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2019 (1) TMI 1057
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....(1)(b) of I.T. Act, 1961 more so when this amount does not come under preview of definition of Undisclosed Income." 2. Briefly the facts of the case are that the assessee is a partnership firm and engaged in the business of manufacturing and trading of Gem Stones and Jewellery. The assessee's firm operates through its three branches situated at Jaipur, Jodhpur and Mumbai. A search and seizure action was carried out U/s 132(1) of the Act on 04.09.2013 at various business and residential premises of Rambhajo's Group and assessee firm is part of the said group. Subsequently, the assessee furnished its return of income on 01.10.2014 declaring total income of Rs. 5,91,64,560/- which includes income of Rs. 5,73,33,348/- which was surrendered during the course of search proceedings. In the return of income, the assessee also disclosed an amount of Rs. 1,77,039/- which, as per the Assessing officer, represents the undisclosed income of the assessee firm. The Assessing officer thereafter completed the assessment U/s 143(3) r.w.s. 153(1)(b) of the Act vide order dated 16.03.2016 at a total income of Rs. 5,93,25,040/-. The Assessing officer simultaneously initiated the penalty proceedin....
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.... assessee moved an appeal before the ld. CIT(A) against the said levy of penalty and submitted before him that the assessee in its return of income has declared additional income surrendered during the course of search and seizure amounting to Rs. 4,38,10,387/- on account of excess stock found during the search, Rs. 5 lacs on account of excess cash found during the search, Rs. 1,12,00,000/- on account of cash advances for land purchases, and Rs. 20 lacs on account of silver & other possible discrepancies totaling to Rs. 5,75,10,387/-. It was further submitted that the additional income so declared in the return of income cannot be treated as concealed income of the assessee as the Department has not found any evidence, which shows that the assessee was having some source of undisclosed income. It was further submitted that the assessee cooperated with the department and true disclosure of income was made, the intention was to avoid litigation and buy peace and the disclosure was not based on any material gathered as a result of search but the same was suo-moto surrendered by the assessee. It was further submitted that the provisions of Section 271AAB are pari materia to Section 271....
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....ding U/s 271AAB of the Act which is purely legal in nature, the additional ground of appeal is admitted for adjudication. 9. In this regard, the ld AR submitted that sub-section (3) of the Section 271AAB prescribes that Section 274 and Section 275 of the Act shall, so far as may be, apply. Sub section (1) of the Section 274 of the Act mandates that order imposing penalty has to be imposed only after hearing the assessee or giving assessee opportunity of hearing. Opportunity i.e. to be given should be meaningful one and not a farce. It was submitted that the ld. AO initiated the penalty u/s 271AAB of Income Tax Act, 1961 without specifying the clause of section 271AAB of the Act in the assessment order and penalty notice under which the penalty was initiated i.e. whether it is for clause (a) or clause (b) or clause (c) of section 271AAB(1). The conditions for imposing the penalty under each such clauses are separate therefore, the cause of the default should be specified while initiation of penalty in assessment order as well as in the notice issued u/s 274 of I.Tax Act. In this regard, our attention was drawn towards the initiation of penalty in assessment order and notice....
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....of the notice issued u/s 274 of I.Tax Act and from the assessment order, the Ld. AO has not put the Appellant on notice as to under which Clause of Sub Section (1) of Section 271AAB, the penalty has been proposed to be imposed. It is to be appreciated that the Appellant was never issued notice under Section 271AAB(1)(a) and 271AAB(1)(b) of the Act and no explanation of the Appellant was sought by the Ld. AO under Section 271AAB(1)(a) and 271AAB(1)(b). Therefore, the imposition of penalty under Section 271AAB(1)(a) and 271AAB(1)(b) is void ab-initio and bad in law in as much as no opportunity to be heard has been provided by the Ld. AO before imposition of the penalty as the notice itself is vague. 11. It was submitted that Ld. AO has not recorded his satisfaction in the assessment order as to under what circumstances or manner the provisions of Section 271AAB(1)(a) and 271AAB(1)(b) are attracted in the case of Appellant. Further, it is relevant that Ld. AO has not discussed the default of the Appellant attracting the provisions of Section 271AAB(1)(a) and 271AAB(1)(b). The assessment has been completed accepting the returned income. Therefore, without recording his satisfaction,....
