TaxTMI 
TaxTMI 
2019 (4) TMI 565
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....ming penalty of Rs. 50,16,672/- imposed by the ld. Assessing Officer u/s 271AAB of the IT Act, 1961. 3. That the appellant craves the permission to add to or amend to any of the above grounds of appeal or to withdraw any of them." Ground No. 1 is regarding validity of initiation of penalty proceedings under section 271AAB of the IT Act for want of specifying the default as per clause (a) to (c) of section 271AAB(1) of the IT Act. 2. A search and seizure action under section 132(1) of the I.T. Act was carried out on 4th September, 2013 at various premises of Rambhajo group, Jaipur. The assessee is also one of the members of this group covered by the search and seizure action. During the course of search and seizure action, the assessee disclosed undisclosed income of Rs. 5,01,66,717/- being an additional business income. The said income was surrendered by the assessee on account unexplained expenditure on house construction of Rs. 2,44,63,575/-, undisclosed stock of Rs. 1,91,24,877/-, undisclosed jewellery of Rs. 60,16,265/- and undisclosed debtors/advances of Rs. 5,62,000/- total amounting to Rs. 5,01,66,717/-. The assessee filed his return of income on 28th November, 2014....
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....es the circumstances and violation attracting the penalty @ 10%, 20% and 30% of undisclosed income of the specified previous year. The assessee should know the grounds which he has to meet specifically otherwise the principles of natural justice are violated. Even in the assessment order the AO has not specified under which clause the penalty is liable to be imposed but the AO has mentioned that the penalty proceedings under section 271AAB of the Act are being initiated. There is no application of mind at the time of issuing the show cause notices as the AO has not specified the undisclosed income on which the assessee is required to show cause. Even the AO has not given any ground for levy of penalty for which the assessee could put his defence. Thus in the absence of specific charge against the assessee, the assessee was not given the proper opportunity to counter the show cause notice issued by the AO as well as to file the cogent reply to the same. In the absence of any grounds specified in the show cause notice as well as any amount to be treated as undisclosed income of the assessee for the purpose of levy of penalty under section 271AAB, the initiation of penalty is not v....
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.... the scope of any pressure or coercion by the search team for taking disclosure from the assessee. Thus the objection raised by the assessee that the AO has not specified the clause under section 271AAB(1) of the Act has no merit when the assessee himself has explained the nature of income disclosed and surrendered and also paid the tax on the same. The ld. D/R has submitted that as per the explanatory note of Finance Bill, 2012, the provisions of section 271AAB are mandatory in nature and the AO has no discretion but the assessee shall pay the penalty in addition to the tax on the undisclosed income surrendered under section 132(4) of the Act. He has relied upon the orders of the authorities below. 4.1. The ld. D/R has also relied upon the decision of Hon'ble Allahabad High Court in case of Principal CIT vs. Sandeep Chandak and Others dated 27th November, 2017 in I.T. Appeal No. 122, 128 and 129 of 2017 and submitted that even otherwise if the show cause notice does not mention the section correctly it will not be invalid as the AO will get the benefit of section 292BB of the Act. The ld. D/R has also relied upon the decision of Kolkata Bench of the Tribunal in the case of DCIT....
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.... make a decision for levy of penalty after considering the fact that all the conditions provided under section 271AAB are satisfied. At the outset, we note that an identical issue has been considered by the Coordinate Bench of this Tribunal in the case of Ravi Mathur vs. DCIT (supra) in para 4 to 6 as under :- "4. We have considered the rival submissions as well as relevant material on record. A search was conducted under section 132 of the IT Act on 30th October, 2014 at the premises of the assessee. The assessee in his statement recorded under section 132(4) has disclosed an income of Rs. 10,02,00,000/- in pursuant to the entries of advances given for purchase of land recorded in the pocket diary which was found and seized during the course of search and seizure action. This is year of search and the financial year would end on 31st March, 2015. However, the assessee disclosed this amount of Rs. 10,02,00,000/- based on the entries in the diary regarding investment in real estate. The due date of filing of return of income under section 139(1) was 30th September, 2015. It is undisputed fact that the assessee is an Individual and was not maintaining regular books of accoun....
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....ndisclosed 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 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 51[computed at the rate of sixty per cent] of the undisclosed income of the specified previous year, if it is not covered by the provisions of clauses (a) and (b). 52[(1A) The Assessing Officer may, notwithstanding anything contai....
