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TMI Blog2018 (6) TMI 1128X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. The assessee is an Individual and derives income during the year under consideration from salary, house property and other sources. A search under sec. 132 was conducted in the case of the assessee on 30.10.2014. During the course of search and seizure action certain incriminating documents were found and seized. The statement of the assessee was recorded under sec. 132(4). The assessee disclosed an income of Rs. 10.02 crores in his statement recorded under sec. 132(4) of the IT Act. The assessee filed his return of income on 30th September, 2015 declaring total income of Rs. 10,95,23,110/- including the surrendered income of Rs. 10.02 crores. The AO completed the assessment under sec. 143(3) read with sec. 153B (1)(b) on 28th December, 2016 accepting the returned income of the assessee. Subsequently, the AO initiated the proceedings for levy of penalty u/s 271AAB of the Act by issuing a show cause notice dated 28th December, 2016 and further vide notice dated 3rd March, 2017. The assessee contested the notice issued by the AO for levy of penalty u/s 271AAAB. The AO imposed the penalty of Rs. 1,00,20,000/- u/s 271AAB of the Act vide order dated 24th April, 2017. Aggrieved by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cific charge against the assessee, he was not in a position to counter the show cause notice issued by the AO as well as his cogent reply to the show cause notice. Though the AO while passing the impugned order has imposed the penalty as per clause (a) of section 271AAB(1) of the Act, however, no such ground was specified in the show cause notice issued under section 271AAB read with section 274 of the Act. Therefore, the show cause notice was unlawful in view of the decision of Hon'ble Karnataka High Court in the case of CIT vs. Manjunatha Cotton & Ginning Factory (supra). The ld. A/R has also relied on the decision of Chennai Bench of the Tribunal dated 5th April, 2018 in the case of DCIT vs. Shri R. Elangovan in ITA No. 1199/CHNY/2017 and submitted that the Tribunal in the said case while considering the validity of show cause notice and initiation of proceedings under section 271AAB and following the decision of Hon'ble Karnataka High Court in the case of CIT vs. Manjunatha Cotton & Ginning Factory (supra) as well as the decision of Hon'ble Supreme Court dismissing the SLP filed by the revenue in the case of CIT vs. SSA's Emerald Meadows, 242 Taxman 150 (SC) held that the notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which such income has been derived and further substantiate the same furnishing material available with him. In the absence of any record or material to show any undisclosed source of income, the entire disclosure on papers is to avoid undue harassment and unwanted litigation. The ld. A/R has then contended that the AO while passing the order under section 271AAB has to examine the case in terms of the provisions of said section and, therefore, the levy of penalty under section 271AAB is not automatic but discretionary. Only when the AO is satisfied that the conditions as prescribed under section 271AAB are satisfied as contained in various clauses of sub-section (1), the penalty can be levied accordingly. In the absence of such finding of the AO as to how the case of the assessee falls under the purview of section 271AAB, the impugned order passed by the AO is contrary to the provisions of the Act and, therefore, liable to be quashed. In the instant case no query was raised by the authorized officer during the course of recording of statement of assessee u/s 132(4) about manner in which undisclosed income has been derived and about its substantiation. In the absence of query raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 271AAB(3) lay down that penalty shall be levied under the section with reference to section 274. In other words the provisions of section shall apply in levying penalty under this section. Section 274 speaks that " No order imposing penalty under this chapter shall be made unless the assessee has been heard or has been given a reasonable opportunity of being heard." Thus hearing has to be given to the assessee before levy of penalty. This itself shows that penalty is leviable only after hearing the assessee and in case assessee is able to make out a case by showing some reasonable cause or otherwise then penalty shall not be leviable. Penalty is not levyable automatic. The ld. A/R placed reliance on the following case laws :- Principal Commissioner of Income Tax vs. Shri Sandeep Chandak (Allahabad High Court) ITA No. 122 of 2017 dated 27.11.2017. DCIT vs. Madan Lal Beswal (ITAT Kolkata) in ITA No. 1475/Kol2015 dated 14.3.2018. ACIT vs. M/s. Marvel Associates (ITAT Vizag) in ITA No. 147/Vizag/2017 dted 16.03.2018. DCIT vs. Shri R. Elangovan (ITAT Chennai) in ITA No. 1199/CHNY/2017 dated 05.04.2018. ACIT vs. Mothukuri Somabrahmam (ITAT Vizag) in ITA No. 126/Vizag/201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he authorities below. 3.2. The ld. D/R has also relied upon the decision of Hon'ble Allahabad High Court in case of Principal CIT vs. Sandeep Chandak and Others dated 27th November, 2017 in I.T. Appeal No. 122, 128 and 129 of 2017 and submitted that even otherwise if the show cause notice does not mention the section correctly it will not be invalid as the AO will get the benefit of section 292BB of the Act. The ld. D/R has also relied upon the decision of Kolkata Bench of the Tribunal in the case of DCIT vs. Amit Agarwal, 88 taxmann.com 288. 