2017 (6) TMI 772 - AT - Income Tax

Tribunal reduces penalty under Income Tax Act, provides significant relief to assessee

Suresh J Patel, Shiv Sadan Versus ACIT, Central Circle-3, Surat

The Tribunal reduced the penalty imposed under Section 271AAA of the Income Tax Act to 10% of the unexplained investment found during the search, ... Levy of penalty u/s. 271AAA - whether the manner in which such income has been derived and whether it has been substantiated was explained by the assessee - Held that:- Wherever and whenever there is a voluntary offer of undisclosed income during the course of the search operation, the same should have a nexus with the unaccounted wealth unearthed. In the case in hand, the declaration of the undisclosed income is far more in excess of the undisclosed and unexplained wealth found during the course of the search operation. The voluntary offer of the assessee is not in consonance with the meaning of undisclosed income given under the explanation to Section 271AAA of the Act as mentioned elsewhere. There should be some nexus between the unaccounted wealth and the undisclosed income. According to us, the penalty should be levied only to the extent of the unexplained investment found at the time of search. Therefore, modifying the findings of the ld. CIT(A), we direct the A.O. to restrict the penalty to the extent of ₹ 7,22,967/- being 10% of ₹ 72,29,667/-. Assessee will get a relief of ₹ 35, 10,172/-. Appeal filed by the Assessee is partly allowed. Issues Involved:1. Levy of penalty under Section 271AAA of the Income Tax Act.2. Compliance with conditions for exemption from penalty under Section 271AAA.3. Determination of undisclosed income and its substantiation.Detailed Analysis:1. Levy of Penalty under Section 271AAA:The primary issue in this case is the levy of penalty amounting to Rs. 42,33,139 under Section 271AAA of the Income Tax Act. The penalty was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)] but contested by the assessee. The penalty was imposed following a search operation under Section 132 of the Act, where the assessee disclosed Rs. 5 crores, of which Rs. 4,23,31,392 was offered for the assessment year (A.Y.) 2011-12. The Assessing Officer (A.O.) issued a show cause notice to the assessee, questioning why the penalty should not be levied on the undisclosed income.2. Compliance with Conditions for Exemption from Penalty under Section 271AAA:The assessee argued that the declaration was voluntary, and there was no element of undisclosed income to attract the penalty. The assessee claimed compliance with all conditions exempting him from the penalty under Section 271AAA. However, the A.O. disagreed, stating that the assessee failed to specify and substantiate the manner in which the undisclosed income was derived, a mandatory condition under Section 271AAA. The A.O. noted that the assessee did not provide documentary evidence for the claimed agricultural income and concluded that the conditions for immunity from penalty were not fulfilled.3. Determination of Undisclosed Income and Its Substantiation:The Tribunal examined the facts and provisions of Section 271AAA, which requires the assessee to admit undisclosed income, specify the manner of derivation, substantiate the manner, and pay the tax with interest. The Tribunal noted that while the assessee admitted the undisclosed income and paid the taxes, the manner of derivation was not substantiated. The Tribunal referred to the statement recorded during the search, where the assessee mentioned agricultural activities but could not clarify the source of the cash found. The Tribunal found this explanation illogical, as agricultural income is exempt from tax, and no prudent person would offer it as undisclosed income.The Tribunal emphasized the definition of 'undisclosed income' under Section 271AAA, which includes income not recorded in the books or disclosed to tax authorities before the search. The Tribunal observed that the unaccounted wealth found during the search included investments in cars, jewelry, watches, and cash totaling Rs. 72,29,667. The Tribunal concluded that the voluntary offer of Rs. 4,23,31,392 was far in excess of the unexplained wealth found and lacked a nexus with the unaccounted wealth unearthed during the search.Conclusion:The Tribunal decided that the penalty should be levied only to the extent of the unexplained investment found during the search, amounting to Rs. 72,29,667. Consequently, the penalty was reduced to Rs. 7,22,967 (10% of Rs. 72,29,667), providing the assessee relief of Rs. 35,10,172. The appeal filed by the assessee was partly allowed. The order was pronounced in open court on April 3, 2017.