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Income Tax Appellate Tribunal, JAIPUR BENCHES, JAIPUR
Before: SHRI VIJAY PAL RAO, JM & SHRI BHAGCHAND, AM vk;dj vihy la-@ITA No. 969/JP/2017
PER VIJAY PAL RAO, J.M.
This appeal by the assessee is directed against the order dated 17.11.2017 of ld. CIT (A)-4, Jaipur arising from penalty order passed under section 271AAB of the IT Act for the assessment year 2015-16. 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.
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Under the facts and circumstances of the case the learned CIT (A) has erred in confirming the action of the learned Assessing Officer in imposing the penalty of Rs. 1,00,20,000/- u/s 271AAB of the Income Tax Act, 1961.
The assessee craves your indulgence to add, amend or alter all or any grounds of appeal before or at the time of hearing.”
The assessee is an Individual and derives income during the year under
consideration from salary, house property and other sources. A search under sec.
132 was conducted in the case of the assessee on 30.10.2014. During the course of
search and seizure action certain incriminating documents were found and seized.
The statement of the assessee was recorded under sec. 132(4). The assessee
disclosed an income of Rs. 10.02 crores in his statement recorded under sec. 132(4) of the IT Act. The assessee filed his return of income on 30th September, 2015
declaring total income of Rs. 10,95,23,110/- including the surrendered income of Rs.
10.02 crores. The AO completed the assessment under sec. 143(3) read with sec. 153B (1)(b) on 28th December, 2016 accepting the returned income of the assessee.
Subsequently, the AO initiated the proceedings for levy of penalty u/s 271AAB of the Act by issuing a show cause notice dated 28th December, 2016 and further vide notice dated 3rd March, 2017. The assessee contested the notice issued by the AO
for levy of penalty u/s 271AAAB. The AO imposed the penalty of Rs. 1,00,20,000/- u/s 271AAB of the Act vide order dated 24th April, 2017. Aggrieved by the order of
imposing the penalty, the assessee filed an appeal before the ld. CIT (A). The
assessee raised a specific ground of validity of the show cause notice as well as
the consequential impugned order passed under section 271AAB of the Act on the
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ground that the show cause notice did not contain any particulars of undisclosed
income with reference to which the penalty was leviable. In the absence of specific
ground and particulars of undisclosed income, the assessee was not in a position to
submit his cogent reply and thus it was contended that the initiation of proceedings
to levy penalty under section 271AAB is unlawful and consequential penalty order is
also not sustainable in law. The assessee relied upon the decision of this Tribunal as
well as the decision of Hon’ble Karnataka High Court in the case of CIT vs.
Manjunatha Cotton & Ginning Factory, 259 ITR 565 (Kar.). The ld. CIT (A) did not
accept the contention of the assessee and upheld the validity of initiation of penalty
proceedings as well as levy of penalty under section 271AAB of the Act while passing
the impugned order.
Before us, the ld. A/R of the assessee has submitted that the AO issued show cause notice on 28th December, 2016 along with completion of assessment and thereafter a show cause notice dated 3rd March, 2017 was issued for imposing
penalty under section 271AAB. Both the notices were issued in a routine manner
without mentioning under which clause of section 271AAB of the Act the assessee is
liable for penalty. The ld. A/R has submitted that section 271AAB(1) has three
clauses (a) to (c) and each clause of sub-section (1) to sec. 271AAB provides the
circumstances and violation attracting the penalty @ 10% or 20% or 30% of
undisclosed income of specified previous year. The ld. A/R has pointed out that
even in the assessment order the AO has not specified under which clause the
penalty is liable to be imposed but the AO has mentioned the penalty proceedings
under section 271AAB of the IT Act are being initiated. Thus there is no application
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of mind at the time of issuing the show cause notice as the show cause notice issued
by the AO do not specify the undisclosed income on which the assessee is required
to show cause. Even the AO has not given any ground for levy of penalty for which
the assessee could put his defence. Thus the ld. A/R has contended that in the
absence of specific charge against the assessee, he was not in a position to counter
the show cause notice issued by the AO as well as his cogent reply to the show
cause notice. Though the AO while passing the impugned order has imposed the
penalty as per clause (a) of section 271AAB(1) of the Act, however, no such ground
was specified in the show cause notice issued under section 271AAB read with
section 274 of the Act. Therefore, the show cause notice was unlawful in view of
the decision of Hon’ble Karnataka High Court in the case of CIT vs. Manjunatha
Cotton & Ginning Factory (supra). The ld. A/R has also 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
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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 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
though a pocket diary was found and seized during the search which contains the
advances given by the assessee for purchase of land. However, the said entry in
the pocket diary giving advances for purchase of land itself is not an undisclosed
income. 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
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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
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
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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
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
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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
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 levyable 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 :-
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(i) There is no valid ground given in the assessment order for
initiating penalty proceedings.
