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TMI Blog2019 (4) TMI 634X X X X Extracts X X X X X X X X Extracts X X X X ..... oden and handicraft items in the name and style of 'M/s. Silver and Art Palace'. A search and seizure action u/s 132 of the Act was carried out at the assessee's premises on 11.03.2015. During the course of search, statement of one of the partner's in the assessee firm u/s 132(4) of was recorded, wherein an amount of Rs. 26,50,50,888/- was surrendered (Rs. 25,80,25,888/- on account of difference in valuation of stock and Rs. 70,25,000/- on account of advances given to different parties). The assessee thereafter filed its return of income on 27.9.2015, declaring total income of Rs. 29,30,41,580/- including Rs. 26,50,50,888/- surrendered during the course of search. The assessment proceedings were completed by the Assessing officer and an order u/s 143(3) r/w 153B(1)(b) of the Act was passed on 23.12.2016 at Rs. 29,30,53,964/- by accepting the returned income except making a disallowance of Rs. 12,384/- on account of delay in deposition of ESI & PF. Simultaneously, penalty proceedings u/s 271AAB were initiated by issuance of notice on 23.12.2016. Subsequently, penalty was imposed u/s 271AAB(1)(a) of the Act at the rate of 10% amounting to Rs. 2,65,05,090/- vide order dated 24.4.2017. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and our reference was drawn to the decision of the Hon'ble Andhra Pradesh High Court in the case of M/s. Sri Radha Krishna Vihar Vs. Pr.CIT (in ITA No. 740 of 2017 dated 13.12.2017) wherein it was held as under: "7. While we respectfully agree with the views of both the High Courts referred to above, we notice an additional feature from the language of Section 158BFA of the Act. While in Sub-Section (1) thereof, which deals with the payment of interest on undisclosed income, the words the assessee shall be liable to pay simple interest are used, whereas in Sub-Section (2) thereof, the words may direct are used referring to the power of the Assessing Officer to direct the person concerned to pay penalty. No doubt, the words shall may at times be construed as directory and the word "may" may be construed as mandatory as the context warrants. However, in Section 158BFA of the Act, these phrases have been used by the Legislature in two different contexts, one in the matter of payment of interest and another in the matter of payment of penalty. The fact that varied phraseology is used in the same provision itself shows that Legislature treated Sub-Sections (1) and (2) of Section 158B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1479/ Kol/2015, dated 09.02.2018), DCIT Vs. Subhas Chandra Agarwala (ITA No. 1470/Kol/2015 dated 19.02.2018), Ravi Mathur Vs. DCIT (ITA No. 969/JP/2017 dated 13.06.2018), Anuj Mathur vs. DCIT (ITA No. 971/JP/2017 dated 13th June 2018) and Shri Suresh Chand Mittal Vs. DCIT, CC-2 (ITA no. 931/JP/2017 order dated 02.07.2018). 10. It was accordingly submitted that levy of penalty is not mandatory in nature. It is to the discretion of AO to levy penalty or not after considering the facts of the case and after giving proper opportunity of being heard to the assessee. The penalty has been imposed based upon the wrong interpretation of law without going further into the facts of the case, hence, deserves to be deleted. 11. Per contra, the ld. DR submitted that the levy of penalty U/s 271AAB is mandatory in nature where the condition prescribed therein are satisfied. It was submitted that the provisions of Section 273B of the Act providing for non imposition of penalty are not applicable to the penalty provisions U/s 271AAB of the Act. It was further submitted that unlike Section 271AAA wherein immunity from imposition of penalty is possible subject to fulfillment of conditions in Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 pari materia 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: 271AAB [Penalty where search has been initiated]: (1) The Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 may be, apply in relation to the penalty referred to in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AA and unlike Section 271AAA(2), there is no immunity clause provided in 271AAB of the Act, at the same time, we are of the considered view that the legislature has retained the phrase "may" and thus the Assessing officer has been empowered to exercise his discretion to levy penalty depending upon facts and circumstances of a particular case. The contention of the ld DR that the discretion which is available with the Assessing Officer is limited to the rate of penalty which can vary from 10% to 30% depending on the facts and circumstance of the particular case is also not acceptable as the essential condition for levy of penalty that there is undisclosed income which is found during the course of search has to be necessarily satisfied before examining additional conditions so specified for determining the rate of penalty. Further, mere disclosure of income under section 132(4) would not automatically lead to levy of penalty but the Assessing officer has to give a clear and specific finding that the case of the assessee falls in the ambit of undisclosed so defined in the explanation to section 271AAB. The facts and circumstances of each case thus needs to be closely examined by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in consequence of any order passed under this Act, the Assessing Officer shall serve upon the assessee a notice of demand as prescribed. The provisions for imposition of penalty and