4. We have considered the rival submissions as well as relevant material on record. A search was conducted under section 132 of the IT Act on 30th October, 2014 at the premises of the assessee. The assessee in his statement recorded under section 132(4) has disclosed an income of Rs. 10,02,00,000/- in pursuant to the entries of advances given for purchase of land recorded in the pocket diary which was found and seized during the course of search and seizure action. This is year of search and the financial year would end on 31st March, 2015. However, the assessee disclosed this amount of Rs. 10,02,00,000/- based on the entries in the diary re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puted at the rate of ten per cent of the undisclosed income of the specified previous year, if such assessee- (i) in the course of the search, in a statement under sub-section (4) of section 132, admits the undisclosed income and specifies the manner in which such income has been derived; (ii) substantiates the manner in which the undisclosed income was derived; and (iii) on or before the specified date- (A) pays the tax, together with interest, if any, in respect of the undisclosed income; and (B) furnishes the return of income for the specified previous year declaring such undisclosed income therein; (b) a sum computed at the rate of twenty per cent of the undisclosed income of the specified previous year, if such assessee- (i) in the course of the search, in a statement under sub-section (4) of section 132, does not admit the undisclosed income; and (ii) on or before the specified date- (A) declares such income in the return of income furnished for the specified previous year; and (B) pays the tax, together with interest, if any, in respect of the undisclosed income; (c) a sum 51[computed at the rate of sixty per cent] of the undisclosed income of the specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search under section 132, which has- (A) not been recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous year; or (B) otherwise not been disclosed to the 54[Principal Chief Commissioner or] Chief Commissioner or 54[Principal Commissioner or] Commissioner before the date of search; or (ii) any income of the specified previous year represented, either wholly or partly, 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 would not have been found to be so had the search not been conducted.]" The section begins with the stipulation that the AO "may" direct the assessee shall pay by way of penalty if the conditions as prescribed under clauses (a) to (c) are satisfied. As per sub-section (3) of section 271AAB the provisions of section 274 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay the penalty. The only mandatory aspect in the provision is the quantum of penalty as specified under clauses (a) to (c) of Sec. 271AAB(1) of the Act as 10% to 30% or more as against the discretion given to the AO as per the provisions of section 271(1)(c) of the Act where the AO has the discretion to levy the penalty from 100% to 300% of the tax sought to be evaded. Thus the AO is duty bound to come to the conclusion that the case of the assessee is fit for levy of penalty under section 271AAB and then only the quantum of penalty being 10% or 20% or 30% has to be determined subject to the explanation of the assessee for the defaults. 5. Before we proceed further, the decisions relied upon by the ld. D/R are to be considered. In the case of Principal CIT vs. Sandeep Chandak & Others (supra) the issue before the Hon'ble High Court was the defect in the notice issued under section 271AAB on account of mentioning wrong provision of the Act being 271(1)(c) of the Act. The Hon'ble High Court after considering the fact that the show cause notice issued by the AO though mentions section 271(1) in the caption of the said notice, however, the body of the show cause notice clearly mentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under :- 5. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. During the appeal hearing, the Ld. A.R. vehemently argued that the A.O. has levied the penalty under the impression that the levy of penalty in the case of admission of income u/s 132(4) is mandatory. The Ld. A.R. further stated that penalty u/s 271AAB of the Act is not mandatory but discretionary. The provisions of section 271AAB of the Act is parimateria with that of section 158BFA of the Act relating to block assessment and accordingly argued that the levy of penalty under section 271AAB is not mandatory but discretionary. When there is reasonable cause, the penalty is not exigible. The Ld. A.R. taken us to the section 271AAB of the Act and also section 158BFA(2) of the Act and argued that the words used in section 271AAB of the Act and the words used in section 158BFA(2) of the Act are identical. Hence, argued that the penalty section 271AAB of the Act penalty is not automatic and it is on the merits of each case. For ready reference, we reproduce hereunder section 158BFA (2) of the Act and section 271AAB of the Act which reads as under; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n has furnished a return under clause (a) of section 158BC; (ii) the tax payable on the basis of such return has been paid or, if the assets seized consist of money, the assessee offers the money so seized to be adjusted against the tax payable. (iii) Evidence of tax paid is furnished along with the return; and (iv) An appeal is not filed against the assessment of that part of income which is shown in the return: Provided further that the provisions of the preceding proviso shall not apply where the undisclosed income determined by the Assessing Officer is in excess of the income shown in the return and in such cases the penalty shall be imposed on that portion of undisclosed income determined which is in excess of the amount of undisclosed income shown in the return. 