KAVERI INFRA PROJECT PVT LTD,WARANGAL vs. DCIT, CENTRAL CIRCLE -1(3), HYDERABAD

Briefly stated relevant facts are that the assessee is a company, engaged in civil contract works. Assessee filed the return of income for the assessment year 2018-19 on 31/10/2018 declaring a total income of Rs. 7,15,21,990/-. Subsequently search and seizure operations under section 132 of the Income Tax Act, 1961 (for short “the Act”) were conducted on 09/08/2018. Notice under section 153A of the Act was issued and the assessee filed the return of income on 15/04/2019 by declaring an income of Rs. 8,13,21,990/-.

Learned Assessing Officer observed in the assessment order dated 30/04/2021 passed under section 153A of the Act, that during the course of search and seizure operations conducted in the premises of the assessee, it was observed that there were various employees present in the attendance roll of the assessee company, who also appeared in the list of sub-contractors; and that when such employee’s were questioned about the execution of sub-contracts, they stated that they did not execute any sub-contracts from the company and that the amounts credited to their accounts were withdrawn and given back in cash to the Managing Directors of the company.

The material that was found during the search and also the statements of the employees were confronted to the Managing Directors of the company. They admitted the same to be true and correct, and declared an additional income of Rs. 9,85,74,205/- in the hands of the assessee company. Subsequently in the return of income for the assessment year 2018-19, the assessee declared an additional income of Rs. 98 lakhs in tune with the declaration made during the course of search proceedings and accepting the same, learned Assessing Officer concluded the assessment of income of the assessee at Rs. 8,13,21,990/-.

While concluding the assessment as above, learned Assessing Officer initiated penalty proceedings under section 271AAB(1A) of the Act, and concluded the same by order dated 16/03/2022 with the levy of penalty of Rs. 29.4 lakhs being 30% of the additional income of Rs. 98 lakhs.

Aggrieved by such levy of penalty, assessee preferred an appeal before the learned CIT(A) and contended that though the employees of the assessee denied to have executed this contract works, the fact remains that the sub-contract works stood executed and, therefore, the natural inference must be that the assessee must have incurred such expenditure represented under the head ‘sub-contract’ to the so-called employee. It was further contended by the assessee before the learned CIT(A) that in the line of business conducted by the assessee there will be certain incidental expenditure and to meet the same, this expenditure is booked. In this process, there arose some confusion which is bound to occur, but as a matter of fact, the amount represented by the sub-contract was actually spent to complete the works undertaken from the Government. It was contended that mere admission of income in a statement recorded under section 132(4) of the Act, ipso facto does not constitute undisclosed income unless the same was tested on the parameters laid down by law. Assessee further pleaded that penalty cannot be levied on the basis on mere admission in a statement in the absence of incriminating evidence. Assessee placed reliance on certain decision which shall include Radhey Shyam Agarwal vs. DCIT [2017] 88 taxmann.com 336 (Jaipur) and CIT vs. Miss Lata Mangeshkar [1974] 97 ITR 696 (Bom) etc.

Learned CIT(A) considered the contentions of the assessee in the light of the material available on record. As a matter of fact, he found that the entries in the books of accounts were found to be bogus in respect of the sub-contract expenses, which were over booked by the assessee than actuals by taking accommodation bills and thereby suppressed the income, which fact could not have been detected without the search and seizure. Learned CIT(A) returned a finding that the modus operandi that has been followed by the assessee for over years is to inflate the expenditure and reduce the taxable income by taking accommodation bills from their own employees under the head ‘sub-contracts’ and it has been a conscious act of tax evasion, by resorting to undue influence on the subordinates. According to the learned CIT(A), it is only the seized material that lead to the admission of income by the assessee, and such disclosure is not at all voluntary. Recording so, learned CIT(A) dismissed the appeal.

Hence, the assessee is in this appeal before us contending that the provisions of section 271AAB of the Act are not applicable to the facts of the assessee’s case as the entire disclosures during the search proceedings was not based on any seized material, but was a disclosure made voluntarily under section 132(4) statement. There is no material to support the disclosure. Learned AR relied on the twin circulars of the CBDT which has been noted with approval in the judgment of S. Khadar Khan & Sons 300 ITR 157, affirmed by the Hon’ble Supreme Court in the same case reported in 352 ITR 480, and even on this ground, the levy of penalty is unsustainable. Further according to the learned AR, the levy of penalty is not mandatory, but discretionary, and it was noted and held by the Jaipur Bench of the Tribunal in the case of Padam Chand Pungliya vs. ACIT, 181 ITD 261, that any disclosure of additional income in the statement recorded under section 132(4) of the Act itself is not sufficient to levy penalty under section 271AAB of the Act, until and unless income so disclosed by assessee falls in definition of ‘un-disclosed income’ defined in Explanation to section 271BBA(1) of the Act. Learned AR placed reliance on the decision of the Hon’ble Delhi High Court in the case of CIT vs. Harjeev Aggarwal, 70 taxmann.com 95, for the principle that a statement recorded under section 132(4) of the Act can form basis for a block assessment only, if such statement relates to any incriminating evidence of undisclosed income unearthed during search. He further placed reliance on the decision of the Co-ordinate Bench of the Tribunal in the case of ACIT vs. Sri Mahender Kumar Agarwal, in dated 22/09/2023.