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.... penalty. In the absence of this, the Appellant was precluded in submitting a cogent reply. The Hon'ble Karnataka High Court in the case of Manjunatha Cotton & Ginning Factory, 259 ITR 565 (Kar.) has held that penalty is not leviable in similar circumstances. Thus this being a legal lacuna, penalty levied may kindly be deleted. The reliance is also placed on the decision of Hon'ble ITAT Chennai Bench in the case of DCIT vs. Shri R. Elangovan in ITA No. 1199/CHN/2017 dated 05.04.2018, wherein Hon'ble ITAT in the said order while considering the validity of show cause notice and initiation of proceedings under section 271AAB and following the decision of Hon'ble Karnataka High Court in the case of CIT vs. Manjunatha Cotton & Ginning Factory (supra) as well as the decision of Hon'ble Supreme Court dismissing the SLP filed by the revenue in the case of CIT vs. SSA's Emerald Meadows, 242 Taxman 150 (SC) held that the notice issued under section 274 read with section 271AAB of the Act not specifying the ground and clauses for levy of penalty was not valid and consequently the penalty order was set aside. Reliance is also placed on the decision of Hon'ble Jurisdictional High Court i....
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....n 271AAB, we find that the primary condition or charge for levy of penalty is the existence of undisclosed income for the specified previous year found during the course of search in the case of assessee. Once the said primary condition or charge is satisfied, for the purposes of quantifying the penalty, the Assessing officer has to examine the satisfaction of ancillary conditions as specified under clause (a), clause (b) or clause (c) to sub-section (1) to Section 271AAB. Merely because the quantum of penalty varies from 10% to 30% subject to compliances with the ancilliary conditions, it cannot be said that where the AO has initiated the penalty under section 271AAB, there is any ambiguity in the charge or there is any lack of application of mind on part of the Assessing officer. Further, the levy of penalty under Section 271AAB is not based on addition made and investigation/enquiry conducted during the course of assessment proceedings, rather it is based on search conducted on the assessee on or after the 1st day of July, 2012, in such a situation, where the penalty show-cause notice is issued u/s 271AAB, the Assessing officer is making the assessee aware of the charge against ....
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.... (ii) substantiates the manner in which the undisclosed income was derived; and (iii) on or before the specified date- (A) pays the tax, together with interest, if any, in respect of the undisclosed income; and (B) furnishes the return of income for the specified previous year declaring such undisclosed income therein; (b) a sum computed at the rate of twenty per cent of the undisclosed income of the specified previous year, if such assessee- (i) in the course of the search, in a statement under sub-section (4) of section 132, does not admit the undisclosed income; and (ii) on or before the specified date- (A) declares such income in the return of income furnished for the specified previous year; and (B) pays the tax, together with interest, if any, in respect of the undisclosed income; (c) a sum which shall not be less than thirty percent but which shall not exceed ninety percent of the undisclosed income of the specified previous year, if it is not covered by the provisions of clauses (a) and (b). (2) No penalty under the provisions of clause (c) of sub-section (1) of section 271 sh....
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....computed at the rate of 10% of the undisclosed income of the specified previous year, if such assessee, in the course of the search, in a statement under sub-section (4) of section 132, admits the undisclosed income and satisfies other conditions as provided in 271AAB(1)(a). It further provides that where the declaration of undisclosed income is not made by the searched person in the course of search but is declared in the return of income furnished for the specified previous year and subject to satisfaction of other conditions, penalty @ 20% is payable by him. It further provides that where the declaration of undisclosed income is neither made by the searched person in the course of search nor declared in the return of income furnished for the specified previous year and additions are made during the course of assessment proceedings, penalty which can vary from 30% to 90% is payable by him. 13. Both the provisions as contained in section 271AAB(1)(a) and 271AAB(1)(c) thus provides for levy of penalty in cases where search has been initiated under section 132 on or after the 1st day of July, 2012 and quantum of penalty has been kept at 10% where there is declaration in the state....
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....ndered in context of section 271(1)(C), it has laid down certain legal proposition revolving around initiation of penalty proceeding and charges towards levy of penalty and we, therefore, deem it relevant to consider the same for the purposes of present appeal. 19. In the aforesaidsaid decision, the Coordinate Bench after analyzing catena of judicial pronouncements, including the decision of Hon'ble Karnataka High Court in case of Manjunatha Cotton and Ginning Factory (supra) which has also been cited by the ld AR in the instant case, it was held as under: "15. The moot question is that what should be the nature of specification of a charge by the AO at the stage of initiation of penalty proceedings and at the time of passing the penalty order. Is the AO required to specify in the penalty notice/order as to whether it is a case of 'concealment of particulars of income'; or 'furnishing of inaccurate particulars of income'; or both of them, which can be expressed by using the word 'and' between the two expressions. When the AO is satisfied that it is a clear-cut case of concealment of particulars of income, he must specify it so in the notice at the t....
