SHRI NIKHIL MADAN,JAIPUR vs. ASSISTANT COMMISSIONER OF INCOME TAX, JAIPUR

आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCH VC ’B’, JAIPUR Jh jes'k lh- 'kekZ] ys[kk lnL; ,oa h Jh fot; iky jkWo] U;kf;d lnL; ds le{k BEFORE: SHRI RAMESH C. SHARMA, AM & SHRI VIJAY PAL RAO, JM vk;dj vihy la-@ITA No. 117/JP/2018 fu/kZkj.k o"kZ@Assessment Year : 2015-16. cuke Shri Nikhil Madan Assistant Commissioner of Vs. 8, Nikhil Apartment, Income-tax, 670, Adarsh Nagar, Central Circle-1, Jaipur. Jaipur. LFkk;h ys[kk la-@thvkbZvkj la-@PAN No. AIGPM 5610 C vihykFkhZ@Appellant izR;FkhZ@Respondent fu/kZkfjrh dh vksj ls@ Assessee by : Shri S.R. Sharma (CA) & Shri R.K. Bhatra (CA) jktLo dh vksj ls@ Revenue by : Smt. Runi Pal (JCIT) lquokbZ dh rkjh[k@ Date of Hearing : 20.07.2020. ?kks"k.kk dh rkjh[k@ Date of Pronouncement : 27/07/2020. vkns'k@ ORDER PER VIJAY PAL RAO, JM :

This appeal by the assessee is directed against the order dated 22nd November, 2017 of ld. CIT (A)-4, Jaipur arising from penalty order passed under section 271AAB of the IT Act for the assessment year 2015-16. The assessee has raised the following grounds :-

“ 1. That the notice issued by assessing officer for initiating the penalty u/s 271AAB of the IT 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 Rs. 45,00,000/- imposed by the ld. Assessing Officer u/s 271AAB of the I.T. 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 for want of specifying the default for which the AO sought to impose the penalty under section 271 AAB of the IT Act.

Thus in the absence of specific 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. He has relied upon the decision of Hon’ble Karnataka High Court in case of CIT vs. Manjunatha Cotton & Ginning Factory, 359 ITR 565 (Kar.) as well as the decision in the case of CIT vs. SSA’s Emerald Meadows, 73 taxmann.com 241. The SLP filed by the department against the said decision of the Hon’ble Karnataka High Court has been dismissed by the Hon’ble Supreme Court reported in 242 taxman 180 (SC).

The ld. A/R has also relied upon the decision of Hon’ble Jurisdictional High Court in case of M/s. Sheveta Construction Co. Pvt. Ltd. Vs. ITO dated 6th December, 2016 in DBIT Appeal No. 534/2008. The ld. A/R has contended that the show cause notices issued by the AO are vague and even the default of the assessee has been alleged as penalty for concealment of particulars of income/furnishing of inaccurate particulars of income.

Thus the penalty under section 271AAB cannot be initiated for the default in the nature as specified in the show cause notices issued by the AO. The ld. A/R has also relied upon various decisions of this Tribunal including decisions dated 13.06.2018 in case of Ravi Mathur vs. DCIT in and Anuj Mathur vs. DCIT in ITA No. 971/JP/2017. He has also relied upon the decision of this Tribunal in case of Gopal Das Sonkia vs. DCIT dated 11.04.2019 in ITA No. 306/JP/2018. Thus the ld. A/R has submitted that on the identical facts this Tribunal has decided this issue in favour of the assessee and against the revenue. Hence he has pleaded that the penalty levied under section 271AAB of the Act is bad in law and liable to be quashed.

The ld. D/R has thus submitted that the show cause notice issued by the AO is valid and mere mistake in the show cause notice will not render the entire proceedings illegal. In support of her contention she has relied upon the decision of Hon’ble Madras High Court in case of Sundaram Finance Ltd. Vs. ACIT, 403 ITR 407 (Mad.) and submitted that the Hon’ble High Court has rejected such a ground raised against the validity of show cause notice and held that all the violations will not result in nullifying the orders passed by statutory authorities. It was observed that if the case of the assessee is that they have been put to prejudice and principles of natural justice were violated on account of being not able to submit effective reply, it would be a different matter. This was never the plea of the assessee either before the AO or before the First Appellate Authority or before the Tribunal. Therefore, such an objection against the defect in notice is not acceptable as the alleged defect has caused no prejudice to the assessee. The ld. D/R has submitted that when the assessee himself has disclosed the undisclosed income during the course of search and seizure action, then the assessee was very much aware about the default which attracts the penalty under section 271AAB of the IT Act. She has relied upon the orders of the authorities below.

