2019 (6) TMI 545 - AT - Income Tax

Penalty u/s 271AAB - treating the declared income during the course of search as undisclosed income - search and seizure action u/s 132(1) - HELD THAT - No question was raised or asked about the undisclosed income for purchase of iron ore as recorded in the exehibit-2 page 25 at the time of search then the disclosure made by the assessee vide letter dated 25.01.2013 on account of the cash purchases cannot be considered as undisclosed income for the purpose of levy of penalty u/s 271AAB. Neither the investigating team nor the AO during the assessment proceedings detected any excess stock or discrepancy in the stock as recorded in the books of accounts by the assessee in comparison to the stock which was found at the time of search and seizure action. Even there is payment for purchase of raw material the said outgo of money itself cannot be treated as undisclosed income of the assessee in the absence of corresponding asset found at the time of search. There was no discrepancy found in the physical stock as well as stock recorded in the books of account despite the physical verification and inventorization carried out of investigating team at the time of search then the mere details of payment for purchases in cash would not constitute undisclosed income as per the definition provided in explanation to Section 271AAB. Accordingly, the penalty levied u/s 271AAB is not sustainable and the same is liable to be deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Legality of the penalty imposed under Section 271AAB of the Income Tax Act.
2. Determination of whether the income declared during the search qualifies as 'undisclosed income' under Section 271AAB.
3. Validity of the penalty proceedings initiated by the Assessing Officer (AO).

Detailed Analysis:

1. Legality of the Penalty Imposed under Section 271AAB:
The assessee contested the penalty of ?19,50,000 imposed under Section 271AAB of the Income Tax Act, arguing that the penalty was illegal, unjustified, and arbitrary. The Tribunal examined the facts and circumstances, including the search conducted on 06.11.2012 and the subsequent declaration of ?65,00,000 by the assessee for cash purchases of raw material. The Tribunal noted that during the search, no discrepancy was found in the stock, and the stock was duly recorded in the accounts. Therefore, the payment made in cash for raw material could not be considered 'undisclosed income' as per the definition in Section 271AAB. Consequently, the penalty imposed by the AO was deemed unsustainable and was deleted.

2. Determination of Whether the Declared Income Qualifies as 'Undisclosed Income':
The Tribunal addressed the additional ground raised by the assessee, which questioned whether the income surrendered during the search was 'undisclosed income' under Section 271AAB. The Tribunal found that the seized document containing details of cash payments for raw material purchases did not represent undisclosed income since the physical stock matched the stock recorded in the books of accounts. The Tribunal referenced a similar case (M/s Rambhajo’s vs. ACIT) where it was held that investments found during a search do not automatically qualify as undisclosed income under Section 271AAB. Therefore, the Tribunal concluded that the cash purchases disclosed by the assessee did not constitute undisclosed income, and hence, the penalty was not justified.

3. Validity of the Penalty Proceedings Initiated by the AO:
The assessee also challenged the initiation of penalty proceedings on the grounds that the AO did not specify the default in the show cause notice issued under Section 271AAB read with Section 274 of the Act. The Tribunal noted that the AO’s failure to specify the exact default rendered the penalty proceedings invalid. However, since the Tribunal had already decided the issue on merits and deleted the penalty, it did not delve further into the procedural validity of the penalty initiation.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, concluding that the penalty levied under Section 271AAB was not sustainable. The decision was based on the finding that the cash purchases did not constitute undisclosed income as per the statutory definition, and there was no discrepancy in the stock recorded in the books of accounts. The Tribunal's order was pronounced in the open court on 10/06/2019.