SHRI SURESH CHAND MITTAL,JAIPUR vs. DEPUTY COMMISSIONER OF INCOME TAX , JAIPUR

PER VIJAY PAL RAO, J.M.

This appeal by the assessee is directed against the order dated 1ST November, 2017 of ld. CIT (A) arising from the penalty order passed under section 271AAB of the I.T. Act for the assessment year 2014-15. The assessee has raised the following grounds of appeal :-

“ 1. Under the facts and circumstances of the case the learned CIT (A) has erred in passed the order u/s 271AAB of the Income Tax Act, 1961 which is void ab-initio deserves to be quashed.

2 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

partnership firm, professional fee, short term capital gain and income from other

sources. A search was conducted in case of Okay Plus JKD Group at the residential and business premises of the assessee group on 4th September, 2013. The assessee

disclosed in the statement under section 132(4) an undisclosed income of Rs.

1,03,60,000/-. The assessee filed his return of income on 29.11.2014 declaring total

income of Rs. 1,14,78,820/- which includes undisclosed income of Rs. 1,03,60,000/-.

The AO has completed the assessment under section 143(3) read with section 153A of the IT Act on 23rd March, 2016 on the total income of Rs. 1,14,88,220/-. The AO

accepted the returned income except a disallowance of Rs. 9400/- of deduction

claimed under section 80C of the Act. The AO initiated the penalty proceedings under section 271AAB by issuing show cause notice dated 23rd March, 2016 when

the assessment order was passed and further a notice dated 12.08.2016 was also

issued under section 274 read with section 271AAB of the Act. In reply to the show

cause notice, the assessee raised the objection against the initiation of penalty

proceedings as the show cause notice issued under section 274 read with section

271AAB of the Act does not specify the grounds for levy of penalty. The assessee

contended before the AO that the AO himself is not sure whether the assessee has

3 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

committed default under section 271AAB or under section 271(1)(c) of the Act as

the show cause notice issued by the AO mentions both the sections i.e. 271AAB and

271(1)(c) of the Act. Further, the AO has also failed to specify the grounds

mentioned for levy of penalty as per the provisions of section 271AAB of the Act. On

merits, the assessee contended that in the statement recorded under section 132(4)

the assessee has specifically stated that he was declaring/surrendering the income

subject to his request that no penalty or penal action will be initiated. The additional

income was declared and offered to tax to avoid the prolong litigation and,

therefore, the same does not fall in the definition of undisclosed income as per the

provisions of section 271AAB of the Act. Thus the assessee raised various objections

before the AO including the invalid show cause notice issued by the AO for initiation

of penalty proceedings. The AO did not accept the contention of the assessee and

levied the penalty of Rs. 10,03,600/- under section 271AAB of the Act vide order dated 27th September, 2016. The assessee challenged the action of the AO before

ld. CIT (A) and raised the objection against the validity of show cause notice and

consequential penalty order. However, the ld. CIT (A) has confirmed the action of

the AO of levying the penalty.

proceedings were not initiated lawfully/legally. The AO has mentioned in the

assessment order in para 11 & 12 that –

“ 11. The total income declared in ROI for the ‘specified year’ included the

undisclosed income of Rs. 1,03,60,000/- which represented the undisclosed

income. Accordingly penalty u/s 271AAB of the Act is initiated on such

4 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

amount of Rs. 1,03,60,000/- by way of issue of notice u/s 274 r.w.s. 271AAB

of the Act.

of notice u/s 274 r.w.s. 271AAB of the Act and u/s 271(1)(c) of the Income-

tax act, 1961 are initiated for concealment of particulars/furnishing of

inaccurate particulars of income.”

The ld. A/R submitted that in the assessment order the AO has not recorded his

satisfaction as to in what manner the provisions of section 271AAB are attracted in

the case. The AO has not discussed the default of the assessee attracting the

provisions of section 271AAB. The assessment has been completed accepting the

returned income. The return was filed by the assessee voluntarily on 29.11.2014

prior to receipt of notice u/s 142(1) issued by the AO on 22.04.2015. In fact there

was no occasion for issuing notice u/s 142(1) when the assessee had filed the return

voluntarily. In the assessment order there is no reference of any statement of the

assessee recorded under section 132(4) of the IT Act, 1961. There is also no

reference whether the assessee surrendered any undisclosed income in the

statement. The assessment order is totally silent in this respect. Therefore, without

recording his satisfaction the AO was not justified in initiating penalty proceedings

under section 271AAB of the IT Act.

