2019 (3) TMI 2075 - AT - Income Tax

Levy of penalty u/s 271AAB - addition @ 30% of the undisclosed income -Reliability of document found during the search - HELD THAT - Once the assessee has established the fact that all these transactions are recorded in the books of account and also produced the relevant documentary evidence to establish the genuineness of the purchase and sale of shares through Stock Exchange then the mere disclosure and surrender of income would not ipso facto lead to the conclusion that the amount surrendered by the assessee is undisclosed income in terms of section 271AAB of the Act. For bringing the income surrendered by the assessee in the fold of undisclosed income as per the definition of undisclosed income in Explanation to section 271AAB the said income must represent either any money bullion jewellery or other valuable article or thing or any entry in the books of account or other documents but has not been recorded in the books of account as on the date of search. Therefore the primary condition for treating an income as undisclosed income is that it should represent inter alia any entry in the books of account or other documents found during the search but the said income is not recorded in the books of account. In the case in hand the document found during the search is not an incriminating material when the entry and the income were duly recorded in the books of account. Therefore the statement of the assessee recorded under section 132(4) would not constitute incriminating material. Therefore the said income disclosed by the assessee cannot be considered as undisclosed income in terms of section 271AAB of the Act. As we hold that the income surrendered by the assessee in the statement recorded under section 132(4) does not fall in the ambit of definition of undisclosed income as contemplated in Explanation to section 271AAB. Accordingly the penalty levied by the AO and sustained by the ld. CIT (A) is not sustainable and the same is deleted. Decided in favour of assessee.

Issues Involved:

1. Validity of the penalty order under section 271AAB of the Income Tax Act.
2. Application of the correct clause of section 271AAB for penalty imposition.
3. Determination of whether the income was undisclosed as per section 271AAB.
4. Mandatory nature of penalty under section 271AAB.
5. Consideration of mens rea and intention for wrongdoing in penalty imposition.

Detailed Analysis:

1. Validity of the Penalty Order:

The primary issue raised by the assessee was the validity of the penalty order under section 271AAB of the Income Tax Act. The assessee argued that the penalty order was wrong, bad in law, invalid, and void-ab-initio because the Assessing Officer (AO) did not specify the clause of section 271AAB under which the penalty was initiated. The conditions for imposing a penalty under each clause of section 271AAB(1) are separate, and the failure to specify the applicable clause rendered the penalty order invalid.

2. Application of the Correct Clause of Section 271AAB:

The assessee contended that the CIT (A) erred in applying the provisions of section 271AAB(1)(a) instead of section 271AAB(1)(c) without issuing a notice as required under section 251(2) of the Income Tax Act. The assessee argued that there was no undisclosed income within the meaning of section 271AAB, and thus, no penalty could be imposed. The penalty was levied based on the statement recorded under section 132(4), and no incriminating material was found during the search to prove undisclosed income.

3. Determination of Whether the Income was Undisclosed:

The assessee argued that the transactions of purchase and sale of shares, resulting in Long Term Capital Gains (LTCG), were duly recorded in the books of account. The LTCG was exempt under section 10(38) of the IT Act, but during the search, the assessee surrendered the LTCG to tax. The assessee provided documentary evidence to substantiate the genuineness of the LTCG, which was not contested by the AO. The mere surrender of income did not automatically become undisclosed income, and the AO failed to demonstrate that the income fell within the definition of undisclosed income under section 271AAB.

4. Mandatory Nature of Penalty Under Section 271AAB:

The assessee challenged the CIT (A)'s view that the penalty under section 271AAB is mandatory. The Tribunal noted that the penalty under section 271AAB is not automatic but requires the AO to make a decision after considering the conditions specified in the section. The AO must issue a show cause notice and provide an opportunity for the assessee to be heard before imposing the penalty. The Tribunal emphasized that the penalty should not be imposed unless the case falls within the legal framework mandating the penalty.

5. Consideration of Mens Rea and Intention for Wrongdoing:

The assessee argued that the CIT (A) erred in not addressing the allegation of mens rea and intention for wrongdoing. The Tribunal reiterated that the penalty under section 271AAB is not automatic and requires the AO to consider the explanation provided by the assessee. The AO must determine whether the surrender made by the assessee constitutes undisclosed income as defined under section 271AAB.

Conclusion:

The Tribunal concluded that the income surrendered by the assessee did not fall within the definition of undisclosed income as per the Explanation to section 271AAB. The transactions were duly recorded in the books of account, and the supporting documents substantiated the genuineness of the LTCG. Consequently, the penalty imposed by the AO and sustained by the CIT (A) was not sustainable and was deleted. The Tribunal allowed the appeal of the assessee and dismissed the appeal of the revenue.

← Previous Next →