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....hould have full opportunity to meet the case of the Department and show that the conditions stipulated in section 271(l)(c) do not exist as such he is not liable to pay penalty. The Hon'ble High Court went on to hold that: 'Clause (c) deals with two specific offences, that is to say, concealing particulars of income or furnishing inaccurate particulars of income.... But drawing up penalty proceedings for one offence and finding the assessee guilty of another offence or finding him guilty for either the one or the other cannot be sustained in law..... Thus once the proceedings are initiated on one ground, the penalty should also be imposed on the same ground. Where the basis of the initiation of penalty proceedings is not identical with the ground on which the penalty was imposed, the imposition of penalty is not valid'. 17. In Manu Engg. Works (supra) penalty was imposed by noting: 'that the assessee had concealed its income and/or that it had furnished inaccurate particulars of such income'. Striking down the penalty, the Hon'ble High Court held that: 'it was incumbent upon the IAC to come to a positive finding as to whether there was concealment of ....
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....;concealment of particulars of income' or 'furnishing of inaccurate particulars of such income'. Uncertain charge at the time of initiation of penalty, must necessarily be substituted with a conclusive default at the time of passing the penalty order. If the penalty is initiated with doubt and also concluded with a doubt as to the concealment of particulars of income or furnishing of inaccurate particulars of such income etc., the penalty order is vitiated. If on the other hand, if the penalty is initiated with an uncertain charge of 'concealment of particulars of income/furnishing of inaccurate particulars of income' etc., but the assessee is ultimately found to be guilty of a specific charge of either 'concealment of particulars of income' or 'furnishing of inaccurate particulars of income', then no fault can be found in the penalty order. 22. In Manu Engineering Works (supra), the Hon'ble Gujarat High Court noticed that the charge at the stage of initiation of penalty proceedings as well in the penalty order was uncertain and the expression used at both the stages was concealment of particulars of income and/or furnishing of inaccurate ....
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..../s 271AAB(1)(b) of the Act which provides for levy of penalty @ 20% on the undisclosed income of Rs. 1,77,039/- disclosed in the income tax return by the assessee. As held by the Coordinate Bench (supra), the uncertain charge at the time of initiation of penalty has been made good and substituted with a conclusive default at the time of passing the penalty order and that in such a case, no fault can be found in the penalty order. Similar proposition has been laid down by the Hon'ble Rajasthan High Court in case of Shweta Construction (supra). Hence, following the same, we donot see any infirmity in the initiation of penalty proceedings and consequent penalty order so passed by the Assessing officer and the contentions so raised by the ld AR in this regard cannot be accepted. Further, we find that the decision of the Coordinate Benches so relied upon by the ld AR, have been rendered without taking into consideration earlier decision of the Co-ordinate Bench in case of Mahesh Jain (Supra) and earlier decision of the larger Bench of the Tribunal in case of ONGC Mittal (Supra) and thus doesn't act as a binding precedent. In light of above discussions, the additional ground so raised by....
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.... course of a search under section 132, which has- (A) not been recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous year; or (B) otherwise not been disclosed to the Chief Commissioner or Commissioner before the date of the search; or (ii) any income of the specified previous year represented, either wholly or partly, by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the specified previous year which is found to be false and would not have been found to be so had the search not been conducted." 24. It was submitted that the additional business income declared in the income Tax return filed u/s 139(1) of Income Tax Act, 1961, cannot be treated as "Undisclosed Income" within the specific meaning given in section 271AAB. The Department carried out search and seizure operations over assessee group and during the course of the search, the Department has not found any evidence of unaccounted purchase/sales or source of undisclosed income. The disclosure of additional income was bona-fide disclosure by the a....
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....s business income utilized/ represented as excess stock. The assessee has declared additional Income of Rs. 5,75,10,387/- shown as "Income surrendered during the search" in Profit & Loss Account out of which Rs. 4,38,10,387/- stated as against excess stock. The ld AO has not determined it as income from other sources u/s 69 of Income Tax Act in the assessment but accepted as business income of current year. Now the mute question arise, whether the excess stock represents unaccounted purchases or difference on account of valuation of stock at the time of search at market value as against the cost. (i) No document of unaccounted purchase/sales was found:- At the outset, we submit that the department has carried out the intensive search operations over the assessee and no document was found to show unaccounted purchases of stock. Neither any entry in the books of account was found to show unaccounted purchases or sales nor any loose document was found to show the unaccounted purchases. (ii) Excess stock is result of valuation of stock at Market rate as on the date of search as against cost. The excess stock was arrived by valuation of stock at market rate as on 04/09....
