2023 (3) TMI 340 - AT - Income Tax

Penalty u/s 271AAB(1) - disallowance u/s 14A - Scope of definition of undisclosed income as per section 271AAB(3)(c)(ii) - Whether the disallowance of expenditure under Section 14A is covered within the definition of undisclosed income for the purpose of levy of penalty under section 271AAB ? - HELD THAT - Disallowance u/s 14A is not made on account of any additional income found either in cash or in kind or otherwise in respect of any documents or entries in the account book. It has been held that it was a notional disallowance made by the assessee on the footing that out of the total expenditure, some of the expenditure might have been attributable to the activity of making investment from which the assessee has earned tax exempt income. It has been held that it is not the case of the AO that the aforesaid disallowance made by the AO u/s 14A is attributable/relating to the incriminating documents found during the search action or that the aforesaid surrender can be related to part of any other income of the assessee. It has been held that the AO has not recorded any satisfaction from the accounts of the assessee that the contention of the assessee that it has not incurred any expenditure for making investment is not correct. We find that the disallowance of expenditure u/s 14A doesn t represent any income of the specified previous year by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the specified previous year which is found to be false and which would not have been found to be so had the search not been conducted - there is no legal basis for sustaining the charge of undisclosed income found during the course of search and accordingly, there is no justifiable and legal basis for levy of penalty u/s 271AAB - Decided against revenue.

Summary

Issues Involved:
1. Justification of penalty deletion under Section 271AAB(1) of the Income Tax Act, 1961.
2. Definition and applicability of "undisclosed income" under Section 271AAB(3)(c)(ii).
3. The relevance of disallowance under Section 14A in the context of "undisclosed income".
4. Validity of the penalty proceedings initiated by the Assessing Officer (AO).

Issue-wise Detailed Analysis:

1. Justification of Penalty Deletion under Section 271AAB(1) of the Income Tax Act, 1961:
The Revenue appealed against the order of the Commissioner of Income Tax (Appeals) [CIT(A)] which deleted the penalty of Rs. 6,98,66,660/- imposed under Section 271AAB(1). The CIT(A) concluded that the amount of Rs. 23,28,88,868/- did not fall within the definition of "undisclosed income" as per Section 271AAB(3)(c)(ii). The Tribunal upheld CIT(A)'s decision, stating that the disallowance under Section 14A was not related to any additional income found during the search but was a notional disallowance.

2. Definition and Applicability of "Undisclosed Income" under Section 271AAB(3)(c)(ii):
The Tribunal examined the definition of "undisclosed income" as per clause (C)(ii) of the explanation to Section 271AAB, which includes any income represented by an entry in respect of an expense recorded in the books of account found to be false during the search. The Tribunal found that the AO did not demonstrate how the conditions of "undisclosed income" were satisfied in this case. The AO's reliance solely on the assessee's admission during the search was insufficient without corroborative evidence.

3. The Relevance of Disallowance under Section 14A in the Context of "Undisclosed Income":
The Tribunal referred to its previous order dated 28/02/2019, which clarified that disallowance under Section 14A is not made on account of any additional income found during the search. It is a notional disallowance based on the assumption that some expenditure might be attributable to tax-exempt income. The Tribunal reiterated that disallowance under Section 14A does not constitute "undisclosed income" as it is not related to any incriminating documents found during the search.

4. Validity of the Penalty Proceedings Initiated by the Assessing Officer (AO):
The Tribunal noted that the AO failed to record satisfaction or provide evidence that the conditions for "undisclosed income" were met. The AO's penalty order was based on the assessee's admission during the search without demonstrating how the disallowance under Section 14A qualified as "undisclosed income". The Tribunal emphasized that penalty provisions must be strictly construed, and the AO must justify the charge of "undisclosed income" with demonstrable evidence.

Conclusion:
The Tribunal affirmed the CIT(A)'s order deleting the penalty under Section 271AAB, concluding that the disallowance under Section 14A did not constitute "undisclosed income" and that the AO failed to provide a legal basis for the penalty. The appeal filed by the Revenue was dismissed.