3.1. The ld. A/R further submitted that 271AAB has three different limbs for levy

of penalty at three different rates (i) 10% u/s 271AAB(1)(a), (ii) 20% u/s

271AAB(1)(b) and (iii) 30% u/s 271AAB(1)(c). It is the submission of the assessee

5 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

that a duty was cast upon the AO to initiate penalty proceedings specifically and

seek reply of the assessee accordingly. But nothing was done of this sort. The

show cause notice issued along with the assessment order is also silent regarding

the applicability of the specific section for levy of penalty. In the absence of this,

the assessee was precluded in submitting a cogent reply. The Hon’ble Karnataka

High Court in the case of Manjunatha Cotton & Ginning Factory, 259 ITR 565 (Kar.)

has held that penalty not leviable in similar circumstances. Thus the ld. A/R

submitted that this being a legal lacuna, penalty levied may kindly be deleted.

3.2. The ld. A/R has relied on the decision of Chennai Bench of the Tribunal dated 5th April, 2018 in the case of DCIT vs. Shri R. Elangovan in ITA No. 1199/CHNY/2017

and submitted that the Tribunal in the said case while considering the validity of

show cause notice and initiation of proceedings under section 271AAB and following

the decision of Hon’ble Karnataka High Court in the case of CIT vs. Manjunatha

Cotton & Ginning Factory (supra) as well as the decision of Hon’ble Supreme Court

dismissing the SLP filed by the revenue in the case of CIT vs. SSA’s Emerald

Meadows, 242 Taxman 150 (SC) held that the notice issued under section 274 read

with section 271AAB of the Act not specifying the ground and clauses for levy of

penalty was not valid and consequently the penalty order was set aside. The ld.

A/R has also relied on the decision of Hon’ble Jurisdictional High Court in the case of

Sheveta Construction Co. Pvt. Ltd. in DBIT Appeal No. 534/2008 dated 06.12.2016.

Thus the ld. A/R has submitted that the order of imposing penalty under section

271AAB is unlawful and not sustainable in law. The second leg of contention of ld.

A/R is that without giving the finding that the income in question is an undisclosed

6 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

income as per sec. 271AAB and particularly the explanation under section 271AAB

defining the term ‘undisclosed income’ the order passed by the AO is a non-speaking

illegal order. He has further submitted that no undisclosed income was found during

the course of search under section 132 of the Act though a loose paper was found

and seized which contains the loans/advances given by the assessee to various

persons. The said entries in the document giving the loan amount is itself is not an

income and only if any interest is earned on such advances/loans, the same will be

the income of the assessee. The revenue authorities have exerted undue pressure

and obtained the surrender of income from the assessee. He has referred to the Board’s Circular dated 10th March, 2003 and submitted that the Board has expressed

its concern about the practice of confession of additional income during the course

of search and seizure proceedings and, therefore, clarified that the confession during

the course of search and survey operation do not serve any useful purpose. There

should be focus and concentration on collection of evidence of income which leads

to information on what has not been disclosed or is not likely to be disclosed before the Income Tax Department. The Board has again issued a Circular dated 18th

December, 2014 and advised the taxing authorities to avoid obtaining admission of

undisclosed income under coercion/undue influence. The ld. A/R has thus

contended that except the statement under section 132(4) there is no undisclosed

income in the case of the assessee. The assessee was forced to admit and

surrender the income in the statement recorded under section 132(4). The

provisions of section 271AAB clearly requires that such undisclosed income to be

substantiated and, therefore, the assessee is required to specify the manner in

7 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

which such income has been derived and further substantiate the same furnishing

material available with him. In the absence of any record or material to show any

undisclosed source of income, the entire disclosure on papers is to avoid undue

harassment and unwanted litigation. The ld. A/R has then contended that the AO

while passing the order under section 271AAB has to examine the case in terms of

the provisions of said section and, therefore, the levy of penalty under section

271AAB is not automatic but discretionary. Only when the AO is satisfied that the

conditions as prescribed under section 271AAB are satisfied as contained in various

clauses of sub-section (1), the penalty can be levied accordingly. In the absence of

such finding of the AO as to how the case of the assessee falls under the purview of

section 271AAB, the impugned order passed by the AO is contrary to the provisions

of the Act and, therefore, liable to be quashed. In the instant case no query was

raised by the authorized officer during the course of recording of statement of

assessee u/s 132(4) about manner in which undisclosed income has been derived

and about its substantiation. In the absence of query raised by authorized officer,

the AO was not justified in imposing penalty u/s 271AAB specially when offered

undisclosed income had been accepted and due tax had been paid by assessee. The

ld. A/R submitted that in section 271AAB the word ‘may’ is used instead of ‘shall’ so

it is not mandatory but it is discretionary. 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 where the authorities have not

used their discretion to provide relief to the assessee. It is settled position of law

