SHRI AJAY AGARWAL,KOTA vs. DEPUTY COMMISSIONER OF INCOME TAX, KOTA

आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCH ‘A’, JAIPUR Jh fot; iky jkWo] U;kf;d lnL; ,oa Jh foØe flag ;kno] ys[kk lnL; ds le{k BEFORE: SHRI VIJAY PAL RAO, JM AND SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA No. 1383/JP/2018 fu/kZkj.k o"kZ@Assessment Year : 2015-16. cuke Shri Ajay Agrawal, The Deputy Commissioner of Vs. Bungalow No. 3, Kansua Income-tax, Central Circle, Room No. 212, 2nd Floor, Road, J.K. Nagar, Kota. C.R. Building, Rawat Bhata Road, Kota. LFkk;h ys[kk la-@thvkbZvkj la-@PAN No. AFOPA 1833 L vihykFkhZ@Appellant izR;FkhZ@Respondent vk;dj vihy la-@ITA No. 1443/JP/2018 fu/kZkj.k o"kZ@Assessment Year : 2015-16. cuke The Deputy Commissioner of Income- Shri Ajay Agrawal, Vs. tax, Central Circle, Room No. 212, Bungalow No. 3, Kansua 2nd Floor, C.R. Building, Rawat Bhata Road, J.K. Nagar, Road, Kota. Kota. LFkk;h ys[kk la-@thvkbZvkj la-@PAN No. AFOPA 1833 L vihykFkhZ@Appellant izR;FkhZ@Respondent fu/kZkfjrh dh vksj ls@ Assessee by : Shri Vijay Goyal (CA) & Shri Gulshan Agarwal (CA) jktLo dh vksj ls@ Revenue by : Shri Varinder Mehta (CIT-DR) lquokbZ dh rkjh[k@ Date of Hearing : 28.02.2019. ?kks"k.kk dh rkjh[k@ Date of Pronouncement : 22/03/2019. vkns'k@ ORDER PER BENCH :

These two cross appeals are directed against the order dated 5th October, 2018 of ld. CIT (A)-2, Udaipur arising from the penalty order passed under section 271AAB of the IT Act for the assessment year 2015-16. The assessee is an

2 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota.

individual and belongs to M/s. Kota Dall Mill Group. The assessee filed his return of

income under section 139(1) of the IT Act on 30.08.2015 declaring total income at

Rs. 11,00,27,200/- which includes surrendered income of Rs. 10,69,91,302/- on

account of Long Term Capital Gain. In response to notice under section 153A of the

IT Act, the assessee furnished his return of income on 01.02.2016 declaring total

income of Rs. 11,18,27,200/- which includes the income of Rs. 10,87,91,302/-

admitted during search (including income of Rs. 10,69,91,302/- already declared in

the return filed u/s 139(1). The assessment was completed under section 143(3)

read with section 153B of the IT Act on 27.12.2017 at the total income of Rs.

11,18,77,980/- which includes an addition of Rs. 9,000/- on account of short

disclosure of commission income and an addition of Rs. 41,778/- on account of

mismatch in the share trading turnover. The AO then initiated the proceedings for

levy of penalty under section 271AAB of the IT Act by issuing a show cause notice dated 27.12.2017. The AO while passing the penalty order dated 21st June, 2018

has levied the penalty under section 271AAB(1) of the IT Act @ 30% of the

undisclosed income of Rs. 10,88,42,080/- which was declared by the assessee in the

return of income filed on 01.02.2016 in response to notice under section 153A on

27.01.2016. The assessee challenged the action of the AO before the ld. CIT (A).

The ld. CIT (A) has reduced the levy of penalty under section 271AAB from 30% to

10%. Hence both the assessee as well as the revenue have challenged the

impugned order of the ld. CIT (A) by filing these cross appeals. The grounds raised

by the assessee as well as by the revenue in the cross appeals are as under :-

3 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota.

