2019 (6) TMI 922 - AT - Income Tax

Penalty u/s 271AAB - residual surrender of income made during recording of statements u/s 132(4) - Surrender on account of jewellery and silver items found at the residence of the assessee - HELD THAT - When the benefit of the personal jewellery of various family members is required to be given while considering the undisclosed income on account of jewellery as well as valuation of the same has been based on the cost of acquisition for treated as undisclosed income. Since the valuation as well as the year of acquisition was not ascertained either during the course of search or in the subsequent prevailing even in the penalty proceeding. Therefore this issue of levy of penalty U/s 271AAB in respect of surrender made on account of jewellery and silver items is set aside to the record of the AO to verify and consider all the relevant facts as discussed above and then decide the same afresh at the giving an opportunity of hearing to the assessee. The penalty in respect of surrender of 50 lacs an account of any other discrepancy or irregularity - It is clear from the record that the assessee has made a surrender of 50 lacs on account of any other irregularity or discrepancy if any found. There is no dispute that no such discrepancy or irregularity was detected either by the department during search proceedings or by the AO during the assessment proceedings and penalty proceedings then mere surrender of the amount without any incriminating material or any undeclared assets it cannot be treated as undisclosed income of the assessee in terms of Section 271AAB. See SHRI RAJENDRA KUMAR GUPTA VERSUS THE DCIT CENTRAL CIRCLE-2 JAIPUR. 2019 (1) TMI 1545 - ITAT JAIPUR In the case in hand when no such discrepancy or irregularity was found by the AO then the mere surrender U/s 132(4) of the Act will not ipso facto attract the penalty U/s 271AAB until and unless the same is qualified as undisclosed income as per definition provided in the explanation to Section 271AAB. The levy of penalty U/s 271AAB is not mandatory but the AO is required to take a decision based on the facts and material and then to arrive to the conclusion that the income disclosed by the assessee falls in the definition of undisclosed income as provided in the explanation to Section 271AAB. Since we have decided the issue of levy of penalty on merits in favour of the assessee therefore we do not propose to go into the issue challenging the validity of initiation of the penalty U/s 271AAB - Decided in favour of assessee.

Summary

Issues Involved:
1. Legality and factual correctness of the orders of the AO and CIT(A).
2. Imposition of penalty under Section 271AAB of the Income Tax Act.
3. Validity of penalty imposition on residual income surrendered during search.
4. Additional grounds regarding the definition of "undisclosed income" and the adequacy of notice under Section 274.

Detailed Analysis:

1. Legality and Factual Correctness of the Orders:
The assessee contested the orders of the AO and CIT(A) as being "bad in law and against facts of the case." The assessee argued that the penalty imposed was based on the incorrect assumption that it was mandatory under Section 271AAB of the IT Act.

2. Imposition of Penalty under Section 271AAB:
The AO imposed a penalty of ?61,95,020 under Section 271AAB, which was confirmed by the CIT(A). The assessee argued that the penalty under this section is not mandatory but discretionary. The Tribunal noted that Section 271AAB begins with the term "the AO may," indicating discretionary power rather than mandatory imposition. The Tribunal cited several decisions, including the case of Shri Padam Chand Pungliya vs. ACIT, to support the view that the penalty is discretionary and depends on the conduct of the assessee.

3. Validity of Penalty Imposition on Residual Income Surrendered During Search:
The Tribunal examined whether the surrendered income during the search under Section 132(4) constituted "undisclosed income" as per the explanation to Section 271AAB. The Tribunal found that the surrendered amount of ?5,17,32,630 on account of unaccounted expenditure on various projects belonged to the firms and companies in which the assessee was a partner or director, not to the assessee individually. Therefore, this amount could not be treated as the assessee's undisclosed income. Similarly, the surrender of ?52,17,563 for jewellery and silver items was questioned due to lack of evidence of acquisition during the year under consideration. The Tribunal directed the AO to reconsider this issue, taking into account the actual cost of acquisition and the inherited nature of some jewellery. For the ?50 lacs surrendered for any other discrepancy, the Tribunal found no evidence of any discrepancy or irregularity, thus ruling out its treatment as undisclosed income.

4. Additional Grounds Regarding the Definition of "Undisclosed Income" and Adequacy of Notice:
The assessee argued that the AO failed to make a case that the surrendered income constituted "undisclosed income" under the provisions of Section 271AAB. The Tribunal agreed, noting that the AO did not establish that the surrendered income fell within the definition of "undisclosed income." Additionally, the assessee contended that the penalty was imposed without serving a proper notice specifying the exact clause of Section 271AAB under which the penalty was to be levied. The Tribunal emphasized that the AO must issue a show cause notice and consider the assessee's explanation before imposing the penalty, thereby ensuring compliance with Sections 274 and 275 of the IT Act.

Conclusion:
The Tribunal concluded that the penalty under Section 271AAB is not mandatory but discretionary. The AO must establish that the surrendered income qualifies as "undisclosed income" and must follow due process, including issuing a proper notice and considering the assessee's explanation. The Tribunal partly allowed the appeal, deleting the penalty on the surrendered expenditure and directing the AO to reconsider the penalty on the surrendered jewellery and silver items.