M/S SILVER AND ART PALACE,JAIPUR vs. DEPUTY COMMISSIONER OF INCOME TAX, JAIPUR

Briefly the facts of the case are that the assessee is a partnership firm carrying on business of trading of gems, jewellery, precious and semi precious stones, diamonds, wooden and handicraft items in the name and style of ‘M/s. Silver and Art Palace’. A search and seizure action u/s 132 of the Act was carried out at the assessee’s premises on 11.03.2015. During the course of search, statement of one of the partner’s in the assessee firm u/s 132(4) of was recorded, wherein an amount of Rs. 26,50,50,888/- was surrendered (Rs. 25,80,25,888/- on account of difference in valuation of stock and Rs. 70,25,000/- on account of advances given to different parties). The assessee thereafter filed its return of income on 27.9.2015, declaring total income of Rs. 29,30,41,580/- including Rs. 26,50,50,888/- surrendered during the course of search. The assessment proceedings were completed by the Assessing officer and an order u/s 143(3) r/w 153B(1)(b) of the Act was passed on 23.12.2016 at Rs. 29,30,53,964/- by accepting the returned income except making a disallowance of Rs. 12,384/- on account of delay in deposition of ESI & PF. Simultaneously, penalty proceedings u/s 271AAB were initiated by issuance of notice on 23.12.2016. Subsequently, penalty was imposed u/s 271AAB(1)(a) of the Act at the rate of 10% amounting to Rs. 2,65,05,090/- vide order dated 24.4.2017. Aggrieved with the order, the assessee filed appeal before ld. CIT(A), wherein the latter confirmed the order of the AO vide order dated 15.12.2017. Aggrieved with the said order, the assessee has moved the present appeal.

During the course of hearing, the ld. AR did not press ground no. 1. Hence, the same is dismissed as not pressed.

In ground no. 2, the assessee has challenged the finding of the ld. CIT(A) that penalty U/s 271AAB of the Act is mandatory in nature.

During the course of hearing, ld. AR submitted that section 271AAB of the Act contains the word “may” which means discretion is vested with the Assessing officer whether to levy penalty or not. Secondly, the intention of the legislature is clear by making the order passed u/s 271AAB as appealable order by amending sub clause (B) of clause (hb) of section 246A w.e.f. 01.07.2012 that it is discretionary and not mandatory to give relief to the assessee. It is settled position of law that penalties are not compulsory, not mandatory but are always discretionary considering the overall facts and circumstances of the case.

The ld. AR further submitted that the interpretation of word “may direct” in context of Section 158BFA(2) of the Act has come up for judicial scrutiny before the Courts and our reference was drawn to the decision of the Hon’ble Andhra Pradesh High Court in the case of M/s. Sri Radha Krishna Vihar Vs. Pr.CIT (in of 2017 dated 13.12.2017) wherein it was held as under:

In the light of the true purport of Sub-Section (2) of Section 158BFA of the Act as explained above, we are of the opinion that the order of the Tribunal confirming the order of the Commissioner (Appeals) does not suffer from any illegality. Both the appellate fora have taken into consideration the fact that on receipt of the notice following the search and seizure, the assessee has filed his returns within ten days of the expiry of the time stipulated for filing such returns and paid a part of the tax on the admitted undisclosed income. The view was, therefore, taken by both the appellate fora that on the facts of the case, the Assessing Officer ought not to have exercised his discretion for imposition of penalty.”

