SHRI VIMAL CHAND SURANA,JAIPUR vs. DEPUTY COMMISSIONER OF INCOME TAX, JAIPUR

This appeal by the assessee is directed against the order dated 14.12.2017 of ld. CIT (A)-4, Jaipur arising from penalty order passed under section 271AAB of the IT Act for the A.Y. 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 I.T. 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.

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.”

2. The assessee is an Individual and about 80 years of age. The assessee derives income from salary, house property and other sources. The assessee is partner in the partnership firm and also director in various companies. There was a search and seizure under section 132 of the IT Act on 15.10.2014 at the residence and business concern of M/s. Bhuramal Rajmal Surana, a proprietorship concern of Shri Vimal Chand Surana HUF. During the course of search, certain incriminating documents containing the entries of advance, unaccounted stock at business premises as well as residence, cash at the residence of the assessee and jewellery at the residence of the assessee were found and seized. In the statement recorded under section 132(4) of the IT Act, the assessee disclosed/surrendered income of Rs. 10,99,80,000/-. The assessee filed his return of income under section 139(1) on 2nd September, 2015 declaring total income of Rs. 11,26,92,000/- including the surrender of additional income of Rs. 10,99,80,000/-. The AO while completing the assessment under section 143(3) on 20th December, 2016 accepted the returned income. However, penalty proceedings under section 271AAB were initiated by issuing notice under section 274 read with section 271AAB of the IT Act. The AO passed the penalty order under section 271AAB on 14.06.2017 whereby a penalty of Rs. 1,09,98,000/- being 10% of undisclosed income was levied. The assessee challenged the action of the AO before the ld. CIT (A) but could not succeed.

3. Before us, the ld. A/R of the assessee has submitted that the ld. CIT (A) has confirmed the levy of penalty by holding that levy of penalty under section 271AAB is mandatory in nature and, therefore, once the assessee has disclosed undisclosed income, the penalty under section 271AAB is mandatory and there is no immunity or escapement from imposition of the penalty. The ld. A/R has further submitted that the initiation of proceedings under section 274 read with section 271AAB are also not valid when the AO has not specified the grounds in the show cause notice. The ld. A/R has contended that the AO has neither specified the undisclosed income on which the penalty was to be levied nor has specified the default of the assessee attracting the quantum of penalty whether 10%, 20% or 30% of undisclosed income as prescribed in clause (a), (b) and (c) of section 271AAB(1) of the IT Act. Thus non-specification of the limb or ground by the AO in the show cause notice has resulted not giving a proper opportunity to the assessee to respond to the show cause notice and, therefore, there is a violation of principles of natural justice. The ld. A/R has contended that in a series of decisions it has been held that the assessee should know the grounds on which the AO proposed to levy the penalty so that he has to meet the charges levied by the AO, otherwise, the principles of natural justice are violated. In support of his contention he has relied on 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 case of CIT vs. M/s. SSA’s Emerald Meadows, 73 taxmann.com 241 which was challenged by the revenue before the Hon’ble Supreme Court but the SLP of the revenue was dismissed by the Hon’ble Supreme Court reported in 242 Taxman 180. The ld. A/R has also relied upon the decision of the Coordinate Bench of this Tribunal in case of Ravi Mathur vs. DCIT in dated 13.06.2018. He has also relied upon the decision of Hon’ble Jurisdictional High Court in case of Sheveta Construction Co. Pvt. Ltd. in DBIT Appeal No. 534/2008 dated 06.12.2016 and submitted that the Hon’ble High Court has also taken a similar view as taken by the Hon’ble Karnataka High Court in case of Manjunatha Cotton & Ginning Factory (supra). The ld. A/R has then relied upon the decision of this Tribunal dated 05.04.2019 in case of Shri Padam Chand Pungliya vs. ACIT in ITA No. 112/JP/2018. Thus he has submitted that in all these decisions it has been held that the defect in the show cause notice renders the initiation of proceedings illegal and consequently the order passed under section 271AAB of the IT Act is not sustainable and liable to be quashed.

