INCOME TAX OFFICER, NCRB, STATUE CIRCLE, JAIPUR vs. VAIBHAV GATTANI, GANGORI BAZAR, JAIPUR

This appeal by the Revenue is directed against the order of the learned Commissioner of Income Tax (Appeals), Jaipur- 4 [hereinafter referred to as “the CIT(A)”] dated 21.02.2025 arising out of the penalty order dated 23.03.2020 passed by the Assessing Officer (hereinafter referred to as “the AO”) under section 271AAB(1)(a) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for the assessment year 2016-17.

The grounds of appeal raised by the Revenue before us in the memorandum of appeal in Form No. 36 read as under:

Briefly stated, the facts of the case are that the assessee is an individual and a constituent of the K.K. Gattani Group, Jaipur. A search and seizure action under section 132 of the Act was carried out on 07.01.2016 in the case of the K.K. Gattani Group, of which the assessee forms part. In the course of the search, a diary marked as Annexure A-2 was seized from the business premises of the assessee. In the statement recorded under section 132(4) of the Act, the assessee surrendered additional income of Rs 14,23,05,000 for the year under consideration, comprising unaccounted cash of Rs 8,05,000 found at the residence and a further sum of Rs 14,15,00,000 referable to the notings in the seized diary. The surrender was reaffirmed by the assessee’s letter dated 25.09.2017, and the entire sum was included in the return of income filed under section 139(1) of the Act on 16.10.2016 declaring total income of Rs 15,11,35,560.

The assessment was completed under section 143(3) read with section 153B(1)(b) of the Act on 18.12.2017 at a total income of Rs 15,11,52,060. The

Penalty proceedings under section 271AAB of the Act had been initiated during the course of the assessment. After the quantum addition was deleted by the CIT(A), the AO issued a fresh show cause notice and, upon considering the assessee’s reply, passed the impugned penalty order dated 23.03.2020 under section 271AAB(1)(a) of the Act. In that order the AO reproduced the provisions of section 271AAB of the Act, set out the essential ingredients of the section, and held that all of them were satisfied. The AO reasoned that the undisclosed income of Rs 14,23,05,000 had been admitted in the statement under section 132(4) of the Act, reaffirmed by the letter dated 25.09.2017, declared in the return and the tax thereon paid, and that the surrender rested upon incriminating documents found in the search and could not be explained away as having been made merely to buy peace. On that basis the AO levied penalty at the rate of ten per cent on the entire surrendered sum of Rs 14,23,05,000, computed at Rs 1,42,30,500. The AO did not undertake any separate examination of whether the sum of Rs 14,15,00,000 referable to the diary notings independently fell within the statutory definition of undisclosed income.

On appeal, the CIT(A), by the impugned order dated 21.02.2025, partly allowed the appeal, deleting the penalty referable to the sum of Rs 14,15,00,000 and confirming the penalty referable to the cash of Rs 8,05,000.

In deleting the penalty of Rs 1,41,50,000 referable to the sum of Rs 14,15,00,000, the CIT(A) undertook a detailed examination of the seized material and recorded a series of findings. He found that the notings in the seized diary did not disclose the name of the recipient, the name of the payer, the date of payment, the purpose of the advance, the term of the advance or the rate of interest, and that there was no reference to any material or statement corroborating such large unaccounted transactions. He further found that no matching undisclosed tangible asset, and no source from which such earnings could be said to have accrued, had been found in the course of the search and seizure action. Placing reliance on the decisions of this Bench in the cases of Padam Chand Pungliya(ITA No. 112/JP/2018, dated 05.04.2019), Rajendra Kumar GuptaGupta (IT Appeal No. 359/JP/2017, dated 18-1-2019), and Nikhil Madan (ITA No. 117/JP/2018, dated 27.07.2020), the CIT(A) held that the admission in the statement recorded under section 132(4) of the Act does not, by itself, constitute incriminating material or undisclosed income in the absence of any corresponding asset or entry representing such income, that the burden lay upon the Department to establish the existence of the persons named and of the underlying transactions or assets, and that, in the absence of such particulars, the entries were vague and might well relate to persons who were not shown to exist. On that reasoning he concluded that the notings did not represent real transactions, that they lacked sufficient particulars, and that the sum of Rs 14,15,00,000 did not answer the definition of undisclosed income given in the Explanation to section

As regards the cash of Rs 8,05,000, the learned CIT(A) confirmed the penalty, holding that such cash was represented by money, was not recorded in the books of account, and could be detected only on account of the search and seizure action, so that the conditions of the definition of undisclosed income under section 271AAB of the Act stood satisfied. It is the deletion of penalty of Rs 1,41,50,000 that is assailed by the Revenue in the present appeal.

The learned Departmental Representative (hereinafter referred to as “the DR”), supporting the grounds of appeal, submitted that the sum of Rs 14,15,00,000 was admitted by the assessee in the statement under section 132(4) of the Act on the basis of the incriminating document found and seized in the search, that the admission is substantive evidence which was never retracted and was reaffirmed by the letter dated 25.09.2017 and offered to tax in the return, and that but for the search the income would not have been detected. It was urged by the learned DR that the seized diary is “other documents” within the definition of undisclosed income and that the additional income was not offered on the assessee’s own volition but on the basis of the incriminating material found in the search. Reliance was placed by the learned DR on MAK Data (P.) Ltd. v. CIT [2013] 358 ITR 593 (SC).

