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TMI Blog2019 (4) TMI 565X X X X Extracts X X X X X X X X Extracts X X X X ..... oposed to be levied. show cause notices issued by the AO for initiation of penalty proceedings under section 271AAB are very vague and silent about the default of the assessee and further the amount of undisclosed income on which the penalty was proposed to be levied. Levy of penalty u/s 271AAB - entries in the seized documents representing the expenditure on account of construction of the house and purchase of other assets as well as advances in the absence of the real transactions - HELD THAT:- in view of the facts and circumstances of the case as well as the decision of the Coordinate Bench of this Tribunal in the case of Rajendra Kumar Gupta vs. DCIT (supra), we hold that the entries in the seized documents representing the expenditure on account of construction of the house and purchase of other assets as well as advances in the absence of the real transactions do not constitute the undisclosed income of the assessee as defined in the explanation to section 271AAB of the Act. Accordingly, the penalty levied under section 271AAB in respect of the said amount is not sustainable and liable to be set aside. Undisclosed income on account of excess stock - HELD THAT:- Once the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For the Revenue : Shri Rajendra Jha (Addl. CIT) ORDER PER VIJAY PAL RAO, JM : This appeal by the assessee is directed against the order dated 22th November, 2017 of ld. CIT (A)-4, Jaipur arising from the penalty order passed under section 271AAB of the IT Act for the assessment year 2014-15. The assessee has raised the following grounds :- 1. That the notice issued by assessing officer for initiating the penalty u/s 271AAB of the I.T. Act, 1961 is not in accordance with law not being specifically pointing out the default for which the ld. A.O. sought to impose penalty u/s 271AAB. 2. That without prejudice to the ground No. (1) above on the facts and in the circumstances of the case the ld. CIT (A) is wrong, unjust and has erred in law in confirming penalty of ₹ 50,16,672/- imposed by the ld. Assessing Officer u/s 271AAB of the IT Act, 1961. 3. That the appellant craves the permission to add to or amend to any of the above grounds of appeal or to withdraw any of them. Ground No. 1 is regarding validity of initiation of penalty proceedings under section 271AAB of the IT Act for want of specifying the default as per clause (a) to (c) of section 271A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee and held that the levy of penalty under section 271AAB is mandatory in nature. Accordingly, the appeal of the assessee was dismissed. 3. Before us, the ld. A/R of the assessee has submitted that the AO while issuing the show cause notice under section 274 read with section 271AAB has not specified the default of the assessee in terms of clause (a) to (c) of section 271AAB of the Act. Therefore, the initiation of penalty proceedings is illegal due to show cause notice is defective. Therefore, the notices were issued in routine manner without mentioning under which clause of section 271AAB(1) of the Act the assessee is liable for penalty. He has referred to the provisions of section 271AAB(1) and submitted that there are three clauses (a) to (c) and each clause of sub-section (1) provides the circumstances and violation attracting the penalty @ 10%, 20% and 30% of undisclosed income of the specified previous year. The assessee should know the grounds which he has to meet specifically otherwise the principles of natural justice are violated. Even in the assessment order the AO has not specified under which clause the penalty is liable to be imposed but the AO has men ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 132(4) of the IT Act. The surrender in question was made because the assessee was unable to explain the source of the investment in question. It is a clear case of undisclosed income detected during the course of search and seizure action and, therefore, the surrender made by the assessee himself is self-explanatory to the nature of income surrendered by the assessee. The ld. D/R has contended that the assessee has participated in the penalty proceedings and has not raised any objection or has demanded before the AO about his unawareness of the nature of default attracting the levy of penalty under section 271AAB. It is not the case of the assessee that the disclosure was taken under coercion and further the assessee has offered the said amount to tax in the return of income which rules out the scope of any pressure or coercion by the search team for taking disclosure from the assessee. Thus the objection raised by the assessee that the AO has not specified the clause under section 271AAB(1) of the Act has no merit when the assessee himself has explained the nature of income disclosed and surrendered and also paid the tax on the same. The ld. D/R has submitted that as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome in the return of income filed under section 139(1) of the Act, therefore, the question of taking any decision by the AO in the assessment proceedings about the true nature of surrender made by the assessee does not arise and only when the AO has proposed to levy the penalty then it is a pre-condition for invoking the provisions of section 271AAB that the said income disclosed by the assessee in the statement under section 132(4) is an undisclosed income as per the definition provided under section 271AAB. Therefore, the AO in the proceedings under section 271AAB has to examine all the facts of the case as well as the basis of the surrender and then arrive to the conclusion that the income disclosed by the assessee falls in the definition of undisclosed income as stipulated in the explanation to the said section. Therefore, we do not agree with the contention of the ld. D/R that the levy of penalty under section 271AAB is mandatory simply because the AO has to first issue a show cause notice to the assessee and then has to make a decision for levy of penalty after considering the fact that all the conditions provided under section 271AAB are