ITA No.1376/JP/2018 (Assessee’s Appeal) :

“ 1. On the facts and in the circumstances of the case and in law the ld. CIT (A) erred in not holding the penalty order as wrong, bad in law, invalid and void-ab-initio as the ld. AO initiated the penalty u/s 271AAB of Income Tax Act, 1961 without specifying the clause of section 271AAB of the Act in the penalty notice under which the penalty was initiated i.e. whether it is for clause (a) or clause (b) or clause (c) of section 271AAB(1) because the conditions for imposing the penalty under each such clauses are separate.

a) The appellant was not having any undisclosed income within the meaning of section 271AAB of the Act, therefore, no penalty under this section can be imposed on assessee. b) The penalty was levied by drawing the inference only from the statement recorded u/s 132(4) of the Act whereas there is no incriminating material or evidence was found during search to prove that the assessee was having undisclosed income. c) Documents and evidences were filed to prove the genuineness of exempted LTCG which were remained uncontroverted.

4 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota.

ITA No.1433/JP/2018 (Departmental Appeal) :

purchase and sale of shares which has resulted Long Term Capital Gains are duly

recorded in the books of account of the assessee. Though the LTCG arising on sale

of shares of listed companies is exempt under section 10(38) of the IT Act, however, during the course of search and seizure action on 2nd July, 2015 the assessee in the

statement recorded under section 132(4) has surrendered the LTCG to tax. The ld.

A/R has further contended that the shares purchased in the preceding year were duly shown in the Balance Sheet as on 31st March 2014 and the AO has not

disturbed the transaction of purchase of shares. The purchase consideration as well

as sale consideration has been paid and received respectively through banking

channel. The fact of purchase of shares as well as sale of shares and payment and

receipt of consideration are independently verifiable from the Demat Account, bank

account statement as well as the record of the Stock Exchange. The ld. A/R has

further contended that the assessee produced all the supporting documentary

evidences of purchase and sale of these shares through Stock Exchange as the

transactions of purchase and sale of shares are of listed companies through

registered brokers. The shares were duly reflected in the Demat account of the

5 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota.

assessee and the sale of these shares were also from the Demat account of the

assessee. Therefore, when the transactions of purchase and sales are through Stock

Exchange and payment of purchase consideration as well as receipt of sale

consideration is through banking channel and duly recorded in the books of

accounts, then the transactions recorded in the separate slips will not change the

character of the transaction and the income from disclosed to undisclosed. The ld.

A/R has pointed out that the assessee submitted all the documents and records

pertaining to purchase and sale of equity shares of listed companies through

recognized Stock Exchange. The documents also include Contract Notes showing

payment of STT, bills, depository statement, registered stock brokers ledger account

and bank statement evidencing the payment of purchase consideration as well as

the receipt of the sale consideration through proper banking channel. All these

documents duly substantiated the genuineness of the LTCG earned during the year

under consideration and the documents produced by the assessee were not either

detected or controverted by the AO in the course of assessment proceedings.

Further, during the course of search and seizure operation, no incriminating

material, evidence or document whatsoever was found but only the calculation of

LTCG recorded in the separate slips cannot be said to be incriminating material when

all these transactions are duly recorded in the books of account. The ld. A/R has

further submitted that the levy of penalty under section 271AAB(1) of the Act is not

automatic but the AO has to take a decision by considering all the conditions to be

satisfied as provided under the said section. Since the disclosure and surrender of

the amount does not fall in the definition of undisclosed income, therefore, the

penalty under section 271AAB is not leviable in the case of the assessee merely

6 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota.

because the assessee has declared and surrendered some income to tax. In support

of his contention, he has relied upon the decision of the Coordinate Bench of this Tribunal dated 24th July, 2018 in case of Shri Dinesh Kumar Agarwal vs. ACIT in ITA

