B. JANARDHAN REDDY, HYDERABAD,HYDERABAD vs. DY. COMMISSIONER OF INCOME TAX, CIRCLE-6(1), HYDERABAD

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH “A” HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMEBR ITA No. 1465/Hyd/2017 Assessment Year: 2008-09

Janardhan Reddy Bekkery, vs. ACIT, Hyderabad. Central Circle-3 Presently PAN – ADYPB3929N DCIT, Circle – 6(1) Hyderabad. (Applicant) (Respondent)

Assessee by : Shri A.V. Raghuram Revenue by : Shri Dinesh Poduchuri Date of hearing : 14-05-2019 Date of pronouncement : 09-08-2019 ORDER PER P. MADHAVI DEVI, J.M.: This is assessee’s appeal for the A.Y 2008-09 against the levy of penalty u/s 271AAA of the Act and which has been confirmed by the CIT(A)-6, Hyderabad, vide orders dated 17.05.2017. 2. The brief facts of the case are that the assessee, an individual, had filed his return of income for the A.Y 2008- 09 on 18.07.2008, admitting a total income of Rs. 8,62,290/- and agricultural income of Rs. 49,100/-. The assessment was completed u/s 143(3) of the Act determining the total income of the assessee at Rs. 15,87,290/-. The A.O had made additions of (i)Rs. 1,15,000/- towards unexplained investment in Serilingampalli property; (ii) Rs.5 lakhs towards

2 ITA.No. 1465/Hyd/2017 Janardhan Reddy Bekkery., Hyderabad. unexplained money u/s 69A of the Act; (iii) Rs.60,000/- towards low withdrawals; and (iv) Rs.50,000/- as unexplained expenditure for lawyer fees and court expenses. The matter travelled up to ITAT and the ITAT deleted the additions of lawyer’s fee and court expenses claimed of Rs. 50,000/- and low withdrawals of Rs.60,000/-. However, with regard to the issue of unexplained money of Rs.5,00,000/- u/s 69A of the Act, low withdrawals of Rs. 60,000/- and unexplained investment in Serilingampalli property at Rs. 1,15,000/-, the ITAT set aside the same to the file of the A.O with a direction to frame the assessment afresh after considering the arguments of the assessee. The A.O therefore, required the assessee to explain with proper evidence as to how the notes of denomination of Rs. 1,000 (containing serial numbers) were found at the time of search if it were the old cash balances available with the assessee. The assessee submitted that he has no evidence to prove that the cash available was from explainable sources. Therefore, the A.O confirmed the addition of Rs. 5 lakhs u/s 69A of the Act. Aggrieved, the assessee preferred an appeal before the CIT(A) who confirmed the additions made by the A.O and the assessee filed second appeal before the ITAT and the ITAT also confirmed the additions of Rs. 5 lakhs and Rs. 1,15,000/-. Meanwhile the A.O initiated the penalty proceedings u/s 271AAA of the Act and levied the penalty of Rs. 61,500/- @ 10% of the undisclosed income assessed. Aggrieved, the assessee filed an appeal before the CIT(A) who confirmed the order of the A.O and the assessee is in second appeal before us.

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4 ITA.No. 1465/Hyd/2017 Janardhan Reddy Bekkery., Hyderabad. • (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) pays the tax, together with interest, if any, in respect of the undisclosed income. • (3) 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). • (4) The provisions of sections 274 and 275 shall, so far as may be, apply in relation to the penalty referred to in this section. • Explanation.—For the purposes of this section,— • (a) “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 Chief 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; • (b) “specified previous year” means the previous year— • (i) which has ended before the date of search, but the date of filing 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 said date; or • (ii) in which search was conducted.]

5.1. From a detailed reading of the above provision, we find that levy of penalty u/s 271AAA of the Act is not automatic but is subject to the Provisions of Sections 274 and 275. We find that the additions made by the A.O. and confirmed by ITAT have triggered the initiation of penalty proceedings u/s 271AAA of the Act, and the same is not covered by the provisions of Sec. 273B of the Act, but is covered by the provision of Sec.274 of the Act which provides as under.