4. On the merits, the ld. A/R has submitted that the ld. CIT (A) has held that the levy of penalty under section 271AAB is mandatory in nature, however, the Tribunal in a series of decisions has held that the levy of penalty under section 271AB is not mandatory but the same is discretionary. In support of his contention, he has relied upon the following decisions :-

M/s. Rambhajo’s vs. ACIT dated 11.01.2019. Shri Ravi Mathur vs. DCIT dated 13.06.2018. Shri Padam Chand Pungliya vs. ACIT dated 05.04.2019.

Hence, the ld. A/R has submitted that the impugned order of the AO as well as the ld. CIT (A) are based on presumption of incorrect law and facts and, therefore, not sustainable in law.

5. On the other hand, the ld. D/R has submitted that the AO issued notice under section 274 read with section 271AAB for the charge of (1) have concealed the particulars of income/furnished inaccurate particulars of income, (2) have undisclosed income within the meaning of section 271AAB of the Act. The ld. D/R has relied upon the decision of Hon’ble Allahabad High Court in case of PCIT vs. Sandeep Chandak, 93 taxmann.com 405 (Allahabad) and submitted that the Hon’ble High Court has observed that penalty under section 271AAB is automatically attracted. He has also relied upon the decision of Coordinate Bench of this Tribunal in case of Shri Rajendra Kumar Gupta vs. DCIT in dated 18.01.2019 as well as in case of Shri Raja Ram Maheshwari vs. DCIT in ITA No. 992/JP/2017 and submitted that the Tribunal has held that once the AO has issued show cause notice for levy of penalty under section 271AAB, no fault can be found in the show cause notice. The ld. D/R has further submitted that even in case of Rambhajo’s vs. ACIT in ITA No. 991/JP/2017 the Tribunal has taken a similar view and rejected the objection of the assessee regarding validity of initiation of penalty.

The ld. D/R has then referred to the Finance Bill 2012 thereby a new section 271AAB was inserted and submitted that the legislatures have made it clear that the assessee shall pay by way of penalty in addition to tax a sum computed @ 10%, 20% or 30% as the case may be. Hence the levy of penalty is mandatory in nature.

He has further referred to section 273B and submitted that the reasonable explanation in case of penalty under section 271AAB is not available to the assessee as provided under section 273B of the IT Act. Therefore, all these provisions make it clear that the levy of penalty under section 271AAB is mandatory in nature.

Thus the AO has issued these show cause notices to levy the penalty under section 271AAB without specifying the undisclosed income whether a part of the surrender made by the assessee was to be subject matter of penalty or the entire disclosure was subject matter of penalty and further the AO has also not specified the penalty proposed to be levied @ 10%, 20% or 30% as per clause (a), (b) and (c) of section 271AAB(1) of the IT Act. Therefore, these show cause notices are vague and general and has not specified the charge or ground on which the penalty was proposed to be levied. As regards the decisions relied upon by the ld. D/R, we find that the issue before the Hon’ble Allahabad High Court in case of PCIT vs. Sandeep Chandak, 93 taxmann.com 405 (Allahabad) was only regarding the typographical mistake in the caption of the show cause notice. The findings of the ld. CIT (A) and the Tribunal were reproduced by the Hon’ble High Court and thereafter it was observed that the contents of the penalty notice issued under section 274 read with section 271AAB clearly indicated that proceedings under section 271AAB being initiated. Thus the Hon’ble High Court found that a typographical mistake in the caption of the show cause notice is covered under section 292BB of the IT Act once the body of the show cause notice clearly indicated that proceedings under section 271AAB were initiated. Even otherwise, the observation regarding the provisions of section 271AAB automatically attracted are only with regard to the validity of the show cause notice where there was a mistake of mentioning the section in the caption of the notice. There was no issue or question before the Hon’ble High Court regarding the validity of initiation on account of not specifying the ground/charge in the show cause notice. The Hon’ble Jurisdictional High Court on the issue of not specifying the charge in the show cause notice for levy of penalty under section 271(1)(c) in case of Sheveta Construction Co. Pvt. Ltd. (supra) has concluded in para 9 as under :-

“ 9. Taking into consideration the decision of the Andhra Pradesh High Court which virtually considered the subsequent law and the law which was prevailing on the date the decision was rendered on 27.08.2012. In view of the observations made in the said judgment, we are of the opinion that the contention raised by the appellant is required to be accepted and in the finding of Assessing Officer in the assessment order it is held that the AO, has to give a notice as to whether he proposes to levy penalty for concealment of income or furnishing inaccurate particulars. He cannot have both the conditions and if it is so he has to say so in the notice and record a finding in the penalty order.”