Thus it is clear that the AO has highlighted the charge in both the show cause notices as the assessee is liable for penalty for concealment of particulars of income/furnishing of inaccurate particulars of income. Except the date of notice, the contents of both the notices are mirror copy of each other. The penalty under section 271AAB is leviable against the undisclosed income of the specified previous year resulting from search and seizure action under section 132 of the IT Act. Therefore, in the absence of any charge of undisclosed income by the AO in the show cause notices, the assessee was deprived of having the knowledge of default and charge for which the AO proposed to levy the penalty under section 271AAB. Even otherwise, the charge as stated by the AO in the show cause notices is not found to be established as the assessee has offered the said income in the return of income filed under section 139(1) of the Act. It is a mandatory condition that the income disclosed by the assessee during the course of search and seizure action must fall in the ambit of ‘undisclosed income’ as defined in the explanation to section 271AAB. Further, the penalty under section 271AAB is required to be levied @ 10%, 20% or 60% depending upon the default committed by the assessee in the process of disclosure of such income, payment of due tax within the prescribed time period, furnishing of return of income and declaring the said income for the specified previous year. Thus the liability of penalty under section 271AAB of the Act varies depending upon the default committed by the assessee. If the assessee after disclosing the income satisfies the conditions specified in clause (a) of section 271AAB(1), then penalty is leviable @ 10% of the undisclosed income. Whereas if there is a further default of declaring such income in the return of income to be furnished within the specified date, then the penalty shall be leviable @ 20% of the income disclosed by the assessee. In case the assessee is not complying with the conditions as specified in clause (1)(a) and (b) of section 271AAB(1) of the Act, then the penalty shall be levied @ 30%/60% of the undisclosed income. Once the provisions stipulate levy of penalty which varies from 10% to 30%/60% depending upon the default committed by the assessee, then it is the duty of the AO to specify the default which is committed by the assessee and consequently the rate at which the penalty is sought to be levied in terms of clause (a), (b) or (c) of section 271AAB(1) of the Act. This is not a mere empty formality but these are the mandatory conditions for deciding the quantum of penalty and the AO has no discretion as far as the quantum of the penalty is concerned.

Therefore, the penalty sought to be levied by the AO in the show cause notice shall also specify the default and the consequential rate of penalty which the AO proposed to be levy. From the show cause notices it is apparent and evident that the AO has not even applied his mind but issued the notices one after another without even stating the primary charge required for levy of penalty under section 271AAB of the Act. Both the show cause notices are completely silent about the charge of undisclosed income discovered during the course of search and other defaults, if any, made by the assessee so as to attract the penalty under clauses (a), (b) or (c) of section 271AAB(1) of the IT Act. Therefore, on the face of the show cause notices it can be said that these are vague and suffering from serious defects which cannot be cured as the primary requirement of charge against the assessee is missing in both the notices. On the contrary, a completely wrong charge has been specified in these notices which cannot be a basis for levy of penalty under section 271AAB of the Act. Therefore, we find that the initiation of the penalty by issuing the show cause notices dated 30th December, 2016 and 26.05.2017 is not valid. The Coordinate Bench of this Tribunal in case of Gopal Das Sonkia vs. DCIT (supra) has considered an identical issue in para 5 as under “ 5. We have considered the rival submissions as well as the relevant material on record. During the course of search and seizure action under section 132 of the Act conducted on 15th October, 2014, the assessee disclosed income of Rs. 9,01,00,000/- in his statement made under section 132(4) of the Act. The said disclosure was made in pursuant to the entries on account of advances for land, excess cash and excess jewellery found in the seized documents. The details of the undisclosed income surrendered by the assessee are as under :-

Found from Annexure/ Relevant Amount Particulars Exhibit No. Page No. 1839, Barah Ann. B Exhibit 1-6 7,81,00,000/- Advances for land Gangaur Ka No.1 and other Rasta, Johari loans/advances Bazar, Jaipur. Excess cash found 20,00,000/- Excess Jewellery found 1,00,00,000/- Total Declaration 9,01,00,000/-

It is pertinent to note that the disclosure of additional income in the statement recorded under section 132(4) itself is not sufficient to levy the penalty under section 271AAB of the Act until and unless the income so disclosed by the assessee falls in the definition of undisclosed income defined in the explanation to section 271AAB(1) of the Act. Therefore, the question whether the income disclosed by the assessee is undisclosed income in terms of the definition under section 271AAB of the Act has to be considered and decided in the penalty proceedings. Since the assessee has offered the said income 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 that an identical issue has been considered by the Coordinate Bench of this Tribunal in the case of Ravi Mathur vs. DCIT (supra) in para 4 to 6 as under :-