No. 855 & 856/JP/2017 as well as decision dated 13.06.2018 in case of Shri Ravi

Mathur vs. DCIT in ITA No. 969/JP/2017 and submitted that the Tribunal has held

that the penalty under section 271AAB is not automatic but the AO has to issue a

show cause notice and give a proper opportunity of hearing to the assessee and,

thereafter take a decision to impose the penalty. It is statutory requirement that the

explanation of the assessee for not fulfilling the conditions as prescribed under

section 271AAB of the IT Act is required to be considered by the AO while passing

the penalty order. The penalty under section 271AAB is not consequential to the

assessment or surrender of income during the course of search 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. The ld. A/R has

contended that it is settled law that penalty should not be imposed unless the case

falls under the four corners of law mandating the penalty. The ld. A/R has referred

to the definition of undisclosed income as provided in the Explanation to section

271AAB and submitted that the mere surrender of income would not automatically

become undisclosed income but the AO has to take a decision as per the definition

given in the Explanation to section 271AAB. In the case of the assessee, when the

surrender is not falling under the category of undisclosed income as prescribed

under section 271AAB as the assessee has already recorded these transactions in

the books of account and also furnished the supporting documents to prove the

genuineness of the transaction of purchase and sale of the shares of listed

7 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota.

companies on the Stock Exchange through registered brokers, therefore, while

passing the penalty order the AO has to decide whether the surrender made by the

assessee is covered under the definition of undisclosed income for the purpose of

section 271AAB. The AO has imposed the penalty based on the statement recorded

during the search whereas the income surrendered by the assessee is not covered

under the definition of undisclosed income provided under section 271AAB of the

Act. The ld. A/R has asserted that the revenue authorities have exaggerated undue

pressure and obtained surrender from the assessee and this fact is manifest from all

the supporting documents produced by the assessee as well as the transactions

were recorded in the books of account and the shares held by the assessee were reflected in the Balance Sheet as on 31st March, 2014. Thus the ld. A/R has

submitted that the mere statement recorded under section 132(4) does not by itself

constitute incriminating material as held by the Hon’ble Delhi High Court in case of

CIT vs. Harjeev Aggarwal, 290 CTR 263 (Delhi) as well as in case of Pr. CIT vs. Best

Infrastructure (India) Pvt. Ltd., 397 ITR 82 (Delhi). The ld. A/R has also referred to

a series of decisions on the point that the penalty under section 271AAB cannot be

imposed merely on the surrender made under section 132(4) in the absence of any

incriminating material found during the search. He has referred to the various

documents produced by the assessee before the AO and submitted that the AO has

not pointed out any defect or given the finding that the documents produced by the

assessee are not genuine, then treating the surrender made by the assessee on

account of LTCG as undisclosed income and levying the penalty under section

271AAB is not sustainable in law.

8 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota.

claim of LTCG exempt under section 10(38) of the IT Act. However, during the

course of search and seizure action it was found that the claim was bogus and

consequently the assessee declared the income and surrendered to tax. Therefore,

bogus claim was detected only during the course of search and seizure action which

was admitted by the assessee in the statement recorded under section 132(4). The

disclosure of undisclosed income is in reference to the seized material which was

found during the course of search. Once the assessee has surrendered the

undisclosed income based on the incriminating material found and seized during the

search, then the said income was rightly treated by the AO as undisclosed income in

terms of provisions of section 271AAB of the Act. Further, the assessee has not

substantiated the manner in which the undisclosed income was derived during the

statement under section 132(4) or during the assessment or penalty proceedings.

Therefore, the penalty @ 30% is leviable in the case of the assessee when the

assessee failed to satisfy the condition (a)(ii) of section 271AAB(1) of the IT Act.

The ld. CIT (A) has committed an error while restricting the penalty to 10% from

30% of the surrendered income levied by the AO. He has relied upon the penalty

order passed under section 271AAB of the IT Act.

record. The AO has levied the penalty under section 271AAB of the Act in respect of

the income surrendered by the assessee on account of LTCG from purchase and sale

of equity shares. The question arises whether the surrender made by the assessee

in the statement recorded under section 132(4) will be regarded as undisclosed

9 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota.

income without testing the same with the definition as provided under clause (c) of