interest are distinct from the provisions for imposition of tax..." 17. It was further submitted that it has been held that by various Courts that penalty proceeding is not continuation of the assessment proceedings. The Tribunal in the case of Shri Ramamoorthy Sridharan Vs. Income Tax Officer (ITA No. 181/Hyd/2014) relying on the judgment of Hon'ble Supreme Court in the case of Anantaram Veerasinghiah vs. CIT 123 ITR 457 has held as under: "28. We heard both the parties and perused the records. Penalty Proceedings are independent proceeding and the matter is to be considered afresh: It is an undisputed position that penalty proceedings are independent proceedings and the matter has to be looked into again as the assessment order is not the final word in the penalty proceedings. The decision of the Supreme Court in the case of Anantaram Veerasinghiah vs. CIT reported at 123 ITR 457 is the main decision on this issue. It is thus possible for the assessee during the course of the penalty proceedings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red premises. Therefore, we submit hereinafter the facts viz.-a-viz. legal provision contained in Section 271AAB to examine whether income under consideration falls under 'undisclosed income' as defined in the said Section. 21. It was submitted by the ld AR that during the search, total surrender was of Rs. 26,50,50,888/- and on that penalty @ 10% of Rs. 2,65,05,090/- levied by the Ld. AO and confirmed by Ld. CIT(A), details of which is as follows:- Particulars Surrendered amount Penalty @10% On account of excess stock found 25,80,25,888 2,58,02,588 On account of advance given to parties 70,25,000 7,02,500 Total 26,50,50,888 2,65,05,088 Penalty on excess stock found 22. It was further submitted that Rs. 25,80,25,888/- was surrendered on account of excess stock found in statement recorded u/s 132(4). Excess stock at the time of search has been worked out in following manner:- To workout the book stock, one trading account and four manufacturing accounts were drawn numbered as (A) to (E). The total value worked out as per books as on 10.03.2015 was Rs. 27,84,49,663/-, annexed at PBP 01-02. Trading account (A) is related to general goods representing almost 17 cate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty, size etc. on lump sum basis, (vi) camel bone goods have been valued without considering the numbers, quality etc., (vii) Entry no. 49 and 50 on shows that different kind of stones have been valued at same price, (viii) silver ornaments of 15 different types, all have been valued at Rs. 100 per gram without specifying the weight and rate of the stone whereas all article must have different weights of stone, however same have been valued at Rs. 100 per gram, (ix) mixed jewellery without specifying the weight/ nature of the diamond/ stone/ pearl and without finding out the net weight, (x) mixed jewellery, the gross and net weight has been taken same whereas it is 22 carat jewellery etc. 23. The ld. AR further submitted that during the search no incriminating documents found which suggest any purchase without recording into the books of accounts. The alleged undeclared stock is not clearly identifiable or does not have independent identity but is integral and inseparable part of declared stock. Assessee is dealing in these items, therefore, all these items are stock in trade for it. Further, assessee firm is in this trade since 1974. Assessee continuously values its stock at estim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luable article, thing, entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purposes of this Act, or any expense, deduction or allowance claimed under this Act which is found to be false." 26. It was submitted that perusal of the same shows that the definition of undisclosed income uses the word "includes" means neither it is exhaustive nor incomes or assets/expenses is mutually exclusive to each other. Perusal of the above definition shows that there should be an income which must be represented 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. In the instant case, neither any money, bullion, jewellery nor other valuable article nor thing nor any entry in the books of account nor other documents nor transactions found. Furthermore, there is no identifiable/ separable stock found, which can be said as undisclosed. 27. It was submitted that it is also relevant to note that there are two sub-clauses to the clause (i) to the definition which is cumulative in nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... racted and imposed litigation and to buy peace of mind, surrender was made and disclosed in the return of income, as it will not impact the financial tax liability in totality. 31. It was submitted that the turnover of the firm during the year was Rs. 45.86 Crores. The declared gross profit and net profit of the business of the year under consideration is Rs. 35.34 Crores and Rs. 29.30 Crores respectively. Thus, G.P. rate comes to 77.06% and N.P. rate comes to 63.90%. This fact shows that the result shown is abnormal and not reflecting the correct picture of the year under consideration. In none of the previous assessed years, assessee has earned this much of profit. 