“4. We have considered the rival submissions as well as relevant material on record. A search was conducted under 13 Shri Nikhil Madan, Jaipur. 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 regarding investment in real estate. The due date of filing of return of income under section 139(1) was 30th September, 2015. It is undisputed fact that the assessee is an Individual and was not maintaining regular books of account. Therefore, the transactions recorded in the pocket diary found during the course of search itself would not lead to the presumption that the assessee would not have offered this income to tax if the search is not conducted on 30th October, 2014. Further, the entries in the diary itself do no not represent the income of the assessee during the year under consideration though the assessee was required to explain the source of investment in question and that source would be the income of the assessee. It is most likely that the investment in question was made from the unaccounted income of preceding years. Hence the investment in the real estate itself would not reveal the nature of income and the source of income of the year under consideration. It is a pre-condition for invoking the provisions of section 271AAB that the assessee admitted the undisclosed income in the statement under section 132(4).

The definition of ‘undisclosed income’ is provided in section 271AAB itself and, therefore, the AO in the proceedings under section 271AAB has to examine all the facts of the case 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 said section. The first question arises is whether the levy of penalty under section 271AAB 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 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 specified previous year, if it is not covered by the provisions of clauses (a) and (b). 52[(1A) 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 date on which the Taxation Laws (Second Amendment) Bill, 2016 receives the assent of the President, 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 thirty per cent of the undisclosed income of the specified previous year, if the 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 sixty per cent of the undisclosed income of the specified previous year, if it is not covered under the provisions of clause (a).] (2) No penalty under the provisions of 53[section 270A or] 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) 52[or sub-section (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 sub-section (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 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 54[Principal or] Chief Commissioner 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 275 as far as may be applied in relation to the penalty referred in this section which means that before imposing the penalty under sec. 271AAB, the AO has to issue a show cause notice and give a proper opportunity of hearing to the assessee. Thus the levy of penalty u/s. 271AAB is not automatic but the A.O. has to take a decision to impose the penalty after giving a proper opportunity of hearing to the assessee. It is statutory requirement that the explanation of the assessee for not fulfilling the conditions as prescribed u/s 271AAB of the Act is required to be considered by the AO and particularly whether the explanation furnished by the assessee is bonafide and non-compliance of the same is due to the reason beyond the control of the assessee. Therefore, the penalty u/s 271AAB is not a consequential act but the AO has to first initiate proceedings by issuing a show cause notice and after considering the explanation and reply of the assessee has to take a decision. This requirement of giving an opportunity of hearing itself makes it clear that the penalty u/s 271AAB is not mandatory but the AO has to take a decision based on the facts and circumstances of the case otherwise there is no requirement of issuing any notice for initiation of proceedings but the levy of penalty would be consequential and only computation of the quantum was to be done by the AO as in the case of levy of interest and fee u/s 234A to E. Even the quantum 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(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 mentions section 271AAB, which was fully comprehended by the assessee as reveals in the reply filed by the assessee against the said show cause notice. Hence the Hon’ble High Court has held as under :-

“ The ld. A.Rs have also challenged that the caption of the notice mentioned only Section 271 and not 271AAB. In this respect, the copy of notice has been produced by the ld. A.R. before me. It is seen that the ld. A.R is correct in observing that the section of penalty has not been correctly mentioned by the AO in the caption. However, the AO will get the benefit of section 292BB of the Income Tax Act, 1961 because firstly, the assessee has raised no objection before the AO in this regard. Secondly, last line of the notice clearly mentions section 271AAB. Thirdly, the assessee has given reply to said notice which shows that the assessee fully comprehended the implication of the notice that it is for section 271AAB.

The assessee has also challenged that the principles of natural justice has not followed by the AO. The detailed submissions of A.R in this regard has already been reproduced above. The A.R did not produce any evidence to show that he was not given proper opportunity of hearing. It is clear from the penalty order that the AO has given penalty notice and which was also replied by the assessee. Therefore, in my opinion, principle of natural justice has not been violated. Thus in view of above discussion penalty 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 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; 271AAB [Penalty where search has been initiated]:

(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 1 st 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—

(i) in the course of 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 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 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 this section.