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“Sec. 274. Procedure (1) No order imposing a penalty under this Chapter shall be made unless the assessee has been heard, or has been given a reasonable opportunity of being heard. (2) No order imposing a penalty under this Chapter shall be made- (a) by the Income- tax Officer, where the penalty exceeds ten thousand rupees; (b) by the Assistant Commissioner, where the penalty exceeds twenty thousand rupees, except with the prior approval of the Deputy Commissioner.] (3) An income- tax authority on making an order under this Chapter imposing a penalty, unless he is himself the Assessing Officer, shall forthwith send a copy of such order to the Assessing Officer'”

5.2. Thus, an opportunity of hearing has to be provided to the assessee and if the AO is not satisfied with the assessee’s explanation, then the penalty u/s 271AAA of the Act can be levied. Thus, it is seen that if the assessee gives an explanation, the AO has to consider the explanation of the assessee before imposing the penalty u/s 271AAA of the Act. 5.3. From the penalty order, we find that the assessee has not filed any Explanation before the A.O. except requesting the A.O. to keep the proceedings in abeyance till the assessee’s appeal before the ITAT is disposed of. The AO, however, concluded the proceedings by observing that the assessee has not submitted any explanation to the show cause notice dated 14.3.2012 issued u/s 271AAA r.w.s. 274 of the Act. The assessee has not filed any explanation even before the CIT(A), except for the cash book for the period 1/4/2007 to 31/3/2008 submitting that the opening balance of Rs.13,37,026.75 as the source

6 ITA.No. 1465/Hyd/2017 Janardhan Reddy Bekkery., Hyderabad. for the cash found. We find that the CIT(A) has clearly brought out that the sources for cash found and the investment are not explained by the assessee. Therefore, assessee’s argument that the assessee’s explanation has not been found to be false and, therefore, penalty is not sustainable is not acceptable. Further, we also find that the assessee has not fulfilled the conditions under Sub- Section (2) of Sec.271AAA of the Act to be out of the ambit of sub-section(1) of sec.271AAA of the Act. Therefore, penalty u/s 271AAA of the Act can be levied as the undisclosed income found during the course of search has not been substantiated by the assessee and it is also not proved that taxes have been paid thereon. The addition has also been confirmed by ITAT. Therefore, we cannot agree with the contentions of the Ld. Counsel for the assessee that the penalty u/s 271AAA of the Act is not attracted because the explanation of the assessee has not been proved to be wrong. Similar decision was taken by the Co-Ordinate Bench of the Tribunal at Pune in the case of ACIT vs. Shri Shailesh Gopal Mhaske, in ITA No.2242/PUN/2014 dated 27.9.2017. For ready reference, the relevant paras are as under:

“13. In order to adjudicate the issue, first we shall refer to Explanation under section 271AAA of the Act, which defines 'undisclosed income'. Undisclosed income means any income of 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 search under section 132 of the Act. The CIT(A) while deciding the issue has referred to part of definition of 'undisclosed income' though in the first part of para 6.4 of the appellate order, he refers that in the assessment order as well as penalty order, there is no whisper either of about any money, bullion, jewelry or other value article or thing or any entry in the books of account or other documents or transactions found in the course of search or books of account maintained in the

7 ITA.No. 1465/Hyd/2017 Janardhan Reddy Bekkery., Hyderabad. normal course but in the later part of para 6.4, he restricts the definition of 'undisclosed money' to income represented by any asset found or any entry in either seized books or regular books. He has lost sight of the transactions found as one of the conditions i.e. entry in the books of account or other documents and also transactions found in the course of search. As pointed out by us in the paras hereinabove, during the course of search, diary was found in which there was mention of transactions in white and black, other documents of expenditure were found and also the list of investments and investments in various assets both movable and immovable were declared by the assessee during search and in view of the said position, the assessee made a declaration of income which admittedly, falls within the definition of 'undisclosed income' and hence, we find no merit in the observations of CIT(A) in this regard and the same are reversed. 14. Now, coming to the main provisions of section 271AAA of the Act. The first grievance of assessee is that penalty proceedings have been initiated for furnishing of inaccurate particulars of income and concealment of income and hence, the satisfaction is incorrect. In case the assessment order and observations of the Assessing Officer are read, then he is only talking about additional income offered by the assessee. He also while concluding states that the additional / total income was offered for taxation only as a result of search action and since it was so offered, penalty proceedings under section 271AAA of the Act were initiated. Though, he mentions concealment of income and furnishing of inaccurate particulars of income but that limb does not decide the action undertaken by the Assessing Officer under section 271AAA of the Act and at best it is superfluous. 15. Coming to the order levying penalty under section 271AAA of the Act. Vide para 8, it is clearly mentioned that where the assessee had disclosed the income in the statement recorded under section 132(4) of the Act but taxes on the undisclosed income were not paid, that the assessee had not fulfilled the conditions of clause (iii) of sub-section (2) of section 271AAA of the Act. Hence, the Assessing Officer talks about the 'undisclosed income' which was basis for levying penalty under section 271AAA of the Act. Hence, the order levying penalty merits to be upheld in case the assessee has not fulfilled the conditions laid down in sub-section (2) of said section. In this regard, reliance was placed upon by the assessee on the Pune Bench of Tribunal in ACIT Vs. Shri Vikas Bapurao Takawane (supra) is misplaced, where satisfaction was for initiating penalty for concealment of income and furnishing of inaccurate particulars of income and the order levying penalty was also for concealment of income. The Tribunal notes that there was no reference of undisclosed income either in the assessment order or the order levying penalty under section 271AAAof the Act and where the Assessing Officer had failed to specify undisclosed income unearthed during the course of search as envisaged under the provisions of section 271AAA of the Act, penalty levied under the said section was deleted. We have already referred to the facts of the present case and order of Assessing Officer while recording satisfaction, wherein he talks about the income unearthed during the course of search and order levying penalty under section 271AAA of the Act, which specifically talks about undisclosed income and consequently, we find no merit in the reliance placed upon by the learned

