2024 (7) TMI 884 - AT - Income Tax

Penalty u/s 271AAA - additional income so surrendered on behalf of the assessee firm in search and seizure operation - Onus to prove - HELD THAT - The undisclosed income so surrendered and admitted during the course of search has to fall within the four corners of the definition of the undisclosed income and only in situation where it satisfy the said definition, the levy of penalty can be said to be justified and not otherwise. It is for the AO to record a specific finding that undisclosed income as so defined has been found based on tangible verifiable material found during the course of search and the onus is thus on the AO to satisfy the conditions before the charge for levy of penalty is fastened on the assessee. In the instant case, CIT(A) has returned a finding that the surrender made by the appellant as apparent from the statement of appellant firm's partner recorded u/s 132(4) of the Act was made to cover any discrepancy in the documents and books seized during the course of search, work in progress and stock. CIT(A) further held that in absence of any discrepancy pointed out, the appellant's admission of undisclosed income does not fall in the definition of undisclosed income which is the very basis of giving immunity from penalty u/s 271AAA as all the sub-clauses of section 271AAA of the Act are related to undisclosed income . CIT(A) has therefore rightly held that no specific discrepancy has been pointed out and merely the fact that surrender has been made by the assessee to cover any potential discrepancy, the same doesn t fall in the definition of undisclosed income as so defined. We are in total agreement with the said reasoning of the ld CIT(A) and fully endorse the same as we have held earlier that the essential condition which needs to be satisfied before penalty is levied is that there is an undisclosed income of the specified previous year as found during the course of search. Inspite of the same, we find that the ld CIT(A) has gone ahead and confirmed the penalty and it is here that we donot agree with him. It is for the Assessing officer to record a specific finding that undisclosed income as so defined has been found based on tangible verifiable material found during the course of search and the onus is thus on the AO (and not on the assessee) to satisfy the conditions before the charge for levy of penalty is fastened on the assessee. The assessee might be seeking immunity under section 271AAA(2) but before that the charge for levy of penalty has to be satisfied by the AO and for that, it for the AO to record a specific finding as to the fulfillment of conditions specified therein and which apparently has not been fulfilled in the instant case. Thus, we are of the considered view that there is no justifiable and legal basis for levy of penalty u/s 271AAA and the same is hereby directed to be deleted. Appeal of the assessee is allowed.

Issues Involved:
1. Confirmation of penalty levied under Section 271AAA of the Income Tax Act, 1961.
2. Consideration of submissions filed by the assessee.
3. Determination of whether the surrendered income falls under the definition of "undisclosed income" as per Section 271AAA.
4. Onus of proving the manner in which undisclosed income was derived.

Detailed Analysis:

1. Confirmation of Penalty Levied Under Section 271AAA:
The primary issue is whether the penalty of Rs. 17,50,000/- levied by the Assessing Officer (AO) under Section 271AAA was correctly confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The penalty was imposed because the assessee allegedly failed to specify the manner in which the additional undisclosed income was derived, a mandatory requirement under Section 271AAA.

2. Consideration of Submissions Filed by the Assessee:
The assessee argued that the submissions made during the hearing were not properly considered by the AO and CIT(A). The AO initiated penalty proceedings under Section 271AAA, asserting that the assessee did not adequately explain the source of the additional undisclosed income with documentary evidence. The CIT(A) upheld the AO’s decision, dismissing the appeal due to an inordinate delay initially, but later, upon remand, sustained the penalty after considering the submissions again.

3. Determination of Whether the Surrendered Income Falls Under the Definition of "Undisclosed Income":
The assessee contended that the surrendered income of Rs. 1.75 crores does not fall within the definition of "undisclosed income" as per the explanation to Section 271AAA. The CIT(A) acknowledged that the surrendered income did not meet the definition of "undisclosed income" but still confirmed the penalty. The Tribunal noted that the essential condition for levying the penalty is the presence of "undisclosed income" as defined, which the AO failed to substantiate with tangible verifiable material found during the search.

4. Onus of Proving the Manner in Which Undisclosed Income Was Derived:
The Tribunal emphasized that the onus is on the AO to record a specific finding that the undisclosed income, as defined, was found based on tangible verifiable material during the search. The assessee’s partners had stated that the additional income was to cover discrepancies in the documents and books seized during the search. The Tribunal agreed with the CIT(A)’s observation that no specific discrepancy was pointed out by the AO, and the mere fact that a surrender was made to cover potential discrepancies does not satisfy the definition of "undisclosed income."

Conclusion:
The Tribunal concluded that the AO did not fulfill the necessary conditions for levying the penalty under Section 271AAA. It held that the penalty provisions must be strictly construed, and in this case, the AO did not provide sufficient evidence to justify the penalty. Therefore, the Tribunal directed the deletion of the penalty.

Order:
The appeal of the assessee was allowed, and the penalty under Section 271AAA was deleted. The order was pronounced in the open court on 28/06/2024.

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