32. It was further submitted that a perusal of the finding of CIT(A) shows that he has confirmed the penalty by observing that no quantum appeal has been made. It is a case where income has been offered for taxation, therefore question of appeal does not arises. Ld. CIT(A) failed to appreciate that penalty proceeding is not continuation of assessment proceeding. Further, he has not appreciated the factual and legal submission made before him wherein it is contended that there is no undisclosed income in term of secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d bring the evidence to unearth the undisclosed income. Neither the A.O. nor the investigation wing linked the cost of profit or cost of asset to the entries in the books of accounts or to the sales conducted by the assessee to the sale deeds. Therefore, we are unable to accept the contention of the revenue that the loose sheet found during the course of search indicates any undisclosed income or asset or inflation of expenditure. The Hon'ble ITAT Delhi Bench in the case of Ajay Sharma Vs. DCIT (2012) 32 CCH 334 held that with respect to the addition on account of alleged receivables as per seized paper, there is no direct material which leads and establishes that any income received by the assessee has not been declared by the assessee. An addition has been made on the basis of loose document, which did not closely prove any concealment or furnishing of inaccurate particulars by the assessee. Hence penalty u/s 158BFA (2) of the Act is not leviable. The facts of the assessee's case shows that there was no undisclosed income found during the course of search and no incriminating material was found, hence we hold that there is no case for imposing penalty u/s 271AAB of the Act, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of the year under consideration. Hence, it is not the undisclosed income as defined in the section 271AAB. 37. It was submitted that alternatively, it is relevant to note that entries under consideration is noted in a diary and placed under proper security, it is so because it proves that assessee does not have guilty mind and intention to conceal the income. It also does not prove that had there been no such operation, the assessee would not have declared such income in return of income. The said presumption is not tenable in law as ample time was left for filing the return of income. The Ld. A.O. has not brought on record anything to prove the intention of the assessee otherwise; further, even he has not doubted the intention of the assessee. Perusal of clause (i) and (ii) to explanation (c) to Section 271AAB reproduced hereinbefore shows that any entry can be termed as 'undisclosed income' only if either it is not entered in the books of accounts or documents maintained in normal course relating to such previous year or otherwise not been disclosed. It is relevant to note that entries under consideration were noted in a dairy used as Memorandum book as evident from the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act is squarely covered by the definition of 'undisclosed income'. Otherwise, it is difficult to comprehend under what conditions and situations, the income declared by the assessees would fall under the definition of 'undisclosed income'. In support, reliance was placed on decision in case of Sonal Steel Trading Pvt. Ltd. vs. ACIT (ITA No. 396/CHNY/2018 dated 23.07.2018). It was accordingly submitted that the penalty imposed by the AO u/s 271AAB should be sustained. 39. We have heard the rival contentions and perused the material available on record. It is a settled proposition that penalty provisions need to be construed strictly. For the purposes of levy of penalty u/s 271AAB, what has to be determined is whether the surrender so made, in terms of statement of the assessee's partner recorded u/s 132(4) during the course of search, falls in the definition of "undisclosed income" of the specified previous year which has been specifically laid down in terms of clause (c) of explanation to section 271AAB which reads as under: "(c) "undisclosed income" means- (i) any income of the specified previous year represented, either wholly or partly, by any money, bullion, jewell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs before the ld CIT(A) has contended that the valuation of the goods classified as "Valuable items" has been done at market rate as on the date of search and in respect of goods classified as "other than valuable items", besides the fact that valuation has been done on the basis of market value, the valuation so done is tentative and on lump-sum basis. It has been contended that valuation has been done without considering the cost disclosed in the regular 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. We find that in the penalty proceedings, there is no such exercise which has been undertaken by the Assessing officer to determine the cost of the goods so found during the course of search. The Assessing officer has merely gone by the surrender made during the course of search and such surrender has been made based on market value as on the date of search. In our view, given that the assessee has disclosed the whole of the amount surrendered during the course of search in its return of income, the amount so surrendered and disclosed in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot be stated to be income which is represented by any money, bullion, jewellery or other valuable article or thing. Whether it can then be said that such undisclosed investment 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. An investment 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 could be subsequent outflow by way of investment. Investment 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 recorded 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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