SHRI NAGENDRA CHOUDHARY,JAIPUR vs. DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2, JAIPUR

PER VIJAY PAL RAO, JM : This appeal by the assessee is directed against the order dated 15.12.2017 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. There is a delay of 59 days in filing the present appeal. The assessee has filed an application for condonation of delay which is supported by the affidavit. 2. We have heard the ld. A/R as well as the ld. D/R on the condonation of delay. The ld. Counsel for the assessee has submitted that the delay in filing the appeal is due to inadvertent and bonafide mistake on his part as he could not prepare the appeal in time though the assessee handed over all the papers and instructed him for filing the appeal before the Tribunal. Only when the assessee enquired about

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the status of the appeal, he realized that the appeal was not filed and accordingly he prepared the appeal in the last week of April, 2018 and then filed the same on 4th

May, 2018. The ld. Counsel has thus submitted that the delay in filing the appeal is

due to bonafide and inadvertent mistake on the part of the Counsel, and therefore it

is a reasonable cause. He has relied upon the decision of Hon’ble Andhra Pradesh

High Court in case of Voltas Limited vs. DCIT, 241 ITR 471 (AP) as well as decision

of Hon’ble Supreme Court in case of Collector Land Acquisition vs. Mst. Katiji, 167

ITR 471 (SC). The ld. A/R has further contended that mistake on the party of the

Counsel is a bonafide mistake and it would be a reasonable cause for explaining the

delay in filing the appeal. He has also relied upon the decision of Hon’ble Supreme

Court in case of Rafiq C. Munshilal, AIR 1981 (SC) 1401. Thus the ld. A/R has

pleaded that the delay in filing the appeal may be condoned.

record. The assessee has explained the delay due to inadvertent and bonafide

mistake on the part of the Counsel of the assessee who could not prepare the

appeal in time. We have gone through the affidavit filed by the ld. Counsel of the

assessee wherein he has explained the cause of delay as a mistake on his part for

not preparing the appeal in time. There is no quarrel on the point that the

reasonableness of cause has to be liberally considered so as to provide an

opportunity to the parties to have a decision on merits. It is also settled proposition

of law that the parties should not suffer for the lapses on the part of the Counsel

specially when the delay was not inordinate. Accordingly, we find that the

explanation and reasons as given in the application for condonation of delay as well

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as affidavit are bonafide as the assessee would not achieve any ulterior purpose in

filing the present appeal belatedly. In view of the facts and circumstances as

discussed above as well as various decisions relied upon by the assessee, we are

satisfied that the assessee has explained a reasonable cause for delay in filing the

appeal. Accordingly, the delay of 59 days in filing the present appeal is condoned.

“ 1. That on the facts and circumstances of the case the learned CIT (A) has erred in upholding the penalty order passed u/s 271AAB of the Income Tax Act, 1961 which is void ab-initio and therefore deserves to be quashed.

The assessee has also raised two additional grounds which read as under :-

“ 1. That on the facts and in the circumstances of the case ld. CIT (A)-IV has grossly erred in law and facts by confirming the order of the ld. AO u/s 271AAB of the IT Act on the basis of notices dt. 23/03/2016 & 22/09/2016 which are void ab-initio and issued without mentioning the specific provision of section for levy of penalty and without application of mind is bad in law and therefore initiation of penalty proceedings was not proper.

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additional grounds. The assessee has raised two grounds. As regards the additional

ground no. 1, the assessee has objected the validity of initiation of penalty

proceedings on the ground that the AO has issued show cause notice without

mentioning the specific provision of section for levy of penalty and without

application of mind. Therefore, the show cause notice issued by the AO suffers from

illegality and consequently the initiation of penalty proceedings as well as

consequential order are vitiated as void ab-initio. The ld. A/R has further submitted

that for adjudication of the ground, no new facts are required to be investigated,

therefore, the additional ground raised by the assessee may be admitted for adjudication. As regards 2nd additional ground, the ld. A/R has not pressed the

same for admission at this stage.

by the assessee first time at this stage and contended that when the assessee has

not objected to the validity of show cause notice either before the AO or before the

ld. CIT (A), then he cannot be permitted to question the validity of show cause

notice at this stage. Even otherwise, the show cause notice has clearly mentioned

the default on the part of the assessee being undisclosed income found and

disclosed during the course of search and, therefore, the penalty was initiated under

section 271AAB of the Act. He has further contended that at the time of initiation of

proceedings, the AO is not required to mention the clause and sub-clause of the

provision but once the conditions as provided under section 271AAB are satisfied

which include search and seizure operation, disclosure and surrender of undisclosed

income on the part of the assessee, then the provisions of section 272AAB are

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attracted for levy of penalty in addition to tax on such undisclosed income. He has

further contended that once the show cause notice has clearly made out the

initiation of proceedings under section 271AAB of the Act, then there is no defect or

illegality in the show cause notice issued by the AO.

record. At the time of admission of the additional ground, we need not go into the

merits of the validity of the show cause notice but the only aspect to be considered

at the stage of admission of additional ground is whether the issue raised in the

additional ground is legal in nature which does not require investigation of any fresh

facts or evidence, but the same can be adjudicated on the basis of the facts and

evidence available on record. In the case in hand, there is no dispute that the issue

raised in the additional ground is regarding validity of initiation of penalty

proceedings under section 271AAB of the Act and particularly the validity of show

cause notice issued by the AO under section 271AAB read with section 274 of the Act dated 23rd March, 2016. Hence for adjudication of this issue, no investigation of

facts or evidence is required but it can be adjudicated by considering the show cause

notice itself in the light of the undisputed facts of the case. Thus in view of the

decision of Hon’ble Supreme Court in case of NTPC vs. CIT, 229 ITR 383 (SC), the

additional ground no. 1 raised by the assessee raising the issue of validity of

initiation of proceedings is admitted for adjudication on merits. As regards ground

no. 2, the ld. A/R has not pressed this ground, therefore, the same is not admitted.

