2019 (4) TMI 1113 - AT - Income Tax

Tribunal clarifies penalty discretion under Section 271AAB, emphasizes specific charges in notices.

The Tribunal ruled that the penalty under Section 271AAB is discretionary, not mandatory. The notice for initiating penalty must specify the clause under ... Penalty u/s 271AAB - advances given for purchase of land - assessee had admitted undisclosed income in its statements u/s 132(4) and paid the taxes thereon before specified date - Whether the surrender so made, in terms of statement of the assessee recorded u/s 132(4) during the course of search, falls in the definition of “undisclosed income ? - HELD THAT:-  The assessee HUF is a partner in two partnership firms and derives income from share in the profit and interest from such partnership firms which it has reported in its return of income and therefore, as far as maintenance of books of accounts is concerned, the assessee HUF not carrying on any business is thus not required to maintain regular books of accounts. The diary found during the course of search and seizure at the premises of the assessee contains the entries of advances given for purchase of land and therefore, the said amount of advance given for purchase of land can be recorded in the capital account of the assessee. Thus the transactions found recorded in the diary are to be recorded in the capital account of the assessee as well as in the balance sheet prepared as on 31.03.2015 and not on the date of search as on 5.02.2015. These transactions are recorded in a diary which is nothing but “other documents” maintained in the normal course, then it cannot be presumed that the assessee would not have disclosed the same in the return of income to be filed after the date of search. A Whether the advances so given for purchase of land qualify as “undisclosed income” as per definition given in the explanation to section 271AAB of the Act? - 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 or other documents on or before the date of search and not an outflow of funds. 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. As relying on SHRI RAJENDRA KUMAR GUPTA VERSUS THE DCIT, CENTRAL CIRCLE-2, JAIPUR. [2019 (1) TMI 1545 - ITAT JAIPUR] we delete the penalty levied under section 271AAB of the Act on cash advances towards purchase of land. - Decided in favour of assessee. Issues Involved:1. Validity of the notice issued for initiating penalty under Section 271AAB.2. Nature of penalty under Section 271AAB - whether mandatory or discretionary.3. Definition and scope of 'undisclosed income' under Section 271AAB.4. Applicability of penalty on cash advances and jewellery found during search.5. Validity of initiation of penalty proceedings due to defective show cause notice.Detailed Analysis:1. Validity of the Notice Issued for Initiating Penalty under Section 271AAB:The assessee argued that the notice issued by the Assessing Officer (AO) for initiating penalty under Section 271AAB was not in accordance with the law as it did not specifically point out the default. The Tribunal noted that the notice should mention under which clause of Section 271AAB the penalty is being levied since each clause provides for a different rate of penalty. The Tribunal referenced the Karnataka High Court decision in CIT vs. M/s SSA’s Emerald Meadows, which supports the requirement for specific charges in the notice.2. Nature of Penalty under Section 271AAB - Whether Mandatory or Discretionary:The Tribunal held that the levy of penalty under Section 271AAB is not automatic but discretionary. The AO must decide based on the facts and circumstances of each case. The Tribunal referred to the decision in DCIT vs. Manish Agarwal, which clarified that the word 'may' in Section 271AAB indicates discretion rather than a mandatory imposition of penalty. The Tribunal emphasized that penalties are not compulsory but should be imposed considering the overall facts and circumstances.3. Definition and Scope of 'Undisclosed Income' under Section 271AAB:The Tribunal examined whether the surrendered income during the search qualifies as 'undisclosed income' as defined under Section 271AAB. The definition includes income represented by money, bullion, jewellery, or other valuable articles not recorded in the books of account before the search. In the case of cash advances for land purchases noted in a diary, the Tribunal concluded that advances represent an outflow of funds, not inflow, and thus do not qualify as 'undisclosed income' under Section 271AAB. The Tribunal referenced the decision in Rajendra Kumar Gupta vs. DCIT, which held that advances cannot be considered undisclosed income for penalty purposes.4. Applicability of Penalty on Cash Advances and Jewellery Found During Search:For cash advances towards land purchases, the Tribunal held that such advances do not qualify as 'undisclosed income' and thus, the penalty under Section 271AAB should be deleted. However, for jewellery valued at Rs. 49,62,554 found during the search, the Tribunal confirmed the penalty as the jewellery was in excess of what was disclosed in the wealth tax return and thus qualified as undisclosed income.5. Validity of Initiation of Penalty Proceedings Due to Defective Show Cause Notice:The Tribunal noted that since the issue of levy of penalty under Section 271AAB was decided on merits, the issue of the validity of the initiation of penalty proceedings due to a defective show cause notice became academic and was not adjudicated further.Judgments Delivered:- ITA No. 124/JP/2018: Penalty on cash advances of Rs. 2,25,00,000 was deleted.- ITA No. 125/JP/2018: Penalty on cash advances of Rs. 1,00,50,000 was deleted; penalty on jewellery valued at Rs. 49,62,554 was confirmed.- ITA No. 126/JP/2018: Penalty on cash advances of Rs. 2,05,00,000 was deleted.- ITA No. 127/JP/2018: Penalty on cash advances of Rs. 2,25,00,000 was deleted.Conclusion:The Tribunal allowed the appeals for ITA No. 124/JP/18, 126/JP/18, and 127/JP/18, deleting the penalties on cash advances. For ITA No. 125/JP/18, the appeal was partly allowed, deleting the penalty on cash advances but confirming the penalty on undisclosed jewellery. The Tribunal emphasized the discretionary nature of penalty under Section 271AAB and the specific definition of 'undisclosed income.'