2019 (8) TMI 1225 - AT - Income Tax

Penalty u/s 271AAB - surrender of additional income - HELD THAT - Penalty u/s 271AAB of the Act is not mandatory as the provisions of section 274 of the Act have been made applicable in relation to the penalty referred to section 271AAB of the Act. It has been held that the penalty u/s 271AAB will not be attracted if the surrendered income would not fall in the definition of undisclosed income as defined under explanation to section 271AAB - See M/S SEL TEXTILES LIMITED VERSUS THE DCIT, CENTRAL CIRCLE-III, LUDHIANA 2019 (4) TMI 1719 - ITAT CHANDIGARH No incriminating material is found during the search action and the surrendered income does not fall in the definition of undisclosed income as defined u/s 271AAB of the Act, the penalty is not warranted. The Coordinate Bench of the Tribunal has also discussed the proposition of law laid down in the Principal CIT vs Sandeep Chandak and Ors. 2017 (12) TMI 70 - ALLAHABAD HIGH COURT and has held that the facts of the said case are distinguishable and do not apply to the facts of the case in which no incriminating material is found during the search action. Assessee has been fair enough to admit that it is not in all the cases that no incriminating material was found. That certain items of jewellery of silver were found / noticed during the search action, the source of income from which as held by the Assessing Officer also stood explained and also the manner of earning of the income was also substantiated. He, therefore, has been fair enough to admit that penalty under the provisions of section 271AAB (1)(a) of the Act was liable to be confirmed to the extent of the property / material found during search action. In the case of Mrs. Rama Rani for assessment year 2016-17, as noted from the above chart, jewellery worth ₹ 1.33 crores was found, whereas, income surrendered by her during the search action was of ₹ 2 crores. In view of the discussion made above, the penalty us 271AAB(1)(a) of the Act is restricted to the value of the jewellery found during search action i.e. ₹ 1.33 crores, the 10% of which comes to ₹ 13.30 lacs, hence, the penalty in the case of Mrs. Rama Rani is restricted to ₹ 13.30 lacs as against ₹ 20 lacs imposed by the Assessing Officer. In the case of Mrs. Veena Rani for assessment year 2016-17, the total income surrendered was of ₹ 1.90 crores, whereas, the jewellery found during search action was of the value of ₹ 54.23 lacs and silver found of ₹ 8.40 lac. Hence, the penalty leviable on the aforesaid gross amount of 6.263 lacs ( ₹ 54.23 lcs ₹ 8.40 lacs), which is calculated @ 10% at ₹ 6.263 lacs. Hence, the penalty is calculated and restricted to ₹ 6.263 lacs in this case. In the case of Sudkharan Kumar for the assessment year 2016-17, neither any incriminating material nor valued property was found, hence, no penalty in this case under the provisions of section 271AAB (1)(a) of the Act is exigible. The penalty in this case is ordered to be deleted. In the cases of M/s R.D. Palace Pvt. Ltd, Ludhiana for the assessment years 2015-16 and 2016-17, since, no incriminating material or valued property was found in these cases and further no unaccounted property was found during the search action, hence, the penalty is not leviable in these cases and the same is accordingly ordered to be deleted.

Summary

Issues Involved:
1. Legality of penalty under section 271AAB of the Income Tax Act, 1961.
2. Definition and scope of "undisclosed income" under section 271AAB.
3. Applicability of penalty when no incriminating material is found during a search.
4. Discretionary vs. mandatory nature of penalty under section 271AAB.
5. Specific cases of different assessees and the applicability of penalty based on findings during the search.

Detailed Analysis:

1. Legality of Penalty under Section 271AAB:
The primary issue revolves around the legality of the penalty levied under section 271AAB of the Income Tax Act, 1961. The Assessing Officer (AO) initiated penalty proceedings under this section, levying a penalty at 10% of the surrendered undisclosed income found during a search action.

2. Definition and Scope of "Undisclosed Income":
The Tribunal analyzed whether the surrendered income falls within the definition of "undisclosed income" as per section 271AAB. The definition includes income represented by money, bullion, jewellery, or other valuable articles found during the search, which were not recorded in the books of account or disclosed to the tax authorities before the search.

3. Applicability of Penalty When No Incriminating Material is Found:
The Tribunal emphasized that the penalty under section 271AAB is not warranted if no incriminating material is found during the search. The Tribunal referred to the case of ‘M/s SEL Textiles Ltd. Vs DCIT’ and other decisions, which held that the penalty is not mandatory if the surrendered income does not fall within the scope of "undisclosed income."

4. Discretionary vs. Mandatory Nature of Penalty:
The Tribunal discussed whether the penalty under section 271AAB is discretionary or mandatory. It was noted that the word "may" in the section indicates discretion, and the provisions of section 274, which require a reasonable opportunity of being heard, apply to penalties under section 271AAB. The Tribunal concluded that the penalty is discretionary and not mandatory.

5. Specific Cases of Different Assessees:
- Mrs. Rama Rani: Jewellery worth ?1.33 crores was found, and the total income surrendered was ?2 crores. The penalty was restricted to 10% of the value of the jewellery found, amounting to ?13.30 lacs.
- Mrs. Veena Rani: Jewellery worth ?54.23 lacs and silver worth ?8.40 lacs were found, with a total income surrendered of ?1.90 crores. The penalty was restricted to 10% of the value of the jewellery and silver found, amounting to ?6.263 lacs.
- Sukhdarshan Kumar: No incriminating material or valued property was found, so no penalty was exigible. The penalty was ordered to be deleted.
- M/s R.D. Palace Pvt. Ltd: No incriminating material or valued property was found for the assessment years 2015-16 and 2016-17. The penalties were ordered to be deleted.

Conclusion:
The Tribunal concluded that the penalty under section 271AAB is not mandatory and should be imposed based on the merits of each case. If no incriminating material is found during the search, the penalty is not warranted. The Tribunal ordered the deletion of penalties in cases where no incriminating material was found and restricted the penalties to 10% of the value of the jewellery and silver found during the search in other cases.