The ld. AR further submitted that the question whether penalty under Section 271AAB is mandatory or not, has also come up for scrutiny before various Benches of the Tribunal and it has been held to be discretionary in nature. In support, reliance was placed on decision in case of Mothukuri Somabrahman Vs. ACIT (ITA No. 126/Vizag/2017 dated 16.03.2018), ACIT, Central Circle-2 V/S. Marvel Associates (ITA No. 147/Vizag/2017), Manish Agarwal Vs. DCIT (ITA No. 1479/ Kol/2015, dated 09.02.2018), DCIT Vs. Subhas Chandra Agarwala (ITA No. 1470/Kol/2015 dated 19.02.2018), Ravi Mathur Vs. DCIT (ITA No. 969/JP/2017 dated 13.06.2018), Anuj Mathur vs. DCIT (ITA No. 971/JP/2017 dated 13th June 2018) and Shri Suresh Chand Mittal Vs. DCIT, CC-2 (ITA no. 931/JP/2017 order dated 02.07.2018).

It was accordingly submitted that levy of penalty is not mandatory in nature. It is to the discretion of AO to levy penalty or not after considering the facts of the case and after giving proper opportunity of being heard to the assessee. The penalty has been imposed based upon the wrong interpretation of law without going further into the facts of the case, hence, deserves to be deleted.

Per contra, the ld. DR submitted that the levy of penalty U/s 271AAB is mandatory in nature where the condition prescribed therein are satisfied. It was submitted that the provisions of Section 273B of the Act providing for non imposition of penalty are not applicable to the penalty provisions U/s 271AAB of the Act. It was further submitted that unlike Section 271AAA wherein immunity from imposition of penalty is possible subject to fulfillment of conditions in Section 271AAA(2), there is no immunity clause provided from penalty U/s 271AAB of the Act. It was accordingly submitted that the penalty U/s 271AAB is mandatory and is imposed at the varying rate of 10% to 30% depending on the fulfillment of certain conditions specified therein. The ld. DR placed reliance on the decision of Hon’ble Allahabad High Court in case of PCIT Vs. Sandeep Chandak [2018] 93 taxmann.com 405. It was further submitted that the decision of the Coordinate Bench in case of Ravi Mathur (supra) is distinguishable as the provisions of Section 273B were not considered in the said decision. Further, reliance was placed on the notes of clauses of the Finance Bill, 2012 relating to insertion of Section 271AAB of the Act. It was accordingly submitted that there is no discretion which has been granted by the legislature to the Assessing Officer in respect of penalty U/s 271AAB of the Act and the same is mandatory in nature. It was further submitted that the discretion which is available with the Assessing Officer is regarding the rate of penalty which can vary from 10% to 30% depending on the facts and circumstance of the particular case. It was accordingly submitted that the findings of the ld. CIT(A) regarding mandatory nature of penalty u/s 271AAB should be confirmed.

We have heard the rival contentions and perused the material available on record. We refer to the provisions of Section 271AAB which begins with the stipulation that the Assessing officer may direct the assessee and the assessee shall pay the penalty as per clause (a) to (c) so satisfied in sub-section (1) to Section 271AAB. Further, as per sub- section (3) of Section 271AAB, the provisions of section 274 and section 275 as far as may be applied in relation to penalty under this section which means that before levying the penalty, the Assessing officer has to issue a show-cause granting an opportunity to the assessee. Thus, the levy of penalty is not automatic but the Assessing officer has to decide based on facts and circumstances of the case after giving a reasonable opportunity to the assessee. Similar view has been taken by the various Co-ordinate Benches and useful reference can be drawn to the decision of the Co-ordinate Bench in case of ACIT vs Marvel Associates 92 Taxmann.com 109 wherein it was held as under:

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.

