record the admitted amount in books or return despite having survey materials, and delaying tax payment for nearly two years until after scrutiny began, indicated an intent to conceal, not an inadvertent error.

* Insufficient Explanation: Merely stating the investment came from undisclosed business/rental income, without specifying how and when that income was generated and bringing that income to tax appropriately, doesn't satisfy the explanation requirement under Section 69.

* Section 115BBE Applicability: The Tribunal stated, "once the incriminating material is unearthed...and any investment is found, which is not found recorded...then even if the same is included in the return of income, it will still be liable to be assessed under section 69/69B and be brought to tax under the special provisions of section 115BBE." The only exception would be if the assessee properly reconciles the source income itself.

* Natural Justice: The argument failed as the assessee hadn't offered a proper, detailed explanation of the source initially for the AO to consider satisfactory or unsatisfactory.

* Voluntary Disclosure: Citing MAK Data , the Tribunal reiterated that disclosures must align with the Act's scheme; subsequent actions post-detection don't negate initial concealment attempts.

3. Sundry Creditors (Sec 68) (Ground 14): Observing the assessee's claim of having repaid the creditors, the Tribunal restored this issue to the AO: "restore this matter back to the file of the ld. AO with a direction to the assessee to provide evidence of such payment...whereupon the ld. AO give the assessee necessary relief."

Final Outcome

The appeal was partly allowed . The major addition of Rs. 1.85 Crores under Section 69/69B with tax under Section 115BBE was confirmed. The treatment of rental income as business was upheld, but depreciation was allowed. The addition under Section 68 regarding sundry creditors was remanded for verification of repayment.