We find that though the Tribunal in some of the cases relied upon by the ld. D/R has taken a view that no fault can be found in the show cause notice for not specifying the specific clause of section 271AAB(1) of the Act, however, in those cases the decision of the Hon’ble Jurisdictional High Court has not been considered. In the recent decision in case of Shri Padam Chand Pungliya vs. ACIT (supra), the Tribunal after considering an identical argument on behalf of both the parties have held in para 5.1 as under :-

“ 5.1. The second limb of challenging the validity of initiation of penalty proceedings for not specifying the ground and default in the show cause notice issued under section 274 has been considered by the Coordinate Bench of this Tribunal in the case of Ravi Mathur vs. DCIT (supra) in para in para 7 as under :-

“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:-

‘’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 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.”

We further note that in the case in hand, the AO in the show cause notice has neither specified the grounds and default on the part of the assessee nor even specified the undisclosed income on which the penalty was proposed to be levied. For ready reference we reproduce the show cause notices issued by the AO under section 274 read with section 271AAB on 30th March, 2016 and 16th August, 2016 as under :-

“ No. ACIT/CC-1/JPR/2015-16 Dated : 30.03.2016.

PENALTY NOTICE UNDER SECTION 274 READ WITH SECTION 271AAB OF THE INCOME TAX ACT, 1961.

PAN – ABDPP 7196A

To,

Sh. Padam Chand Pungalia, 2372, MSB Ka Rasta, Johari Bazar, Jaipur.

Whereas in the course of assessment proceedings before me for the A.Y. 2014-15, it appears to me that as per sections 274 and 275 read with section 271AAB of the Income-tax Act you are liable for penalty on assessed undisclosed income.

You are hereby requested to appear before me at my office Room No. 103 (NA), N.C.R.B., Jaipur at 11.00 A.M. on 28.04.2016 and show cause why an order imposing penalty on you should not be made u/s 271AAB r.w.s. 274 of the Income tax Act, 1961. If you do not wish to avail yourself of this opportunity of being heard in person or through Authorized Representative, you may reply to show cause in writing on or before the said date which will be considered before any such order is made.

Yours faithfully,

Sd/- ( Sushil Kumar Kulhari ) Asstt. Commissioner of Income-tax, Central Circle-1, Jaipur.

“ No. ACIT/CC-1/JPR/2016-17/928 Dated : 16.08.2016.

PENALTY NOTICE UNDER SECTION 274 READ WITH SECTION 271AAB OF THE INCOME TAX ACT, 1961.

PAN – ABDPP 7196A

To,

Sh. Padam Chand Pungalia, 2372, MSB Ka Rasta, Johari Bazar, Jaipur.

Whereas in the course of assessment proceedings before me for the A.Y. 2014-15, it appears to me that as per sections 274 and 275 read with section 271AAB of the Income-tax Act you are liable for penalty on assessed undisclosed income.

You are hereby requested to appear before me at my office Room No. 103 (NA), N.C.R.B., Jaipur at 11.00 A.M. on 25.08.2016 and show cause why an order imposing penalty on you should not be made u/s 271AAB r.w.s. 274 of the Income tax Act, 1961. If you do not wish to avail yourself of this opportunity of being heard in person or through Authorized Representative, you may reply to show cause in writing on or before the said date which will be considered before any such order is made.

