2019 (6) TMI 285 - AT - Income Tax

Penalty u/s 271AAB - defective notice - show cause notice issued by the AO without specifying the default - search and seizure u/s 132 - certain incriminating documents containing the entries of advance, unaccounted stock at business premises as well as residence, cash at the residence of the assessee and jewellery at the residence of the assessee were found and seized - assessee filed his return of income u/s 139(1) on 2nd September, 2015 declaring total income including the surrender of additional income - HELD THAT - The show cause notice issued by the AO without specifying the default and ground for which the penalty u/s 271AAB was proposed to be levied renders the initiation of penalty proceedings invalid and consequently the order passed u/s 271AAB is liable to be quashed. Mandatory or discretionary nature of levy of penalty u/s 271AAB - Tribunal after considering all the decisions including the decision of Hon ble Allahabad High Court in case of PCIT vs. Sandeep Chandak 2017 (12) TMI 70 - ALLAHABAD HIGH COURT held that the levy of penalty u/s 271AAB is not mandatory but the AO has to take a decision on the basis of the relevant facts of the case and after considering the explanation of the assessee whether the surrender made by the assessee falls in the definition of undisclosed income as proposed in explanation to section 271AAB. Accordingly this issue is decided in favour of the assessee and against the revenue. Penalty on account of excess stock - When assessee was not found to be doing any business in his individual capacity and all business of Gem Jewellery are run through the proprietorship concern of the assessee s HUF as well as the other firms and companies in which the assessee and his family members are partners and directors, the said income on account of excess stock disclosed by the assessee cannot be regarded as undisclosed income for the purpose of levy of penalty u/s 271AAB. The definition of Undisclosed Income as provided in explanation to section 271AAB has to be considered for the purpose of levy of penalty and not the mere disclosure of undisclosed income u/s 132(4). Accordingly, we delete the penalty levied u/s 271AAB in respect of the Income surrendered on account of excess stock. Since we have considered that this is not undisclosed income of the assessee, therefore, we do not propose to go into the issue of valuation of closing stock. Penalty on cash advances - As relying on SHRI RAJENDRA KUMAR GUPTA VERSUS THE DCIT, CENTRAL CIRCLE-2, JAIPUR. 2019 (1) TMI 1545 - ITAT JAIPUR the mere entry of advances representing the out go of money would not constitute undisclosed income of the assessee as defined in the explanation to section 271AAB. Moreover, no efforts were made to ascertain the status of these advances given to these two persons and even whether the entries in the name of these two persons were artificial or in the name of some existing persons. Accordingly, the penalty levied u/s 271AAB on account of entries for advances is deleted. Penalty on account of cash found at the residence of the assessee - Though the assessee has surrendered the same in the statement recorded u/s 132(4), however, the mere surrender in the statement u/s 132(4) would not itself constitute undisclosed income ignoring the other relevant facts being source of cash found during the search. Once the assessee and other family members of the assessee are having the income as well as withdrawals which are many times or in hundred times of the cash found at the residence of the assessee, by considering these undisputed facts of income and withdrawals, the said cash cannot be held as undisclosed income of the assessee. Accordingly, penalty levied u/s 271AAB on account of cash found at the residence is deleted. Disclosure on account of excess jewellery found at the residence - After giving the benefit of the CBDT Instruction No. 1916 and the status of the assessee s family, the jewellery found from the residence and locker of the assessee cannot be considered as excess of the normal possession of this jewellery. Therefore, even if the assessee has disclosed the undisclosed income in the statement recorded u/s 132(4) but for the purpose of levy of penalty u/s 271AAB, all these facts are required to be taken into account. Once all these facts are considered, then the said jewellery found at the time of search and seizure action cannot be held as undisclosed income. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the notice issued for initiating penalty under Section 271AAB.
2. Nature of penalty under Section 271AAB – whether mandatory or discretionary.
3. Merits of the penalty imposed on the assessee.

Detailed Analysis:

1. Validity of the Notice Issued for Initiating Penalty Under Section 271AAB:

The assessee contested the validity of the notice issued by the Assessing Officer (AO) for initiating penalty under Section 271AAB, arguing that the notice did not specifically point out the default for which the penalty was sought. The assessee contended that the AO did not specify the undisclosed income or the default attracting the penalty, resulting in a violation of the principles of natural justice. The Tribunal noted that the show cause notices were vague, not specifying the charge or ground for the penalty, and thus, were not sustainable. The Tribunal relied on multiple judicial precedents, including the Hon’ble Karnataka High Court in CIT vs. Manjunatha Cotton & Ginning Factory, and the Hon’ble Jurisdictional High Court in Sheveta Construction Co. Pvt. Ltd., which emphasized the necessity of specifying the grounds in the penalty notice to uphold the principles of natural justice.

2. Nature of Penalty Under Section 271AAB – Mandatory or Discretionary:

The Tribunal examined whether the levy of penalty under Section 271AAB is mandatory. It was argued by the revenue that the penalty is automatically attracted once undisclosed income is admitted. However, the Tribunal held that the penalty under Section 271AAB is not mandatory but discretionary. The AO must consider all relevant facts and circumstances and provide a proper opportunity to the assessee before imposing the penalty. The Tribunal referred to various decisions, including the Visakhapatnam Bench in ACIT vs. Marvel Associates, which held that the penalty under Section 271AAB is discretionary and not automatic.

3. Merits of the Penalty Imposed on the Assessee:

a. Penalty on Account of Excess Stock:

The Tribunal found that the excess stock of ?10,11,30,000/- was actually belonging to the business concern of the assessee’s HUF, M/s. Bhuramal Rajmal Surana, and not to the assessee individually. The assessee had no business in his individual capacity, and thus, the stock could not be considered as his undisclosed income. The Tribunal concluded that the penalty on this account was not justified.

b. Penalty on Cash Advances of ?50,00,000/-:

The Tribunal held that the entries of advances are not income but represent an outflow of funds. Referring to the decision in Rajendra Kumar Gupta vs. DCIT, the Tribunal stated that such advances could not be treated as undisclosed income for the purpose of penalty under Section 271AAB.

c. Penalty on Account of Cash Found at the Residence:

The Tribunal noted that the cash of ?38,50,000/- found at the residence belonged to the entire family, which had substantial income and withdrawals over the years. Given the family’s financial status, the cash could not be considered as undisclosed income. The Tribunal deleted the penalty on this account.

d. Penalty on Account of Jewellery Found:

The Tribunal observed that the jewellery found was within the limits prescribed by CBDT Instruction No. 1916, considering the family’s status and the number of family members. Thus, the jewellery could not be treated as undisclosed income, and the penalty was deleted.

Conclusion:

The Tribunal quashed the penalty proceedings under Section 271AAB, holding that the initiation of penalty was invalid due to vague notices, and the penalty itself was not mandatory but discretionary. On merits, the Tribunal found that the excess stock, cash advances, cash found at the residence, and jewellery did not constitute undisclosed income as per the definition under Section 271AAB, and thus, the penalty was not justified. The appeal of the assessee was allowed.