6. Careful reading of section 271AAB of the Act, the words used are 'AO may direct' and 'the assessee shall pay by way of penalty'. Similar words are used section 158BFA(2) of the Act. The word may direct indicates the discretion to the AO. Further, sub section (3) of section 271AAB of the Act, fortifies this view. Sub section (3) of section 271AAB: The provisions of section 274 and 275 shall, as far as ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind that when the basic condition of the undisclosed income not recorded in the books of accounts does not exists, then the same has to be specified by the AO in the show cause notice and further the AO is required to give a finding while imposing the penalty under section 271AAB. Even if the AO is satisfied and come to the conclusion that the assessee has not recorded the undisclosed income in the books of accounts or in the other documents / record maintained in normal course relating to specified previous year, the show cause notice shall also specify the default committed by the assessee to attract the penalty @ 10% or 20% or 30% of the undisclosed income. There is no dispute that the AO has not specified the default and charge against the assessee which necessitated the levy of penalty under section 271AAB of the Act. Consequently, the assessee was not given an opportunity to explain his case for specific default attracting the levy of penalty in terms of clauses (a) to (c) of section 271AAB(1) of the Act. The Channai Bench of the Tribunal in the case of DCIT vs. Shri R. Elangovan (supra) at pages 7 to 10 has held as under :- " It is clear from the Sub Section (3) of Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income or furnishing of inaccurate particulars of income. The Tribunal, while allowing the appeal of the assessee, has relied on the decision of the Division Bench of this Court rendered in the case of CIT vs. Manjunatha Cotton and Ginning Factory (2013) 359 ITR 565. 4. In our view, since the matter is covered by judgment of the Division Bench of this Court, we are of the opinion, no substantial question of law arises in this appeal for determination by this Court. The appeal is accordingly dismissed''. In the earlier case of Manjunatha Cotton and Ginning Factory (supra) their lordship had observed as under:- ''Notice under section 274 of the Act should specifically state the grounds mentioned in section 271(1)(c), i.e., whether it is for concealment of income or for furnishing of incorrect particulars of income. Sending printed form where all the grounds mentioned in section 271 are mentioned would not satisfy the requirement of law ; The assessee should know the grounds which he has to meet specifically. Otherwise, the principles of natural justice are offended. On the basis of such proceedings, no penalty could be imposed on the assessee ; ) taking up of penalty proceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO in the proceedings under section 271AAB of the Act has to first decide that the conditions prescribed under the said section are satisfied for levy of penalty and then to further take a decision after considering the explanation of the assessee for non compliance of any of the conditions under clauses (a) to (c) of sub-section (1) regarding the quantum of penalty. The primary condition for levy of penalty is the existence of undisclosed income as per the disclosure made by the assessee under section 132(4). The term 'undisclosed income' has been defined in Explanations to section 271AAB. Therefore, as per the definition provided in the Explanation, the undisclosed income may have various forms and the same is not recorded in the books of accounts or other documents maintained in normal course relating to the specified previous year. As per sub-clause (i) of clause (c) of the Explanation, the undisclosed income means any income of the specified previous year represented by any money, bullion, jewellery or valuable article or things or any entry in books of accounts or other documents or transactions found in the course of search. This definition is further subject to two cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iable and further whether it is 10% or 20% or 30% of such undisclosed income. Therefore, the AO is under statutory obligation to examine all the issues during the proceedings under section 271AAB after giving the assessee an opportunity to explain the charges/grounds on which the penalty is proposed to be levied. Hence it is a pre-requisite condition that the AO first specify the charges against the assessee and to make known the assessee of his default so as to afford an opportunity to explain the default/charges so brought against the assessee. Without considering the explanation of the assessee on the specific default, the order passed by the AO under section 271AAB suffers from serious illegality and therefore not sustainable in law. When a stringent action is provided in the Statute against the default committed by the assessee, then it also cast an equally stringent and strict duty on the authority responsible to take such action. Therefore, when the provisions for levy of penalty under section 271AAB is a specific provision to deal with the undisclosed income and it provides a strict penal action then the corresponding duty of the tax authority is also equally stringent. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . DR brought to our notice that in the very same group case of Manoj Beswal & Ors. the Tribunal had confirmed the levy of penalty and contended before us that penalty u/s. 271AAB of the Act is mandatory and therefore, according to Ld. DR, the Ld. CIT(A) erred in deleting the penalty by stating that the assessee did not had any 'mens rea' not to disclose the amount in question. According to him, penalty has to be mandatorily levied u/s. 271AAB of the Act on the undisclosed income found during search. On the other hand, Ld. AR Shri Miraz D. Shah, supporting the decision of Ld. CIT(A) made contentions though taken up before the Ld. CIT(A) but has not been adjudicated on those averments, which the Ld. AR urges before us to consider while adjudicating the appeal of the Revenue. The Ld. AR also pointed out that the contentions which he is going to raise has been taken up before the AO also, however, according to Ld. Counsel, those legal arguments were not considered by the AO