PRAFULLA SHASHIKANT VAIDYA,THANE vs. DCIT, CC-1, THANE

Brief facts of the case are that there was search action on the ‘Valuable Group’ and consequential search was carried out at the premises of assessee. During the course of search, jewellery of Rs. 2,14,53,102/- was found and Rs. 1,55,54,889/- and cash of Rs. 29.08 lakhs was found, out of which Rs. 27 Lakh was Shri Prafulla Shashikant Vaidya seized. During the course of search statement of the Director of Valuable group, Mr. Narendra Hete was recorded wherein he on behalf of the entire group offered a sum of Rs. 148.75 crore in the hands of different entities and he enclosed list of various entities, wherein he has declared a sum of Rs. 66,48,000/- for the assessee which was later confirmed by the assessee. Assessee thereafter had filed his return of income wherein he has not disclosed the above declared income.

During the course of assessment, the assessee submitted bills for jewellery and also explained cash belongs to M/s Meghabites, a proprietary concern of his wife and in support of the same he submitted sales tax return of the said firm where cash sales duly reflected. However, assessing officer has not accepted the explanation and added the amount of Rs. 66,48,000/- as declared in the statement by Shri Narendra Hete. In the first assessment proceeding, assessee reiterated the same fact and reconciled the entire jewellery and cash found during the course of search. Ld CIT(A) appreciated the submission of the assessee and accepted jewellery to the extent of bills produced, but explanation in the nature of jewellery related to other family members and received by them on different family rituals was not accepted and confirmed to the tune of Rs. 14,88,464/-. Similarly, for the cash balance also Ld CIT(A) deleted to the extent of balance appearing in the books of the said proprietary concern and confirmed balance amount of Rs. 5,42,350/- which Shri Prafulla Shashikant Vaidya was explained as related to other family members as per their books.

Later Assessing officer issued notice for penalty U/s 274 for levying penalty U/s 271AAB (1). Ld counsel for the assessee Mr. Rakesh Joshi pointed out that, in the first notice issued at the time of assessment proceedings on 28/03/2016, do not have any reference of any undisclosed income, but in the subsequent notice dated 09/03/2021 issued after the order of Ld. CIT(A), the AO has mentioned that a search was conducted in your case and you were found to have undisclosed income on which penalty leviable U/s 271AAB(1). However, there was no reference that under which clause out of clause (a), (b) & (c) of section 271AAB(1), penalty is leviable. He submitted that section 271AAB(1) prescribes three situations under which the quantum of penalty is to be determined. Hence before issue of notice AO has to decide, under which clause he intends to levy penalty. Since there was no such reference in the second notice also hence there is no effective communication to the assessee and accordingly there is no compliance to section 274 and penalty levied needs to be dropped. In this regard, he relied upon the decision of Hon’ble Madras High Court in case of PCIT vs. Shri R Elangovan (Appeal No. 770/771 of 2018) dated 30.03.2021, wherein the Hon’ble High Court held as under:-

“14. In our considered view, the Tribunal is fully right in vacating the penalty on the ground that the notice was defective. The provisions of the Act have clearly laid down the procedure to Shri Prafulla Shashikant Vaidya be followed and adhered to while imposing the penalty. The proposal for such penalty proceedings was separately initiated upon completion of assessment and there may be cases where the assessee would not even contest the order of assessment. But, that would not preclude the assessee from challenging the penalty proceedings, as penalty proceedings are independent and the procedure required to be followed cannot be dispensed with.

As rightly pointed out by the learned counsel appearing for the assessee, Section 271AAB of the Act, which deals with penalty consists of three contingencies. Therefore, the Assessing Officer should point out to the assessee as to under which of the three clauses, he chooses to proceed against the assessee so as to enable the assessee to give an effective reply. Since the same has not been mentioned, the assessee has been denied reasonable opportunity to put forth their submissions. The Tribunal, in paragraph 5 of the impugned order, has verbatim reproduced the penalty notice and we find that the notice is absolutely vague and none of the irrelevant portions had been struck off nor the relevant portions had been marked or indicated. Hence, the Tribunal is right in observing that the penalty could not have been levied based on such defective notice and more particularly, when the assessee has been strenuously canvassing the jurisdictional issue from the inception.”

Further on merits of the case, Mr. Joshi submitted that the assessee has submitted all the documents to explain source of jewellery found during the course of search and produced bills for the same before AO as well as CIT(A). Part of the jewellery to the extent of Rs. 14,88,464/- was explained as belongs to other family members who have received as gift on various family

Ld DR submitted that the disclosure of undisclosed income is in reference to the assets seized which were found during the course of search. Once the assessee has surrendered the undisclosed income based on the assets found and seized during the search, then the said income was rightly treated by the AO as undisclosed income in terms of provisions of section 271AAB of the Act. He further stated that the penalty U/s 274AAB(1) is automatic and once any addition made in the specified year it will attract penalty U/s 271AAB(1) at the rate depending upon the category of the case. He has relied upon the penalty order passed under section 271AAB of the IT Act.