8 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

that penalties are not compulsory, not mandatory but are always discretionary

considering the overall facts and circumstances of the case. In imposition of penalty

mens-rea also plays a vital role before imposing the penalty, it is always compulsory

to prove the mens-rea of the assessee as malafide for concealment of income or for

avoidance of any provision of law in force intentionally. In the case of the assessee,

the AO has not mentioned anything in the assessment order passed by him on

28.12.2016 u/s 143(3)/153B(1)(b) of the Act. From the assessment order it is clear

that the assessee has maintained a separate diary for the income surrendered

during the course of search. The diary was also maintaining as books of accounts

(placed on paper book page no. 1 to 5). In this diary all the entries are for the

current financial year i.e. from 01.04.2014 to date of search i.e. 31.10.2014. All the

transactions are recorded. Nothing adverse was found which suggest that the

assessee’s intention was not to disclose the income recorded in the seized

documents. The settled position of law is that the power to levy penalty inherently

has power not to levy penalty. Thus, the ld. CIT (A) confirmed the penalty under a

wrong notion. The provisions of section 271AAB itself speak that these are not

mandatory. He has referred to section 271AAB and submitted that the term “ The

AO may” used in the section does not make the levy of penalty as mandatory. The

section starts that the Assessing Officer “MAY” direct. Thus it is not ‘SHALL’ which

would have made the levy of penalty mandatory. Thus the ld. CIT (A) was wrong in

observing that levy of penalty u/s 271AAB was mandatory. Secondly the provisions

of section 271AAB(3) lay down that penalty shall be levied under the section with

reference to section 274. In other words the provisions of section shall apply in

9 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

levying penalty under this section. Section 274 speaks that “ No order imposing

penalty under this chapter shall be made unless the assessee has been heard or has

been given a reasonable opportunity of being heard.” Thus hearing has to be given

to the assessee before levy of penalty. This itself shows that penalty is leviable only

after hearing the assessee and in case assessee is able to make out a case by

showing some reasonable cause or otherwise then penalty shall not be leviable.

Penalty is not leviable automatic. The ld. A/R placed reliance on the following case

laws :-

Principal Commissioner of Income Tax vs. Shri Sandeep Chandak (Allahabad High Court) ITA No. 122 of 2017 dated 27.11.2017.

DCIT vs. Madan Lal Beswal (ITAT Kolkata) in ITA No. 1475/Kol2015 dated 14.3.2018.

ACIT vs. M/s. Marvel Associates (ITAT Vizag) in ITA No. 147/Vizag/2017 dted 16.03.2018.

DCIT vs. Shri R. Elangovan (ITAT Chennai) in ITA No. 1199/CHNY/2017 dated 05.04.2018.

ACIT vs. Mothukuri Somabrahmam (ITAT Vizag) in ITA No. 126/Vizag/2017 dated 16.03.2018.

The ld. A/R submitted that in view of the aforesaid discussion and various case laws

cited above the penalty in this case would not be levied because of the following

facts :-

(i) There is no valid ground given in the assessment order for

initiating penalty proceedings.

(ii) The initiation of penalty is statutorily defective.

10 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

(iii) The assessee filed the return in good faith and surrendered

income to purchase peace of mind and avoid litigation.

(iv) Assessment has been completed accepting the income declared

by the assessee.

(v) If at all there is any default it is technical. There is virtually no

concealment of income. No particulars of income have been

filed inaccurately.