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Ground No. 1 is regarding validity of penalty order passed under

section 271AAB of the IT Act.

raising a plea that the initiation of penalty proceedings is not valid. The ld. A/R of the assessee has submitted that the AO issued two show cause notices dated 23rd March, 2016 and 22nd September, 2016 both these show cause notices were very

vague and issued in routine manner. The AO has not mentioned under which clause

assessee is liable for penalty. Even the amount of undisclosed income which was

liable for penalty under section 271AAB was also not mentioned in the show cause

notices issued by the AO. The ld. A/R has pointed out that the AO has not applied

his mind but a vague notice was issued without giving any ground for levy of penalty

for which the assessee could put his defence. Once the assessee was not given a

proper opportunity to counter the show cause notice as the AO has not pointed out

a specific default for levy of penalty, then the initiation of penalty proceedings are

not valid and consequential penalty order passed under section 271AAB is liable to

be set aside. In support of his contention he has relied upon the decision of Hon’ble

Karnataka High Court in case of Manjunatha Cotton & Ginning Factory, 359 ITR 565

(Kar.) and submitted that the decision of Hon’ble Karnataka High Court was

challenged by the revenue before the Hon’ble Supreme Court in case of CIT vs. M/s.

SSA’s Emerald Meadows, but the SLP filed by the revenue is dismissed, reported in

242 Taxman 180. Thus the notice without specifying the default and ground is

invalid and consequently the order passed under section 271AAB is not sustainable

and liable to be set aside. The ld. A/R has also relied upon the decision of

Coordinate Bench of this Tribunal in case of Ravi Mathur vs. DCIT in ITA No.

7 ITA No. 611/JP/2018 Shri Nagendra Choudhary, Jaipur. 969/JP/2017 dated 13.06.2018 as well as decision dated 24th July, 2018 in case of

Dinesh Kumar Agarwal vs. ACIT in ITA No. 855 & 856/JP/2017.

and seizure action in the case of the assessee and during the course of search and

seizure action the assessee has disclosed and surrendered an amount of Rs.

1,50,00,000/- as undisclosed income for the year under consideration, then the

conditions as specified under section 271AAB of the IT Act are satisfied. Therefore,

the initiation of proceedings under section 271AAB becomes automatic once the

conditions provided under section 271AAB are fulfilled. The assessee has not

disputed all these basic facts of search and seizure action and disclosure of

undisclosed amount, therefore, the question of validity of show cause notice does

not arise. At the time of initiation of penalty proceedings what is required to be

seen is the satisfaction of the primary condition of search and seizure action and

disclosure of undisclosed income. The assessee has surrendered the said amount

and also paid the tax thereon and declared in the return of income, thus the

provisions of section 271AAB are attracted in the case of the assessee and there is

no scope of any other provision of levy of penalty can be applied. He has relied

upon the orders of the authorities below.

record. The AO has issued two show cause notices under section 271AAB read with section 274 of the IT Act dated 23rd March, 2016 and 22nd September, 2016. For

ready reference we reproduce the show cause notices as under :-

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From the contents of these show cause notices, it is clear that though the AO has

mentioned that he propose to levy the penalty under section 271AAB of the IT Act,

however, the AO has not specified on which amount of undisclosed income the

penalty was proposed to be levied and whether the assessee was guilty of levy of

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penalty @ 10%, 20% or 30% as provided under clause (a) to (c) of section

271AAB(1) of the IT Act. It is pertinent to note that in the case in hand the

assessee has disclosed a sum of Rs. 1,47,00,000/- based on seizure material AS-6

containing the entries of advances for land. Apart from the said disclosure, the

assessee has also surrendered a sum of Rs. 3,00,000/- on account of any other

illegality in the books of account of the assessee. We find that the said Rs.

3,00,000/- surrendered by the assessee does not represent any undisclosed income

on account of any entry or money, bullion, jewellery or other valuable articles.

Therefore, in the absence of any incriminating material found or detected during the

search, post search or even during the assessment proceedings, the said surrender

of Rs. 3,00,000/- would not constitute undisclosed income as defined in explanation

to section 271AAB of the IT Act. Therefore, in the absence of specifying the details

of undisclosed income against which the AO proposed to levy the penalty as well as

the quantum of penalty whether equivalent to 10%, 20% or 30% of the undisclosed

income, the show cause notices issued by the AO are very vague. At the outset, we

note that an identical issue has been considered by the Coordinate Bench of this

Tribunal in the case of Dinesh Kumar Agarwal vs. ACIT (supra) in para 8 and 9 as

under :-

“8. Having considered the rival submissions as well as relevant material on record we note that there is no quarrel on the fact that in the show cause issue U/s 271AAB r.w.s. 274 of the Act the AO has not specified the particular clause which is applicable or propose to be applied in the case of the assessee for levy of penalty U/s 271AAB of the Act. Thus the AO has not mentioned in the show cause notice to

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but what would be the quantum of penalty to be levied U/s 271AAB of the Act whether it would be 10% or 20% or 30% of the undisclosed income in terms of clause-(a) to (c) of section 271AAB(1) of the Act. We further note that an identical issue was considered by this Tribunal in case of Shri Ravi Mathur vs. DCIT vide order dated 13.06.2018 in ITA No. 969/JP/2017 in paras 4 to 7 as under:-

“4. We have considered the rival submissions as well as relevant material on record. A search was conducted under 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

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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;

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(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

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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 the 54[Principal (B) otherwise not been disclosed to Chief or 54[Principal Commissioner 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 @

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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.