(ii) The initiation of penalty is statutorily defective.
(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.
3.1. 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
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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
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.
3.2. 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.
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
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year of search and the financial year would end on 31st March, 2015. However, the
assessee disclosed this amount of Rs. 10,02,00,000/- based on the entries in the
diary regarding investment in real estate. The due date of filing of return of income under section 139(1) was 30th September, 2015. It is undisputed fact that the
assessee is an Individual and was not maintaining regular books of account.
Therefore, the transactions recorded in the pocket diary found during the course of
search itself would not lead to the presumption that the assessee would not have offered this income to tax if the search is not conducted on 30th October, 2014.
Further, the entries in the diary itself do no not represent the income of the
assessee during the year under consideration though the assessee was required to
explain the source of investment in question and that source would be the income of
the assessee. It is most likely that the investment in question was made from the
unaccounted income of preceding years. Hence the investment in the real estate
itself would not reveal the nature of income and the source of income of the year
under consideration. It is a pre-condition for invoking the provisions of section
271AAB that the assessee admitted the undisclosed income in the statement under
section 132(4). The definition of ‘undisclosed income’ is provided in section 271AAB
itself and, therefore, the AO in the proceedings under section 271AAB has to
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
12 ITA NO. 969/JP/2017 Shri Ravi Mathur, Jaipur.
whether the given case has satisfied the requirements for levy of penalty under
section 271AAB of the Act. In order to consider this issue, the provisions of section
271AAB are to be analyzed. For ready reference, we quote section 271AAB as
under :- “ 271AAB. (1) The Assessing Officer may, notwithstanding anything contained in any other provisions of this Act, direct that, in a case where search has been initiated under section 132 on or after the 1st day of July, 2012 49[but before the date on which the Taxation Laws (Second Amendment) Bill, 2016 receives the assent of the President50], the assessee shall pay by way of penalty, in addition to tax, if any, payable by him,— (a) a sum computed at the rate of ten per cent of the undisclosed income of the specified previous year, if such assessee— (i) in the course of the search, in a statement under sub-section (4) of section 132, admits the undisclosed income and specifies the manner in which such income has been derived; (ii) substantiates the manner in which the undisclosed income was derived; and (iii) on or before the specified date— (A) pays the tax, together with interest, if any, in respect of the undisclosed income; and (B) furnishes the return of income for the specified previous year declaring such undisclosed income therein; (b) a sum computed at the rate of twenty per cent of the undisclosed income of the specified previous year, if such assessee— (i) in the course of the search, in a statement under sub-section (4) of section 132, does not admit the undisclosed income; and (ii) on or before the specified date— (A) declares such income in the return of income furnished for the specified previous year; and (B) pays the tax, together with interest, if any, in respect of the undisclosed income; (c) a sum 51[computed at the rate of sixty per cent] of the undisclosed income of the specified previous year, if it is not covered by the provisions of clauses (a) and (b). 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
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132, admits the undisclosed income and specifies the manner in which such income has been derived; (ii) substantiates the manner in which the undisclosed income was derived; and (iii) on or before the specified date— (A) pays the tax, together with interest, if any, in respect of the undisclosed income; and (B) furnishes the return of income for the specified previous year declaring such undisclosed income therein; (b) a sum computed at the rate of sixty per cent of the undisclosed income of the specified previous year, if it is not covered under the provisions of clause (a).] (2) No penalty under the provisions of 53[section 270A or] clause (c) of sub-section (1) of section 271 shall be imposed upon the assessee in respect of the undisclosed income referred to in sub-section (1) 52[or sub-section (1A)]. (3) The provisions of sections 274 and 275 shall, as far as may be, apply in relation to the penalty referred to in this section. Explanation.—For the purposes of this section,— (a) "specified date" means the due date of furnishing of return of income under sub- section (1) of section 139 or the date on which the period specified in the notice issued under section 153A for furnishing of return of income expires, as the case may be; (b) "specified previous year" means the previous year— (i) which has ended before the date of search, but the date of furnishing the return of income under sub-section (1) of section 139 for such year has not expired before the date of search and the assessee has not furnished the return of income for the previous year before the date of search; or (ii) in which search was conducted; (c) "undisclosed income" means— (i) any income of the specified previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search under section 132, which has— (A) not been recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous year; or the 54[Principal (B) otherwise not been disclosed to Chief 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.]”
