2019 (4) TMI 634 - AT - Income Tax

Tribunal rules penalty discretionary, not mandatory under Section 271AAB. Excess stock not undisclosed income.

M/s Silver & Art Palace Versus The DCIT, Central Circle-4, Jaipur.

The tribunal ruled in favor of the appellant, holding that the penalty under Section 271AAB is discretionary, not mandatory. They found that the excess ... Penalty u/s 271AAB - essential condition for levy of penalty - undisclosed income in terms of clause (c) of explanation to section 271AAB - HELD THAT:- Mere disclosure of income u/s 132(4) would not automatically lead to levy of penalty but the AO has to give a clear and specific finding that the case of the assessee falls in the ambit of undisclosed so defined in the explanation to section 271AAB. The facts and circumstances of each case thus needs to be closely examined by the AO which shows that the levy of penalty is not automatic. Levy of penalty under section 271AAB is not mandatory in nature and it needs to be examined whether there is any basis for levy of penalty and whether the assessee has satisfied the necessary conditions for levy of penalty u/s 271AAB. In the result, the ground of appeal is allowed. Penalty on excess stock found - HELD THAT:- AO has merely gone by the surrender statement where the stock has been valued at market price prevailing as on the date of search and has not examined the matter from the perspective of determining separate identifiable stock not found recorded in the books of accounts and also the cost of such stock which is not recorded in the books of accounts. There is no finding that there is any excess stock which has been physically found and which has not been recorded in the books of accounts as on the date of search. It is thus clear that difference in stock of goods as per books and as found at the time of search is on account of valuation of such stock at the market value instead of cost and the same cannot be a basis to hold that it represent undisclosed income so defined in explanation to section 271AAB and the penalty levied thereon is liable to be set-aside. Cash advances for land purchases in the statement recorded u/s 132(4) - HELD THAT:- The undisclosed investment by way of advance for purchase of land can be subject matter of addition in the quantum proceedings, as the same has been surrendered during the course of search in the statement recorded u/s 132(4) and offered in the return of income, however the same cannot be said to qualify as an undisclosed income in the context of section 271AAB read with the explanation thereto and penalty so levied thereon deserved to be set-aside. Also conscious of the fact that there are deeming provisions in terms of section 69, 69A and 69B wherein such investments are deemed to be treated as income in absence of satisfactory explanation. In our view, the deeming fiction so envisaged under Section 69, 69A and Section 69B where investments which are found either not recorded or found recorded at a lesser value in the books of accounts, and such investments are deemed to be income of the assessee of the year in which such investments have been made, cannot be extended and applied automatically in context of section 271AAB. It is a well-settled legal proposition that the deeming provisions are limited for the purposes that have been brought on the statute book and have therefore to be applied in the context of provisions wherein they have been brought on the statue book and not otherwise. In the instant case, the deeming provisions are contained in section 69, 69A and section 69B and therefore, the same could have been applied in the context of bringing to tax such investments to tax in the quantum proceedings, though the fact of the matter is that the AO has not even invoked the said deeming provisions in the quantum proceedings in the instant case. Therefore, even on this account, the deeming fiction cannot be extended to the penalty proceedings which are separate and distinct from the assessment proceedings and more so, where the provisions of section 271AAB provide for a specific definition of undisclosed income. Where a specific definition of undisclosed income has been provided in Section 271AAB, being a penal provision, the same must be strictly construed and in light of satisfaction of conditions specified therein and it is not expected to examine other provisions where the same has been defined or deemed for the purposes of bringing the amount to tax. In the entirety of facts and circumstances of the case, the penalty U/s 271AAB is directed to be deleted on amount of surrender made during the course of search in absence of the same qualifying as undisclosed income as so defined under section 271AAB of the Act. - Decided in favour of assessee. Issues Involved:1. Legality of the order passed U/s 250.2. Nature of penalty U/s 271AAB (mandatory or discretionary).3. Justification of the penalty amounting to Rs. 2,65,05,088/- U/s 271AAB.Detailed Analysis:1. Legality of the Order Passed U/s 250:- The appellant did not press this ground during the hearing, thus it was dismissed as not pressed.2. Nature of Penalty U/s 271AAB:- Appellant's Argument: The appellant argued that the word 'may' in Section 271AAB implies discretion for the Assessing Officer (AO) to levy a penalty. They contended that penalties are discretionary, not mandatory, and referenced judicial interpretations of similar provisions (Section 158BFA(2)). They cited various tribunal decisions supporting this view.- Respondent's Argument: The respondent argued that the penalty U/s 271AAB is mandatory where conditions are met, and Section 273B does not apply to provide immunity. They referenced the Allahabad High Court’s decision in PCIT Vs. Sandeep Chandak to support their stance.- Tribunal’s Findings: The tribunal noted that Section 271AAB uses 'may direct,' indicating discretion. The tribunal emphasized that the AO must issue a show-cause notice and provide an opportunity for the assessee to be heard, making the penalty discretionary. They referenced several tribunal decisions supporting this interpretation, concluding that the penalty U/s 271AAB is not mandatory but discretionary.3. Justification of the Penalty Amounting to Rs. 2,65,05,088/- U/s 271AAB:- Appellant's Argument: The appellant argued that the excess stock found was based on estimation and approximation. They contended that no incriminating documents were found, and the alleged undeclared stock was integral to the declared stock. They argued that the penalty was imposed based on hypothetical income and not real income. They also argued that the advances given to parties noted in a diary did not represent undisclosed income as defined in Section 271AAB.- Respondent's Argument: The respondent maintained that the excess stock and advances found during the search were not recorded in the regular books, thus qualifying as undisclosed income. They argued that the valuation by the department valuer was accepted by the assessee, and the penalty was justified.- Tribunal’s Findings: The tribunal held that the penalty U/s 271AAB is not mandatory and must be based on facts and circumstances. They found that the excess stock valuation was based on market value, not cost, and thus did not represent undisclosed income. Regarding the advances, the tribunal noted that investments and income are distinct and the advances did not qualify as undisclosed income under Section 271AAB. They concluded that the penalty was imposed without proper basis and directed its deletion.Conclusion:The tribunal allowed the appeal, ruling that the penalty U/s 271AAB is discretionary and not mandatory. They found that the excess stock and advances did not qualify as undisclosed income under the section, thus directing the deletion of the penalty amounting to Rs. 2,65,05,088/-.