We have considered the rival submissions as well as the relevant material placed on record. The AO has levied the penalty under section 271AAB of the Act in respect of the income surrendered by the assessee. The question arises whether the Shri Prafulla Shashikant Vaidya surrender made by the assessee in the statement recorded under section 132(4) will be regarded as undisclosed income without testing the same with the definition as provided under clause (c) of Explanation to section 271AAB of the Act. There is no dispute that in the statement recorded under section 132(4), the assessee has disclosed the income by confirming statement of the director of valuable group. However, for the purpose of levying the penalty under section 271AAB, the primary condition is that the assessee shall pay the penalty equivalent to 10 percent, 20 percent or 30 percent of undisclosed income of specified previous year depending upon the ‘satisfaction’ of the condition as provided under section 271AAB. The term "undisclosed income" has been defined in clause (c) of the Explanation to section 271AAB and, therefore, the penalty under the said provision has to be levied only when the income surrendered by the assessee falls in the ambit of ‘undisclosed income’ as defined under this section. Section 271AAB defines the undisclosed income as under: "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 Shri Prafulla Shashikant Vaidya

As far as the issue involved in this case is concerned, it falls under clause (i) above which envisages that the income in the form of jewellery or cash which has not been recorded in the books of accounts or other documents maintained in the normal course relating to such previous year. Now in the case of assessee entire jewellery and cash was duly recorded in the documents maintained in the normal course and was also explained to the lower authorities. But the same has only been accepted partially. In the penalty order none of the authorities have given any finding that, how the income confirmed in the quantum proceedings falls in the category of ‘undisclosed income’. The documents submitted in the form of sales tax return etc. are independently verifiable evidence without having any control or influence of the assessee except the books of account of the assessee which were not disputed by the AO. Further, the revenue has not disputed the correctness of the documentary evidence filed by the assessee, albeit the AO has proceeded on the assumption that the income disclosed by the assessee under section 132(4) is undisclosed income for the purpose of section 271AAB of the Act. Once the assessee has Shri Prafulla Shashikant Vaidya explained the fact that all the assets found during the course of search have been duly recorded in the documents in the normal course relating to such previous year, then the mere disclosure and surrender of income would not ipso facto lead to the conclusion that the amount surrendered by the assessee is ‘undisclosed income’ in terms of section 271AAB of the Act.

In this case one more anomaly is noted, as during the search jewellery of Rs. 1.55 crore and cash of Rs. 27 lakhs were seized but disclosure was taken only for Rs. 66.48 lakhs, which also indicates that the said disclosure don’t have any live connection with each other. Therefore, the statement of the assessee recorded under section 132(4) de hors any corroborative material or document found would not constitute incriminating material, when assessee later explained the source from the books. Therefore, the said income disclosed by the assessee cannot be considered as undisclosed income in terms of section 271AAB of the Act. The penalty under section 271AAB cannot be treated as automatic but the AO has to take a decision as per the provisions of section 271AAB and particularly in the light of the definition of the undisclosed income as prescribed in the Explanation to section 271AAB of the Act.

We further note that this Tribunal has considered this issue in case of Raja Ram Maheshwari v. Dy. CIT in [IT Appeal No. 992(JP) of 2017,dated 10-1-2019] in paras 12 to 14 as under :—

From a plain reading the provisions of Section 271AAB, it can be seen that, it begins with the stipulation that the Assessing officer may direct the assessee and the assessee shall pay the penalty as per clause (a) to (c) so satisfied in sub-section (1) to Section 271AAB. Further, as per sub-section (3) of Section 271AAB, the provisions of section 274 and section 275 as far as maybe applied in relation to penalty under this section which means that before levying the penalty, the Assessing officer has to issue a show cause granting an opportunity to the assessee. Thus, the levy of penalty is not automatic but the Assessing officer has to decide based on facts and circumstances of the case. Similar view has been taken by the various Co-ordinate Benches and useful reference can be drawn to the decision of the Co-ordinate Bench in case of ACIT v. Marvel Associates 92 Taxmann.com 109 wherein it was held as under: "5. We have heard both the parties, perused the materials available on record and gone through the orders of the Shri Prafulla Shashikant Vaidya

Thus, we agree with the contentions of the ld Counsel for the assessee that the levy of penalty under section 271AAB is not mandatory or automatic, same needs to be examined, whether there is any basis for levy of penalty or non-levy thereof and the same will depend upon the facts and circumstances of the case.

Hence in view of the facts and circumstances as discussed in detail in foregoing paras as well as following the decision of this Tribunal cited supra, we hold that the addition confirmed

In the result, appeal of the assessee is allowed. Order pronounced on 30th August, 2023.