3.3. On the other hand, the ld. D/R has submitted that the assessee was very well

aware about the default and the nature of income he has disclosed and surrendered

during the statement recorded under section 132(4) of the IT Act. The surrender in

question was made because the assessee was unable to explain the source of the

investment in question. It is clear case of undisclosed income detected during the

course of search and seizure action and, therefore, the surrender made by the

assessee itself is self-explanatory to the nature of income surrendered by the

assessee. The ld. D/R has contended that the assessee has participated in the

penalty proceedings and has not raised any objection or has demanded before the

AO about his unawareness of the nature of default attracting the levy of penalty

under section 271AAB. It is not the case of the assessee that the disclosure was

taken under coercion and further the assessee has offered the said amount to tax in

the return of income which rules out the scope of any pressure or coercion by the

search team for taking disclosure from the assessee. Thus the objection raised by

the assessee that the AO has not specified the clause under section 271AAB(1) of

11 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

the Act has no merit when the assessee himself has explained the nature of income

disclosed and surrendered and also paid the tax on the same. The ld. D/R has

submitted that as per the explanatory note of Finance Bill, 2012, the provisions of

section 271AAB are mandatory in nature and AO has no discretion but the assessee

shall pay the penalty in addition to the tax on the undisclosed income surrendered

under section 132(4) of the Act. She has relied upon the orders of the authorities

below.

3.4. The ld. D/R has also relied upon the decision of Hon’ble Allahabad High Court in case of Principal CIT vs. Sandeep Chandak and Others dated 27th November, 2017

in I.T. Appeal No. 122, 128 and 129 of 2017 and submitted that even otherwise if

the show cause notice does not mention the section correctly it will not be invalid as

the AO will get the benefit of section 292BB of the Act. The ld. D/R has also relied

upon the decision of Kolkata Bench of the Tribunal in the case of DCIT vs. Amit

Agarwal, 88 taxmann.com 288.

record. During the course of search and seizure action under section 132 conducted

on 04.09.2013 at the residence and business premises of the assessee, a loose

paper was found and seized containing various entries of advances/loans given to 8

(eight) persons. The rate of interest against each entry is also mentioned. Thus it is

clear that the seized document contains the principal amount of loan given by the

assessee to various persons total amounting to Rs. 1,01,10,000/-. The assessee in

his statement recorded under section 132(4) has disclosed an income of Rs.

1,01,10,000/-. The assessee has also surrendered an income of Rs. 2,50,000/- on

12 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

account of interest on surrendered income. In the return of income the assessee

has offered the said income of Rs. 1,03,60,000/- which includes the principal loan

amount and interest of Rs. 2,50,000/- to tax. The AO accepted the returned income

except a disallowance of claim under section 80C of Rs. 9,400/-. Subsequently, the

AO initiated the proceedings under section 271AAB of the Act by issuing the show cause notice dated 23rd March, 2016 and again by notice dated 12.08.2016. The

assessee objected to initiation of penalty proceedings as well as levy of penalty

proposed by the AO, however, could not succeed. The AO imposed the penalty of

Rs. 10,03,600/- @ 10% of the undisclosed income while passing the penalty order

dated 27.09.2016.

4.1. At the outset, we note that on identical facts, issues as well as the

contentions raised by the parties, this Bench of the Tribunal in case of Ravi Mathur vs. DCIT in ITA No. 969/JP/2017 dated 13th June, 2018 has considered and decided

the issue of levy of penalty 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

13 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

assessee is an Individual and was not maintaining regular books of account. Therefore, the transactions recorded in the pocket diary found during the course of search itself would not lead to the presumption that the assessee would not have offered this income to tax if the search is not conducted on 30th October, 2014. Further, the entries in the diary itself do no not represent the income of the assessee during the year under consideration though the assessee was required to explain the source of investment in question and that source would be the income of the assessee. It is most likely that the investment in question was made from the unaccounted income of preceding years. Hence the investment in the real estate itself would not reveal the nature of income and the source of income of the year under consideration. It is a pre-condition for invoking the provisions of section 271AAB that the assessee admitted the undisclosed income in the statement under section 132(4). The definition of ‘undisclosed income’ is provided in section 271AAB itself and, therefore, the AO in the proceedings under section 271AAB has to examine all the facts of the case and then arrive to the conclusion that the income disclosed by the assessee falls in the definition of undisclosed income as stipulated in the explanation to said section. The first question arises is whether the levy of penalty under section 271AAB is mandatory and consequential to the disclosure of income by the assessee under section 132(4) or the AO has to take a decision whether the given case has satisfied the requirements for levy of penalty under section 271AAB of the Act. In order to consider this issue, the provisions of section 271AAB are to be analyzed. For ready reference, we quote section 271AAB as under :-

“ 271AAB. (1) The Assessing Officer may, notwithstanding anything contained in any other provisions of this Act, direct that, in a case where search has been initiated under section 132 on or after the 1st day of July, 2012 49[but before the date on which the Taxation Laws (Second Amendment) Bill, 2016 receives the assent of the President50], the assessee shall pay by way of penalty, in addition to tax, if any, payable by him,— (a) a sum computed at the rate of ten per cent of the undisclosed income of the specified previous year, if such assessee— (i) in the course of the search, in a statement under sub-section (4) of section

