2019 (11) TMI 327 - AT - Income Tax

Penalty u/s 271AAB - whether the penalty levied by the AO under section 271AAB is valid as the initiation of penalty was under section 271(1)(c) of the Act by issuance of notice under section 274 read with section 271(1)(c) dated 30.03.2015 - HELD THAT - From the penalty order or the order of CIT(A), it is not coming out that the alleged undisclosed income is false claim of deduction or claim of income is false or claim of expenditure is false. The definition provided in section 271AAB under Explanation (c) of undisclosed income sub-clause (ii) clarifies that any income of the specified previous year represented either wholly or partly by any entry represented in respect of expense recorded in the books of accounts maintained in the normal course of business should found to be false or would not have been found to be so had the search not being conducted. We noted that the aforesaid expenses have not been found to be false or it is not a case of the Revenue that such expenses are not allowable under the provisions of the Act. Here the simplicitor case is that the assessee during the course of search in the statement recorded under section 132(4) of the Act admitted this to be the income to avoid litigation and to buy peace of mind. It is good piece of evidence for making assessment but not for levy of penalty under section 271AAB of the Act because for levy of penalty falsity of the expense is a pre-requisite under the provision. Hence, we delete the penalty and allow the appeal of the assessee on merits. Appeal of the assessee is allowed

Summary

Issues Involved:
1. Validity of penalty under section 271AAB initiated under section 271(1)(c).
2. Levy of penalty under section 271AAB on specific disallowances.

Issue-wise Detailed Analysis:

1. Validity of Penalty under Section 271AAB Initiated under Section 271(1)(c):
The assessee argued that the penalty levied by the AO under section 271AAB was invalid as the initiation of penalty was under section 271(1)(c) by issuance of notice under section 274 read with section 271(1)(c). The AO later corrected this defect under section 292B, stating that the penalty should be read as issued under section 271AAB. The Tribunal noted that the penalty was initially proposed under section 271(1)(c) for furnishing inaccurate particulars and concealment of income, but later corrected to section 271AAB, which was contested by the assessee.

2. Levy of Penalty under Section 271AAB on Specific Disallowances:
The CIT(A) confirmed the penalty under section 271AAB for the following disallowances:

a. Sales Promotion Expenses (?8,39,35,025):
- The assessee contended that the expenditure was recorded in the books and not claimed as a deduction in the return due to a possible disallowance under section 37 based on CBDT Circular No. 5/2012. The Tribunal noted that the expenditure was not found to be false and hence did not qualify as 'undisclosed income' under section 271AAB.

b. Research and Development Expenses (?4,67,96,325):
- The assessee argued that the expenses were incurred and recorded in the books, and the claim under section 35(2AB) was to be made while filing the return. The Tribunal agreed that these expenses did not fall under 'undisclosed income' as defined in section 271AAB.

c. Sales Promotion Expenses Incurred After Search (?4,08,20,319):
- The Tribunal found that expenses incurred after the date of search and disallowed voluntarily in the return could not be penalized under section 271AAB.

d. Training Expenses (?40,40,000):
- The Tribunal noted these expenses were supported by documentary evidence and were recorded in the books, thus not qualifying as 'undisclosed income.'

e. Discrepancy in Physical Stock at R&D Centre (?14,05,680):
- The Tribunal found that the discrepancy was noted during the search but was recorded in the books, thus not falling under 'undisclosed income.'

f. Reduction in Depreciation (?15,95,863):
- The Tribunal noted that the purchases were supported by invoices and payments made by cheques, thus not qualifying as 'undisclosed income.'

The Tribunal concluded that the expenses were recorded in the books and were not found to be false. The admissions made during the search were to avoid litigation and buy peace, which is not a valid ground for penalty under section 271AAB. The Tribunal deleted the penalty and allowed the appeal of the assessee on merits.

Conclusion:
The Tribunal allowed the appeal, deleting the penalty levied under section 271AAB, as the expenses were recorded in the books and not found to be false. The admissions made during the search were to avoid litigation, which does not justify the penalty under section 271AAB. The appeal of the assessee was allowed.