The contention of the ld DR that the provisions of Section 273B of the Act providing for non imposition of penalty are not applicable to the penalty provisions U/s 271AAB of the Act is correct but the same doesn’t take away the discretionary nature of penalty as discernable from the plain reading of Section 271AAB. It is also correct that the provisions of section 271AAB have been further strengthened in comparison to section 271AAA and unlike Section 271AAA(2), there is no immunity clause provided in 271AAB of the Act, at the same time, we are of the considered view that the legislature has retained the phrase “may” and thus the Assessing officer has been empowered to exercise his discretion to levy penalty depending upon facts and circumstances of a particular case. The contention of the ld DR that the discretion which is available with the Assessing Officer is limited to the rate of penalty which can vary from 10% to 30% depending on the facts and circumstance of the particular case is also not acceptable as the essential condition for levy of penalty that there is undisclosed income which is found during the course of search has to be necessarily satisfied before examining additional conditions so specified for determining the rate of penalty. Further, mere disclosure of income under section 132(4) would not automatically lead to levy of penalty but the Assessing officer has to give a clear and specific finding that the case of the assessee falls in the ambit of undisclosed so defined in the explanation to section 271AAB. The facts and circumstances of each case thus needs to be closely examined by the Assessing officer which shows that the levy of penalty is not automatic. Once the Assessing officer comes to a definitive finding that the case of the assessee falls within the ambit of section 271AAB, the quantum of penalty at the rate of 10% to 30% to be determined subject to explanation of the assessee. The decision of Hon’ble Allahabad High Court in case of PCIT Vs. Sandeep Chandak (supra) doesn’t support the case of the Revenue as the issue before the Hon’ble High Court was the defect in the notice issued under section 271AAB on account of mentioning the wrong provisions of section 271(1)(c) of the Act and in that context, it was held that:-

In light of above discussions, we are of the considered view that the levy of penalty under section 271AAB is not mandatory in nature and it needs to be examined whether there is any basis for levy of penalty and whether the assessee has satisfied the necessary conditions for levy of penalty u/s 271AAB. In the result, the ground of appeal is allowed.

The ld. AR further submitted that the proceeding under consideration is penal in nature and it is a settled legal position that penal section should be construed strictly. The Tribunal in the case of DCIT, CC (2), Kolkata Vs. Manish Agarwal (Supra) while discussing the penalty provisions u/s 271AAB has held that “the first contention of the Ld. AR is that since section 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.”

It was further submitted that Jaipur Bench of the Tribunal in case of Shri Ravi Mathur Vs. DCIT, CC-4, (Supra) and Shri Suresh Chand Mittal Vs. DCIT, CC-2 (Supra) has observed that merely on the basis of surrender and subsequently showing the same in return of income, penalty cannot be imposed under Section 271AAB. The A.O. is duty bound to examine the facts of the case in light of provision 271AAB including the definition of the word “undisclosed income” given in the said section. Penalty u/s 271AAB is attracted on undisclosed income but not on admission made by the assessee u/s 132(4) or disclosing income in return of income.

It was submitted by the ld AR that in the instant case penalty have been imposed and confirmed solely on the basis of admission u/s 132(4) and disclosure in return of income. It is important to note that during the penalty proceeding and before CIT(A), a detailed factual and legal submission was made and without pointing out any error in facts or contentions, penalty has been imposed and confirmed merely on the basis of above referred premises. Therefore, we submit hereinafter the facts viz.-a-viz. legal provision contained in Section 271AAB to examine whether income under consideration falls under ‘undisclosed income’ as defined in the said Section.

It was submitted by the ld AR that during the search, total surrender was of Rs. 26,50,50,888/- and on that penalty @ 10% of Rs. 2,65,05,090/- levied by the Ld. AO and confirmed by Ld. CIT(A), details of which is as follows:-

It was further submitted that Rs. 25,80,25,888/- was surrendered on account of excess stock found in statement recorded u/s 132(4). Excess stock at the time of search has been worked out in following manner:-

The ld. AR further submitted that during the search no incriminating documents found which suggest any purchase without recording into the books of accounts. The alleged undeclared stock is not clearly identifiable or does not have independent identity but is integral and inseparable part of declared stock. Assessee is dealing in these items, therefore, all these items are stock in trade for it. Further, assessee firm is in this trade since 1974. Assessee continuously values its stock at estimated cost as evident from the notes to accounts. The income surrendered has been disclosed in the return of income as business income, which has been accepted as it is in the assessment order.