satisfied. At the outset, we note t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1AAB is mandatory and consequential to the disclosure of income by the assessee under section 132(4) or the AO has to take a decision whether the given case has satisfied the requirements for levy of penalty under section 271AAB of the Act. In order to consider this issue, the provisions of section 271AAB are to be analyzed. For ready reference, we quote section 271AAB as under :- 271AAB. (1) The Assessing Officer may, notwithstanding anything contained in any other provisions of this Act, direct that, in a case where search has been initiated under section 132 on or after the 1st day of July, 2012 49[but before the date on which the Taxation Laws (Second Amendment) Bill, 2016 receives the assent of the President50], 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- (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 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n (1A)]. (3) The provisions of sections 274 and 275 shall, as far as may be, apply in relation to the penalty referred to in this section. Explanation.-For the purposes of this section,- (a) specified date means the due date of furnishing of return of income under subsection (1) of section 139 or the date on which the period specified in the notice issued under section 153A for furnishing of return of income expires, as the case may be; (b) specified previous year means the previous year- (i) which has ended before the date of search, but the date of furnishing the return of income under sub-section (1) of section 139 for such year has not expired before the date of search and the assessee has not furnished the return of income for the previous year before the date of search; or (ii) in which search was conducted; (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of penalty leviable u/s 271AAB is also subject to the condition prescribed under clauses (a) to (c) of sub-section (1) and the AO has to again give a finding for levy of penalty @ 10% or 20% or 30% of the undisclosed income. Thus the AO is bound to take a decision as to what default is committed by the assessee and which particular clause of section 271AAB(1) is attracted on such default. Further, mere disclosure of income under section 132(4) would not ipso facto par take the character of undisclosed income but the facts of each case are required to be analyzed in objective manner so as to attract the provisions of section 271AAB of the Act. Since it is not automatic but the AO has to give a finding that the case of the assessee falls in the ambit of undisclosed income as defined in Explanation to the said section. Therefore, the provisions of section 271AAB stipulate that the AO may come to the conclusion that the assessee shall 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( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y imposed by AO u/s 271AAB of the Act is confirmed. Thus it was found by the Hon ble High Court that the mistake in mentioning the section in the show cause notice is covered under section 292BB and the AO will get the benefit of the same. The said decision will not help the case of the revenue so far as the issue involves the merits of levy of penalty under section 271AAB. As regards the decision of Kolkata Benches of the Tribunal in the case of DCIT vs. Amit Agarwal (supra), we find that the said decision was subsequently recalled by the Tribunal and a fresh order dated 14th March, 2018 was passed by the Tribunal in favour of the assessee. Therefore, the decision relied upon by the ld. D/R is no more in existence. 6. The question whether levy of penalty under section 271AAB by the AO is mandatory or discretionary has been considered by the Visakhapatnam Bench of this Tribunal in case of ACIT vs. M/s. Marvel Associates (supra) in para 5 to 7 as 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 lev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r; and (B) pays the tax, together with interest, if any, in respect of the undisclosed income; (c) a sum which shall not be less than thirty per cent but which shall not exceed ninety per cent of the undisclosed income of the specified previous year, if it is not covered by the provisions of clauses (a) and (b). (2) No penalty under the provisions of clause (c) of sub-section (1) of section 271 shall be imposed upon the assessee in respect of the undisclosed income referred to in sub-section (1). Section 158BFA(2): (2) The Assessing Officer or the Commissioner (Appeals) in the course of any proceedings under this Chapter, may direct that a person shall pay by way of penalty a sum which shall not be less than the amount of tax leviable but which shall not exceed three times the amount of tax so leviable in respect of the undisclosed income determined by the Assessing Officer under clause (c) of section 158BC: Provided that no order imposing penalty shall be made in respect of a person if- (i) such person 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e under sub section (1) of section 158BFA of the Act that are entitled to be mandatory, the words may direct in sub section 2 there of intended to directory . In other words, while payment of interest is mandatory levy of penalty is discretionary. It is trite position of law that discretion is vested and authority has to be exercised in a reasonable and rational manner depending upon the facts and circumstances of the each case. Plain reading of section 271AAB and 274 of the Act indicates that the imposition of penalty u/s 271AAB of the Act is not mandatory but directory. Accordingly we hold that the penalty u/s 271AAB is not mandatory but to be imposed on merits of the each case. Thus the Tribunal has held that the levy of penalty under section 271AAB is not mandatory but the AO has the discretion to take a decision and shall be based on judicious decision of the AO. Hence we fortify our view by the above decisions of Tribunal in case of ACIT vs. Marvel Associates. Thus the Tribunal has analyzed all the relevant provisions of the Act as well as various decisions on this point including the decision of Hon ble Allahabad High Court in the case of Pr. CIT