14 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

132, admits the undisclosed income and specifies the manner in which such income has been derived; (ii) substantiates the manner in which the undisclosed income was derived; and (iii) on or before the specified date— (A) pays the tax, together with interest, if any, in respect of the undisclosed income; and (B) furnishes the return of income for the specified previous year declaring such undisclosed income therein; (b) a sum computed at the rate of twenty per cent of the undisclosed income of the specified previous year, if such assessee— (i) in the course of the search, in a statement under sub-section (4) of section 132, does not admit the undisclosed income; and (ii) on or before the specified date— (A) declares such income in the return of income furnished for the specified previous year; and (B) pays the tax, together with interest, if any, in respect of the undisclosed income; (c) a sum 51[computed at the rate of sixty per cent] of the undisclosed income of the specified previous year, if it is not covered by the provisions of clauses (a) and (b). 52[(1A) The Assessing Officer may, notwithstanding anything contained in any other provisions of this Act, direct that, in a case where search has been initiated under section 132 on or after the date on which the Taxation Laws (Second Amendment) Bill, 2016 receives the assent of the President, the assessee shall pay by way of penalty, in addition to tax, if any, payable by him,— (a) a sum computed at the rate of thirty per cent of the undisclosed income of the specified previous year, if the assessee— (i) in the course of the search, in a statement under sub-section (4) of section 132, admits the undisclosed income and specifies the manner in which such income has been derived; (ii) substantiates the manner in which the undisclosed income was derived; and (iii) on or before the specified date— (A) pays the tax, together with interest, if any, in respect of the undisclosed income; and (B) furnishes the return of income for the specified previous year declaring such undisclosed income therein; (b) a sum computed at the rate of sixty per cent of the undisclosed income of the specified previous year, if it is not covered under the provisions of clause (a).] (2) No penalty under the provisions of 53[section 270A or] clause (c) of sub-section (1) of section 271 shall be imposed upon the assessee in respect of the undisclosed income referred to in sub-section (1) 52[or sub-section (1A)]. (3) The provisions of sections 274 and 275 shall, as far as may be, apply in relation to the penalty referred to in this section.

15 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

Explanation.—For the purposes of this section,— (a) "specified date" means the due date of furnishing of return of income under sub- section (1) of section 139 or the date on which the period specified in the notice issued under section 153A for furnishing of return of income expires, as the case may be; (b) "specified previous year" means the previous year— (i) which has ended before the date of search, but the date of furnishing the return of income under sub-section (1) of section 139 for such year has not expired before the date of search and the assessee has not furnished the return of income for the previous year before the date of search; or (ii) in which search was conducted; (c) "undisclosed income" means— (i) any income of the specified previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search under section 132, which has— (A) not been recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous year; or the 54[Principal (B) otherwise not been disclosed to Chief or 54[Principal Commissioner or] Chief Commissioner Commissioner or] Commissioner before the date of search; or (ii) any income of the specified previous year represented, either wholly or partly, by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the specified previous year which is found to be false and would not have been found to be so had the search not been conducted.]”

The section begins with the stipulation that the AO “may” direct the assessee shall pay by way of penalty if the conditions as prescribed under clauses (a) to (c) are satisfied. As per sub-section (3) of section 271AAB the provisions of section 274 and 275 as far as may be applied in relation to the penalty referred in this section which means that before imposing the penalty under sec. 271AAB, the AO has to issue a show cause notice and give a proper opportunity of hearing to the assessee. Thus the levy of penalty u/s. 271AAB is not automatic but the A.O. has to take a decision to impose the penalty after giving a proper opportunity of hearing to the assessee. It is statutory requirement that the explanation of the assessee for not fulfilling the