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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 :-

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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

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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.

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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. 7. As regards the validity of notice under section 274 for want of specifying the ground and default, we find that when the basic condition of the undisclosed income not recorded in the books of accounts does not exists, then the same has to be specified by the AO in the show cause notice and further the AO is required to give a finding while imposing the penalty under section 271AAB. Even if the AO is satisfied and come to the conclusion that the assessee has not recorded the undisclosed income in the books of accounts or in the other documents / record maintained in normal course relating to specified previous year, the show cause notice shall also specify the default committed by the assessee to attract the penalty @ 10% or 20% or 30% of the undisclosed income. There is no dispute that the AO has not specified the default and charge against the assessee which necessitated the levy of penalty under section 271AAB of the Act. Consequently, the assessee was not given an opportunity to explain his case for specific default attracting the levy of penalty in terms of clauses (a) to (c) of section 271AAB(1) of the Act. The Channai Bench of the Tribunal in the case of DCIT vs. Shri R. Elangovan (supra) at pages 7 to 10 has held as under :-

“ It is clear from the Sub Section (3) of Section 271 AAB that Sections 274 and Section 275 of the Act shall, so far as may be, apply. 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:-

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‘’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 of the case?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the penalty notice under Section 274 r.w.s. 271(1)(c) is bad in law and invalid despite the amendment of Section 271(1B) with retrospective effect and by virtue of the amendment, the assessing officer has initiated the penalty by properly recording the satisfaction for the same?

(3) Whether on the facts and in the circumstances of the case, the Tribunal was justified in deciding the appeals against the Revenue on the basis of notice issued under Section 274 without taking into consideration the assessment order when the assessing officer has specified that the assessee has concealed particulars of income?

In the earlier case of Manjunatha Cotton and Ginning Factory (supra) their lordship had observed as under:-

‘’Notice under section 274 of the Act should specifically state the grounds mentioned in section 271(1)(c), i.e., whether it is for concealment of income or for furnishing of incorrect particulars of income. Sending printed form

21 ITA No. 611/JP/2018 Shri Nagendra Choudhary, Jaipur.

where all the grounds mentioned in section 271 are mentioned would not satisfy the requirement of law ;

The assessee should know the grounds which he has to meet specifically. Otherwise, the principles of natural justice are offended. On the basis of such proceedings, no penalty could be imposed on the assessee ; ) taking up of penalty proceedings on one limb and finding the assessee guilty 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 at para 5 above was not valid. Ex-consequenti, the penalty order is set aside. 6. Since we have set aside the penalty order for the impugned assessment year, the appeal filed by the Revenue has become infructuous.”

In view of the decision of the Chennai Bench (supra), the show cause notice issued by the AO in the case of the assessee is not sustainable.”

Thus, the Tribunal in the said decision has arrived to the conclusion that the levy of penalty U/s 271AAB of the Act is not mandatory but the AO has discretion to take a decision and the same shall be based on judicious decision of the AO. 9. As regards the validity of notice U/s 274 for want of specifying the ground and default of the assessee the Tribunal has held that the AO is

22 ITA No. 611/JP/2018 Shri Nagendra Choudhary, Jaipur.

required to specifically state in the show cause notice the gfound and the default committed by the assessee as to attract the penalty U/s 271AAB of the Act @ 10% 20% or 30% of the undisclosed income. In the absence of specifying the default and charge against the assessee for which the penalty was proposed to be levied the show cause notice issued by the AO and initiation of proceeding for levy of penalty U/s 271AAB are not valid. Hence, following the earlier order of this Tribunal we hold that the show cause issued by the AO in the case assessee is not sustainable and liable to the quashed.”

The show cause notices issued by the AO in the case of the assessee are also silent

about the details of undisclosed income as well as specifying the clauses for levy of

penalty whether it is 10%, 20% or 30% of the undisclosed income. Further, it is

also pertinent to note that a part of the surrendered amount to the extent of Rs.

3,00,000/- is not based on any incriminating material or any illegality in the books of

account, then the same cannot be held as undisclosed income for the purpose of

section 271AAB of the Act. Though the issue of undisclosed income regarding the

balance amount surrendered by the assessee based on the entries in the seized

material is a debatable issue, however, the amount of Rs. 3,00,000/- not based on

any incriminating material is in any case not an undisclosed income as defined in

explanation to section 271AAB of the Act. Hence following the earlier decision of

this Tribunal as well as the decision of Hon’ble Jurisdictional High Court in case of

Sheveta Construction Co. Pvt. Ltd. in DB IT Appeal No. 534/2008 dated 06.12.2016,

the initiation of penalty proceeding is not valid and consequently the order passed

under section 271AAB of the IT Act is not sustainable in law.

23 ITA No. 611/JP/2018 Shri Nagendra Choudhary, Jaipur.

Ground No. 2 is regarding the merits of levy of penalty of Rs.

15,00,000/- under section 271AAB of the IT Act.

income in the case of the assessee. The assessee was forced to admit and surrender

income in statement recorded u/s 132(4). Such forceful admission does not comply

with the spirit of the law. The provisions of section 271AAB(a)(ii) clearly requires

that such undisclosed income admitted u/s 132(4) requires to be substantiated.