Explanation to section 271AAB of the Act. There is no dispute that in the statement

recorded under section 132(4) the assessee has disclosed the income under

consideration as undisclosed income on account of LTCG. However, for the purpose

of levying the penalty under section 271AAB, the primary condition is that the

assessee shall pay the penalty equivalent to 10%, 20% or 30% of undisclosed

income of specified previous year depending upon the satisfaction of the condition

as provided under section 271AAB. The term “undisclosed income” has been

defined in the Explanation to section 271AAB and, therefore, the penalty under the

said provision has to be levied only when the income surrendered by the assessee

falls in the ambit of undisclosed income as defined under this section. The mere

disclosure of income in the statement recorded under section 132(4) would not ipso

facto be regarded as undisclosed income unless and until it is tested as per the

definition provided in the Explanation to section 271AAB of the Act. In the case in

hand, there is no dispute that the assessee has duly recorded the transaction of

purchase and sale of equity shares of the listed companies in the books of account

which has yielded the capital gain in question of Rs. 10,87,91,302/-. The assessee has also shown these shares in the Balance Sheet as on 31st March, 2014 and the

AO has not doubted or disturbed the holding of shares by the assessee on the date of Balance Sheet ended on 31st March, 2014. Once the transactions are duly

recorded in the books of account, then the documents in the shape of slips

containing the details of LTCG found during the search would not amount to

incriminating material disclosing any undisclosed income. The definition of

10 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota.

undisclosed income as per clause (c) of Explanation to section 271AAB reads as

under :-

“ "undisclosed income" means— (c) (i) any income of the specified previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search under section 132, which has— (A) not been recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous year; or (B) otherwise not been disclosed to the 54[Principal Chief Commissioner or 54[Principal or] Chief Commissioner Commissioner or] Commissioner before the date of search; or (ii) any income of the specified previous year represented, either wholly or partly, by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the specified previous year which is found to be false and would not have been found to be so had the search not been conducted.] ”

The levy of penalty under section 271AAB does not dependent on the addition made

during the assessment proceedings but the conditions provided under section

271AAB are precedent for levy of penalty. The assessment order is relevant only for

the purpose of limitation provided under section 275 of the IT Act whereas the

penalty under section 271AAB has to be imposed only when the income disclosed by

the assessee falls in the ambit of undisclosed income as defined under section

271AAB of the Act. The definition of undisclosed income contemplates various forms

and the primary condition is that the income of the specified previous year

represented 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 during the

course of search which has not been recorded on or before the date of search in the

11 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota.

books of account or other documents maintained in the normal course relating to

such previous year. In the case in hand, since the surrender was made in respect of

the LTCG recorded in the seized material, therefore, it is based on the entries in the

other documents found during the course of search. The income in the shape of

entries in other documents found during the course of search would be considered

as undisclosed income if the said income has not been recorded in the books of

account on or before the date of search. In the case in hand, it is undisputed fact

that all the transactions of purchase and sale and LTCG arising from the sale of

equity shares of the listed companies are duly recorded in the books of account.

Therefore, it is not the case of any income of the specified year representing the

entry in the other documents which has not been recorded in the books of account

on the date of search. Therefore, the primary condition of undisclosed income that

the income represented by the entry in the other record is not recorded in the books

of account on the date of search is not satisfied. The definition of “undisclosed

income” is subjected to two conditions that the said income has 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. The second

condition is not relevant for our purpose since these entries are undisputedly duly

recorded in the books of account of the assessee. We further note that the seized

material does not reveal the nature of transaction being genuine or bogus but the

entry in the seized material is only the computation of long term capital gain on sale

of shares. Therefore, the documents which were found and seized during the

course of search and seizure action contains the details of LTCG would not be

regarded as incriminating material disclosing any income not recorded in the books

12 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota.

of account. Hence the primary condition for treating such income as undisclosed

income in terms of section 271AAB is not satisfied. Apart from the fact that these

transactions were duly recorded in the books of account, the assessee has also

produced relevant documents, the details of which are as under :-

(A) IN RELATION TO SHARES PURCHASE :