Per contra, learned DR submitted that it is not a case where the addition and the penalty are based merely on the statements recorded under section 132(4) of the Act, but the picture completes when we look into the statement where the Managing Directors’ attention was specifically drawn to the material that was seized during the course of search and seizure operations in the shape of Annexure: A/KIPL/OFF/01 and A/KIPL/OFF/02 in the context of the statements of the employees. He placed reliance on the decisions reported in PCIT vs. Sandeep Chandak [2018] 93 taxmann.com 405 (Allahabad), Sandeep Chandak vs. PCIT [2018] 93 taxmann.com 406 (SC), Sri Venkateswara Reddy Pachhia vs. DCIT in ITA No. 521/Hyd/2022. He brought to our notice that in assessee’s own case for assessment years 2015-16 and 2016-17 in and 511/Hyd/2022 on identical facts, penalty under section 271(1)(c) of the Act was confirmed. In respect of the decision in the case of ACIT vs. Sri Mahender Kumar Agarwal (supra), he submitted that in that case, the learned Assessing Officer did not point out any specific discrepancies in the books of the assessee pertaining to the additional income nor did he highlight any seized material and, at the same time, there is no finding from any seized material indicating that there is any concealment of income unearthed in the course of search or post search proceedings; whereas in this case, the seized material was confronted to the Managing Directors of the assessee in the light of the statements of the employees shown as ‘sub-contractors’.

In reply, learned AR submitted that the decisions in the case of Sandeep Chandak (supra) and Sri Venkateswara Reddy Pachhia (supra), have no application to the facts of the case, since in both the cases, the admission of undisclosed income was arising out of the incriminating material found during the search, apart from the fact that the penalty in the case of Sri Venkateswara Reddy Pachhia (supra), was under section 271AAC of the Act, which operates in a different field and not akin to section 271AAB of the Act.

We have gone through the record in the light of the submissions made on either side. Originally, in the return filed under section 139 of the Act, the assessee declared income at Rs. 7,15,21,990/- and in the return filed under section 153A of the Act, the assessee declared the income at Rs. 8,13,21,990/-. The difference was undisputedly made while considering the sub-contract expenses. The so-called sub-contractors who are in fact the employees of the assessee, in their statement recorded denied having executed any sub-contracts, or execution of such sub-contract work or retaining the amounts remitted to their bank accounts towards such sub-contracts. They stated that immediately after remittance of amounts in their bank accounts, they withdrew the same and paid to the Managing Directors in cash. There is no dispute in respect of the material that was seized, namely, Annexure: A/KIPL/OFF/01 and A/KIPL/OFF/02, which were loose sheets as well as the back up of system containing the books of account of the assessee and also certain other material.

When confronted with the seized material and the statements of the so called sub-contractors, who are actually the employees of the assessee, the Managing Directors categorically admitted the statements made by Shri Ram Prasad, Jr. Accountant, Shri K. Ravinder Reddy, Shri B. Sanjeev Reddy, employees and Shri Ponugoti Paripurnachary, an Accountant of the assessee to be true and correct; whereas all such four persons in one voice stated that they never undertook any sub-contract from the assessee, the amount credited to their bank account towards sub-contract was returned to the Managing Directors. It is only in this context the Managing Directors surrendered a sum of Rs. 9,85,74,205/-. It is, therefore, amply clear that what was booked as sub-contract expense in the original return, having been found to be a bogus one on that heading, was surrendered subsequently, and assessed to the income of the assessee. In the circumstances it cannot be stated that the additional income that was assessed was solely based on the statements recorded under section 132(4) of the Act. As rightly pointed out by the learned CIT(A), the material seized during the search and seizure operation under section 132 of the Act ultimately lead to the admission of income by the assessee and it was but for the search.

Another circumstance that weighs consideration in these proceedings is that the quantum assessment was allowed to become final and on identical facts and circumstances, penalty under section 271(1)(c) of the Act was upheld by a Co-ordinate Bench of the Tribunal in assessee’s own case for the assessment years 2015-16 and 2016-17. Though the learned AR argued that the elements and degree of proof required to hold the assessee liable for penalty under section 271AAB of the Act are altogether different from those under section 271(1)(c) thereof also does not help the case of the assessee because under section 271AAB of the Act, the undisclosed income also means any income by any entry in respect of an expense recorded in the books of accounts and in this case, the additional income is the result of falsification of the sub-contract expense, recorded in the books of the assessee.

For the reasons recorded in the foregoing paragraphs, we are of the considered opinion that this appeal is devoid of merits and is liable to be dismissed. Grounds of appeal are accordingly dismissed.

In the result, appeal of the assessee is dismissed. Order pronounced in the open court on this the 21st day of November, 2023.