That means the assessee is required to specify the manner in which such income

has been derived and further substantiate the same by furnishing material available

with him. In this case no such substantiation was done as in fact there existed no

undisclosed income. The entire disclosure was on paper and assessee admitted such

disclosure to avoid undue harassment and unwanted litigation. In the circumstances

no penalty is called for under section 271AAB of the Income Tax Act, 1961. Further,

assessee seeks to rely on the judgment of Suresh Chandra Mittal reported in 251

ITR 9 (SC) Larger Bench. In this case it has been held in categorical terms that

surrender made by the assessee upon persistent queries of AO in a search matter

should be treated as bona fide surrender. It is submitted that so far as the case of

the present assessee is concerned the facts are on better footage. He has further

contended that the ld. CIT (A) has confirmed the penalty levied under section

271AAB of the Act by holding that the penalty under section 271AAB is mandatory

and there is no discretion with the AO but to impose the penalty. He has contended

that the provisions of section 271AAB begins with the word “May” and, therefore,

the AO has the discretion to levy the penalty after considering the facts as well as

the explanation and contention of the assessee. In support of his contention, the ld.

24 ITA No. 611/JP/2018 Shri Nagendra Choudhary, Jaipur.

A/R submitted that it is settled position of law that penalties are not compulsory nor

mandatory but are always discretionary considering the overall facts and

circumstances of the case. In imposition of penalty mens rea also plays a vital role

before imposing the penalty, it is always compulsory to prove the mens rea of the

assessee as bona fide for concealment of income or for advancement of any

provisions of law in force intentionally. In the case of assessee the learned

Assessing Officer has not mentioned anything in the assessment order passed by

him on 28.12.2016 u/s 143(3)/153B(1)(b) of the Income Tax Act, 1961. He has

relied upon the decision of the Coordinate Bench of this Tribunal in case of Ravi

Mathur vs. DCIT (supra) as well as in case of Dinesh Kumar Agarwal vs. ACIT

(supra). The ld. A/R has further contended that the assessee is an individual and

derives income from salary, house property and other sources and he is not required

to maintain regular books of account under section 44AB of the Act. Therefore, the

entries recorded in the diary found during the search cannot be held as undisclosed

income as the said diary can be considered as other record maintained in regular

course. He has also relied upon the decision of the coordinate Bench of this Tribunal

in case of Ravi Mathur vs. DCIT (supra).

12.1. The next contention of the ld. A/R is that the confession/surrender made

under section 132(4) would not ipso facto be held as undisclosed income for the

purpose of levy of penalty under section 271AAB of the IT Act. The entries are only

out go of money and even these are not ascertained transactions but only the

amount in the name of advance is mentioned. Therefore, in the absence of any

corresponding asset or any other documentary evidence to show that the assessee

is having a right to the extent of said amount either in the particular land or to

25 ITA No. 611/JP/2018 Shri Nagendra Choudhary, Jaipur.

recover the said amount from the alleged person, these entries would not qualify as

undisclosed income under section 271AAB of the Act. In support of his contention

he has relied upon the decision in case of Ravi Mathur vs. DCIT (supra) and Dinesh

Kumar Agarwal vs. ACIT (supra).

made the surrender of undisclosed income based on the incriminating material found

and seized during the course of search, then it is an apparent case of undisclosed

income attracting the levy of penalty under section 271AAB of the IT Act. He has

further contended that the assessee has not only disclosed the said income but also

declared the same in the return of income and paid the tax and, therefore, there is

no dispute regarding the nature of surrender made by the assessee. The assessee

himself has explained the nature of income in the statement recorded under section

132(4) and, therefore, the amount of Rs. 1,50,00,000/- falls in the definition of

Undisclosed Income. He has relied upon the orders of the authorities below.

record. The assessee is an Individual and is a director in 5 companies doing the

business. The assessee in his Individual capacity is not doing any business but

earning the income from salary, rent and other sources. The main source of income

of the assessee is remuneration received from the various companies in which the

assessee is a director. A search and seizure action under section 132 of the IT Act was conducted on 4th September, 2013. The statement of the assessee was

recorded under section 132(4) of the IT Act in the capacity of Director of various

companies. During the said statement, the assessee has surrendered a sum of Rs.

1,47,00,000/- on account of the entries in Annexure A-6 showing the various

26 ITA No. 611/JP/2018 Shri Nagendra Choudhary, Jaipur.

amounts for purchase of land. Though the said surrender was made by the assessee

in his individual capacity, however, as it is apparent from the record that neither in

the past nor in the future the assessee has shown any business income or any

business activity of purchase and sale of land. We further note that the various

companies in which the assessee is a director, are in the business of real estate and

purchase and sale of land. Therefore, it appears that even if the transactions

recorded in the seized material AS-6 are regarding the advance for purchase of land,

such transactions are in ordinary and regular manner are carried out by the

companies in which the assessee is director and not by the assessee in his personal

capacity. In any case, there are total 6 (six) transactions of advance total

amounting to Rs. 1,47,00,000/- on account of land. These transactions themselves

do not represent any undisclosed income as per the definition in explanation to

section 271AAB of the Act. These transactions are out go and expenditure on the

part of the assessee and, therefore, the source of these transactions can be income

of the assessee which can be held as undisclosed income but neither there is any

material or any entry found during the course of search and seizure action to show

any income of the assessee which is not recorded in the books. Further, these are

only the entries of advances but no details of person or any detail of any land is

recorded in the seized material. Such vague entries itself do not represent any

asset, money, bullion or even the income of any manner/nature but these are simple

out go of money. Even the corresponding asset is not reflected in these entries

recorded in the seized material. Therefore, until and unless a right is created and

vested with the assessee to have an asset equivalent to amount or other right to

recover the said amount from the persons to whom the amounts were paid, these

27 ITA No. 611/JP/2018 Shri Nagendra Choudhary, Jaipur.

entries cannot be held as income of the assessee much less the undisclosed income

of the assessee. On careful perusal of the entries, we note that very vague

description is there, only amount is mentioned against land but there is no detail of

any person or particular details of the land is given in these entries. Further, apart

from these entries, there was no document or other material found to show that any

transaction of purchase of land has taken place between the assessee and other

party. Even the receipts in respect of these payments were not found or detected

by the Investigation Wing. Thus the mere entry of out go in the seized material

would not constitute undisclosed income as defined in explanation to section 271AAB

of the Act. The Coordinate Bench of this Tribunal in case of Ravi Mathur vs. DCIT

