[Opinion] Can AO Automatically Invoke Deeming Provisions After Initiation of Survey or Search Proceedings?

CA Mukesh Kohli – [2023] 155 taxmann.com 340 (Article)

Normally we see when a survey is conducted in the business premises of an assessee during which the assessee surrenders certain amount then a question arises whether where survey or search proceeding is initiated at the business premises of an assessee then does it mandate the AO to automatically invoke deeming provisions of sections 69, 69A, 69B, 69C or 69D.

Analysis

It is like laying a general rule which is beyond the mandate of law that wherever there is survey and some income is detected or surrendered by the assessee, the deeming provisions are attracted by default and by virtue of the same, provisions of section 115BBE are attracted. Merely stating that excess cash is clearly covered u/s 68 or 69A, excess stock is covered u/s 69 or 69B, construction of shed/godown is covered u/s 69B or 69C and advances made to various parties are covered u/s 69, 69B, or 69D is like an open ended hypothesis which is not supported by any specific finding that matter shall fall under which of the specific sections and how the conditions stated therein are satisfied before the said provisions are invoked.

If we look at the provisions of section 133A, clause (iii) of sub-section (3) which provides that an income tax authority acting under this section shall record the statement of any person which may be useful for or relevant to any proceedings under this Act. Therefore, what explanation has been offered by the assessee as part of his statement recorded under section 133A needs to be analysed and examined before drawing any conclusions in this regard.

For the deeming provisions of section 69 to be attracted, there has to be a finding that the assessee has made investments during the financial year in the stock and by way of advances, such investments are not recorded in the books of account so maintained by the assessee, and the assessee offers no explanation about the nature and source of the investments or the explanation so offered is not found satisfactory in the opinion of the Assessing Officer. Similarly, for the deeming provisions of section 69A to be attracted, there has to be a finding that the assessee was found to be owner of cash so found at the time survey, such cash has not been recorded in the books of account so maintained by the assessee, and the assessee offers no explanation about the nature and source of the cash or the explanation so offered is not found satisfactory in the opinion of the Assessing Officer.

Therefore, the foundational requirement before invoking the deeming provisions is not that there were certain survey operations under section 133A and some undisclosed income has been detected and surrendered by the assessee and, thus, the deeming provisions are automatically attracted. Rather the foundational requirement is whether the assessee has made the investment/has been found to be owner of cash and the explanation offered by the assessee explaining the nature and source of such undisclosed income and the reasonability of the explanation so offered by the assessee keeping into account the facts and circumstances of the relevant case. In fact, if one looks at the provisions of section 133A, clause (iii) of sub-section (3) provides that an income tax authority acting under this section shall record the statement of any person which may be useful for or relevant to any proceedings under this Act. Therefore, what explanation has been offered by the assessee as part of his statement recorded under section 133A needs to be analysed and examined before drawing any conclusions in this regard.

What is relevant before invoking the deeming provisions is not just the factum of survey action but besides that, what is the explanation so offered by the assessee explaining the nature and source of income so found during the course of survey proceedings and which has not been recorded in the books of account and the same is the essence of the statutory provisions as duly recognized by the Courts and various Benches of the Tribunal and which has been reiterated from time to time. The statement of the assessee has to be read as a whole and not in piecemeal especially where the revenue is relying on the same statement and in such circumstances, the defence available to the assessee in terms of part of the statement having not been considered by the revenue cannot be ignored. The mere fact that survey/search proceedings have been initiated at the business premises of the assessee doesn’t mandate the Assessing officer to automatically invoke the deeming provisions and before invoking the deeming provisions, he has to call for the explanation of the assessee and only where the explanation so offered is not found satisfactory, he can proceed and invoke the deeming provisions.

Where the source of investment or expenditure is clearly identifiable and the alleged undisclosed asset has no independent existence of its own orthere is no separate physical identity of such investment or expenditure, then, first, what is to be taxed is the undisclosed business receipt invested in unidentifiable unaccounted asset and only on failure it should be considered to be taxed u/s 69 of the Act on the premises that such excess investment is not recorded in the books of accounts and its nature and source is not identifiable.

Where the assessee has only one source of income i.e. business income and nowhere it has on record that the assessee has any other source of income except business income then deeming provisions of section 69, 69A, 69B, 69C of the Act will not apply.

Now a question arise why there is so much hue and cry among professionals regarding levy of deeming provisions under section 69,69A,69B,69C or 69D.

An amendment was brought in by Taxation Law (Second Amendment) Act, 2016 which has been made effective from 1.4.2017 and deemed income u/s 68, 69, 69A, 69B, 69C or 69D of the Act are liable for tax @60%.

Let us see the provisions of section 115BBE.

Section 115BBE

Tax on income referred to in section 68 or section 69 or section 69A or section 69B or section 69C or section 69D.

1. Where the total income of an assessee, –

(a) Includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D and reflected in the return of income furnished under section 139.

(b) Determined by the Assessing Officer includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, if such income is not covered under clause (a).

The income-tax payable shall be the aggregate of-

(i) The amount of income-tax calculated on the income referred to in clause (a) and clause (b), at the rate of sixty per cent.

(ii) The amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (1).

2. Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance [or set off of any loss] shall be allowed to the assessee under any provision of this Act in computing his income referred to in clause (a) [and clause (b)] of sub-section (1).

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