Summary of shares purchased during the FY 2012-13 (page no. 89 of paper book) Copy of share certificate in support of share purchased (page no. 90 of paper book. Copy of relevant page of bank statement showing the payment made against purchases of shares (page no. 91 of paper book) Acknowledgement of ITR filed on 27.09.2013 u/s 139(1) of Income Tax Act, 1961 along with computation sheet of total Income of the A.Y. 2013-14 (page nos. 92-94 of paper book). Acknowledgement of ITR filed on 01.02.2016 u/s 153A of Income Tax Act, 1961 along with computation sheet of total Income of the A.Y. 2013-14. (page nos. 95-98 of paper book) Copy of Balance Sheet and Capital Account of Assessment Year 2013-14. (page no. 99-99A of paper book) Copy of Assessment Order dated 28.12.2017 u/s 143(3) r.w.s. 153A passed by Deputy Commissioner of Income Tax, Central Circle Kota (Raj.) for the Assessment Year 2013-14 (page nos. 100-106 of paper book). Copy of Ledger A/c of following shares brokers from the books of account of assessee depicting the details of equity shares purchased by the assessee are enclosed. (page no. 107-108 of paper book) • Religare Securities Limited • Suresh Rathi Securities Private Limited

(B) IN RELATION TO SHARES SALES: Summary of shares sale during the year under consideration (page no. 109 of paper book) Copy of sales bills/contract notes of shares (page nos. 110-152 of paper book) Copy of ledger Account of assessee in books of accounts of share brokers through whom the shares were sold (page nos. 153-156 of paper book) Copy of relevant page of bank statement showing the entry of payment received against sales of shares (page nos.157-164 of paper book) (C) DEMAT ACCOUNT STATEMENT OF FOLLOWING SHARES BROKERS IN RESPECT OF SALES & PURCHASE OF SHARES (Page nos. 165-167 of paper book) :

13 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota. • Arihant Capital Markets Limited • Suresh Rathi Securities Private Limited • Hem Securities Limited

Thus, the purchase bill for the purchase of shares along with ledger account in the

books of the share broker clearly reveal the date of purchase and also payment of

purchase consideration through banking channel as reflected in the bank account

statement of the assessee. All the above mentioned documents are independently

verifiable evidence without having any control or influence of the assessee except

the books of account of the assessee which were not disputed by the AO. Further,

the revenue has not disputed the correctness of the documentary evidence filed by

the assessee but the AO has proceeded on the assumption that the income

disclosed by the assessee under section 132(4) is undisclosed income for the

purpose of section 271AAB of the Act. The AO while passing the assessment order

under section 153A for the assessment year 2014-15 has not disturbed the holding of the shares shown in the Balance Sheet as on 31st March, 2014. These

transactions were also carried out from the capital account of the assessee which

was also part of the record of the assessment year 2014-15. But the AO has

accepted all these details without any adverse finding or comments while passing

the assessment order under section 153A or the Act. The assessee has also

produced sale bills/contract notes regarding sale of shares, copy of ledger account of

the assessee in the books of share broker in respect of sale transactions, bank

statement showing receipt of sale consideration and Demat account having the

entries of credit of shares at the time of purchase and debit of shares at the time of

14 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota.

sale. The equity shares in question are of listed companies in the Stock Exchange

and were purchased and sold by the assessee through Stock Exchange. Therefore,

the transactions of purchase and sale are verifiable from the independent source

including the record of the Stock Exchange without having any influence of the

assessee. Hence the document produced by the assessee is the evidence which

cannot be manipulated and also can be verified from the independent sources.

Once the assessee has established the fact that all these transactions are recorded

in the books of account and also produced, the relevant documentary evidence to

establish the genuineness of the purchase and sale of shares through Stock

Exchange, then the mere disclosure and surrender of income would not ipso facto

lead to the conclusion that the amount surrendered by the assessee is undisclosed

income in terms of section 271AAB of the Act. For bringing the income surrendered

by the assessee in the fold of undisclosed income as per the definition of

“undisclosed income” in Explanation to section 271AAB, the said income must

represent either any money, bullion, jewellery or other valuable article or thing or

any entry in the books of account or other documents but has not been recorded in

the books of account as on the date of search. Therefore, the primary condition for

treating an income as undisclosed income is that it should represent inter alia any

entry in the books of account or other documents found during the search but the

said income is not recorded in the books of account. In the case in hand, the

document found during the search is not an incriminating material when the entry

and the income were duly recorded in the books of account. Therefore, the

statement of the assessee recorded under section 132(4) would not constitute

incriminating material. Therefore, the said income disclosed by the assessee cannot