7. The legislature has included the provisions of section 274 and section 275 of the Act in 271AAB of the Act with clear intention to consider the imposition of penalty judicially. Section 274 deals with the procedure for levy of penalty, wherein, it directs that no order imposing penalty shall be made unless the assessee has been heard or has been given a reasonable opportunity of being heard. Therefore, from plain reading of section 271AAB of the Act, it is evident that the penalty cannot be imposed unless the assessee is given a reasonable opportunity and assessee is being heard. Once the opportunity is given to the assessee, the penalty cannot be mandatory and it is on the basis of the facts and merits placed before the A.O. Once the A.O. is bound by the Act to hear the assessee and to give reasonable opportunity to explain his case, there is no mandatory requirement of imposing penalty, because the opportunity of being heard and reasonable opportunity is not a mere formality but it is to adhere to the principles of natural justice. Hon’ble A.P. High Court in the case of Radhakrishna Vihar in ITTA No.740/2011 while dealing with the penalty u/s 158BFA held that ‘we are of the opinion that while the words shall be liable 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 Chandak, 405 ITR 648 (Allahabad) relied upon by the ld. D/R and then arrived at the conclusion that the penalty under section 271AAB is not mandatory but the AO has the discretion to take a decision and the same should be based on judicious decision of the AO. Accordingly following the earlier decision of this Tribunal in the case of Ravi Mathur vs. DCIT (supra), we hold that the levy of penalty under section 271AAB is not mandatory but the AO has a discretion after considering all the relevant aspects of the case and then to satisfy himself that the case of the assessee falls in the definition of undisclosed income as provided in the explanation to section 271AAB of the Act. “

Accordingly, in view of the facts and circumstances of the case as well as the order of this Tribunal wherein the decisions of the Hon’ble Jurisdictional High Court as well as the Hon’ble Karnataka High Court were followed, we hold that the initiation of penalty is not valid and consequently the order passed by the AO under section 271AAB is liable to be quashed.

Ground no. 2 is regarding levy of penalty under section 271AAB of the IT Act being unjust and against the provisions of law.

Ravi Mathur vs. DCIT dated 13.06.2018. Dinesh Kumar Agarwal vs. ACIT & 856/JP/2017 dated 24.07.2018. Raja Ram Maheshwari vs. DCIT dated 10.01.2019. M/s. Rambhajo’s vs. ACIT dated 11.01.2019. Rajendra Kumar Gupta vs. DCIT dated 18.01.2019.

Thus the ld. A/R has submitted that even if the seized material discloses some out-flow of funds from the assessee’s hands, the same cannot necessarily be an income of the assessee. Therefore, in the absence of any other material or evidence to show the undisclosed income of the assessee, only the entries in the seized material which is dumb and deaf document cannot be the basis of levy of penalty under section 271AAB of the IT Act. Thus no incriminating document was found during the course of search and seizure action and the alleged seized papers on the basis of which surrender was taken by the Department contains only imaginary names and some figures. Neither during the search proceedings nor the AO has made any enquiry or investigation regarding the entries made in the seized papers. The surrender of the said income by the assessee was just to buy peace as it is evident from the statement recorded under section 132(4) of the Act. The said entries in the pocket diary giving advances itself is not an undisclosed income but due to undue pressure exerted by the revenue authorities to obtain the surrender, the assessee has made the surrender of the said income.

An identical issue has been considered by this Tribunal in the case of Gopal Das Sonkia vs. DCIT (supra) in para 8 as under :-

“8. We have considered the rival submissions as well as the relevant material on record. As apparent from the seized documents, the assessee disclosed inter alia the income of Rs. 7,81,00,000/- on account of advances for land. On careful perusal and consideration of the seized documents, we find that various entries are made against various names from the month of May, 2014 to 4th October, 2014. These entries are in respect of certain amounts against some imaginary names and the department has not made any effort or conducted any enquiry either during the search and seizure action or during the assessment proceedings or in the penalty proceedings to ascertain the particulars of these persons whether these are real existing persons or only fake names are written in the seized documents. Further, there is no description of any land for which the alleged advances are found to be not in the seized material. Apart from these entries, there is nothing on record or even any enquiry was conducted by the department to find out the particulars of the details or transactions for which the alleged advances were given by the assessee. The mere entries in these documents do not reveal the correct nature of transaction and the existence of the corresponding asset for which the alleged advances were given. The department has concentrated only to obtain the surrender from the assessee but no relevant question or enquiry was conducted to find out the particulars of the land and the full particulars of the persons to whom the advances were given. In the absence of the existence of the land for which the alleged advances were given, these entries alone would not ipso facto undisclosed income of the assessee. Even otherwise, these entries itself are not having any element of income but these are all expenditure entries and, therefore until and unless the full particulars of the land or the asset against which the advances were given is identified along with the persons to whom the advances were given, it would not be regarded as representing the undisclosed income of the assessee. Further, the advances given in the month of May, 2014 may not necessarily be representing the undisclosed income of the year under consideration.