16 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

conditions as prescribed u/s 271AAB of the Act is required to be considered by the AO and particularly whether the explanation furnished by the assessee is bonafide and non-compliance of the same is due to the reason beyond the control of the assessee. Therefore, the penalty u/s 271AAB is not a consequential act but the AO has to first initiate proceedings by issuing a show cause notice and after considering the explanation and reply of the assessee has to take a decision. This requirement of giving an opportunity of hearing itself makes it clear that the penalty u/s 271AAB is not mandatory but the AO has to take a decision based on the facts and circumstances of the case otherwise there is no requirement of issuing any notice for initiation of proceedings but the levy of penalty would be consequential and only computation of the quantum was to be done by the AO as in the case of levy of interest and fee u/s 234A to E. Even the quantum of penalty leviable u/s 271AAB is also subject to the condition prescribed under clauses (a) to (c) of sub-section (1) and the AO has to again give a finding for levy of penalty @ 10% or 20% or 30% of the undisclosed income. Thus the AO is bound to take a decision as to what default is committed by the assessee and which particular clause of section 271AAB(1) is attracted on such default. Further, mere disclosure of income under section 132(4) would not ipso facto par take the character of undisclosed income but the facts of each case are required to be analyzed in objective manner so as to attract the provisions of section 271AAB of the Act. Since it is not automatic but the AO has to give a finding that the case of the assessee falls in the ambit of undisclosed income as defined in Explanation to the said section. Therefore, the provisions of section 271AAB stipulate that the AO may come to the conclusion that the assessee shall pay the penalty. The only mandatory aspect in the provision is the quantum of penalty as specified under clauses (a) to (c) of Sec. 271AAB(1) of the Act as 10% to 30% or more as against the discretion given to the AO as per the provisions of section 271(1)(c) of the Act where the AO has the discretion to levy the penalty from 100% to 300% of the tax sought to be evaded. Thus the AO is duty bound to come to the conclusion that the

17 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

case of the assessee is fit for levy of penalty under section 271AAB and then only the quantum of penalty being 10% or 20% or 30% has to be determined subject to the explanation of the assessee for the defaults.

“ The ld. A.Rs have also challenged that the caption of the notice mentioned only Section 271 and not 271AAB. In this respect, the copy of notice has been produced by the ld. A.R. before me. It is seen that the ld. A.R is correct in observing that the section of penalty has not been correctly mentioned by the AO in the caption. However, the AO will get the benefit of section 292BB of the Income Tax Act, 1961 because firstly, the assessee has raised no objection before the AO in this regard. Secondly, last line of the notice clearly mentions section 271AAB. Thirdly, the assessee has given reply to said notice which shows that the assessee fully comprehended the implication of the notice that it is for section 271AAB. The assessee has also challenged that the principles of natural justice has not followed by the AO. The detailed submissions of A.R in this regard has already been reproduced above. The A.R did not produce any evidence to show that he was not given proper opportunity of hearing. It is clear from the penalty order that the AO has given

18 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

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.

19 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

the Act are identical. Hence, argued that the penalty section 271AAB of the Act penalty is not automatic and it is on the merits of each case. For ready reference, we reproduce hereunder section 158BFA (2) of the Act and section 271AAB of the Act which reads as under; 271AAB [Penalty where search has been initiated]:

(1) The Assessing Officer may, notwithstanding anything contained in any other provisions of this Act, direct that, in a case where search has been initiated under section 132 on or after the 1 st day of July, 2012, the assessee shall pay by way of penalty, in addition to tax, if any, payable by him—

(a) a sum computed at the rate of ten per cent of the undisclosed income of the specified previous year, if such assessee—

(i) in the course of search, in a statement under sub-section (4) of section 132, admits the undisclosed income and specifies the manner in which such income has been derived.

(ii) Substantiates the manner in which the undisclosed income was derived; and

(iii) On or before the specified date—

(A) pays the tax, together with interest, if any, in respect of the undisclosed income; and

(B) furnishes the return of income for the specified previous year declaring such undisclosed income therein;

(b) a sum computed at the rate of twenty per cent of the undisclosed income of the specified previous year, if such assessee—

(i) in the course of the search, in a statement under sub-section (4_) of section 132, does not admit the undisclosed income; and

(ii) on or before the specified date—

(A) declares such income in the return of income furnished for the specified previous year; and

(B) pays the tax, together with interest, if any, in respect of the undisclosed income; (c) a sum which shall not be less than thirty per cent but which shall not exceed ninety per cent of the undisclosed income of the specified previous year, if it is not covered by the provisions of clauses (a) and (b).

20 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

(2) No penalty under the provisions of clause (c) of sub-section (1) of section 271 shall be imposed upon the assessee in respect of the undisclosed income referred to in sub-section (1).