15 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota.

be considered as undisclosed income in terms of section 271AAB of the Act. This

Tribunal in the case of Ravi Mathur vs. DCIT (supra) while considering an issue of

levy of penalty under section 271AAB has held in para 4 to 9 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 271AAB has to

16 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota.

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).

17 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota. 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

18 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota. 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 @

19 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota.

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 :-

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“ 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.

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(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—

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(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

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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.

The provisions of section 274 and 275 shall, as far as may be, apply in relation to the penalty referred to in this section.

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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

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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

26 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota.

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.

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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 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

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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 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.

29 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota.

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. 9. The Kolkata Bench of the Tribunal in the case of DCIT vs. Madan Lal Beswal (supra) has considered this issue of the alleged income found recorded in the other documents would fall in the definition of undisclosed income in para 3 and 4 as under :-

“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 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:-

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u/s. 132(4) of the Act the income from speculative trading. The undisputed facts the AO has given finding pertaining to this case is as follows: 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). 4. The Ld. DR brought to our notice that in the very same group case of Manoj Beswal & Ors. the Tribunal had confirmed the levy of penalty and contended before us that penalty u/s. 271AAB of the Act is mandatory and therefore, according to Ld. DR, the Ld. CIT(A) erred in deleting the penalty by stating that the assessee did not had any ‘mens rea’ not to disclose the amount in question. According to him, penalty has to be mandatorily levied u/s. 271AAB of the Act on the undisclosed income found during search. On the other hand, Ld. AR Shri Miraz D. Shah, supporting the decision of Ld. CIT(A) made contentions though taken up before the Ld. CIT(A) but has not been adjudicated on those averments, which the Ld. AR urges before us to consider while adjudicating the appeal of the Revenue. The Ld. AR also pointed out that the contentions which he is going to raise has been taken up before the AO also, however, according to Ld. Counsel, those legal arguments were not considered by the AO in the right perspective. The first contention of the Ld. AR is that since Sec. 271AAB of the Act is a penalty section it should be construed strictly, which we agree being it is a trite law that penalty provisions have to be strictly interpreted. 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

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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 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.

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(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: Income from Salary Rs. 45,57,600 Income from Other sources Rs.3,00,24,047 Rs.3,45,81,647 6. We note that the AO has accepted the aforesaid statement of total income filed before him without contesting the claim of the assessee as to whether the assessee’s claim of income other than from salary should be from “Income from Business”. The confusion that has arisen in this case, we note is on the misdirection of AO in the assessment proceedings wherein the assessment order of the assessee, the AO has observed “during search and seizure operation, Shri Manoj Beswal had made a consolidated disclosure of Rs.32 crore vide his disclosure petition. Out of this consolidated disclosure, the assessee owned up Rs. 3 cr. In the disclosure petition Shri Manoj Beswal it was stated that the source

34 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota.

of such undisclosed income was out of commodity profit. It has been submitted that the amount has already been disclosed in his Income & Expenditure account for the AY 2013-14 under the head ‘Income out of Speculative Business from sale of commodities’. Verification of accounts confirms his claim.” This observation is flawed because, we note that AO got carried away by perusal of the “Income & Expenditure Account for AY 2013-14” submitted by the assessee before him, wherein it was shown in the income side that is right hand column as “Income from Speculative Business from sale of commodities” and left hand side column reflects the expenditure; and AO came to the conclusion that assessee has disclosed under the heading income out of Speculative Business from sale of commodities. The character of a receipt and the head under which it has to be taxed is not based on the nomenclature of receipt of income shown in Income & Expenditure Account. All the incomes of revenue nature will be posted in the right hand side column of ‘income’ in the Income & Expenditure Account and the description given therein cannot determine the head of income prescribed under chapter IV of the Act. Therefore, the observation of the AO in assessment order in the light of his action of accepting the statement of total income filed by the assessee along with return which without being contested, is erroneous, unless the AO was able to negate the claim of the assessee by bringing the income from commodity transactions as part of business income. It should be remembered that under the Income Tax Act 1961, the total income of an assessee individual /company is 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

35 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota.