(supra) as well as in case of Dinesh Kumar Agarwal vs. ACIT (supra) has considered

an identical issue. In case of Dinesh Kumar Agarwal vs. ACIT (supra), the Tribunal

in para 12 has considered this issue as under :-

“12. We have considered the rival submissions as well as relevant material on record. During the course of search and seizure proceeding a pocket diary was found and seized containing entries of various amount against the different persons. When this seized material was confronted with the assessee he surrendered undisclosed income of Rs. 8,13,41,547/-. The Assessing Officer has accepted the explanation of the assessee regarding substantiation of the manner for earning the undisclosed income in question. The details of the entries in the seized material disclose certain amounts are recorded as advance to the persons, expenditure on construction of house and expenditure on the marriage of daughter. Thus, measure amount of undisclosed

28 ITA No. 611/JP/2018 Shri Nagendra Choudhary, Jaipur.

income consisted the sundery advances. All these transactions do not pertain to the business activity of the assessee but these are either advances given by the assessee or expenditure incurred on construction of the house or expenditure on the marriage of the daughter. Therefore, the entries in the seized material are not the transactions generating income except some interest income. At the outset we note that the Coordinate Bench of this Tribunal in case of Shri Ravi Mathur vs. DCIT (supra) has considered the issue of levy of penalty U/s 271AAB in paras 8 and 9 as under:-

“8. Even otherwise, without restricting ourselves to the validity of show cause notice, we note that section 271AAB of the Act contemplates imposition of penalty pursuant to the disclosure of undisclosed income in the statement recorded under section 132(4) and, therefore, the levy of penalty under this section does not depend on the addition made during the assessment proceedings. Hence the penalty proceedings under section 271AAB are completely independent of the enquiry and finding of the AO in the assessment order except for the limitation provided as per section 275 of the Act. We have already held that the penalty is not automatic but the AO has to take a decision to impose the penalty after giving an opportunity of hearing to the assessee in terms of section 274 of the Act. Thus the AO in the proceedings under section 271AAB of the Act has to first decide that the conditions prescribed under the said section are satisfied for levy of penalty and then to further take a decision after considering the explanation of the assessee for non compliance of any of the conditions under clauses (a) to (c) of sub-section (1) regarding the quantum of penalty. The primary condition for levy of penalty is the existence of undisclosed income as per the disclosure made by the assessee under section 132(4). The term ‘undisclosed income’ has been defined in Explanations to section 271AAB. Therefore, as per the definition provided in the Explanation, the undisclosed income may have various forms and the same is not recorded in the books of accounts or other documents maintained in normal course relating to the specified previous year. As per sub-clause (i) of clause (c) of

29 ITA No. 611/JP/2018 Shri Nagendra Choudhary, Jaipur.

the Explanation, the undisclosed income means any income of the specified previous year represented by any money, bullion, jewellery or valuable article or things or any entry in books of accounts or other documents or transactions found in the course of search. This definition is further subject to two conditions that the said income has not been recorded on or before the date of search in the books of accounts or other documents maintained in the normal course relating to such previous year or otherwise not being disclosed to the Principal Chief Commissioner, Principal Commissioner or Commissioner before the date of search. The other forms of undisclosed income as defined in sub clause (ii) is any entry in respect of expenses recorded in the books of accounts or other documents maintained in the normal course. Therefore, the clause (ii) contemplates undisclosed income in the form of false entries of expenses recorded in the books of accounts which is not relevant for the case in hand.

Since in the case of assessee the transactions of investment were found in the diary, therefore, whether these entries in the diary constitute undisclosed income as per clause (c)(i) of Explanation to Section 271AAB of the Act. The assessee is an Individual and for the year under consideration the assessee has not reported any business income nor it was assessed by the AO. Therefore, it is clear that the assessee was not required by any mandate of law to maintain regular books of accounts. In the computation of income, the assessee has shown income from Salary, income from house property and income from other sources. The returned income was accepted by the AO while framing the assessment under section 143(3) and hence assessee’s case does not fall in the category where the regular books of accounts are mandatory. The entries of investment in real estate were found recorded in the diary and in the absence of any other document maintained in the normal course relating to the year under consideration, the entries in the diary are to be considered as recorded in the documents maintained in the normal course. It is not the case of the revenue that the assessee has recorded the other transactions in the other documents maintained in the regular course relating to the year under consideration and only these entries are recorded in the diary. Since the levy of penalty under section 271AAB is not based on the addition and enquiry conducted by the AO in the assessment proceedings, therefore, it is incumbent on the AO to conduct a proper examination of facts, circumstances and explanation furnished by the assessee before arriving to the conclusion that penalty under section