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...., by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the 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 54[Principal Chief Commissioner or] Chief Commissioner or 54[Principal Commissioner or] Commissioner before the date of 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.]" The section begins with the stipulation that the AO "may" direct the assessee shall pay by way of penalty if the conditions as prescribed under clauses (a) to (c) are satisfied. As per sub-section (3) of section 271AAB the provisions of section 274 and 275 as far as may be applied....
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....ndatory aspect in the provision is the quantum of penalty as specified under clauses (a) to (c) of Sec. 271AAB(1) of the Act as 10% to 30% or more as against the discretion given to the AO as per the provisions of section 271(1)(c) of the Act where the AO has the discretion to levy the penalty from 100% to 300% of the tax sought to be evaded. Thus the AO is duty bound to come to the conclusion that the case of the assessee is fit for levy of penalty under section 271AAB and then only the quantum of penalty being 10% or 20% or 30% has to be determined subject to the explanation of the assessee for the defaults. 5. Before we proceed further, the decisions relied upon by the ld. D/R are to be considered. In the case of Principal CIT vs. Sandeep Chandak & Others (supra) the issue before the Hon'ble High Court was the defect in the notice issued under section 271AAB on account of mentioning wrong provision of the Act being 271(1)(c) of the Act. The Hon'ble High Court after considering the fact that the show cause notice issued by the AO though mentions section 271(1) in the caption of the said notice, however, the body of the show cause notice clearly mentions section 271AAB, which w....
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....5. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. During the appeal hearing, the Ld. A.R. vehemently argued that the A.O. has levied the penalty under the impression that the levy of penalty in the case of admission of income u/s 132(4) is mandatory. The Ld. A.R. further stated that penalty u/s 271AAB of the Act is not mandatory but discretionary. The provisions of section 271AAB of the Act is parimateria with that of section 158BFA of the Act relating to block assessment and accordingly argued that the levy of penalty under section 271AAB is not mandatory but discretionary. When there is reasonable cause, the penalty is not exigible. The Ld. A.R. taken us to the section 271AAB of the Act and also section 158BFA(2) of the Act and argued that the words used in section 271AAB of the Act and the words used in section 158BFA(2) of the Act are identical. Hence, argued that the penalty section 271AAB of the Act penalty is not automatic and it is on the merits of each case. For ready reference, we reproduce hereunder section 158BFA (2) of the Act and section 271AAB of the Act which reads as under; 271AA....
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....mposing penalty shall be made in respect of a person if- (i) such person has furnished a return under clause (a) of section 158BC; (ii) the tax payable on the basis of such return has been paid or, if the assets seized consist of money, the assessee offers the money so seized to be adjusted against the tax payable. (iii) Evidence of tax paid is furnished along with the return; and (iv) An appeal is not filed against the assessment of that part of income which is shown in the return: Provided further that the provisions of the preceding proviso shall not apply where the undisclosed income determined by the Assessing Officer is in excess of the income shown in the return and in such cases the penalty shall be imposed on that portion of undisclosed income determined which is in excess of the amount of undisclosed income shown in the return. 6. Careful reading of section 271AAB of the Act, the words used are 'AO may direct' and 'the assessee shall pay by way of penalty'. 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 secti....
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....ribunal has analyzed all the relevant provisions of the Act as well as various decisions on this point including the decision of Hon'ble Allahabad High Court in the case of Pr. CIT vs. Sandeep Chandak, 405 ITR 648 (Allahabad) relied upon by the ld. D/R and then arrived at the conclusion that the penalty under section 271AAB is not mandatory but the AO has the discretion to take a decision and the same should be based on judicious decision of the AO. Accordingly following the earlier decision of this Tribunal in the case of Ravi Mathur vs. DCIT (supra), we hold that the levy of penalty under section 271AAB is not mandatory but the AO has a discretion after considering all the relevant aspects of the case and then to satisfy himself that the case of the assessee falls in the definition of undisclosed income as provided in the explanation to section 271AAB of the Act. 5.1. The second limb of challenging the validity of initiation of penalty proceedings for not specifying the ground and default in the show cause notice issued under section 274 has been considered by the Coordinate Bench of this Tribunal in the case of Ravi Mathur vs. DCIT (supra) in para in para 7 as under :- "7.....