It was further submitted that what emerges from the foregoing discussion of facts is that both the ingredients of working out the excess stock i.e. stock as per books and physical stock are based on estimation, approximation and full of tentativeness. It is well known fact that gross profit rate never remain constant. It is always varying depending upon the composition of product mixed, market scenario, nature of customer, financial position, volume etc. The value adopted under the facts are market value as on date on search which is inconsistent to the practice adopted by the assessee i.e. at estimated cost. Looking to the nature of trade wherein, various items took exorbitant long time to sell, since, assessee is dealing with antiques and precious items under the facts it becomes more important to work out the estimated cost also, which has not been worked out. Under the facts the working of excess stock not only on approximate basis but method is also not backed with legal provisions, which says it should be worked out in consistent manner. Due to the defective method of working out excess stock, assessee have been in fact taxed on expected profit on the stock in hand, which is not the intent of law and does not fall within the definition of term “undisclosed income”.

It was submitted that an analysis of definition of term “undisclosed income” given in section to 271AAB shows that there must be undisclosed income which is represented either wholly or partly by any money, bullion etc. It is important to note that according to Section, there are two limbs of undisclosed income, one is income and second is assets or expenditure. Both are exclusive to each other and cumulative in nature. By using the word “represented”, the legislature has departed from its intention and the meaning of the word “undisclosed income” from the meaning previously given to the undisclosed income u/s 158B(b) which is again reproduced for ready reference:- “undisclosed income” includes any money, bullion, jewellery or other valuable article or thing or any income based on any entry in the books of account or other documents or transactions, where such money, bullions, jewellery, valuable article, thing, entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purposes of this Act, or any expense, deduction or allowance claimed under this Act which is found to be false.”

It was submitted that perusal of the same shows that the definition of undisclosed income uses the word “includes” means neither it is exhaustive nor incomes or assets/expenses is mutually exclusive to each other. Perusal of the above definition shows that there should be an income which must be represented 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. In the instant case, neither any money, bullion, jewellery nor other valuable article nor thing nor any entry in the books of account nor other documents nor transactions found. Furthermore, there is no identifiable/ separable stock found, which can be said as undisclosed.

It was submitted that it is also relevant to note that there are two sub-clauses to the clause (i) to the definition which is cumulative in nature while reading the clause (i) defining the meaning of ‘undisclosed income’. Sub-clause (A) says that, not only any income represented by such valuables, documents or transactions should be found but also it must not be recorded on or before the date of search in the books of accounts or other documents maintained in regular course related to such previous year or (B) not otherwise been disclosed to the Chief- Commissioner before the date of search. In the instant case, there is not a single item/ document/transaction found which was not recorded in the books of accounts or not disclosed to Chief-Commissioner. Under the law and the facts, it is clear that there is no undisclosed income within the meaning given in the said section.

It was submitted that it is an admitted fact that there is no identifiable/separable stock found which can be said as undisclosed. More particularly, assessee has no unexplained purchases or sales. At most without admitting the excess stock, it is a case of difference in value, wherein same has been worked out on the basis of estimation, approximation and incorrect application of method. Under the facts and circumstances, the difference in value is due to such estimation and due to probable profit on stock in trade to be accrued. There is no real income and no real excess stock. Without establishing real income, no penalty can be imposed presuming the hypothetical income.

It was submitted that in the instant case, the surrender has been made on account of excess stock, it is not a case where during search, unaccounted sales or unexplained purchases have been found. Therefore, whenever the assessee will sell these stocks, the resulted profit will automatically get incorporated in its taxable profits. Under the facts and circumstances, in no case there would be any undisclosed income of the assessee, therefore, provision of this section is not attracted in the instant case.

It was accordingly submitted that forgoing discussions of the facts shows that it is not the case where Department either found any income or any assets or any expenses not recorded in the regular books of accounts or documents, hence, does not met the definition of undisclosed income given in Section 271AAB. It is clear that increase in value of stock will automatically reduce the profit in future at the time of sale, therefore, to avoid the protracted and imposed litigation and to buy peace of mind, surrender was made and disclosed in the return of income, as it will not impact the financial tax liability in totality.