Section 158BFA(2):

(2) The Assessing Officer or the Commissioner (Appeals) in the course of any proceedings under this Chapter, may direct that a person shall pay by way of penalty a sum which shall not be less than the amount of tax leviable but which shall not exceed three times the amount of tax so leviable in respect of the undisclosed income determined by the Assessing Officer under clause (c) of section 158BC:

Provided that no order imposing penalty shall be made in respect of a person if—

(i) such person has furnished a return under clause (a) of section 158BC;

(ii) the tax payable on the basis of such return has been paid or, if the assets seized consist of money, the assessee offers the money so seized to be adjusted against the tax payable.

(iii) Evidence of tax paid is furnished along with the return; and

(iv) An appeal is not filed against the assessment of that part of income which is shown in the return:

Provided further that the provisions of the preceding proviso shall not apply where the undisclosed income determined by the Assessing Officer is in excess of the income shown in the return and in such cases the penalty shall be imposed on that portion of undisclosed income determined which is in excess of the amount of undisclosed income shown in the return.

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

21 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

evident that the penalty cannot be imposed unless the assessee is given a reasonable opportunity and assessee is being heard. Once the opportunity is given to the assessee, the penalty cannot be mandatory and it is on the basis of the facts and merits placed before the A.O. Once the A.O. is bound by the Act to hear the assessee and to give reasonable opportunity to explain his case, there is no mandatory requirement of imposing penalty, because the opportunity of being heard and reasonable opportunity is not a mere formality but it is to adhere to the principles of natural justice. Hon’ble A.P. High Court in the case of Radhakrishna Vihar in ITTA No.740/2011 while dealing with the penalty u/s 158BFA held that ‘we are of the opinion that while the words shall be liable under sub section (1) of section 158BFA of the Act that are entitled to be mandatory, the words may direct in sub section 2 there of intended to directory’. In other words, while payment of interest is mandatory levy of penalty is discretionary. It is trite position of law that discretion is vested and authority has to be exercised in a reasonable and rational manner depending upon the facts and circumstances of the each case. Plain reading of section 271AAB and 274 of the Act indicates that the imposition of penalty u/s 271AAB of the Act is not mandatory but directory. Accordingly we hold that the penalty u/s 271AAB is not mandatory but to be imposed on merits of the each case.”

Thus the Tribunal has held that the levy of penalty under section 271AAB is not mandatory but the AO has the discretion to take a decision and shall be based on judicious decision of the AO. Hence we fortify our view by the above decisions of Tribunal in case of ACIT vs. Marvel Associates.

22 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

specify the default committed by the assessee to attract the penalty @ 10% or 20% or 30% of the undisclosed income. There is no dispute that the AO has not specified the default and charge against the assessee which necessitated the levy of penalty under section 271AAB of the Act. Consequently, the assessee was not given an opportunity to explain his case for specific default attracting the levy of penalty in terms of clauses (a) to (c) of section 271AAB(1) of the Act. The Channai Bench of the Tribunal in the case of DCIT vs. Shri R. Elangovan (supra) at pages 7 to 10 has held as under :-

“ It is clear from the Sub Section (3) of Section 271 AAB that Sections 274 and Section 275 of the Act shall, so far as may be, apply. Sub Section (1) of Section 274 of the Act mandates that order imposing penalty has to be imposed only after hearing the assessee or giving a assessee opportunity of hearing. Opportunity that is to be given to the assessee should be a meaningful one and not a farce. Notice issued to the assessee reproduced (supra), does not show whether penalty proceedings were initiated for concealment of income or for furnishing inaccurate particulars of income or for having undisclosed income within the meaning of Section 271AAB of the Act. Notice in our opinion was vague. Hon’ble Karnataka High Court in the case of SSA’s Emerald Meadows (supra) relying in its own judgment in the case of Manjunatha Cotton and Ginning Factory (supra) had held as under:-

‘’2. This appeal has been filed raising the following substantial questions of law:

(1) Whether, omission if assessing officer to explicitly mention that penalty proceedings are being initiated for furnishing of inaccurate particulars or that for concealment of income makes the penalty order liable for cancellation even when it has been proved beyond reasonable doubt that the assessee had concealed income in the facts and circumstances of the case?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the penalty notice under Section 274 r.w.s. 271(1)(c) is bad in law and invalid despite the amendment of Section 271(1B) with retrospective

23 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

effect and by virtue of the amendment, the assessing officer has initiated the penalty by properly recording the satisfaction for the same?

(3) Whether on the facts and in the circumstances of the case, the Tribunal was justified in deciding the appeals against the Revenue on the basis of notice issued under Section 274 without taking into consideration the assessment order when the assessing officer has specified that the assessee has concealed particulars of income?