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....ying at Jaipur office vide letter dated 15/12/2015 as under:- "Further, Kundan Meena jewellery is special jewellery quite different to ordinary jewellery. Kundan Meena jewellery also has wax, colour stones, tassels, semi precious stones, silver and diamonds. Therefore, the valuation should have been made by adjusting the gross weight for wax, tassels and other impurities. In Jaipur, the valuation of Kundan jewellery was made in totality without specifying the individual item and without giving the deduction for wax, tassels and other impurities. The valuer at Jaipur office/shop valued the jewellery at the rate of fine gold (24 carat gold) prevailing in market as on the date of search. For Kundan jewellery the valuer simply took the gross weight of Kundan jewelry and converted it into the weight in fine jewellery. For this purpose he converted the gross weight of Kundan Jewelry into fine jewellery by giving the deduction of 10% in the gross weight by considering the Kundan jewellery is of 21.6 carat. For valuation of Kundan jewellery he must have given proper deduction for wax and other impurities and then he should convert the resulted weight in 24 carat for valuation at the rat....
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....he search which contains the advances given by the assessee for purchase of land. However, the said entry in the loose paper giving advances for purchase of land itself is not an undisclosed income. The assessee has declared additional business Income of Rs. 5,75,10,387/- for current year shown as "Income surrendered during the search" in Profit & Loss Account out of which Rs. 1,12,00,000/- represents as utilized in advance against purchase of land. The ld AO has not determined it as income from other sources u/s 69 of Income Tax Act in the assessment but accepted as business income of current year. No document of unaccounted purchase or sales was found showing any unaccounted business by the assessee firm. Therefore, normal business income of the assessee was utilized in making the payments for purchase of land. Therefore, merely on the basis of surrender made in the search statement, this cannot be held as "Undisclosed Income" for the purpose of levy of penalty u/s 271AAB. d) Silver items Rs. 12,70,861/- It was submitted that explanation given for the jewellery stock of the firm should be consider for silver items . However the silver items found at the residence o....
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....on 271AAB the term " The AO may" is used, which shows the levy of penalty is not mandatory. The section states that the Assessing Officer "MAY" direct. Thus it is not 'SHALL' which would have made the levy of penalty mandatory. Thus the ld. CIT (A) was wrong in observing that levy of penalty u/s 271AAB was mandatory. Secondly the provisions of section 271AAB(3) lay down that penalty shall be levied under the section with reference to section 274. In other words the provisions of section shall apply in levying penalty under this section. Section 274 states that " No order imposing penalty under this chapter shall be made unless the assessee has been heard or has been given a reasonable opportunity of being heard." Thus hearing has to be given to the assessee before levy of penalty. This itself shows that penalty is leviable only after hearing the assessee and in case assessee is able to make out a case by showing some reasonable cause or otherwise then penalty shall not be leviable. Penalty is not automatically leviable. 29. Furthermore, every additional income declared in the return filed is not amount of undisclosed income. There may be several bonafide reasons of declaring ....
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....the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute." 32. Per contra, the ld. DR submitted that the assessee has surrendered the undisclosed income in its statement recorded u/s 132(4) and therefore, there cannot be any question of said surrender of income not falling in the definition of undisclosed income. It was submitted that the penalty U/s 271AAB is mandatory in nature and is imposed at the varying rate of 10%, 20% or 30% depending on the fulfillment of certain conditions therein. It was submitted that all the conditions specified in Section 271AAB have been fulfilled in the instant case, therefore, the penalty U/s 271AAB being in the nature of mandatory penalty and there being no discretion with the Income tax authorities, the penalty so imposed by the AO was rightly confirmed by the ld CIT(A) and the order of the ld CIT(A) should be upheld. 33. We have heard the rival contentions and perused the material available on record. Firstly, regarding the contention of the ld AR where he has challenged the findings of the ld. CIT(A) that penalty U/s 271AAB is mandatory in na....