Yours faithfully,

Sd/- ( Devangi Swarnkar ) Asstt. Commissioner of Income-tax, Central Circle-1, Jaipur. “

Thus it is clear that both the show cause notices issued by the AO for initiation of penalty proceedings under section 271AAB are very vague and silent about the default of the assessee and further the amount of undisclosed income on which the penalty was proposed to be levied. Even the Hon’ble Jurisdictional High Court in case of Shevata Construction Co. Pvt. Ltd in DBIT Appeal No. 534/2008 dated 06.12.2016 has concurred with the view taken by Hon’ble Karnataka High Court in case of CIT vs. Manjunatha Cotton & Ginning Factory, 359 ITR 565 (Karnataka) which was subsequently upheld by the Hon’ble Supreme Court by dismissing the SLP filed by the revenue in the case of CIT vs. SSA’s Emerald Meadows, 242 taxman 180 (SC). Accordingly, following the decision of the Coordinate Bench as well as Hon’ble Jurisdictional High Court, this issue is decided in favour of the assessee by holding that the initiation of penalty is not valid and consequently the order passed under section 271AAB is not sustainable and liable to be quashed.”

Therefore, in view of a series of decisions as well as decision of Hon’ble Jurisdictional High Court, we hold that the show cause notice issued by the AO without specifying the default and ground for which the penalty under section 271AAB was proposed to be levied renders the initiation of penalty proceedings invalid and consequently the order passed under section 271AAB of the Act is liable to be quashed.

“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 conducted on 4th September, 2013, the assessee disclosed income of Rs. 5,01,66,717/- in his statement made under section 132(4) of the Act. The said disclosure was made in pursuant to the entries in the seized documents. The details of the undisclosed income surrendered by the assessee are as under :- a) Unexplained expenditure on house construction 2,44,63,575/- b) Undisclosed stock 1,91,24,877/- c) Undisclosed jewellery 60,16,265/- d) Undisclosed debtors/advances 5,62,000/- ------------------ Total : 5,01,66,717/- ------------------

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 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

16 Shri Vimal Chand Surana, Jaipur. 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 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 @ 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.

“ 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.”

Thus the Tribunal after considering all the decisions including the decision of Hon’ble Allahabad High Court in case of PCIT vs. Sandeep Chandak (supra) held that the levy of penalty under section 271AAB is not mandatory but the AO has to take a decision on the basis of the relevant facts of the case and after considering the explanation of the assessee whether the surrender made by the assessee falls in the definition of undisclosed income as proposed in explanation to section 271AAB of the Act. Accordingly this issue is decided in favour of the assessee and against the revenue.

In support of his contention, he has relied upon the following decisions :- M/s. Rambhajo’s vs. ACIT dated 11.01.2019. M/s. Silver & Art Palace vs. DCIT dated 11.02.2019.

Thus the ld. A/R has submitted that the surrender made by the assessee on account of excess stock does not fall in the ambit of undisclosed income as per explanation to section 271AAB of the IT Act and consequently no penalty can be levied.

Penalty on account of excess stock :

Therefore, the stock which was treated as unaccounted excess stock of the assessee was found at the business premises of M/s. Bhuramal Rajmal Surana and the assessee has surrendered the said amount in his individual capacity instead of in the hands of this proprietorship concern of his HUF. From the facts it is clear that the alleged excess stock/unaccounted stock was nothing but the stock of M/s. Bhuramal Rajmal Surana but when the assessee offered the same in his individual hands, the department did not try to get the disclosure and surrender in the hands of the right person. It appears that the department is more concerned about the surrender whether it is in the hands of the Individual assessee or in the hands of the business concern of the HUF. Once the department has accepted the surrender in the hands of the assessee though the stock was not of the assessee but of the HUF business concern, then after receiving the tax for levy of penalty under section 271AAB of the Act, the AO was under the statutory obligation to establish that the said stock found at the time of search and disclosure made by the assessee falls in the definition of undisclosed income of the assessee as per explanation to section 271AAB of the Act.