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.... that for concealment of income makes the penalty order liable for cancellation even when it has been proved beyond reasonable doubt that the assessee had concealed income in the facts and circumstances of the case? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the penalty notice under Section 274 r.w.s. 271(1)(c) is bad in law and invalid despite the amendment of Section 271(1B) with retrospective effect and by virtue of the amendment, the assessing officer has initiated the penalty by properly recording the satisfaction for the same? (3) Whether on the facts and in the circumstances of the case, the Tribunal was justified in deciding the appeals against the Revenue on the basis of notice issued under Section 274 without taking into consideration the assessment order when the assessing officer has specified that the assessee has concealed particulars of income? 3. The Tribunal has allowed the appeal filed by the assessee holding the notice issued by the Assessing Officer under Section 274 read with Section 271(1)(c) of the Income Tax Act, 1961 (for short 'the Act') to be bad in law as it....
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....e of SSA's Emerald Meadows (supra), specifically observing that there was no merits in the petition filed by the Revenue. Considering the above cited judgments, we hold that the notice issued u/s.274 r.w.s. 271AAB of the Act, reproduced by us at para 5 above was not valid. Ex-consequenti, the penalty order is set aside. 6. Since we have set aside the penalty order for the impugned assessment year, the appeal filed by the Revenue has become infructuous." In view of the decision of the Chennai Bench (supra), the show cause notice issued by the AO in the case of the assessee is not sustainable." We further note that in the case in hand, the AO in the show cause notice has neither specified the grounds and default on the part of the assessee nor even specified the undisclosed income on which the penalty was proposed to be levied. For ready reference we reproduce the show cause notices issued by the AO under section 274 read with section 271AAB on 30th March, 2016 and 16th August, 2016 as under :- " No. ACIT/CC-1/JPR/2015-16 &nbs....
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....ct, 1961. If you do not wish to avail yourself of this opportunity of being heard in person or through Authorized Representative, you may reply to show cause in writing on or before the said date which will be considered before any such order is made. Yours faithfully, Sd/- ( Devangi Swarnkar ) Asstt. Commissioner of Income-tax, Central Circle-1, Jaipur. " Thus it is clear that both the show cause notices issued by the AO for initiation of penalty proceedings under section 271AAB are very vague and silent about the default of the assessee and further the amount of undisclosed income on which the penalty was proposed to be levied. Even the Hon'ble Jurisdictional High Court in case of Shevata Construction Co. Pvt. Ltd in DBIT Appeal No. 534/2008 dated 06.12.2016 has concurred with the view taken by Hon'ble Karnataka High Court in case of CIT vs. Manjunatha Cotton & Ginning Factory, 359 ITR 565 (Karnataka) which was subsequently upheld by the Hon'ble Supreme Court by dismissing the SLP filed by the revenue in the case of CIT vs. SSA's Emerald Meadows, 242 taxman 180 (SC). Accordingly, following the decision of the Coordinate Bench as well as Hon'ble Jurisdictional Hi....
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....ikely to be disclosed. Hence the ld. A/R has submitted that the Board has time and again advised the taxing authorities to avoid obtaining an admission/confession of undisclosed income under coercive/undue influence. He has then referred to the Circular dated 18th December, 2018 and submitted that the CBDT has repeated its earlier instructions. Thus the ld. A/R has submitted that in the absence of any undisclosed income indicated or discovered on the basis of seized material, the disclosure made in the statement under section 132(4) is not sufficient to levy the penalty under section 271AAB of the Act. In support of his contention, he has relied upon the following decisions :- Ravi Mathur vs. DCIT ITA No. 969/JP/2017 dated 13.06.2018. Dinesh Kumar Agarwal vs. ACIT ITA Nos. 855 & 856/JP/2017 dated 24.07.2018. Raja Ram Maheshwari vs. DCIT ITA No. 992/JP/2017 dated 10.01.2019. M/s. Rambhajo's vs. ACIT ITA No. 991/JP/2017 dated 11.01.2019. Rajendra Kumar Gupta vs. DCIT ITA No. 359/JP/2017 dated 18.01.2019. Thus the ld. A/R has submitted that even if the seized material discloses some outflow of funds from the assessee's hands, the same cannot necessarily be an income ....