in the right perspective. The first contention of the Ld. AR is that since Sec. 271AAB of the Act is a penalty section it should be construed strictly, which we agree being it is a trite law that penalty provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he is engaged in commodities trading business and therefore mandated to maintain books of accounts in terms of section 44AA of the Act and thereby inferring that the assessee had reported the profit from commodities trading business under the head "income from business or profession". Based on this crucial finding, the Tribunal had concluded that since the transaction of commodities trading had not been entered by the assessee in his books of accounts as on the date of search on 01.08.2012 and thereby it takes the character of undisclosed income for which penalty u/s 271AAB of the Act is exigible. In this regard, we find that the Ld. AR drew our attention to the computation of the total income wherein the assessee had offered income from commodity trading only under the head income from other sources. We also find that the Ld. AO had also specifically stated in the body of the assessment order vide column no. 10 that the assessee is having only salary income and income from other sources. We find that due to the absence of the assessee at the time of hearing this particular fact had escaped the attention of the Tribunal. On perusal of the fact available on record, we find that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re only for assesses who are earning income under the head "Business or profession". We note that Sec. 44AA or Sec. 44AA(2)(ii) of the Act casts a duty upon the assessee who are into "Business or Profession" and such assessee's are bound to maintain books of account as stipulated therein. For appreciating this submission let us go through the provisions of law. "44AA. (1) Every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette shall keep and maintain such books of account and other documents as may enable the [Assessing] Officer to compute his total income in accordance with the provisions of this Act. (2) Every person carrying on business or profession [not being a profession referred to in subsection (1)] shall,- (i) if his income from business or profession exceeds [one lakh twenty] thousand rupees or his total sales, turnover or gross receipts, as the case may be, in business or profession exceed or exceeds [ten lakh] rupees in any one of the three years immediately preceding the previous year; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled along with the return: Income from Salary Rs. 45,57,600 Income from Other sources Rs. 3,00,24,047 Rs.3,45,81,647 6. We note that the AO has accepted the aforesaid statement of total income filed before him without contesting the claim of the assessee as to whether the assessee's claim of income other than from salary should be from "Income from Business". The confusion that has arisen in this case, we note is on the misdirection of AO in the assessment proceedings wherein the assessment order of the assessee, the AO has observed "during search and seizure operation, Shri Manoj Beswal had made a consolidated disclosure of Rs. 32 crore vide his disclosure petition. Out of this consolidated disclosure, the assessee owned up Rs. 3 cr. In the disclosure petition Shri Manoj Beswal it was stated that the source of such undisclosed income was out of commodity profit. It has been submitted that the amount has already been disclosed in his Income & Expenditure account for the AY 2013-14 under the head 'Income out of Speculative Business from sale of commodities'. Verification of accounts confirms his claim." This observation is flawed because, we note that AO got carried away by per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Hon'ble Apex Court held that the question as to whether a principal receipt is of the nature of income and falls within the charge of sec. 4 of the Act is a question of law which has to be decided by the Court on the basis of the provisions of the Act and interpretation of the term 'income' given in a large number of decisions of the Hon'ble Supreme Court, High Court and Privy Council. After taking note of the Apex Court order as above, we note that the AO in the assessment order after having accepted the statement of total income (supra) and the return wherein the assessee has shown the income from commodities under the head "Income from Other Sources" cannot now after perusal of "Income & Expenditure Account" determine the character of transaction in the penalty proceedings as "Income from Business or Profession" which approach/action is erroneous. We note that the assessee in his statement of total income along with return has classified his income under two heads (i) Salary and (ii) from other sources and the income of Rs. 3 cr. as income from other sources, which we find the AO has not contested in the assessment order, has thus crystallized and the necessary inference d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after the 1st day of July, 2012, the assessee shall pay by way of penalty, in addition to tax, if any, payable by him,- (a) a sum computed at the rate of ten per cent of the undisclosed income of the specified previous year, if such assessee- ******** Explanation - For the purposes of this section, - (a) .......... (b) .......... (c) "undisclosed income" means- (i) any income of the specified previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search under section 132, which has- (A) not been recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous year; or (B) otherwise not been disclosed to the [Principal Chief Commissioner or] Chief Commissioner or [Principal Commissioner or] Commissioner before the date of search; or (ii) any income of the specified previous year represented, either wholly or partly, by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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