Once the stock was found at the premises of the business concern of HUF and the surrender was taken from the assessee in his individual capacity, then the penalty cannot be levied by ignoring or over-looking the fact that when assessee has not carried out any business either in the past or in future or even during the year under consideration. The AO has accepted that the assessee’s main source of income is only salary and other sources, thus the mere surrender under section 132(4) would not ipso facto bring the same in the ambit of undisclosed income as defined in explanation to section 271AAB of the Act. Even otherwise, neither the AO nor the ld. CIT (A) has made any effort to made out a case that the income surrendered by the assessee falls in the definition of Undisclosed Income as per explanation to section 271AAB of the Act. Accordingly, in view of the facts and circumstances of the case when assessee was not found to be doing any business in his individual capacity and all business of Gem & Jewellery are run through the proprietorship concern of the assessee’s HUF as well as the other firms and companies in which the assessee and his family members are partners and directors, the said income on account of excess stock disclosed by the assessee cannot be regarded as undisclosed income for the purpose of levy of penalty under section 271AAB of the Act. The definition of Undisclosed Income as provided in explanation to section 271AAB has to be considered for the purpose of levy of penalty and not the mere disclosure of undisclosed income under section 132(4) of the IT Act. Accordingly, we delete the penalty levied under section 271AAB of the Act in respect of the Income surrendered on account of excess stock. Since we have considered that this is not undisclosed income of the assessee, therefore, we do not propose to go into the issue of valuation of closing stock.

Penalty on cash advances of Rs. 50,00,000/- :

Shri Hari Kishan - Rs. 30 Lac on 02.08.2014.

Shri Ram Nath Ji - Rs. 20 Lac on 03.08.2014.

The assessee made disclosure of Rs. 50,00,000/- in the statement recorded under section 132(4) of the Act. The ld. A/R of the assessee has submitted that the entry of advances of Rs. 50,00,000/- is not an income of the assessee but it is an out go and, therefore, it cannot be held as undisclosed income for the purpose of levy of penalty under section 271AAB of the Act. The ld. A/R has submitted that the department has taken the disclosure on account of these entries from the assessee whereas there was not an iota of evidence that the assessee was having any undisclosed income. He has referred to the CBDT Instruction No. 286/2/2003-IT (Inv.) dated 10.03.2003 and submitted that the CBDT has issued the guidelines that no forced confession shall be obtained regarding undisclosed income during the course of search and seizure and survey operations. Therefore, it was advised that there should be focus and concentration on collection of evidence of income which lead to information on what has not been disclosed or is not likely to be disclosed.

Despite the various CBDT Circulars on this point, the department is taking the disclosure without any evidence, therefore, all these disclosures are in contravention of the CBDT Circulars. He has also relied upon the decision of Coordinate Bench of this Tribunal dated 18.01.2019 in case of Rajendra Kumar Gupta vs. DCIT (ITA No. 359/JP/2017) and submitted that the Tribunal has considered this issue and held that giving advance is not an income in itself but it is an out go and, therefore, in the absence of any evidence or source of income found during the course of search and seizure, the entry of advances cannot be treated as undisclosed income of the assessee for the purpose of levy of penalty under section 271AAB of the IT Act.

Hence, the ld. D/R has submitted that the income disclosed on account of advance/loans given to the individuals found recorded in the seized material and not recorded in the books of account is an undisclosed income of the assessee. He has relied upon the orders of the authorities below.

The Coordinate Bench of this Tribunal in case of Rajendra Kumar Gupta vs. DCIT (supra) while considering an identical issue has held in para 21 as under :-

“ 21. During the course of search, a note book (diary) has been found referred on 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 valueable 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 statute 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.”

A similar view has been taken by the Coordinate Bench of this Tribunal in case of Padam Chand Pungliya vs. ACIT (supra). Accordingly, in view of these decisions of the Tribunal on this issue, we hold that the mere entry of advances representing the out go of money would not constitute undisclosed income of the assessee as defined in the explanation to section 271AAB of the Act. Moreover, no efforts were made to ascertain the status of these advances given to these two persons and even whether the entries in the name of these two persons were artificial or in the name of some existing persons. Accordingly, the penalty levied under section 271AAB of the Act on account of entries for advances is deleted.