It was submitted that the turnover of the firm during the year was Rs. 45.86 Crores. The declared gross profit and net profit of the business of the year under consideration is Rs. 35.34 Crores and Rs. 29.30 Crores respectively. Thus, G.P. rate comes to 77.06% and N.P. rate comes to 63.90%. This fact shows that the result shown is abnormal and not reflecting the correct picture of the year under consideration. In none of the previous assessed years, assessee has earned this much of profit.

It was further submitted that a perusal of the finding of CIT(A) shows that he has confirmed the penalty by observing that no quantum appeal has been made. It is a case where income has been offered for taxation, therefore question of appeal does not arises. Ld. CIT(A) failed to appreciate that penalty proceeding is not continuation of assessment proceeding. Further, he has not appreciated the factual and legal submission made before him wherein it is contended that there is no undisclosed income in term of section 271AAB. Under the facts and circumstances, his finding is misplaced and based upon the wrong presumption.

The ld AR placed reliance on the decision of the Tribunal in case of Mothukuri Somabrahman Vs. ACIT (ITA No. 126/Vizag/2017, vide order dated 16.03.2018) wherein it was held as under:

It was further submitted that since amount of excess stock has been worked out on estimation and by applying wrong method as explained herein before, even on estimated addition or income, no penalty can be imposed. Reliance was placed on the following decisions in case CIT vs. Raharnat Khan Birbaf Khan Badruddin & Party (1999) 240 ITR 778 (Raj), in case of Hari Gopal Singh Vs. CIT [2002] 258 ITR 85 (P&H), in case of CIT Vs. Ravail Singh & Co.[2002] 254 ITR 191 (P&H), in case of CIT v. Raj Bans Singh [2005] 276 ITR 351 (All), in case of J. A. Trivedi Bros. v. CIT [1986] 158 ITR 705 (MP) and in case of Bombay Hardware Syndicate v. CIT [1978] 114 ITR 586 (Mad).

It was finally submitted that it is clear that penalty has been imposed without considering the argument made before the A.O. and Ld. CIT(A), further, as demonstrated hereinbefore basic ingredients of imposing penalty u/s 271AAB i.e. any income represented by certain type of assets is missing in the instant case. The penalty provision has to read strictly without importing any word or meaning to unambiguous words and sentences used in the Section. Under the facts, circumstances and law, it is requested to delete the penalty which is imposed @ 10% u/s 271AAB by Ld.AO and confirmed by Ld. CIT(A).

It was submitted that Rs. 70,25,000/- was surrendered as advance to parties, which were not recorded in the books of account in the statement recorded u/s 132(4). Perusal of the facts shows that there is a diary which was placed in the drawer of a table. On the five pages of the diary, certain noting was there. Out of which noting contained on Page Nos. 1, 2 and 4 have been considered as an income. It is an important to note that entries in diary itself do not represent income of the assessee. It also does not represent that it is related to the year under consideration. In the instant case, no incriminating documents found which suggest that assessee has earned any undisclosed income pertaining to year under consideration. Therefore, in all probabilities, it may be related to the preceding years, hence, investment by way of advances itself does not reveal the nature of income and source of income of the year under consideration. Hence, it is not the undisclosed income as defined in the section 271AAB.

