2019 (4) TMI 565 - AT - Income Tax

Penalty u/s 271AAB - tax on the undisclosed income surrendered under section 132(4) - validity of penalty proceedings for want of specifying the default as per clause (a) to (c) of section 271AAB(1) - relevance of Statement recorded under section 132(4) - HELD THAT - Penalty u/s 271AAB is not mandatory but the AO has the discretion to take a decision and the same should be based on judicious decision of the AO. Accordingly following the earlier decision of this Tribunal in the case of Ravi Mathur vs. DCIT 2018 (6) TMI 1128 - ITAT JAIPUR we hold that the levy of penalty under section 271AAB is not mandatory but the AO has a discretion after considering all the relevant aspects of the case and then to satisfy himself that the case of the assessee falls in the definition of undisclosed income as provided in the explanation to section 271AAB AO in the show cause notice has neither specified the grounds and default on the part of the assessee nor even specified the undisclosed income on which the penalty was proposed to be levied. show cause notices issued by the AO for initiation of penalty proceedings under section 271AAB are very vague and silent about the default of the assessee and further the amount of undisclosed income on which the penalty was proposed to be levied. Levy of penalty u/s 271AAB - entries in the seized documents representing the expenditure on account of construction of the house and purchase of other assets as well as advances in the absence of the real transactions - HELD THAT - in view of the facts and circumstances of the case as well as the decision of the Coordinate Bench of this Tribunal in the case of Rajendra Kumar Gupta vs. DCIT (supra), we hold that the entries in the seized documents representing the expenditure on account of construction of the house and purchase of other assets as well as advances in the absence of the real transactions do not constitute the undisclosed income of the assessee as defined in the explanation to section 271AAB of the Act. Accordingly, the penalty levied under section 271AAB in respect of the said amount is not sustainable and liable to be set aside. Undisclosed income on account of excess stock - HELD THAT - Once the stock is found recorded in the books of account, it does not fall in the category of valuable article or things which has not been recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous year. Stock which was found at the time of search and seizure was not disputed by the department that the same has been recorded in the books of accounts of the assessee. Once the stock is recorded in the books of account and no discrepancy is found as far as quantity of stock, then the difference of valuation would not amount to undisclosed income in terms of definition prescribed in the explanation to section 271AAB Jewellery found during the course of search and seizure action - HELD THAT - Once the jewellery was not found to be purchased during the year under consideration, then the same cannot be treated as an undisclosed income for the year under consideration which is specified previous year. The department has not found that the jewellery was purchased or acquired by the assessee and other family members only during the year under consideration. The jewellery belong to the family members of the assessee and found in the locker was old jewellery and, therefore, the valuation of the jewellery for the purpose of computing the undisclosed income by applying the current rates on the gross weight is not permissible. Hence when the department has not made any efforts to ascertain the year of acquisition of the jewellery and then to apply the rates as prevailing in the year of acquisition and some of the jewellery even not acquired by the assessee or the family members but is inherited, then the manner in which the disclosure is obtained on account of the jewellery would not represent the undisclosed income as defined in the explanation to section 271AAB Statement recorded under section 132(4) itself would not either constitute an incriminating material or undisclosed income in the absence of any corresponding asset or entry in the seized document representing the undisclosed income. Accordingly, the penalty levied by the AO under section 271AAB of the Act is deleted. - Decided in favour of assessee.

Issues Involved:
1. Validity of initiation of penalty proceedings under section 271AAB of the IT Act.
2. Legality of the penalty imposed under section 271AAB of the IT Act.
3. Adequacy of the show cause notice issued under section 274 read with section 271AAB of the IT Act.
4. Nature of the income disclosed during the search and whether it qualifies as "undisclosed income" under section 271AAB.
5. Discretionary vs. mandatory nature of penalty under section 271AAB.

Detailed Analysis:

1. Validity of Initiation of Penalty Proceedings:
The assessee contested the validity of the initiation of penalty proceedings under section 271AAB, arguing that the show cause notice issued by the AO did not specify the default as per clause (a) to (c) of section 271AAB(1). The Tribunal noted that the AO must specify the grounds which the assessee has to meet, otherwise the principles of natural justice are violated. The Tribunal held that the initiation of penalty proceedings is invalid if the show cause notice is defective and does not specify the default or the amount of undisclosed income.

2. Legality of the Penalty Imposed:
The assessee argued that the additional income disclosed during the search was not "undisclosed income" but an additional business income, surrendered to buy peace. The Tribunal examined whether the income disclosed falls within the definition of "undisclosed income" as per the explanation to section 271AAB. The Tribunal emphasized that the AO must determine if the disclosed income qualifies as undisclosed income before imposing the penalty. It was held that the penalty under section 271AAB is not mandatory but discretionary, and the AO must judiciously decide based on the facts of each case.

3. Adequacy of the Show Cause Notice:
The Tribunal found that the show cause notices issued by the AO were vague and did not specify the grounds or the amount of undisclosed income for which the penalty was proposed. Citing various judicial precedents, the Tribunal held that a notice under section 274 must clearly state the grounds for penalty to provide the assessee a fair opportunity to respond. The Tribunal concluded that the penalty order is not sustainable if the show cause notice is defective.

4. Nature of the Income Disclosed:
The Tribunal analyzed the nature of the income disclosed during the search and whether it qualifies as "undisclosed income." It was observed that the disclosure of income in the statement under section 132(4) does not automatically qualify as undisclosed income unless it meets the criteria defined in section 271AAB. The Tribunal held that entries in seized documents representing expenditure or advances do not constitute undisclosed income unless they represent real transactions. The Tribunal also noted that the excess stock valuation based on market rates instead of cost does not qualify as undisclosed income if the stock is recorded in the books of account.

5. Discretionary vs. Mandatory Nature of Penalty:
The Tribunal reiterated that the penalty under section 271AAB is discretionary and not mandatory. The AO must issue a show cause notice, provide an opportunity for the assessee to be heard, and then decide based on the facts whether the penalty should be imposed. The Tribunal emphasized that the AO must determine if the disclosed income is indeed undisclosed income as per the statutory definition before imposing the penalty.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the initiation of penalty proceedings was invalid due to defective show cause notices, and the penalty imposed under section 271AAB was not sustainable as the disclosed income did not qualify as undisclosed income. The Tribunal emphasized the discretionary nature of the penalty and the requirement for the AO to judiciously decide based on the facts of each case.

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