2019 (3) TMI 2075 - AT - Income Tax

Penalty under s.271AAB deleted where surrendered income from share transactions was recorded in books and supported by documents

ITAT JAIPUR - AT held that penalty under s.271AAB could not be sustained where surrendered income arose from share transactions duly recorded in books and ... Undisclosed income - penalty under section 271AAB - discretionary nature of penalty (AO's duty to 'may' direct after hearing) - definition of undisclosed income in Explanation to section 271AAB - requirement of show-cause notice and opportunity under sections 274/275 - entries in other documents versus entries in books of accountUndisclosed income - definition of undisclosed income in Explanation to section 271AAB - entries in other documents versus entries in books of account - Whether the LTCG surrendered in the statement recorded under section 132(4), but which was recorded in the assessee's books of account and supported by independent documents, constituted 'undisclosed income' for the purpose of section 271AAB. - HELD THAT: - The Tribunal applied the Explanation to section 271AAB, noting that clause (c)(i) treats as 'undisclosed income' entries found in search-material only if such entries 'have not been recorded on or before the date of search in the books of account or other documents maintained in the normal course.' In this case the transactions of purchase and sale of listed shares and the resulting LTCG were recorded in the assessee's books and reflected in the balance sheet as on 31 March 2014; independent evidence (contract notes, broker ledgers, bank statements, Demat records) was produced and not controverted by the AO. The seized computation/slips therefore did not amount to incriminating material of income not recorded in the books. Consequently the primary condition for treating the amount as 'undisclosed income' under the Explanation was not satisfied and the surrender could not be equated ipso facto with undisclosed income for levy of penalty under section 271AAB.The surrendered LTCG did not fall within the statutory definition of 'undisclosed income' in the Explanation to section 271AAB and thus could not sustain the penalty under that provision.Penalty under section 271AAB - discretionary nature of penalty (AO's duty to 'may' direct after hearing) - requirement of show-cause notice and opportunity under sections 274/275 - Whether levy of penalty under section 271AAB is mandatory upon disclosure in a section 132(4) statement or whether the Assessing Officer has discretion and must act after issuing show-cause and hearing the assessee. - HELD THAT: - The Tribunal examined the language of section 271AAB and its cross-reference to sections 274 and 275. The use of the word 'may' and the statutory application of sections 274/275 indicate that the AO must issue a notice and give an opportunity of hearing and then decide whether penalty is exigible and, if so, which limb (quantum) applies. The Tribunal followed earlier bench decisions holding that penalty under section 271AAB is not automatic; the AO must reach a reasoned conclusion on whether the conditions for clauses (a),(b) or (c) are satisfied and consider the assessee's explanation before levying penalty.Levy of penalty under section 271AAB is discretionary and not automatic; the AO must adjudicate the applicability of the statutory conditions after issuing proper notice and affording an opportunity of hearing.Requirement of show-cause notice and opportunity under sections 274/275 - penalty under section 271AAB - Whether the show-cause/penalty notice in the present case was valid and whether the penalty order could stand where the AO did not specify the particular default/clause under section 271AAB attracting the penalty. - HELD THAT: - The Tribunal reviewed authority holding that a notice under section 274 must specify the grounds/default so the assessee knows the specific charge to meet; mere generic or vague notice is insufficient and offends principles of natural justice. Applying those precedents, the Tribunal found the AO had not specified the default or clause of section 271AAB relied upon and had failed to make the requisite findings that the case fell within the Explanation's definition of 'undisclosed income.' Consequently the show-cause notice was held not sustainable and the penalty order was set aside.The penalty notice/order was invalid for failure to specify the default/clause and to make requisite findings; the penalty was set aside.Final Conclusion: On the facts and in law the Tribunal held that the LTCG surrendered in the section 132(4) statement-being recorded in the books and substantiated by independent documents-did not constitute 'undisclosed income' under the Explanation to section 271AAB; that levy of penalty under section 271AAB is discretionary (not automatic) and requires a reasoned adjudication after issuing a valid show-cause and hearing the assessee; and that the AO's notice/order in the present case was not sustainable. Accordingly the assessee's appeal is allowed and the revenue's appeal is dismissed; the penalty is deleted. Issues Involved:1. Validity of the penalty order under section 271AAB of the Income Tax Act.2. Application of the correct clause of section 271AAB for penalty imposition.3. Determination of whether the income was undisclosed as per section 271AAB.4. Mandatory nature of penalty under section 271AAB.5. Consideration of mens rea and intention for wrongdoing in penalty imposition.Detailed Analysis:1. Validity of the Penalty Order:The primary issue raised by the assessee was the validity of the penalty order under section 271AAB of the Income Tax Act. The assessee argued that the penalty order was wrong, bad in law, invalid, and void-ab-initio because the Assessing Officer (AO) did not specify the clause of section 271AAB under which the penalty was initiated. The conditions for imposing a penalty under each clause of section 271AAB(1) are separate, and the failure to specify the applicable clause rendered the penalty order invalid.2. Application of the Correct Clause of Section 271AAB:The assessee contended that the CIT (A) erred in applying the provisions of section 271AAB(1)(a) instead of section 271AAB(1)(c) without issuing a notice as required under section 251(2) of the Income Tax Act. The assessee argued that there was no undisclosed income within the meaning of section 271AAB, and thus, no penalty could be imposed. The penalty was levied based on the statement recorded under section 132(4), and no incriminating material was found during the search to prove undisclosed income.3. Determination of Whether the Income was Undisclosed:The assessee argued that the transactions of purchase and sale of shares, resulting in Long Term Capital Gains (LTCG), were duly recorded in the books of account. The LTCG was exempt under section 10(38) of the IT Act, but during the search, the assessee surrendered the LTCG to tax. The assessee provided documentary evidence to substantiate the genuineness of the LTCG, which was not contested by the AO. The mere surrender of income did not automatically become undisclosed income, and the AO failed to demonstrate that the income fell within the definition of undisclosed income under section 271AAB.4. Mandatory Nature of Penalty Under Section 271AAB:The assessee challenged the CIT (A)'s view that the penalty under section 271AAB is mandatory. The Tribunal noted that the penalty under section 271AAB is not automatic but requires the AO to make a decision after considering the conditions specified in the section. The AO must issue a show cause notice and provide an opportunity for the assessee to be heard before imposing the penalty. The Tribunal emphasized that the penalty should not be imposed unless the case falls within the legal framework mandating the penalty.5. Consideration of Mens Rea and Intention for Wrongdoing:The assessee argued that the CIT (A) erred in not addressing the allegation of mens rea and intention for wrongdoing. The Tribunal reiterated that the penalty under section 271AAB is not automatic and requires the AO to consider the explanation provided by the assessee. The AO must determine whether the surrender made by the assessee constitutes undisclosed income as defined under section 271AAB.Conclusion:The Tribunal concluded that the income surrendered by the assessee did not fall within the definition of undisclosed income as per the Explanation to section 271AAB. The transactions were duly recorded in the books of account, and the supporting documents substantiated the genuineness of the LTCG. Consequently, the penalty imposed by the AO and sustained by the CIT (A) was not sustainable and was deleted. The Tribunal allowed the appeal of the assessee and dismissed the appeal of the revenue.