30 ITA No. 611/JP/2018 Shri Nagendra Choudhary, Jaipur.

271AAB is leviable and further whether it is 10% or 20% or 30% of such undisclosed income. Therefore, the AO is under statutory obligation to examine all the issues during the proceedings under section 271AAB after giving the assessee an opportunity to explain the charges/grounds on which the penalty is proposed to be levied. Hence it is a pre-requisite condition that the AO first specify the charges against the assessee and to make known the assessee of his default so as to afford an opportunity to explain the default/charges so brought against the assessee. Without considering the explanation of the assessee on the specific default, the order passed by the AO under section 271AAB suffers from serious illegality and therefore not sustainable in law. When a stringent action is provided in the Statute against the default committed by the assessee, then it also cast an equally stringent and strict duty on the authority responsible to take such action. Therefore, when the provisions for levy of penalty under section 271AAB is a specific provision to deal with the undisclosed income and it provides a strict penal action then the corresponding duty of the tax authority is also equally stringent. The AO cannot escape from following the strict mandatory requirement of law and particularly the principle of natural justice. The AO has neither specified the grounds and clause of section 271AAB nor has dealt with the same in the impugned order passed under section 271AAB. The AO has also not given a finding that the case of the assessee falls in the definition of undisclosed income provided under clause (c)(i) of Explanation to section 271AAB. When the transactions of investment in real estate are recorded in the diary being other documents maintained by the assessee for the said purpose, then in the absence of any requirement of maintaining regular books of accounts by the assessee, the case of the assessee would not fall in the definition of undisclosed income as per clause (c) of Explanation to section 271AAB of the Act.

“3. We have heard rival submissions and gone through the facts and circumstances of the case. We find that the issue involved herein is squarely covered in favour of the assessee in the case of DCIT vs Manish Agarwala (another member in the same Nezone

31 ITA No. 611/JP/2018 Shri Nagendra Choudhary, Jaipur.

Group) in ITA No. 1479/Kol/2015 for AY 2013-14 dated 9.2.2018 by the order of this tribunal , wherein it was held as under:-

i) The assessee has substantiated the manner in which the income was derived. ii) Furnished the return of income therein and

iii) Paid the tax along with interest.

Based on the said finding, according to AO, the assessee satisfies the conditions enumerated in sec. 271AAB(i)(a) of the Act and thereafter levied ten percent of Rs.3 cr., which have been deleted by the impugned order of Ld. CIT(A).

32 ITA No. 611/JP/2018 Shri Nagendra Choudhary, Jaipur.

Next contention of Ld. AR is that sec. 271AAB of the Act is not mandatory because Parliament in its wisdom has used the word ‘may’ and not ‘shall’. So, according to him, it is the discretion bestowed upon the AO whether to initiate and impose penalty u/s. 271AAB of the Act. We agree with the said contention of Ld. AR because when a similar issue was adjudicated by ITAT Lucknow (the author of this order was a member of the Bench) in Sandeep Chandak & Ors. Vs. CIT (2017) 55 ITR (Trib) 209 and 2017 (5) TMI 675- ITAT-Lucknow in ITA No. 416, 417 and 418/LKW/2016 dated 30.01.2017 while adjudicating a case where penalty was levied under section 271AAB of the Act it was held that the provisions of Sec. 271AAB of the Act are not mandatory, which means that penalty need not be levied in each and every case wherever the assessee has made default as stated in clauses (a), (b) and (c) of the Act. Sub-section (1) of Sec. 271AAB of the Act uses the word “may” not “shall”. “May” cannot be equated with “shall” especially in penalty proceeding. Using the word “may” in our opinion, gives a discretion to the AO to levy the penalty or not to levy, even if the assessee has made the default under the said provision.” Therefore, the 2nd ground of Revenue fails and we hold that penalty u/s. 271AAB of the Act is not mandatory and is discretionary. Before proceeding further, we note that the ex parte order passed by the Coordinate Bench relied upon by Ld. DR, Manoj Beswal, supra, have been recalled in MA Nos. 218 to 220/Kol/2017 dated 12.01.2018 by observing as under:

“By virtue of these miscellaneous applications, the assessee seeks to recall the order passed by this Tribunal in I.T.A. Nos. 1471, 1475&1476/Kol/2015 in the hands of Amit Agarwal, Madan Lal Beswal and Manoj Beswal respectively for the assessment year 2013-14 on the ground that notice was not served on the assessee for the hearing and on certain factual error that had crept in the order of the Tribunal. The first preliminary objection raised by the Ld. AR was that the notice of hearing was not served on the assessee for the hearing scheduled on 06.11.2017 and hence, the assessee could not be present on the said date by way of personal appearance. The second objection raised by the Ld. AR was that the Tribunal had stated in para 9 of its order that the assessee himself had accepted that he is engaged in commodities trading business and therefore mandated to maintain books of accounts in terms of section 44AA of the Act and thereby inferring that the

33 ITA No. 611/JP/2018 Shri Nagendra Choudhary, Jaipur.

assessee had reported the profit from commodities trading business under the head “income from business or profession”. Based on this crucial finding, the Tribunal had concluded that since the transaction of commodities trading had not been entered by the assessee in his books of accounts as on the date of search on 01.08.2012 and thereby it takes the character of undisclosed income for which penalty u/s 271AAB of the Act is exigible. In this regard, we find that the Ld. AR drew our attention to the computation of the total income wherein the assessee had offered income from commodity trading only under the head income from other sources. We also find that the Ld. AO had also specifically stated in the body of the assessment order vide column no. 10 that the assessee is having only salary income and income from other sources. We find that due to the absence of the assessee at the time of hearing this particular fact had escaped the attention of the Tribunal. On perusal of the fact available on record, we find that the finding recorded by this Tribunal in para 9 of its order dated 10.11.2017 that the assessee is mandated to maintain books of accounts u/s 44AA of the Act is factually incorrect and deserves to be rectified. This mistake of primary fact had lead to a conclusion of upholding the levy of penalty u/s 271AAB of the Act. Hence, in these facts and circumstances and in view of the aforesaid mistake of primary fact rightly pointed out by the ld. AR , we deem it fit to recall the orders of this Tribunal dated 10.11.2017 in the case of aforesaid assessees.”