8 ITA.No. 1465/Hyd/2017 Janardhan Reddy Bekkery., Hyderabad. Authorized Representative for the assessee in ACIT Vs. Shri Vikas Bapurao Takawane (supra). 16. Now, coming to the conditions to be fulfilled. In cases where the assessee claims the immunity from levy of penalty under section 271AAA of the Act, sub- section (2) provides that three conditions to be fulfilled but in actual fact there are four steps are to be undertaken before grant of any immunity under section 271AAA of the Act, which are as under:- a) Assessee in the statement recorded under section 132(4) of the Act admits the undisclosed income; b) Assessee satisfies the manner in which the income has been derived; c) Assessee substantiate the manner in which the undisclosed income was derived; and d) pays the taxes together with interest, if any, in respect of undisclosed income. 17. The assessee claims that it has fulfilled all the conditions of said sub- section (2) of section 271AAA of the Act and hence, there is no merit in the levy of penalty. Admittedly, yes, the assessee in the course of search while statement under section 132(4) of the Act was recorded, had admitted the undisclosed income. However, he failed to specify the manner in which the income was derived. Vide question No.25, he was specifically asked to explain the investments made in land / plots and movable & immovable assets, considering the non filing the income tax returns. In reply, he does not give any explanation about the said investments and the sources from where he has made the said investments but he voluntarily declared sum of Rs.2.30 crores towards his capital in Home Corporation, investment in movable and immovable assets, unexplained expenditure, drawings, etc. He also admitted that he would file yearwise breakup in due course, which he consequently, filed and the said breakup is tabulated at page 2 of the assessment order. The assessee in assessment years 2005-06 to 2011-12 in all, declared sum of Rs.2.39 crores as his additional income out of which sum of Rs.1.02 crores related to assessment year 2011-12. In the absence of assessee having satisfied the manner in which the income was derived and also specifying the manner, clause (i)(part) and clause (ii) under sub- section (2) of section 271AAA of the Act are not fulfilled. 18. The assessee in this regard has placed reliance on the decision of Chandigarh Bench of Tribunal in ACIT Vs. Munish Kumar Goyal (supra) and pointed out that where the assessee had furnished income in the course of search and filed the return of income and taxes were paid, there was sufficient compliance of provisions of section 271AAA(2) of the Act and it was held that the impugned penalty order deserves to be set aside. Reference is made to para 10 of the said order, wherein questions asked to the assessee during the course of search proceedings have been extracted. The question which was put to the assessee was do you want to say anything more. He replied that he voluntarily surrenders sum of Rs.4 crores for assessment year 2010-11 to cover all the discrepancies in the seized papers. The