It was submitted that alternatively, it is relevant to note that entries under consideration is noted in a diary and placed under proper security, it is so because it proves that assessee does not have guilty mind and intention to conceal the income. It also does not prove that had there been no such operation, the assessee would not have declared such income in return of income. The said presumption is not tenable in law as ample time was left for filing the return of income. The Ld. A.O. has not brought on record anything to prove the intention of the assessee otherwise; further, even he has not doubted the intention of the assessee. Perusal of clause (i) and (ii) to explanation (c) to Section 271AAB reproduced hereinbefore shows that any entry can be termed as ‘undisclosed income’ only if either it is not entered in the books of accounts or documents maintained in normal course relating to such previous year or otherwise not been disclosed. It is relevant to note that entries under consideration were noted in a dairy used as Memorandum book as evident from the fact that said diary contains entries through bank as well as cash, which itself shows that it was maintained in normal course relating to previous year. Further, as far as intention of not to be disclosed, neither doubted nor it is a case of the A.O. Under the facts and circumstances, it does not fall under the definition of ‘undisclosed income’. Jurisdictional ITAT in case of Shri Ravi Mathur Vs. DCIT, CC-4, JP/2017 vide order dated 13th June,2018 and Shri Suresh Chand Mittal Vs. DCIT, CC-2, ITA no. 931/JP/2017 vide order dated 02.07.2018 has observed that the diary maintained is other document maintained in regular course, in the facts and circumstances of that case.

Per contra, the ld. DR submitted that undisputed facts are that the assessee has made disclosure of Rs. 25,80,28,888/- on account of excess stock found during the course of search, which was not recorded in its regular books of accounts. During the proceedings before the Ld. C1T(A), it has been submitted by the assessee that the stock was valued on the basis of estimation only. However, it is to be noted that the valuation made by the Department valuer during the search proceedings was accepted to be true and fair by the assessee firm in the statement recorded u/s 132(4). A reference may also made to schedule 16 relating to significant accounting policies and notes on accounts wherein it has been mentioned that the assessee firm does not maintain item wise purchase and sales and no stock register has been maintained and the estimated cost or that realizable value involves technical judgments of partner, which has been relied upon by the auditors. Thus, now no issue can be raised about the valuation of stock found during the course of search. Further, the assessee firm has incorporated the excess stock in its books of accounts for the year under consideration. The assessee firm has accepted the same as undisclosed income in its statement recorded u/s 132(4) of the Act. Thus, the excess stock is clearly covered under the definition of undisclosed income. It was further submitted that undisputed fact that the entries relating to advances made for purchases of land were not recorded in the regular books of accounts maintained in the normal course of business. Thus, in view of the above discussion, it is crystal clear that the undisclosed income declared by the assessee u/s 132(4) of the Act is squarely covered by the definition of ‘undisclosed income’. Otherwise, it is difficult to comprehend under what conditions and situations, the income declared by the assessees would fall under the definition of ‘undisclosed income’. In support, reliance was placed on decision in case of Sonal Steel Trading Pvt. Ltd. vs. ACIT (ITA No. 396/CHNY/2018 dated 23.07.2018). It was accordingly submitted that the penalty imposed by the AO u/s 271AAB should be sustained.

We have heard the rival contentions and perused the material available on record. It is a settled proposition that penalty provisions need to be construed strictly. For the purposes of levy of penalty u/s 271AAB, what has to be determined is whether the surrender so made, in terms of statement of the assessee’s partner recorded u/s 132(4) during the course of search, falls in the definition of “undisclosed income” of the specified previous year which has been specifically laid down in terms of clause (c) of explanation to section 271AAB which reads as under: “(c) "undisclosed income" means—

In the instant case, stock of gems, gold, silver and studded jewellery, precious and semi-precious stones, wooden articles, ivory items, marble items, other handicraft items and textile and readymade good were found during the course of search. These are goods which are regularly traded by the assessee and are thus stock-in-trade of the assessee firm. In this regard, what has to be determined is the income of such previous year which is represented by such stock of goods which is not found recorded in the books of accounts maintained by the assessee in the normal course relating to such previous year. The valuation of such excess stock is required to determine the investment which has been made in such excess stock and which has remained undisclosed to the Revenue authorities. The investment in stock is thus the function of price or cost at which stock has been purchased by the assessee and therefore, what is to be determined at the cost price of such stock and not the market price. Where such stock is ultimately sold, any profit arising therefrom would be brought to tax in regular course and the determination of market price would be relevant at that point in time. In other words, the value at which such stock has been acquired by the assessee and not the value which such stock can fetch in the market or the fair market value of such stock is to be determined.