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 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. 7. Finally, the Ld. AR submitted that during the search, the search party found the records of the assessee’s transactions in speculative commodity from the drawer of assessee’s accountant from which the AO could compute the income of the assessee from the said transaction which amount assessee declared during search and which was duly returned and which figure was accepted by the AO. According to Ld. AR, the fact that search happened on 01.08.2012 need to be taken note of since undisputedly there was enough and more time for the assessee to submit the accounts during assessment proceedings which fact has been taken note of and concurred by the Ld. CIT(A). Thereafter, the Ld. AR drew our attention to the definition of undisclosed income given under section 271AAB which reads as under:

“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— ********

Explanation – For the purposes of this section, - (a) ……….

36 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota.

(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 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.

37 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota.

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.”

Thus the Tribunal has taken a consistent view that the penalty under section

271AAB is not automatic but the AO has to take a decision as per the provisions of

section 271AAB and particularly in the light of the definition of the undisclosed

income as prescribed in the Explanation to section 271AAB of the Act. We further

note that this Tribunal has considered this issue in case of Shri Raja Ram Maheshwari vs. DCIT vide order dated 10th January, 2019 in ITA No. 992/JP/2017 in

para 12 to 14 as under :-

38 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota.

“12. Now, coming to another contention of the ld AR where he has challenged the findings of the ld. CIT(A) that penalty U/s 271AAB is mandatory in nature and there is no discretion with the Income tax authorities. It was submitted by the ld AR that in section 271AAB, the word ‘may’ is used instead of ‘shall’ so it is not mandatory but same is discretionary. It was submitted that it is settled position of law that penalties are not compulsory, not mandatory but are also discretionary considering the overall facts and circumstances of the case. In support, reliance was placed on provisions of section 158BFA(2) wherein similar phraselogy has been used by the legislature and decision of Hon’ble A.P High Court in case of RadhaKrishna Vihar (ITA no. 740/2011).

“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

39 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota.

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 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—

(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

40 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota.

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):

41 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota.

(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:

42 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota.

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.” 14. Therefore, we agree with the contentions of the ld AR that the levy of penalty under section 271AAB is not mandatory. In the instant case, it therefore needs to be examined whether there is any basis for levy of penalty

43 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota.

or non-levy thereof and the same will depend upon the facts and circumstances of the present case which we shall discuss in subsequent paragraphs.”

Hence in view of the facts and circumstances as discussed in detail in foregoing

paras as well as following the earlier decision of this Tribunal, we hold that the

income surrendered by the assessee in the statement recorded under section 132(4)

does not fall in the ambit of definition of undisclosed income as contemplated in

Explanation to section 271AAB of the Act. Accordingly, the penalty levied by the AO

and sustained by the ld. CIT (A) is not sustainable and the same is deleted.

is dismissed.

Order is pronounced in the open court on 22/03/2019.

Sd/- Sd/- (foØe flag ;kno) (fot; iky jkWo ½ (VIKRAM SINGH YADAV ) (VIJAY PAL RAO) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member

Jaipur Dated:- 22/03/2019. Das/ आदेश की प्रतिलिपि अग्रेषित@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. The Appellant- Shri Ajay Agarwal, Kota. 2. The Respondent – The DCIT, Central Circle, Kota. 3. The CIT(A). 4. The CIT, 5. The DR, ITAT, Jaipur 6. Guard File (ITA No. 1383 & 1443/JP/2018) vkns'kkuqlkj@ By order,

सहायक पंजीकार@ Aेेपेजंदज. त्महपेजतंत

44 ITA Nos. 1383 & 1443/JP/2018 Shri Ajay Agarwal, Kota.