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....eady reference, we reproduce hereunder section 158BFA (2) of the Act and section 271AAB of the Act which reads as under: 271AAB [Penalty where search has been initiated]: (1) The Assessing Officer may, notwithstanding anything contained in any other provisions of this Act, direct that, in a case where search has been initiated under section 132 on or after the 1st day of July, 2012, the assessee shall pay by way of penalty, in addition to tax, if any, payable by him- (a) a sum computed at the rate of ten per cent of the undisclosed income of the specified previous year, if such assessee- (i) in the course of search, in a statement under sub-section (4) of section 132, admits the undisclosed income and specifies the manner in which such income has been derived. (ii) Substantiates the manner in which the undisclosed income was derived; and (iii) On or before the specified date- (A) pays the tax, together with interest, if any, in respect of the undisclosed income; and (B) furnishes the return of income for the specified previous year declaring such undisclosed income therein; (b) a sum computed at the rate of twenty per cent....
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....enalty'. Similar words are used section 158BFA(2) of the Act. The word may direct indicates the discretion to the AO. Further, sub section (3) of section 271AAB of the Act, fortifies this view. Sub section (3) of section 271AAB: The provisions of section 274 and 275 shall, as far as may be, apply in relation to the penalty referred to in this section. 7. The legislature has included the provisions of section 274 and section 275 of the Act in 271AAB of the Act with clear intention to consider the imposition of penalty judicially. Section 274 deals with the procedure for levy of penalty, wherein, it directs that no order imposing penalty shall be made unless the assessee has been heard or has been given a reasonable opportunity of being heard. Therefore, from plain reading of section 271AAB of the Act, it is evident that the penalty cannot be imposed unless the assessee is given a reasonable opportunity and assessee is being heard. Once the opportunity is given to the assessee, the penalty cannot be mandatory and it is on the basis of the facts and merits placed before the A.O. Once the A.O. is bound by the Act to hear the assessee and to give reason....
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....ded the same in its return of income. Even from the perusal of the statements so recorded of the partners of the assessee firm, there is nothing which in any way suggests that there is any forced surrender by the assessee. The contention of the ld AR therefore has no legal leg to stand where he contends that the Revenue authorities have exerted undue pressure on the assessee and obtained surrender of income and therefore, there was no undisclosed income in the hands of the assessee. In any case, the assessment proceedings have attained finality where such undisclosed income has been offered and brought to tax and the same is not an issue before us. 37. Now, coming to the contention of the ld AR regarding amount surrendered during the course of search not qualifying as undisclosed income u/s 271AAB. For the purposes of levy of penalty, what has to be seen is that whether the surrender so made, in terms of statement of the assessee's partners recorded u/s 132(4) during the course of search, falls in the definition of "undisclosed income" which has been specifically laid down in terms of clause (c) of explanation to section 271AAB which reads as under: "(c) "undisclosed income" ....
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....s higher than the stock valued at the time of search. As per computation prepared which we have noted above, we find that stock (including stock of silver jewellery) as per books of accounts comes to Rs. 35,11,24,031 as against Rs. 34,27,22,924 valued by the Department at the time of search and therefore, contention so advanced by the ld AR is found reasonable. Another aspect which has been submitted by the assessee relates to non-deduction on account of chapadi, wax etc for the Kundan Meena Jewellery while physically weighing the jewellery. It was submitted by the ld AR that the said fact was duly brought to the notice of Assessing officer vide written submission dated 15.12.2015, however, the same has not been considered by the Assessing officer. In our view, given that the assessee has disclosed the whole of the amount surrendered during the course of search in its return of income, the amount so surrendered and disclosed in the return of income has rightly been brought to tax in the quantum proceedings. However, as far as penalty proceedings are concerned, the Assessing officer is required to give a specific finding that there is an undisclosed income found during the course....
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....of any entry in the books of account or other documents or transactions found in the course of a search under section 132. An investment per se represents an outflow of funds from the assessee's hand and an income per se represents an inflow of funds in the hands of the assessee. Therefore, once there is an inflow of funds by way of income, there could be subsequent outflow by way of investment. Investment and income thus connotes different meaning and connotation and thus cannot be used inter-changeably. In the definition of undisclosed income, where it talks about "income by way of any entry in the books of account or other documents or transactions found in the course of a search under section 132", what perhaps has been envisaged by the legislature is an inflow of funds in the hands of the assessee which has been found recorded by way of any entry in the books of accounts or other documents, and which has not been recorded before the date of search in the books of accounts or other documents maintained by the assessee in the normal course. We are also conscious of the fact that there are deeming provisions in terms of section 69 and 69B wherein such investments are deemed to....