9 ITA.No. 1465/Hyd/2017 Janardhan Reddy Bekkery., Hyderabad. Tribunal thus, in view thereof, observed that where the Revenue has not asked the assessee to disclose the manner in which said income was earned, then during search, the assessee must have disclosed the manner. However, in the facts of present case, there is variance that vide question No.25, the assessee was specifically asked to explain the investments in land and plots, movable and immovable assets and non filing of return of income. In reply, he did not give an explanation as to manner in which the income was earned and he only surrendered additional income in his hands for the year under consideration. The year before us is the year of search and in view of declaration made by the assessee on account of undisclosed income, then in view of sub-section (1) to section 271AAA of the Act, the assessee is to pay penalty in addition to taxes, if any, payable by him on such undisclosed income. Accordingly, we hold so. 19. Now, coming to the last clause of immunity under sub-section (2) of said section, wherein it is provided that the assessee is to pay taxes together with interest, if any, in respect of undisclosed income immediately preceding the assessment year relating to previous year in which search is conducted or any requisition is made. In the facts of present case, search action under section 132 of the Act on 10.02.2011 i.e. in the financial year under consideration. The assessee furnished the return of income on 05.03.2012 disclosing total income of Rs.1.01 crores. Subsequently, he filed the revised return on 14.03.2013 declaring income of Rs.1.25 crores. The assessment in the case was completed on 28.03.2013 and the order levying penalty under section 271AAA of the Act was passed on 20.09.2013. The assessee till the date of passing of penalty order under section 271AAA of the Act had not deposited the taxes due on the return of income. Even in the written submissions filed before the Assessing Officer in penalty proceedings under section 271AAA of the Act, the assessee has pointed out that he had only made part payment of taxes due. The assessee having defaulted to make the payment of taxes which were due, cannot be said to have fulfilled the conditions laid down in clause (iii) of sub-section (2) of section 271AAA of the Act. The learned Authorized Representative for the assessee had placed reliance on the ratio laid down by the Hon'ble Supreme Court in ACIT Vs. Gebilal Kanhaialal HUF (supra), wherein it has been held that while levying penalty under section 271(1)(c) of the Act, Explanation 5 is attracted in cases of search proceedings. The Hon'ble Supreme Court held that to grant immunity from payment of penalty, no time limit for payment of taxes is prescribed under clause (ii) of Explanation 5 to section 271(1)(c) of the Act. In the facts of said case, the apex court noted that the assessee had paid taxes with interest upto the date of payment and hence, three conditions stood fulfilled. The issue before the Hon'ble Supreme Court was with regard to return filed in response to notice under section 158BC of the Act, which was in addition to the regular returns of income for respective years of search period. On the other hand, penalty under section 271AAA of the Act is leviable in respect of regular return of income of search year. In the facts of present case before us, the assessee has not paid the taxes due on returned income (not additional income under section 158BC of the Act) till the date of passing the assessment order and even till date of passing the order levying penalty. The assessee claims to have paid the taxes thereafter, but such payment of taxes which does not accompany the return of income, cannot be

10 ITA.No. 1465/Hyd/2017 Janardhan Reddy Bekkery., Hyderabad. held to be compliance to the conditions laid down in sub-section (2) to section 271AAA of the Act. It may be pointed out that major portion of taxes have been paid after September, 2013 and consequently, we find no merit in the plea of assessee in this regard and the same is rejected. Accordingly, we reverse the findings of CIT(A) and uphold the levy of penalty under section 271AAA of the Act. The application moved under Rule 27 of the Rules is thus, dismissed and the grounds of appeal raised by the Revenue are allowed. 20. In the result, appeal of Revenue is allowed.” 5.4. Accordingly, by respectfully following the above decision, we reject the assessee’s grounds and the penalty u/s 271AAA is upheld. 6. In the result, the appeal filed by the assessee is dismissed. Pronounced in the open court on 09th August, 2019.

Sd/- Sd/- (S. RIFAUR RAHMAN) (P. MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, Dated:09th August, 2019

KRK *Gmv

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1) Shri B. Janardhan Reddy, 8-2-686/L/A, Road No. 12, Banjara Hills, Hyderabad. 2) DCIT, Circle – 6(1), Hyderabad.. 3) CIT(A)-6, Hyderabad. 4) Pr.CIT-6, Hyderabad. 5) The Departmental Representative, I.T.A.T., Hyderabad. 6) Guard File.

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Description Date Intls 1. Draft dictated on 14.05.19 2. Draft placed before author 14.05.19 07.08.19 Draft proposed & placed before the second 3 Member 4 Draft discussed/approved by second Member 5 Approved Draft comes to the Sr.P.S./PS 6. Kept for pronouncement on 09.08.19 7. File sent to the Bench Clerk 8 Date on which file goes to the Head Clerk 9 Date of Dispatch of order