2019 (1) TMI 1546 - AT - Income Tax

Penalty u/s 271AAB - undisclosed income in terms of clause (c) of explanation to section 271AAB - non specific limb of section 271AAB which the AO wishes to invoke in the assessee s case - undisclosed investment, stock of jewellery - HELD THAT - In the instant case, the deeming provisions are contained in section 69 and section 69B and therefore, the same have to be applied in the context of bringing to tax such investments to tax in the quantum proceedings. The same cannot be extended to the penalty proceedings which are separate and distinct from the assessment proceedings and more so, where the provisions of section 271AAB provide for a specific definition of undisclosed income. Where a specific definition of undisclosed income has been provided in Section 271AAB, being a penal provision, the same must be strictly construed and in light of satisfaction of conditions specified therein. The undisclosed investment by way of advance for purchase of land can be subject matter of addition in the quantum proceedings, however the same cannot be said to qualify as an undisclosed income in the context of section 271AAB read with the explanation thereto and penalty so levied deserve to be set-aside. Regarding undisclosed investment in the construction of house, we find that such undisclosed investment has been worked out based on assessee s statement of approximate investment in the construction of house and after determining the amount which has been reflected in the books of accounts, and the difference has been estimated at ₹ 31,77,000. There has been nothing tangible in terms of any entries or documents relating to actual expenditure on construction of house which has been incurred which is found to be false during the course of search and therefore, penalty levied thereon deserve to be set-aside. Physical stock of metal jewellery, semi-precious jewellery and silver jewellery, such stock has been physically found in excess of what has been recorded in the assessee s regular books of accounts at the time of search and such excess stock has been valued at ₹ 85,79,654. It is not the case of the assessee that such excess stock has been wrongly inventorised during the course of search or there is any dispute regarding the value at which such stock has been valued. Having accepted such excess stock of jewellery found at the time of search and which has not been found recorded at the time of search in the books of account maintained in the normal course of assessee s business relating to such previous year, income represented by such excess stock of jewellery found at the time of search will fall in the definition of undisclosed income and will be subject to levy of penalty u/s 271AAB. The assessee has admitted such undisclosed stock in his statement u/s 132(4) and in response to question no. 20 has specified the source of investment in such jewellery which is the unaccounted sale of jewellery and stones during the current financial year which has not been recorded in his regular books of accounts. Thus, admission has been made by the assessee in his statement u/s 132(4) and specification of the manner in which such investment in jewellery has been derived has been specified as arising from his jewellery business. The return of income has been filed disclosing such undisclosed income and taxes have been paid prior to such filing. Thus, the charge of undisclosed found during the course of search has been duly satisfied and other conditions so specified under section 271AAB(1)(a) duly fulfilled and satisfied in the instant case, the penalty levied u/s 271AAB in respect of such undisclosed stock of jewellery is hereby sustained. - Appeal of the assessee is partly allowed.

Issues Involved:
1. Validity of the penalty order under Section 271AAB of the Income Tax Act, 1961.
2. Legality of the show cause notice issued under Section 271AAB.
3. Nature of penalty provisions under Section 271AAB.
4. Discretionary vs. mandatory nature of penalty under Section 271AAB.
5. Basis for levy of penalty when there is no variation between assessed and returned income.
6. Conditions for penalty under Section 271AAB(1)(a) regarding admission and substantiation of undisclosed income.
7. Existence of undisclosed income and its substantiation.

Detailed Analysis:

1. Validity of the Penalty Order under Section 271AAB:
The appellant challenged the penalty order under Section 271AAB, claiming it was void ab-initio and deserved to be quashed. The Tribunal found that the primary condition for the levy of penalty under Section 271AAB is the existence of undisclosed income found during a search. The Tribunal held that the penalty order was valid as the Assessing Officer had made the assessee aware of the charge and provided an opportunity to rebut it.

2. Legality of the Show Cause Notice:
The appellant argued that the show cause notice issued under Section 271AAB was vague and did not specify the specific limb of the section under which the penalty was being imposed. The Tribunal noted that the penalty proceedings under Section 271AAB are distinct from assessment proceedings and emphasized that the charge must be specified in the penalty notice and order. The Tribunal found that the notice sufficiently made the assessee aware of the charge and provided an opportunity to respond, thus upholding the validity of the notice.

3. Nature of Penalty Provisions under Section 271AAB:
The Tribunal analyzed the provisions of Section 271AAB and concluded that the section provides for a singular charge of undisclosed income found during a search. The quantum of penalty varies based on the satisfaction of ancillary conditions specified under clauses (a), (b), or (c) of sub-section (1). The Tribunal held that there was no ambiguity in the charge or lack of application of mind by the Assessing Officer.

4. Discretionary vs. Mandatory Nature of Penalty:
The appellant contended that the penalty under Section 271AAB is discretionary and not mandatory. The Tribunal agreed, stating that the use of the word "may" in the section indicates discretion. The Tribunal referenced various judicial precedents and concluded that the levy of penalty is not automatic but depends on the facts and circumstances of each case.

5. Basis for Levy of Penalty When There is No Variation Between Assessed and Returned Income:
The appellant argued that penalty cannot be levied when there is no variation between the assessed and returned income. The Tribunal rejected this contention, clarifying that the basis for the levy of penalty under Section 271AAB is the existence of undisclosed income found during a search, not the addition made during assessment proceedings.

6. Conditions for Penalty Under Section 271AAB(1)(a):
The appellant claimed that the conditions regarding the admission and substantiation of undisclosed income were not met. The Tribunal examined the statement recorded during the search and found that the assessee had admitted the undisclosed income and specified the manner in which it was derived. The Tribunal held that the conditions under Section 271AAB(1)(a) were satisfied.

7. Existence of Undisclosed Income and Its Substantiation:
The appellant argued that no undisclosed income was found during the search and that the disclosure was made under pressure. The Tribunal reviewed the evidence, including the statement recorded during the search and the subsequent affidavit and return of income filed by the assessee. The Tribunal found that the undisclosed income was properly substantiated and that the penalty was correctly levied on the excess stock of jewellery found during the search. However, the Tribunal set aside the penalty on the undisclosed investment in land and construction of the house, as there was no tangible evidence to support these findings.

Conclusion:
The appeal was partly allowed. The penalty on the undisclosed stock of jewellery was sustained, while the penalty on the undisclosed investment in land and construction of the house was set aside. The Tribunal upheld the validity of the penalty order and the show cause notice, confirmed the discretionary nature of the penalty under Section 271AAB, and clarified that the basis for the penalty is the existence of undisclosed income found during a search.

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