In the aforesaid scenario, the legal position is that an order which has been recalled for de novo adjudication, is no order in the eyes of law and so it cannot be treated as a precedent. Hence, the reliance placed by the Ld. DR in respect of assessee’s in the same group concern cases as decided by the Tribunal no longer survives and cannot be treated as covered against the assessee.

34 ITA No. 611/JP/2018 Shri Nagendra Choudhary, Jaipur.

from Other Sources”, which, according to Ld. AR was accepted as such by the AO and drew our attention to page one of assessment order, (not the penalty order) wherein we note that the AO has acknowledged that the assessee owned up Rs. 3 cr. as his income from commodity profit and it has been disclosed in his income and expenditure for AY 2013-14 under the head “income out of speculative business from sale of commodities”, and thereafter the AO confirmed the assessee’s claim and thereafter total income was assessed by the AO as per the return submitted by the assessee. In the light of the aforesaid facts discerned from assessment order, the assessee’s case is that for the first time in this AY he was doing unsystematic speculative activity which earned income and, it was brought under the head “Income from Other Sources”, and so, accordingly, he is not required to maintain books of account as stipulated in Sec. 44AA or Sec. 44AA(2)(ii) of the Act because, these provisions are only for assesses who are earning income under the head “Business or profession”. We note that Sec. 44AA or Sec. 44AA(2)(ii) of the Act casts a duty upon the assessee who are into “Business or Profession” and such assessee’s are bound to maintain books of account as stipulated therein. For appreciating this submission let us go through the provisions of law.

“44AA. (1) Every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette shall keep and maintain such books of account and other documents as may enable the [Assessing] Officer to compute his total income in accordance with the provisions of this Act. (2) Every person carrying on business or profession [not being a profession referred to in subsection (1)] shall,—

(i) if his income from business or profession exceeds [one lakh twenty] thousand rupees or his total sales, turnover or gross receipts, as the case may be, in business or profession exceed or exceeds [ten lakh] rupees in any one of the three years immediately preceding the previous year; or

(ii) where the business or profession is newly set up in any previous year, if his income from business or profession is likely to exceed [one lakh twenty] thousand rupees or his total sales, turnover or gross receipts, as the case may be, in business or

35 ITA No. 611/JP/2018 Shri Nagendra Choudhary, Jaipur.

profession are or is likely to exceed [ten lakh] rupees, [during such previous year; or

(iii) where the profits and gains from the business are deemed to be the profits and gains of the assessee under [section 44AE] [or section 44BB or section 44BBB], as the case may be, and the assessee has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business, as the case may be, during such [previous year; or]]

(iv) where the profits and gains from the business are deemed to be the profits and gains of the assessee under section 44AD and he has claimed such income to be lower than the profits and gains so deemed to be the profits and gains of his business and his income exceeds the maximum amount which is not chargeable to income-tax during such previous year,]

keep and maintain such books of account and other documents as may enable the [Assessing] Officer to compute his total income in accordance with the provisions of this Act.

(3) The Board may, having regard to the nature of the business or profession carried on by any class of persons, prescribe, by rules, the books of account and other documents (including inventories, wherever necessary) to be kept and maintained under sub-section (1) or sub-section (2), the particulars to be contained therein and the form and the manner in which and the place at which they shall be kept and maintained.

(4) Without prejudice to the provisions of sub-section (3), the Board may prescribe, by rules, the period for which the books of account and other documents to be kept and maintained under sub-section (1) or sub-section (2) shall be retained.]”

So from a reading of the above provisions which clearly stipulates that assessee who are carrying on business or profession shall keep and maintain such books of account and other documents which may enable the AO to compute the total income. We note that assessee in the statement of total income filed before the AO has shown income only under two heads (i) salary income (ii) income from other sources. We would like to reproduce the summary of total income of the assessee filed along with the return:

36 ITA No. 611/JP/2018 Shri Nagendra Choudhary, Jaipur.

Income from Salary Rs. 45,57,600 Income from Other sources Rs.3,00,24,047 Rs.3,45,81,647

37 ITA No. 611/JP/2018 Shri Nagendra Choudhary, Jaipur.

chargeable to tax u/s. 4 of the Act. The total income has to be computed in accordance with the provisions of the Act. Section 14 of the Act lays down that for the purpose of computation, income of an assessee has to be classified under five heads. It is possible for an assessee/individual/company to have five different sources of income, each one of it will be chargeable to Income Tax Act. Profits and gains of business or profession is only one of the heads under which an assessee’s income is liable to be assessed to tax. If an assessee has not commenced business there cannot be any question of assessment of its profits and gains of business. That does not mean that until and unless the assessee commences its business, its income from any other source will not be taxed as held by the Hon’ble Supreme Court in the case of Tuticorin Alkali & Chemicals Ltd. Vs. CIT (1997) 227 ITR 172 (SC). It has been further held that when the question is whether a receipt of money is taxable or not or whether certain deduction from that receipt is principles of law and not in accordance with accountancy practice. Further, the Hon’ble Apex Court held that the question as to whether a principal receipt is of the nature of income and falls within the charge of sec. 4 of the Act is a question of law which has to be decided by the Court on the basis of the provisions of the Act and interpretation of the term ‘income’ given in a large number of decisions of the Hon’ble Supreme Court, High Court and Privy Council. After taking note of the Apex Court order as above, we note that the AO in the assessment order after having accepted the statement of total income (supra) and the return wherein the assessee has shown the income from commodities under the head “Income from Other Sources” cannot now after perusal of “Income & Expenditure Account” determine the character of transaction in the penalty proceedings as “Income from Business or Profession” which approach/action is erroneous. We note that the assessee in his statement of total income along with return has classified his income under two heads (i) Salary and (ii) from other sources and the income of Rs. 3 cr. as income from other sources, which we find the AO has not contested in the assessment order, has thus crystallized and the necessary inference drawn is that assessee an individual who was admittedly a salaried person engaged in the previous year relevant to the assessment year under consideration (that too for the first time) in an activity from which he derived “Income from Other Sources” are not required to maintain books of account which are applicable only if the assessee was engaged in Business or Profession. However, we further note that the transactions which yielded income, the assessee had in fact