The learned Authorised Representative (hereinafter referred to as “the AR”) supported the impugned order and submitted that the sum of Rs 14,15,00,000 was recorded merely as loose notings of advances in a diary found during the search, without any date, name, address, mode of payment or particulars of the persons concerned, and without any

We have heard the rival contentions and perused the material available on record. The short and the only question that falls for our determination is whether the sum of Rs 14,15,00,000 surrendered in the statement recorded under section 132(4) of the Act and reflected as notings of advances in the seized diary constitutes undisclosed income within the meaning of the Explanation to section 271AAB of the Act so as to attract penalty under clause (a) of sub-section (1) thereof.

Before dealing with the rival contentions, it is useful to notice the scheme of section 271AAB of the Act. The relevant portion reads as under:

The charge in every clause of the section is levied not upon the amount surrendered as such, but upon the undisclosed income of the specified previous year. The existence of undisclosed income, as defined in clause (c) of the Explanation, is thus the jurisdictional foundation of the levy. The use of the word “may”, read with the mandate of section 274 of the Act, indicates that the AO is required to apply his mind and record a finding that the surrendered amount answers the statutory definition, rather than to treat the levy of penalty as an automatic consequence of the disclosure.

Being a penal provision which carries its own exhaustive definition of the very income on which it operates, section 271AAB of the Act must be construed strictly, and the amount sought to be penalised must be shown to fall squarely within one or the other limb of the definition. It follows, and this Bench has consistently held, that the mere admission or surrender of an amount in a statement recorded under section 132(4) of the Act does not, by itself, clothe that amount with the character of undisclosed income for the purposes of the section. The disclosure under section 132(4) of the Act is made during the course of the enquiry and not at its conclusion. The AO remains obliged to examine the facts and to record a finding that the surrendered sum answers the definition before penalty can be fastened upon it.

These principles now stand authoritatively settled by the Hon’ble Supreme Court. In K. Krishnamurthy (supra), which arose under section 271AAA of the Act, being the provision analogous to and the immediate predecessor of section 271AAB of the Act, the Hon’ble Supreme Court held that the imposition of penalty is not mandatory and that the discretion conferred upon the AO by the word “may” is not unfettered, unbridled and uncanalised but must be a sound discretion guided by law. Their Lordships further held that such a penalty provision must be strictly construed, that the mere surrender of income in the course of search or in a statement recorded thereunder is not sufficient to fasten the levy, and that the onus lies upon the AO to establish that undisclosed income was found in the course of the search. The Hon’ble Supreme Court observed in paragraphs 34 and 35 of its judgment as under:

Tested on this touchstone, the sum in question does not qualify as undisclosed income. The seized diary recorded notings of advances given to various persons. Such advances are plainly not money, bullion, jewellery or other valuable article or thing found in the search. Nor can they be said to be income represented by any entry or transaction found in the course of the search, because an advance represents an outflow of funds from the hands of the assessee, whereas the definition contemplates an inflow of funds not recorded before the date of search. The second limb of the definition, which deals with a false entry of an expense recorded in the regular books, has no application. The distinction between an outflow by way of advance and an inflow by way of income goes to the root of the charge, because what the legislature has sought to bring within section 271AAB of the Act is undisclosed income, and not the application of funds. This is precisely the view taken by the coordinate Benches in the decisions relied upon by the learned CIT(A).

The point is placed beyond doubt by the manner in which the AO himself dealt with the amount in the quantum proceedings. The AO did not invoke section 68 or section 69 of the Act to bring the sum of Rs 14,15,00,000 to tax as income from an undisclosed source, but accepted the same as the assessee’s income of the year. The deeming fictions of sections 69 and 69B of the Act, being confined to the purposes for which they are enacted, cannot in any event be automatically imported into section 271AAB of the Act, which carries its own self contained definition of undisclosed income.

The AO proceeded solely on the strength of the admission, without recording the requisite finding that the sum fell within the definition. As the Hon’ble Supreme Court has held in K. Krishnamurthy (supra), the onus lay upon the AO to demonstrate and prove that the amount represented undisclosed income found in the course of the search, and that onus remained undischarged. The very foundation for the levy on this head was thus found wanting.

The reliance by the Revenue on MAK Data (P.) Ltd. (supra) is misplaced. That decision was rendered in the context of section 271(1)(c) of the Act and dealt with the evidentiary effect of a voluntary surrender for the purpose of a concealment penalty. It does not dilute, much less displace, the specific and exhaustive definition of undisclosed income enacted in section 271AAB of the Act. The question before us is not whether the surrender was voluntary or whether it was retracted, but whether the surrendered amount falls within the statutory definition, and for the reasons already recorded, it does not. The contention that the amount must be presumed to be undisclosed income because it would not have surfaced but for the search is, in substance, an invitation to apply the deeming fiction of section 69 of the Act to the penalty provision, which, for the reasons already given, is impermissible. A levy of penalty cannot rest upon a presumption piled upon an inference, in the absence of any material establishing an inflow of undisclosed income.

We do not find any inconsistency in the order of the CIT(A) that would warrant interference at the instance of the Revenue. The character of each item has to be tested against the statutory definition on its own facts. The cash of Rs 8,05,000 was money found in the search and answered the definition, whereas the sum of Rs 14,15,00,000 was referable to vague

In the light of the foregoing discussion, and having regard to the law laid down by the Hon’ble Supreme Court in K. Krishnamurthy (supra), we hold that the sum of Rs 14,15,00,000 does not fall within the definition of undisclosed income given in the Explanation to section 271AAB of the Act, and that the penalty of Rs 1,41,50,000 levied thereon under section 271AAB(1)(a) of the Act was rightly deleted by the CIT(A). We find no reason to interfere with the impugned order. The grounds raised by the Revenue are accordingly rejected.

In the result, the appeal filed by the Revenue is dismissed.