In the instant case, it is noted that the assessee in the penalty proceedings before the Assessing officer and thereafter during the appellate proceedings before the ld CIT(A) has contended that the valuation of the goods classified as “Valuable items” has been done at market rate as on the date of search and in respect of goods classified as “other than valuable items”, besides the fact that valuation has been done on the basis of market value, the valuation so done is tentative and on lump-sum basis. It has been contended that valuation has been done without considering the cost disclosed in the regular books of accounts and without considering the well-accepted accounting policy which has been followed by the assessee firm where it values its stock at lower of cost and net realizable value. We find that in the penalty proceedings, there is no such exercise which has been undertaken by the Assessing officer to determine the cost of the goods so found during the course of search. The Assessing officer has merely gone by the surrender made during the course of search and such surrender has been made based on market value as on the date of search. In our view, given that the assessee has disclosed the whole of the amount surrendered during the course of search in its return of income, the amount so surrendered and disclosed in the return of income is subject matter of assessment and has rightly been brought to tax in the quantum proceedings. However, as far as present penalty proceedings u/s 271AAB are concerned which is solely based on the search proceedings and anyways independent of the assessment proceedings, the Assessing officer is required to give a specific finding that there is an undisclosed income found during the course of search in terms of undisclosed stock and which has not been recorded in the books of account. The undisclosed stock could be in terms of physically identifiable stock not found recorded in the books of accounts or the stock not found recorded at the appropriate value so determined by the Assessing officer. In the instant case, we find that the Assessing officer has merely gone by the surrender statement where the stock has been valued at market price prevailing as on the date of search and has not examined the matter from the perspective of determining separate identifiable stock not found recorded in the books of accounts and also the cost of such stock which is not recorded in the books of accounts. There is no finding that there is any excess stock which has been physically found and which has not been recorded in the books of accounts as on the date of search. In light of above discussions, it is thus clear that difference in stock of goods as per books and as found at the time of search is on account of valuation of such stock at the market value instead of cost and the same cannot be a basis to hold that it represent undisclosed income so defined in explanation to section 271AAB of the Act and the penalty levied thereon is liable to be set- aside.

Now, coming to surrender made on account of cash advances for land purchases in the statement recorded u/s 132(4) of the Act. During the course of search, a diary has been found wherein there are notings relating to advance given to various persons towards purchase of land. Therefore, what has been found during the course of search is certain entries relating to undisclosed investment in purchase of land. Besides the said entries, there are no other documents/material in terms of any agreement to sell, the description of the property etc, which has been found during the course of search. As per the definition of undisclosed income u/s 271AAB, the undisclosed investment in so called purchase of land cannot be stated to be income which is represented by any money, bullion, jewellery or other valuable article or thing. Whether it can then be said that such undisclosed investment 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. An investment 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 could be subsequent outflow by way of investment. Investment 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 recorded 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. In light of the same, the undisclosed investment by way of advance for purchase of land 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.

We are also conscious of the fact that there are deeming provisions in terms of section 69, 69A and 69B wherein such investments are deemed to be treated as income in absence of satisfactory explanation. In our view, the deeming fiction so envisaged under Section 69, 69A and Section 69B where investments which are found either not recorded or found recorded at a lesser value in the books of accounts, and such investments are deemed to be income of the assessee of the year in which such investments have been made, cannot be extended and applied automatically in context of section 271AAB. It is a well-settled legal proposition that the deeming provisions are limited for the purposes that have been brought on the statute book and have therefore to be applied in the context of provisions wherein they have been brought on the statue book and not otherwise. In the instant case, the deeming provisions are contained in section 69, 69A and section 69B and therefore, the same 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 in the instant case. 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.