2019 (4) TMI 620 - AT - Income Tax

Tribunal confirms penalty on undisclosed income, deems cash advances regular business transactions

The Deputy Commissioner of Income Tax, Central Circle, Kota Versus Shri Vasudev Agarwal And (Vice-Versa)

The Tribunal upheld the penalty of Rs. 75,17,711/- on undisclosed income of Rs. 7,97,915, confirming it was not recorded in the books. Cash advances of ... Penalty u/s 271AAB - search proceedings - income surrendered by the assessee in his statement u/s 132(4) consist of cash advances to farmers for purchase of wheat and cash - HELD THAT:- As far as cash of ₹ 7,97,915 found in possession of the assessee during the course of search is concerned, there cannot be any dispute that the same represents undisclosed income so defined in section 271AAB and which has not been recorded in the books of accounts of the assessee at the time of search. Regarding the contention of the AR that such cash is out of past savings of the assessee, these are contentions which are relevant for determining the nature and source of such undisclosed income for the purposes of determining the quantum of penalty which the CIT(A) has duly considered and has upheld the levy of penalty @ 10% as against 30% levied by the AO. In the result, we confirm the levy of penalty @ 10% on the undisclosed income of ₹ 7,97,915 so sustained by the ld CIT(A). Regarding cash advances to farmers for purchase of wheat - whether the advances so given to the farmers for purchase of wheat qualify as undisclosed income? - HELD THAT:- An advance represents an outflow of funds and what has been envisaged by the legislature while defining “undisclosed income” in section 271AAB is an inflow of funds which has not been recorded in the books of accounts on or before the date of search. Further, the deeming fiction so envisaged in section 69 and 69B cannot be extended and applied automatically in context of section 271AAB which contains a specific definition of undisclosed income. In light of above discussions and following the earlier decision of the Coordinate Bench of the Tribunal in the case of M/s Rambhajo vs ACIT (2019 (1) TMI 1057 - ITAT JAIPUR), we delete the penalty levied under section 271AAB of the Act on cash advances of ₹ 7,43,79,200 paid to farmers towards purchase of wheat. Since the issue of levy of penalty U/s 271AAB of the Act has been decided on merits, therefore, the issue of validity of initiation of the penalty proceeding due to defective show cause notice become academic in nature and we do not propose to adjudicate the same. Appeal of the Revenue is dismissed and the appeal of the assessee is partly allowed. Issues Involved:1. Reduction of penalty by CIT(A) from Rs. 2,25,53,134/- to Rs. 75,17,711/- under section 271AAB of the Income Tax Act.2. Validity of penalty order due to non-specification of the clause under section 271AAB in the penalty notice.3. Applicability of section 271AAB(1)(a) versus section 271AAB(1)(c) without issuing notice under section 251(2).4. Confirmation of penalty of Rs. 75,17,711/- under section 271AAB(1)(a).5. Mandatory nature of penalty under section 271AAB.6. Allegation of mens rea and intention of wrongdoing by the appellant.Detailed Analysis:1. Reduction of Penalty by CIT(A):The CIT(A) reduced the penalty levied by the AO from Rs. 2,25,53,134/- to Rs. 75,17,711/- under section 271AAB. The Revenue challenged this reduction, arguing that the manner of earning the undisclosed income was not disclosed by the assessee, which warranted a higher penalty under clause 1(c) of section 271AAB.2. Validity of Penalty Order:The assessee contended that the penalty order was invalid as the AO did not specify the clause under section 271AAB in the penalty notice. The assessee argued that the conditions for imposing the penalty under each clause are separate, and failure to specify the clause showed a lack of application of mind by the AO, rendering the proceedings bad in law.3. Applicability of Section 271AAB(1)(a) vs. Section 271AAB(1)(c):The assessee argued that the CIT(A) erred in applying section 271AAB(1)(a) instead of section 271AAB(1)(c) without issuing the required notice under section 251(2). The assessee claimed that the penalty was imposed based on an incorrect and misconceived finding that the appellant surrendered bogus long-term capital gain.4. Confirmation of Penalty of Rs. 75,17,711/-:The assessee contended that no penalty should be imposed as there was no undisclosed income within the meaning of section 271AAB. The penalty was based on the statement recorded under section 132(4), without any incriminating material or evidence found during the search. The assessee argued that the advances recorded in documents did not fall under the definition of 'undisclosed income.'5. Mandatory Nature of Penalty:The CIT(A) held that the penalty under section 271AAB is mandatory. The Tribunal, however, observed that the levy of penalty under section 271AAB is not automatic and the AO has discretion to decide after concluding that the income disclosed falls within the definition of 'undisclosed income.'6. Allegation of Mens Rea:The assessee argued that the CIT(A) did not address the allegation of the AO that the appellant had mens rea and intention of wrongdoing. The Tribunal noted that the AO's findings were based on the statement recorded under section 132(4) and the absence of any incriminating material or evidence found during the search.Tribunal's Findings:- The Tribunal upheld the penalty of Rs. 75,17,711/- on the undisclosed income of Rs. 7,97,915 found in possession of the assessee during the search, confirming that it represented undisclosed income not recorded in the books of accounts.- Regarding the cash advances to farmers amounting to Rs. 7,43,79,200, the Tribunal held that these advances, recorded in the notepad and notebooks, were part of regular business transactions and did not qualify as 'undisclosed income' under section 271AAB. The Tribunal deleted the penalty levied on these advances.- The Tribunal emphasized that the definition of 'undisclosed income' in section 271AAB should be strictly construed, and the deeming provisions of sections 69 and 69B could not be automatically applied in the context of section 271AAB.Conclusion:The appeal of the Revenue was dismissed, and the appeal of the assessee was partly allowed. The Tribunal confirmed the penalty on the undisclosed income of Rs. 7,97,915 but deleted the penalty on the cash advances of Rs. 7,43,79,200. The issue of the validity of the initiation of the penalty proceeding due to a defective show cause notice was deemed academic and not adjudicated.