2019 (6) TMI 922 - AT - Income Tax

Tribunal: Penalty under Income Tax Act discretionary, not mandatory. Assessing Officer must prove undisclosed income criteria.

Shri Vivek Sethia Versus The ACIT, Central Circle-1, Jaipur.

Shri Vivek Sethia Versus The ACIT, Central Circle-1, Jaipur. - TMI Issues Involved:1. Legality and factual correctness of the orders of the AO and CIT(A).2. Imposition of penalty under Section 271AAB of the Income Tax Act.3. Validity of penalty imposition on residual income surrendered during search.4. Additional grounds regarding the definition of 'undisclosed income' and the adequacy of notice under Section 274.Detailed Analysis:1. Legality and Factual Correctness of the Orders:The assessee contested the orders of the AO and CIT(A) as being 'bad in law and against facts of the case.' The assessee argued that the penalty imposed was based on the incorrect assumption that it was mandatory under Section 271AAB of the IT Act.2. Imposition of Penalty under Section 271AAB:The AO imposed a penalty of Rs. 61,95,020 under Section 271AAB, which was confirmed by the CIT(A). The assessee argued that the penalty under this section is not mandatory but discretionary. The Tribunal noted that Section 271AAB begins with the term 'the AO may,' indicating discretionary power rather than mandatory imposition. The Tribunal cited several decisions, including the case of Shri Padam Chand Pungliya vs. ACIT, to support the view that the penalty is discretionary and depends on the conduct of the assessee.3. Validity of Penalty Imposition on Residual Income Surrendered During Search:The Tribunal examined whether the surrendered income during the search under Section 132(4) constituted 'undisclosed income' as per the explanation to Section 271AAB. The Tribunal found that the surrendered amount of Rs. 5,17,32,630 on account of unaccounted expenditure on various projects belonged to the firms and companies in which the assessee was a partner or director, not to the assessee individually. Therefore, this amount could not be treated as the assessee's undisclosed income. Similarly, the surrender of Rs. 52,17,563 for jewellery and silver items was questioned due to lack of evidence of acquisition during the year under consideration. The Tribunal directed the AO to reconsider this issue, taking into account the actual cost of acquisition and the inherited nature of some jewellery. For the Rs. 50 lacs surrendered for any other discrepancy, the Tribunal found no evidence of any discrepancy or irregularity, thus ruling out its treatment as undisclosed income.4. Additional Grounds Regarding the Definition of 'Undisclosed Income' and Adequacy of Notice:The assessee argued that the AO failed to make a case that the surrendered income constituted 'undisclosed income' under the provisions of Section 271AAB. The Tribunal agreed, noting that the AO did not establish that the surrendered income fell within the definition of 'undisclosed income.' Additionally, the assessee contended that the penalty was imposed without serving a proper notice specifying the exact clause of Section 271AAB under which the penalty was to be levied. The Tribunal emphasized that the AO must issue a show cause notice and consider the assessee's explanation before imposing the penalty, thereby ensuring compliance with Sections 274 and 275 of the IT Act.Conclusion:The Tribunal concluded that the penalty under Section 271AAB is not mandatory but discretionary. The AO must establish that the surrendered income qualifies as 'undisclosed income' and must follow due process, including issuing a proper notice and considering the assessee's explanation. The Tribunal partly allowed the appeal, deleting the penalty on the surrendered expenditure and directing the AO to reconsider the penalty on the surrendered jewellery and silver items.