2020 (8) TMI 236 - AT - Income Tax

Penalty u/s 271AAB - mandatory levy of penalty on surrender of undisclosed income - non specification of charge - difference in stock of goods as per books and as found at the time of search - AR submitted that the penalty notice does not specify the specific limb of section 271AAB under which the penalty was sought to be levied - difference in valuation of stock valued by registered valuer - HELD THAT - AO has merely gone by the surrender statement of partner of the assessee firm where the stock has been valued at market price as on the date of search and has not examined the matter from the perspective of determining any excess stock and the cost of such stock which is not recorded in the books of accounts. There is no finding that there is any excess stock which has been physically found and which has not been recorded in the books of accounts as on the date of search. Therefore, basis the facts emerging from the records, it is clear that difference in stock of goods as per books and as found at the time of search is on account of valuation of such stock at the market value instead of cost and the same cannot be a basis to hold that it represent undisclosed income so defined in explanation to section 271AAB - In the entirety of facts and circumstances of the case and following the decision referred supra, the penalty levied u/s 271AAB is not sustainable as it doesn t satisfy the requirements as so prescribed under section 271AAB and the orders of the lower authorities are set-aside and the appeal of the assessee is allowed.

Summary

Issues Involved:
1. Confirmation of penalty under Section 271AAB.
2. Nature of the penalty under Section 271AAB - mandatory or discretionary.
3. Validity of the penalty notice under Section 271AAB.
4. Definition and applicability of "undisclosed income" under Section 271AAB.

Issue-wise Detailed Analysis:

1. Confirmation of Penalty under Section 271AAB:
The primary issue was whether the penalty of ?5,78,750/- imposed under Section 271AAB was justified. The assessee argued that the penalty was wrongly confirmed by the CIT(A) as the income disclosed was not "undisclosed income" within the meaning of Section 271AAB. The Tribunal found that the penalty was based on the surrender of additional business income during a search, which was disclosed in the return of income. However, it was determined that the surrendered amount did not qualify as "undisclosed income" as per the definition provided in the explanation to Section 271AAB.

2. Nature of the Penalty under Section 271AAB - Mandatory or Discretionary:
The Tribunal examined whether the penalty under Section 271AAB is mandatory. It was argued that the CIT(A) erred in holding the penalty as mandatory. The Tribunal referenced the statutory language, noting that the term "may" in Section 271AAB allows for discretion. The Tribunal emphasized that the penalty is not automatic and must be considered judicially, taking into account the facts and circumstances of each case.

3. Validity of the Penalty Notice under Section 271AAB:
The assessee contended that the penalty notice did not specify the specific limb under which the penalty was sought to be levied, violating principles of natural justice. The Tribunal noted that the penalty notice should make the assessee aware of the specific charge. However, it found that the Assessing Officer had not provided a clear charge in the notice, which was a procedural lapse. Nonetheless, the Tribunal concluded that the penalty order itself contained a clear finding, thus validating the penalty proceedings.

4. Definition and Applicability of "Undisclosed Income" under Section 271AAB:
The Tribunal analyzed whether the surrendered income qualified as "undisclosed income" under Section 271AAB. It was argued that the surrendered amount represented a difference in stock valuation, not actual undisclosed income. The Tribunal referenced previous decisions, including the case of M/s Sumangal Gems, where it was held that differences in stock valuation at market value instead of cost do not constitute "undisclosed income." The Tribunal concluded that the surrendered amount did not meet the definition of "undisclosed income" as it was based on valuation differences, not unrecorded or unaccounted stock.

Conclusion:
The Tribunal set aside the orders of the lower authorities, holding that the penalty under Section 271AAB was not sustainable. It emphasized that the surrendered amount did not constitute "undisclosed income" and that the penalty provisions under Section 271AAB should be applied judiciously, considering the specific facts and circumstances of each case. The appeal of the assessee was allowed.