In the earlier case of Manjunatha Cotton and Ginning Factory (supra) their lordship had observed as under:-

‘’Notice under section 274 of the Act should specifically state the grounds mentioned in section 271(1)(c), i.e., whether it is for concealment of income or for furnishing of incorrect particulars of income. Sending printed form where all the grounds mentioned in section 271 are mentioned would not satisfy the requirement of law ;

The assessee should know the grounds which he has to meet specifically. Otherwise, the principles of natural justice are offended. On the basis of such proceedings, no penalty could be imposed on the assessee ; ) taking up of penalty proceedings on one limb and finding the assessee guilty of another limb is bad in law ; penalty proceedings are distinct from the assessment proceedings : though proceedings for imposition of penalty emanate from proceedings of assessment, they are independent and a separate aspect of the proceedings ;

The findings recorded in the assessment proceedings in so far as “concealment of income” and “furnishing of incorrect particulars” would not operate as res judicata in the penalty proceedings. It is open to the assessee to contest the proceedings on the merits. However, the validity of the assessment or reassessment in pursuance of which penalty is levied, cannot be the subject matter of penalty proceedings. The assessment or reassessment cannot be declared invalid in the penalty proceedings’’.

24 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

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.

25 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

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 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

26 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

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. 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

27 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

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.

“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:-

28 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

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 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

29 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

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.

30 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

and drew our attention to page one of assessment order, (not the penalty order) wherein we note that the AO has acknowledged that the assessee owned up Rs. 3 cr. as his income from commodity profit and it has been disclosed in his income and expenditure for AY 2013-14 under the head “income out of speculative business from sale of commodities”, and thereafter the AO confirmed the assessee’s claim and thereafter total income was assessed by the AO as per the return submitted by the assessee. In the light of the aforesaid facts discerned from assessment order, the assessee’s case is that for the first time in this AY he was doing unsystematic speculative activity which earned income and, it was brought under the head “Income from Other Sources”, and so, accordingly, he is not required to maintain books of account as stipulated in Sec. 44AA or Sec. 44AA(2)(ii) of the Act because, these provisions are only for assesses who are earning income under the head “Business or profession”. We note that Sec. 44AA or Sec. 44AA(2)(ii) of the Act casts a duty upon the assessee who are into “Business or Profession” and such assessee’s are bound to maintain books of account as stipulated therein. For appreciating this submission let us go through the provisions of law. “44AA. (1) Every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette shall 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. (2) Every person carrying on business or profession [not being a profession referred to in subsection (1)] shall,— (i) if his income from business or profession exceeds [one lakh twenty] thousand rupees or his total sales, turnover or gross receipts, as the case may be, in business or profession exceed or exceeds [ten lakh] rupees in any one of the three years immediately preceding the previous year; or (ii) where the business or profession is newly set up in any previous year, if his income from business or profession is likely to exceed [one lakh twenty] thousand rupees or his total sales, turnover or gross receipts, as the case may be, in business or profession are or is likely to exceed [ten lakh] rupees, [during such previous year; or

(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]]

31 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

(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 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

32 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

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 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

33 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

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.

(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) ………. (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—

34 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

(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. 8. In the result, the appeal of the revenue is dismissed. 4. We find that the facts in the aforesaid case and the decision rendered thereon are squarely applicable to the facts of the instant cases before us and respectfully following the same, we dismiss the appeals of the revenue.”

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

35 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

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.”

Since the nature of entries in the case of the are identical being advances given

by the assessee to various parties on interest, therefore, the amount of advance

itself is not in the nature of income though the source of the advances can be

added to the income of the assessee. The assessee has explained the source of

the said advances from his activities. Accordingly, by following the earlier order

of this Tribunal, we delete the penalty levied by the AO under section 271AAB of

the Act.

36 ITA No. 931/JP/2018 Shri Suresh Chand Mittal, Jaipur.

आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. vihykFkhZ@The Appellant-Shri Suresh Chand Mittal, Jaipur. 2. izR;FkhZ@ The Respondent-The DCIT, Central Circle-2, Jaipur. 3. vk;dj vk;qDr@ CIT 4. vk;dj vk;qDr@ CIT(A) 5. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत 6. xkMZ QkbZy@ Guard File {ITA No. 931/JP/2018}

vkns'kkuqlkj@ By order,

सहायक पंजीकार@Aेेज. त्महपेजतंत