2019 (5) TMI 1000 - AT - Income Tax

Penalty levied u/s.158BFA(2) - additions towards undisclosed income has been sustained in the hands of the assessee purely on estimated basis - whether penalty u/s 158BFA(2) is justified where alleged undisclosed income was finalized on the basis of estimation alone - Whether the payment of interest under s.158BFA(1) is mandatory, levy of penalty is discretionary? - whether penalty u/s 158BFA(2) is justified where alleged undisclosed income was finalized on the basis of estimation alone? - whether penalty should be levied must be considered on the basis of the judicial determination? - HELD THAT - Authority concerned is vested with the discretion towards levy of penalty. It is trite position of law that any discretion vested in an authority has to be exercised in a reasonable and rational manner depending upon the facts and circumstances of each case. It is also trite that the process of imposition of penalty is not automatic in the eventuality of estimated income. All the attendant circumstances of the case requires to be carefully scrutinized. The question whether penalty should be levied must be considered on the basis of the judicial determination. It must be proved beyond the shadow of doubt that there was actually income and further such income was not disclosed. The mere fact of addition on estimated basis particularly when the undidsclosed income is concluded on the inference flowing from the inability of the assessee to establish the case pleaded by him, will not be sufficient for the purpose of imposition of penalty. An estimation so made may be correct or may not be correct. The degree of proof required for imposition of penalty is quite different from and is on a much higher pedestal, then required for the purpose of making additions on estimated basis and de hors sufficient evidence, penalty cannot be levied. Such view has been expressed in CIT vs. Dr.Giriraj Agarwal Giri 2012 (8) TMI 617 - RAJASTHAN HIGH COURT and CIT vs. Becharbhai P.Parmar 2012 (4) TMI 418 - GUJARAT HIGH COURT relied upon on behalf of the assessee. Undisclosed income has been ultimately determined purely on estimated basis shorn of adequate reference to underlying material. The estimation has been made with caveats like to put an end to the litigation and meet the ends of justice in the given peculiar facts etc . Such basis of addition, in our view, cannot entail onerous burden in the form of penalty. In the circumstances, the statutory discretion vested with the revenue authorities, in our opinion, requires to be exercised in favour of assessee. Therefore, we set aside the order of the CIT(A) and direct the AO to cancel the penalty imposed under s.158BFA(2) - Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Confirmation of penalty levied under section 158BFA(2) of the Income Tax Act, 1961.
2. Assessment of undisclosed income based on search and seizure operations.
3. Legitimacy of additions made on an estimated basis.
4. Discretionary nature of penalty imposition under section 158BFA(2).

Issue-wise Detailed Analysis:

1. Confirmation of Penalty Levied under Section 158BFA(2):
The primary issue raised by the Assessee was the confirmation of the penalty amounting to ?57,58,700/- levied under section 158BFA(2) of the Income Tax Act, 1961. The Tribunal noted that the penalty under section 158BFA(2) is discretionary, unlike the mandatory interest under section 158BFA(1). The Tribunal emphasized that the imposition of penalty should be based on judicial determination and must be proved beyond doubt that there was actual undisclosed income. The Tribunal concluded that since the undisclosed income was determined on an estimated basis, the penalty could not be justified and directed the Assessing Officer to cancel the penalty.

2. Assessment of Undisclosed Income Based on Search and Seizure Operations:
The case originated from a search and seizure operation under section 132 of the Act, conducted on 18/03/1997 at the business and residential premises of the assessee. The Assessing Officer initially determined the undisclosed income to be ?96,35,468/-, which was later revised to ?95,97,832/- by the CIT(A). The Tribunal, in its earlier order dated 20/11/2017, set aside the basis for the addition towards unaccounted income but retained an addition of ?25 lakhs on a pure estimation basis to conclude the prolonged litigation.

3. Legitimacy of Additions Made on an Estimated Basis:
The Tribunal acknowledged that the additions towards the undisclosed income were sustained purely on an estimated basis. The Tribunal observed that the estimation was made to put an end to the litigation and meet the ends of justice given the peculiar facts of the case. The Tribunal highlighted that the estimation lacked adequate reference to underlying material, and such basis of addition could not justify the imposition of penalty. The Tribunal cited precedents from the Hon’ble Rajasthan High Court and Gujarat High Court, which supported the view that penalty cannot be imposed merely based on estimated additions.

4. Discretionary Nature of Penalty Imposition under Section 158BFA(2):
The Tribunal elaborated on the discretionary nature of penalty imposition under section 158BFA(2). It emphasized that the discretion must be exercised reasonably and rationally, considering the facts and circumstances of each case. The Tribunal reiterated that the process of imposing penalty is not automatic in cases of estimated income and requires a higher degree of proof than that needed for making additions on an estimated basis. The Tribunal concluded that the statutory discretion should be exercised in favor of the assessee, given the estimated nature of the undisclosed income determination.

Conclusion:
The Tribunal allowed the appeal of the assessee, setting aside the order of the CIT(A) and directing the Assessing Officer to cancel the penalty imposed under section 158BFA(2) of the Income Tax Act, 1961. The judgment emphasized the discretionary nature of penalty imposition and the necessity of a higher degree of proof for penalties compared to estimated income additions. The order was pronounced in Open Court on 15/05/2019.