2019 (4) TMI 1719 - AT - Income Tax

Levy of penalty u/s 271AAB - penalty was initiated by AO u/s 271AAB(1)(a) whereas while levying penalty it was levied u/s 271AAB(1)(c) - assessee surrendered income during the search action carried out at his premises u/s 132 - AO had made the additional disallowance u/s 14A in addition to the suomotu disallowance returned by the assessee - HELD THAT - It is quite apparent that the issue of disallowance of expenditure on the aforesaid three issues was a debatable one and in fact in the light of the various decisions of the Hon ble High Courts the assessee has a fair case on merits and that it cannot be said that there was any intentional act on the part of the assessee to claim any inadmissible expenditure rather the assessee had put a bonafide claim of the allowance/expenditure on these issues. What we wish to convey through the aforesaid discussion is that even despite certain disallowances made by the AO it cannot be said that assessee had claimed any inadmissible expenditure which would fall within the definition of undisclosed income as defined under the provisions of section 271AAB. Except the aforesaid disallowance made by the AO on debatable issues there is no case of the Department in respect of any inadmissible expenditure claimed by the assessee which would cover the surrendered income of 14 cores. From the facts on the file it is established that the aforesaid surrender of 14 crores was based on the mere statement of the assessee and nothing incriminating material which would constitute undisclosed income as per the provisions of section 271AAB was detected or found during the search action. In view of the various case laws as discussed above the aforesaid amount for 14 cores would not fall in the definition of undisclosed income as defined under section 271AAB and hence the penalty is not leviable on the said amount under the provisions of section 271AAB. So far as the surrendered amount of 39.99 lacs is concerned same was offered on account of profits on stock found short during the search action. Admittedly the stock was found short during the search action. In fact the Assessing officer apart from the above surrender of 39.99 lacs has made further addition of 2.58 cores on this issue. It is apparent that the aforesaid profit on short stock were not accounted for by the assessee but was only detected during the search action. The assessee has substantiated the manner of earning of the said income which include the surrender income of 39.99 lacs hence penalty @ 10% is leviable on the aforesaid amount as per the provisions of section 271AAB (1)(a). The penalty in this case is restricted to 10% of the surrendered income on account of stock found short as per the provisions of section 271AAB (1)(a). The remaining part of the penalty is ordered to be deleted.

Summary

Issues Involved:
1. Legality of the penalty levied under section 271AAB of the Income Tax Act, 1961.
2. Justification of the penalty under section 271AAB(1)(a) versus section 271AAB(1)(c).
3. Definition and applicability of "undisclosed income" under section 271AAB(3)(c).

Detailed Analysis:

1. Legality of the penalty levied under section 271AAB of the Income Tax Act, 1961:
The assessee contested the penalty of ?4,31,99,747 levied under section 271AAB, arguing that it was not exigible under the facts and circumstances of the case. The Tribunal examined the relevant provisions of section 271AAB and section 274 of the Income Tax Act, 1961. It was noted that the penalty under section 271AAB is not mandatory but discretionary, as indicated by the use of the word "may" instead of "shall" in the statute. The Tribunal referenced several case laws, including decisions from the ITAT Visakhapatnam Bench and the Hon’ble Andhra Pradesh High Court, which supported the view that the levy of penalty under section 271AAB is discretionary and not automatic.

2. Justification of the penalty under section 271AAB(1)(a) versus section 271AAB(1)(c):
The assessee argued that the penalty was initiated under section 271AAB(1)(a) but levied under section 271AAB(1)(c). The Tribunal noted that the penalty under section 271AAB(1)(c) requires the income to be undisclosed and not covered by clauses (a) and (b). The Tribunal found that the income surrendered by the assessee did not fall within the definition of "undisclosed income" as per section 271AAB(3)(c). The Tribunal observed that the Assessing Officer did not substantiate the manner of earning the said income and that the penalty under section 271AAB(1)(c) was not justified.

3. Definition and applicability of "undisclosed income" under section 271AAB(3)(c):
The Tribunal examined the definition of "undisclosed income" under section 271AAB(3)(c), which includes income represented by money, bullion, jewelry, or other valuable articles or entries in books of account found during the search. The Tribunal found that the income surrendered by the assessee did not meet this definition. The Tribunal referenced several case laws, including decisions from the ITAT Kolkata Bench and the Hon’ble Andhra Pradesh High Court, which supported the view that the income surrendered by the assessee did not qualify as "undisclosed income" under section 271AAB.

Conclusion:
The Tribunal concluded that the penalty under section 271AAB was not justified for the surrendered amount of ?14 crores, as it did not fall within the definition of "undisclosed income." However, the penalty was justified for the surrendered amount of ?39,99,158 on account of stock found short, as it was detected during the search and substantiated by the assessee. The penalty was restricted to 10% of the surrendered amount of ?39,99,158 under section 271AAB(1)(a). The appeal of the assessee was partly allowed, with the remaining part of the penalty ordered to be deleted.