Neither any other document like agreement to purchase and sale of land or receipt to indicate the real transaction entered into by the assessee with the persons whose names are recorded in the seized material are either found or brought on record by the AO. The existence of the asset being land for which the alleged advances were given is essential to establish that the assessee has actually entered into these transactions and paid the advances. In the absence of such fact or the land for which the advances were given or the full particulars of the persons to show that the names appearing in the seized documents are real existing persons, these entries in the seized documents would not constitute undisclosed income on account of advances for land. Therefore, without ascertaining the full particulars of the persons in whose names the entries are made, it is possible that all these names are imaginary and not the names of any existing persons. The vague entries itself do not represent the real transaction and consequently the undisclosed income of the assessee. The Coordinate Bench of this Tribunal in case of Rajendra Kumar Gupta vs. DCIT (supra) has considered the issue of out flow of funds from the assessee can be an undisclosed income for the purpose of section 271AAB of the Act in para 21 as under :-

“21. During the course of search, a note book (diary) has been found referred to as Ann. AS wherein there are certain notings relating to cash advances given to various persons totaling to Rs 82,80,000. Referring to the statement of the assessee in respect of these notings recorded u/s 132(4), ld CIT(A) has given a finding that the assessee has given a generalized statement without specifying the complete particulars of persons to whom loans were given and also failed to substantiate the same. The said findings have not been disputed by the Revenue and therefore, merely based on surrender and generalized statement of the assessee, in absence of anything specific to corroborate such entries, can it be said that such entries/notings represent undisclosed income of the assessee. As per the definition of undisclosed income u/s 271AAB, the said cash advances cannot 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 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 normal course and not vice-versa. We are also conscious of the fact that there are deeming provisions in terms of section 69 and 69B wherein such amounts may be deemed as income in absence of satisfactory explanation. In our view, the deeming fiction so envisaged under Section 69 and Section 69B cannot be extended and applied automatically in context of section 271AAB. It is a well-settled legal proposition that the deeming provisions are limited for the purposes that have been brought on the statute book and have therefore to be applied in the context of provisions wherein they have been brought on the statue book and not otherwise. In the instant case, the deeming provisions contained in section 69 and section 69B could have been applied in the context of bringing to tax such investments to tax in the quantum proceedings, though the fact of the matter is that the AO has not even invoked the said deeming provisions in the quantum proceedings. Therefore, even on this account, the deeming fiction cannot be extended to the penalty proceedings which are separate and distinct from the assessment proceedings and more so, where the provisions of section 271AAB provide for a specific definition of undisclosed income. Where a specific definition of undisclosed income has been provided in Section 271AAB, being a penal provision, the same must be strictly construed and in light of satisfaction of conditions specified therein and it is not expected to examine other provisions where the same has been defined or deemed for the purposes of bringing the amount to tax. In light of the same, the undisclosed investment by way of advances can be subject matter of addition in the quantum proceedings, as the same has been surrendered during the course of search in the statement recorded u/s 132(4) and offered in the return of income, however the same cannot be said to qualify as an undisclosed income in the context of section 271AAB read with the explanation thereto and penalty so levied thereon deserved to be set-aside.”

Accordingly in view of the facts and circumstances as discussed above as well as the order of the Coordinate Bench of this Tribunal, we hold that the entries in the seized documents representing the payment on account of land in the absence of the other essential facts regarding the particulars of the land as well as the persons do not constitute undisclosed income of the assessee as defined in the explanation to section 271AAB of the Act. Accordingly, the penalty levied under section 271AAB by the AO and confirmed by the ld. CIT (A) is not sustainable and liable to be deleted.”

Thus on identical facts, the Tribunal has held that entries in the seized documents representing the payment on account of land in the absence of other essential facts regarding the particulars of land as well as persons do not constitute undisclosed income of the assessee as defined in the explanation to section 271AAB of the Act. In the case in hand, on the analysis of facts and in the light of definition of ‘undisclosed income’ given in the explanation to section 271AAB of the Act, the entries in the seized material of payment for land without any underlying assets being the land do not constitute undisclosed income of the assessee. Accordingly by following the earlier decision of this Tribunal, the penalty levied under section 271AAB is deleted.

Order is pronounced in the open court on 27/07/2020.