vs. Sandeep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sub Section (1) of Section 274 of the Act mandates that order imposing penalty has to be imposed only after hearing the assessee or giving a assessee opportunity of hearing. Opportunity that is to be given to the assessee should be a meaningful one and not a farce. Notice issued to the assessee reproduced (supra), does not show whether penalty proceedings were initiated for concealment of income or for furnishing inaccurate particulars of income or for having undisclosed income within the meaning of Section 271AAB of the Act. Notice in our opinion was vague. Hon ble Karnataka High Court in the case of SSA s Emerald Meadows (supra) relying in its own judgment in the case of Manjunatha Cotton and Ginning Factory (supra) had held as under:- 2. This appeal has been filed raising the following substantial questions of law: (1) Whether, omission if assessing officer to explicitly mention that penalty proceedings are being initiated for furnishing of inaccurate particulars or that for concealment of income makes the penalty order liable for cancellation even when it has been proved beyond reasonable doubt that the assessee had concealed income in the facts and circumstances o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of another limb is bad in law ; penalty proceedings are distinct from the assessment proceedings : though proceedings for imposition of penalty emanate from proceedings of assessment, they are independent and a separate aspect of the proceedings ; The findings recorded in the assessment proceedings in so far as concealment of income and furnishing of incorrect particulars would not operate as res judicata in the penalty proceedings. It is open to the assessee to contest the proceedings on the merits. However, the validity of the assessment or reassessment in pursuance of which penalty is levied, cannot be the subject matter of penalty proceedings. The assessment or reassessment cannot be declared invalid in the penalty proceedings . View taken by the Hon ble Karnataka High Court in the above judgment was indirectly affirmed by the Hon ble Apex Court, when it dismissed an SLP filed by the Revenue against the judgment in the case of SSA s Emerald Meadows (supra), specifically observing that there was no merits in the petition filed by the Revenue. Considering the above cited judgments, we hold that the notice issued u/s.274 r.w.s. 271AAB of the Act, reproduced by us a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 271AAB of the Income-tax Act you are liable for penalty on assessed undisclosed income. You are hereby requested to appear before me at my office Room No. 103 (NA), N.C.R.B., Jaipur at 11.00 A.M. on 25.08.2016 and show cause why an order imposing penalty on you should not be made u/s 271AAB r.w.s. 274 of the Income tax Act, 1961. If you do not wish to avail yourself of this opportunity of being heard in person or through Authorized Representative, you may reply to show cause in writing on or before the said date which will be considered before any such order is made. Yours faithfully, Sd/- ( Devangi Swarnkar ) Asstt. Commissioner of Income-tax, Central Circle-1, Jaipur. Thus it is clear that both the show cause notices issued by the AO for initiation of penalty proceedings under section 271AAB are very vague and silent about the default of the assessee and further the amount of undisclosed income on which the penalty was proposed to be levied. Even the Hon ble Jurisdictional High Court in case of Shevata Construction Co. Pvt. Ltd in DBIT Appeal No. 534/2008 dated 06.12.2016 has concurred with the view taken by Hon ble Karnataka High Court in case of CIT v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 dated 10th March, 2003 and submitted that the CBDT expressed its concern about the practice of confession of additional income during the course of search and seizure proceedings which do not serve any useful purpose in the absence of any evidence of income which leads to information on what has not been disclosed or is not likely to be disclosed. Hence the ld. A/R has submitted that the Board has time and again advised the taxing authorities to avoid obtaining an admission/confession of undisclosed income under coercive/undue influence. He has then referred to the Circular dated 18th December, 2018 and submitted that the CBDT has repeated its earlier instructions. Thus the ld. A/R has submitted that in the absence of any undisclosed income indicated or discovered on the basis of seized material, the disclosure made in the statement under section 132(4) is not sufficient to levy the penalty under section 271AAB of the Act. In support of his contention, he has relied upon the following decisions :- Ravi Mathur vs. DCIT ITA No. 969/JP/2017 dated 13.06.2018. Dinesh Kumar Agarwal vs. ACIT ITA Nos. 855 856/JP/2017 dated 24.07.2018. Raja Ram Maheshwari vs. DCIT ITA No. 992/J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the undisclosed advances and submitted that the alleged seized material contains no details except some imaginary names and details and therefore, the same do not constitute undisclosed income. This Tribunal in the case of Raja Ram Maheshwari vs. DCIT (supra) has dealt with this issue and held that the entries of out-go of money from the hands of the assessee does not represent the income but only an in-flow in the hands of the assessee would constitute an income, if at all. 7. On the other hand, the ld. D/R has submitted that the assessee has disclosed the income based on the seized material found during the course of search. Therefore, the disclosure is in respect of the undisclosed income recorded in the seized material. He has further contended that in this case the entries are in respect of some physical assets with the assessee except the advances of ₹ 5,62,000/-, therefore, the entries in the seized material represents the physical assets of the assessee. He has relied upon the orders of the authorities below. 