38 ITA No. 611/JP/2018 Shri Nagendra Choudhary, Jaipur.

maintained records from which the AO was able to deduce the true income and expenditure of the assessee. We note the AO in the assessment order has accepted the returned income comprising of income from salary and income from other sources by observing as under :

“Total income assessed as per return Rs.3,44,65,120/-”.

And further we note that the AO had specifically stated in the body of the assessment order vide column no. 10 that the assessee is having only salary income and income from other sources. Thus from a perusal of the assessment order, it is not in dispute that assessee is not engaged in any business. And the AO cannot change the character of income in a derivative proceeding which is an off-shoot of assessment proceedings i.e. the penalty proceedings without contesting and making a finding against the claim of the assessee in the assessment order as discussed above.

“Penalty where search has been initiated. '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, 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—

********

39 ITA No. 611/JP/2018 Shri Nagendra Choudhary, Jaipur.

Explanation – For the purposes of this section, -

(a) ……….

(b) ……….

(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 [Principal Chief Commissioner or] Chief Commissioner or [Principal 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.”

According to the Ld. AR, from the facts and circumstances described above, since the assessee is not engaged in business or profession, he does not require to maintain the books of account as per sec. 44AA or sec. 44AA(2) of the Act, therefore, the assessee’s case falls in the second limb i.e. “or other documents” as stipulated u/s. 271AAB Explanation (c) (supra) which describes undisclosed income for the purposes of this section which is very important to adjudicate this issue. Therefore, the question is when the search took place, the assessee’s transactions (in this case, the speculative transaction) has been found to be recorded in the “other documents” which is (retrieved from the assessee’s accountant’s drawer) and based on that the assessee declared Rs. 3 cr. during search and later returned income of Rs. 3 cr. as income under the head “Income from Other

40 ITA No. 611/JP/2018 Shri Nagendra Choudhary, Jaipur.

Sources” which was accepted by the AO in toto. We note that since the income under question (Rs. 3 cr.) was in fact entered in the “other documents” maintained in the normal course relating to the AY 2013- 14, which document was retrieved during search, hence, the amount of Rs. 3 cr. offered by the assessee does not fall in the ken of “undisclosed income” defined in Sec. 271AAB of the Act. So, Rs. 3 cr. which was commodity profit recorded in the other document maintained by the assessee which was retrieved during search cannot be termed as “undisclosed Income” in the definition given u/s. 271AAB of the Act. Since Rs. 3 cr. cannot be termed as “Undisclosed Income” as per sec. 271AAB of the Act, no penalty can be levied against the assessee. Therefore, we uphold the order of the Ld. CIT(A) on the aforesaid reasoning rendered by us.

Therefore, when the assessee is not required to maintain the books of account as per section 44AA, then the matter is required to be examined whether the alleged undisclosed income is recorded in the other documents maintained in the normal course as per clause (c) to Explanation to section 271AAB. Undisputedly the alleged income was found recorded in the diary which is nothing but the other record maintained in the normal course, thus the same would not fall in the definition of undisclosed income. Once the said income is found as recorded in the other documents maintained in the normal course, then it cannot be presumed that the assessee would not have disclosed the same in the return of income to be filed after about one year from the date of search. Hence, in view of the above facts and circumstances of the case as well as the various decisions on this point, we hold that the penalty levied under section 271AAB is not sustainable and the same is deleted.”

We find that the said decision of this Tribunal is applicable in the facts of the present case and accordingly, in view of the

41 ITA No. 611/JP/2018 Shri Nagendra Choudhary, Jaipur.

decision in case of Shri Ravi Mathur vs. DCIT (supra) we delete the penalty levy U/s 271AAB of the Act.”

In view of the facts and circumstances as discussed above and following the earlier

decisions of this Tribunal, we hold that the mere disclosure and surrender of the

amount by the assessee on account of some payments for land would not constitute

undisclosed income in the absence of corresponding asset and other material to

create any right in favour of the assessee. As we have already discussed in the

preceding paras that the surrender of Rs. 3,00,000/- by the assessee on account of

any other irregularity is not even the income of the assessee much less the

undisclosed income of the assessee when there was no deficiency found either

during the search and seizure proceedings or post search investigation or during the

assessment proceedings in the books of account of the assessee, therefore, the

penalty against the said surrender is highly arbitrary and illegal. Accordingly, the

penalty levied by the AO under section 271AAB is deleted.

Sd/- Sd/- ( jes'k lh- 'kekZ ) (fot; iky jkWo ½ (RAMESH C. SHARMA ) (VIJAY PAL RAO) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member

Jaipur Dated:- 10/06/2019. Das/

42 ITA No. 611/JP/2018 Shri Nagendra Choudhary, Jaipur.

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