Penalty on account of cash found at the residence of the assessee :

The ld. A/R of the assessee has submitted that the cash found at the residence of the assessee belong to entire family members of the assessee and, therefore, without considering the availability of the cash as per the drawings of all the members of the family of 8 persons, the same cannot be considered as undisclosed income of the assessee. He has referred to the detailed drawings of the various members of the assessee’s family and pointed out that for the last 4 years i.e. financial years 2011-12 to 14-15, 6 members of the assessee have declared the income of several crores in each hand. Even the withdrawals as per their Balance Sheets are also in crores during these years and, therefore, the cash of Rs. 38,50,000/- found at the residence of a family of about 10 members, out of which 6 members are tax payers and declared income of crores of rupees, then the said amount of cash cannot be treated as Undisclosed income of the assessee. He has referred to the details of the income and withdrawals to justify the jewellery found at the residence of the assessee and submitted that by considering the status of the assessee family, their business income from the various firms, companies as well as the income declared by the various persons, the said amount of quantity or jewellery cannot be regarded as undisclosed income. Thus the ld. A/R has submitted that the penalty levied on account of cash found of Rs. 38,50,000/- is not justified.

per the explanation to section 271AAB of the Act. He has relied upon the orders of the authorities below.

Considering the married women in the family and one married girl as well as the male members, we find that the benefit of the Circular/Instruction No. 1916 dated 11.05.1994 shall be given in respect of all the family members. The ld. A/R of the assessee has relied upon the decision of Hon’ble Jurisdictional High Court in case of CIT vs. Satya Narain Patni, 366 ITR 325 (Raj.) wherein the Hon’ble High Court has held in para 12 & 13 as under :- “12. It is true that the circular of the CBDT, referred to supra dt. 11/05/1994 only refers to the jewellery to the extent of 500 gms per married lady, 250 gms per unmarried lady and 100 gms per male member of the family, need not be seized and it does not speak about the questioning of the said jewellery from the person who has been found with possession of the said jewellery. However, the Board, looking to the Indian customs and traditions, has fairly expressed that jewellery to the said extent will not be seized and once the Board is also of the express opinion that the said jewellery cannot be seized, it should normally mean that any jewellery, found in possesion of a married lady to the extent of 500 gms, 250 gms per unmarried lady and 100 gms per male member of the family will also not be questioned about its source and acquisation. We can take notice of the fact that at the time of wedding, the daughter/daughter-in-law receives gold ornaments jewellery and other goods not only from parental side but in-laws side as well at the time of 'Vidai' (farewell) or/and at the time when the daughter-in-law enters the house of her husband. We can also take notice of the fact that thereafter also, she continues to receive some small items by various other close friends and relatives of both the sides as well as on the auspicious occasion of birth of a child whether male or female and the CBDT, looking to such customs prevailing throughout India, in one way or the another, came out with this Circular and we accordingly are of the firm opinion that it should also mean that to the extent of the aforesaid jewellery, found in possession of the varoius persons, even source cannot be questioned. It is certainly 'Stridhan' of the woman and normally no question at least to the said extent can be made. However, if the authorized officers or/and the Assessing Officers, find jewellery beyond the said weight, then certainly they can question the source of acquisation of the jewellery and also in appropriate cases, if no proper explanation has been offered, can treat the jewellery beyond the said limit as unexplained investment of the person with whom the said jewellery has been found.

13. Admittedly, looking to the status of the family and the jewellery found in possesssion of four ladies, was held to be reasonable and therefore, the authorized officers, in the first instance, did not seize the said jewellery as the same being within the tolerable limit or the limits prescribed by the Board and thus, in our view, subsequent addition is also not justificable on the part of the Assessing Officer and rightly deleted by both the two appellate authorities namely' CIT(A) as well as the Tribunal.”

Accordingly after giving the benefit of the CBDT Instruction No. 1916 and the status of the assessee’s family, the jewellery found from the residence and locker of the assessee cannot be considered as excess of the normal possession of this jewellery.

Therefore, even if the assessee has disclosed the undisclosed income in the statement recorded under section 132(4) of the Act but for the purpose of levy of penalty under section 271AAB, all these facts are required to be taken into account.

Once all these facts are considered, then the said jewellery found at the time of search and seizure action cannot be held as undisclosed income.