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....ey from the hands of the assessee does not represent the income but only an in-flow in the hands of the assessee would constitute an income, if at all. 7. On the other hand, the ld. D/R has submitted that the assessee has disclosed the income based on the seized material found during the course of search. Therefore, the disclosure is in respect of the undisclosed income recorded in the seized material. He has further contended that in this case the entries are in respect of some physical assets with the assessee except the advances of Rs. 5,62,000/-, therefore, the entries in the seized material represents the physical assets of the assessee. He has relied upon the orders of the authorities below. 8. We have considered the rival submissions as well as the relevant material on record. Out of the four items representing the undisclosed income disclosed by the assessee during the statement under section 132(4) of the IT Act, only two items, namely, expenditure on house construction and undisclosed advances are based on the seized material. The other two items being representing excess stock and undisclosed jewellery are not based on the seized documents but these are based on....
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....es in itself are not having any income element but these are all expenditure entries and, therefore, until and unless a corresponding asset is found in the possession of the assessee, the entries alone cannot be regarded as representing the undisclosed income of the assessee. Therefore, when the duration of the construction period of the house has not been ascertained by the department, then showing the entire cost of construction with imaginary figures for a period of 2 month is not justified. Even we find that the construction material entries are on subsequent dates and furniture and TV entries on the earlier dates which do not support of the case of the department that these entries/notings in the seized documents represents the real transactions/assets purchased by the assessee or in the possession of the assessee. The possession of the asset was a matter of fact at the time of search and in the absence of such asset either found or otherwise discovered during the course of search and seizure, these entries in the seized documents would not constitute undisclosed income on account of expenditure in construction of the house. Similarly, the entries in respect of advances ....
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....f funds in the hands of the assessee. Therefore, once there is an inflow of funds by way of income, there can be subsequent outflow by way of an advance to any third party. Giving an advance 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 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 and not vice-versa. We are also conscious of the fact that there are deeming provisions in terms of section 69 and 69B wherein such amounts may be deemed as income in absence of satisfactory explanation. In our view, the deeming fiction so envisaged under Section 69 and Section 69B cannot be extended and applied automatically in context of section 271AAB. It is a ....
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....earch and seizure action the department has got valued the stock of the assessee from the departmental valuer. We find that in the valuation report the valuer has not made any attempt to find out the net weight but all the articles are taken at gross weight on which the prevailing market prices as on the date of search were applied. Thus it is clear that the difference in the closing stock was due to the valuation determined by the departmental valuer based on the gross weight and prevailing market prices in comparison to the value recorded by the assessee in the books of account. We further note that in the entire valuation report and in the proceedings of the search and seizure, the department has not made any allegation that there was any discrepancy in the quantity of the stock found during the course of search and seizure and the stock recorded by the assessee in the books of account. Once the stock which is recorded in the books of account of the assessee and the stock physically found at the time of search has no discrepancy in terms of quantity, then only because of difference in valuation done by the departmental valuer would not amount to undisclosed income based on the d....
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....lery which is not found recorded in the books of accounts maintained in the normal course relating to such previous year. In other words, the value at which such stock has been acquired by the assessee and not the value which such stock can fetch in the market or the fair market value of such stock. In the instant case, it has been contended that the valuation of the stock has been done at market rate as on the date of search without considering the cost disclosed in the books of accounts and without considering the well-accepted accounting policy which has been followed by the assessee firm where it values its stock at lower of cost and net realizable value. The cost can be determined on the basis of historical and/or current cost so recorded in the books of accounts. Alternatively, past gross profit percentage can also give a reasonable basis for determining such cost. In the instant case, the ld AR has contended that where gross profit of the past year determined at the rate of 13.92% is used and applied to the stock valued by the Revenue at the current market value, it will result in a scenario where the stock as per books of account is higher than the stock valued at the ti....
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....ve facts and circumstances of the case and following the earlier order of this Tribunal, we hold that the amount representing the excess stock based on the valuation of the departmental valuer cannot be regarded as undisclosed income in terms of definition provided in the explanation to section 271AAB of the Act. Hence, the penalty levied against such amount is not sustainable. 10. The ld. A/R of the assessee has submitted that no incriminating material was found during the course of search and the disclosure was taken only on the basis of the valuation of jewellery at current rate instead of the actual cost of acquisition of the jewellery. Therefore, he has submitted that considering the status of the assessee's family and the number of family members, the jwellery found during the course of search is not abnormal and acquired in the long back. The ld. A/R has further contended that part of the jewellery was even not purchased but inherited from the forefathers. Hence the disclosure obtained on account of the jewellery would not constitute undisclosed income of the assessee for the purpose of levy of penalty. 11. On the other hand, the ld. D/R has submitted that the jeweller....