8. We have considered the rival submissions as well as the relevant material on record. Out of the four items representing the undisclosed inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns then it was incumbent upon the department to find out and establish the existence of these assets in the possession of the assessee. In the absence of such efforts and even any question put to the assessee regarding the existence of these assets, these entries alone would not ipso facto constitute undisclosed income of the assessee. Even otherwise, these entries in itself are not having any income element but these are all expenditure entries and, therefore, until and unless a corresponding asset is found in the possession of the assessee, the entries alone cannot be regarded as representing the undisclosed income of the assessee. Therefore, when the duration of the construction period of the house has not been ascertained by the department, then showing the entire cost of construction with imaginary figures for a period of 2 month is not justified. Even we find that the construction material entries are on subsequent dates and furniture and TV entries on the earlier dates which do not support of the case of the department that these entries/notings in the seized documents represents the real transactions/assets purchased by the assessee or in the possession of the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lery or other valuable article or thing. Whether it can then be said that such undisclosed cash advances represents income by way of any entry in the books of account or other documents or transactions found in the course of a search under section 132. A cash advance per se represents an outflow of funds from the assessee s hand and an income per se represents an inflow of funds in the hands of the assessee. Therefore, once there is an inflow of funds by way of income, there can be subsequent outflow by way of an advance to any third party. Giving an advance and income thus connotes different meaning and connotation and thus cannot be used inter-changeably. In the definition of undisclosed income, where it talks about income by way of any entry in the books of account or other documents or transactions found in the course of a search under section 132 , what perhaps has been envisaged by the legislature is an inflow of funds in the hands of the assessee which has been found by way of any entry in the books of accounts or other documents, and which has not been recorded before the date of search in the books of accounts or other documents maintained by the assessee in the norm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the real transactions do not constitute the undisclosed income of the assessee as defined in the explanation to section 271AAB of the Act. Accordingly, the penalty levied under section 271AAB in respect of the said amount is not sustainable and liable to be set aside. 9. As regards the undisclosed income on account of excess stock, we note that during the course of search and seizure action the department has got valued the stock of the assessee from the departmental valuer. We find that in the valuation report the valuer has not made any attempt to find out the net weight but all the articles are taken at gross weight on which the prevailing market prices as on the date of search were applied. Thus it is clear that the difference in the closing stock was due to the valuation determined by the departmental valuer based on the gross weight and prevailing market prices in comparison to the value recorded by the assessee in the books of account. We further note that in the entire valuation report and in the proceedings of the search and seizure, the department has not made any allegation that there was any discrepancy in the quantity of the stock found during the course of sea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inate Bench of the Tribunal in the case of M/s. Rambhajo s vs. ACIT (supra) has considered the identical issue in para 38 as under :- 38. Firstly, regarding stock of Kundan Meena, and diamond and other gemstones studded jewellery which has been surrendered during the course of search, what has to be determined is the income which is represented by such stock of jewellery which is not found recorded in the books of accounts maintained in the normal course relating to such previous year. In other words, the value at which such stock has been acquired by the assessee and not the value which such stock can fetch in the market or the fair market value of such stock. In the instant case, it has been contended that the valuation of the stock has been done at market rate as on the date of search without considering the cost disclosed in the books of accounts and without considering the well-accepted accounting policy which has been followed by the assessee firm where it values its stock at lower of cost and net realizable value. The cost can be determined on the basis of historical and/or current cost so recorded in the books of accounts. Alternatively, past gross profit percenta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the market value instead of cost and such valuation difference and on account of non-deduction of Chapadi, wax, etc while weighing the Kundan Meena Jewellery and the same cannot be a basis to hold that it represent undisclosed income so defined in explanation to section 271AAB of the Act and the penalty levied thereon is liable to be set-aside. Accordingly, in view of the above facts and circumstances of the case and following the earlier order of this Tribunal, we hold that the amount representing the excess stock based on the valuation of the departmental valuer cannot be regarded as undisclosed income in terms of definition provided in the explanation to section 271AAB of the Act. Hence, the penalty levied against such amount is not sustainable. 10. The ld. A/R of the assessee has submitted that no incriminating material was found during the course of search and the disclosure was taken only on the basis of the valuation of jewellery at current rate instead of the actual cost of acquisition of the jewellery. Therefore, he has submitted that considering the status of the assessee s family and the number of family members, the jwellery found during the course of search i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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