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The section begins with the stipulation that the AO “may” direct the assessee shall
pay by way of penalty if the conditions as prescribed under clauses (a) to (c) are
satisfied. As per sub-section (3) of section 271AAB the provisions of section 274 and
275 as far as may be applied in relation to the penalty referred in this section which
means that before imposing the penalty under sec. 271AAB, the AO has to issue a
show cause notice and give a proper opportunity of hearing to the assessee. Thus
the levy of penalty u/s. 271AAB is not automatic but the A.O. has to take a decision
to impose the penalty after giving a proper opportunity of hearing to the assessee.
It is statutory requirement that the explanation of the assessee for not fulfilling the
conditions as prescribed u/s 271AAB of the Act is required to be considered by the
AO and particularly whether the explanation furnished by the assessee is bonafide
and non-compliance of the same is due to the reason beyond the control of the
assessee. Therefore, the penalty u/s 271AAB is not a consequential act but the AO
has to first initiate proceedings by issuing a show cause notice and after considering
the explanation and reply of the assessee has to take a decision. This requirement
of giving an opportunity of hearing itself makes it clear that the penalty u/s 271AAB
is not mandatory but the AO has to take a decision based on the facts and
circumstances of the case otherwise there is no requirement of issuing any notice for
initiation of proceedings but the levy of penalty would be consequential and only
computation of the quantum was to be done by the AO as in the case of levy of
interest and fee u/s 234A to E. Even the quantum of penalty leviable u/s 271AAB is
also subject to the condition prescribed under clauses (a) to (c) of sub-section (1)
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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 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.
Before we proceed further, the decisions relied upon by the ld. D/R are to be
considered. In the case of Principal CIT vs. Sandeep Chandak & Others (supra) the
issue before the Hon’ble High Court was the defect in the notice issued under
section 271AAB on account of mentioning wrong provision of the Act being 271(1)(c)
of the Act. The Hon’ble High Court after considering the fact that the show cause
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notice issued by the AO though mentions section 271(1) in the caption of the said
notice, however, the body of the show cause notice clearly mentions section
271AAB, which was fully comprehended by the assessee as reveals in the reply filed
by the assessee against the said show cause notice. Hence the Hon’ble High Court
has held as under :-
“ The ld. A.Rs have also challenged that the caption of the notice mentioned only Section 271 and not 271AAB. In this respect, the copy of notice has been produced by the ld. A.R. before me. It is seen that the ld. A.R is correct in observing that the section of penalty has not been correctly mentioned by the AO in the caption. However, the AO will get the benefit of section 292BB of the Income Tax Act, 1961 because firstly, the assessee has raised no objection before the AO in this regard. Secondly, last line of the notice clearly mentions section 271AAB. Thirdly, the assessee has given reply to said notice which shows that the assessee fully comprehended the implication of the notice that it is for section 271AAB. The assessee has also challenged that the principles of natural justice has not followed by the AO. The detailed submissions of A.R in this regard has already been reproduced above. The A.R did not produce any evidence to show that he was not given proper opportunity of hearing. It is clear from the penalty order that the AO has given penalty notice and which was also replied by the assessee. Therefore, in my opinion, principle of natural justice has not been violated. Thus in view of above discussion penalty imposed by AO u/s 271AAB of the Act is confirmed.”
17 ITA NO. 969/JP/2017 Shri Ravi Mathur, Jaipur.
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.
The question whether levy of penalty under section 271AAB by the AO is
mandatory or discretionary has been considered by the Visakhapatnam Bench of this
Tribunal in case of ACIT vs. M/s. Marvel Associates (supra) in para 5 to 7 as under :-
We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. During the appeal hearing, the Ld. A.R. vehemently argued that the A.O. has levied the penalty under the impression that the levy of penalty in the case of admission of income u/s 132(4) is mandatory. The Ld. A.R. further stated that penalty u/s 271AAB of the Act is not mandatory but discretionary. The provisions of section 271AAB of the Act is parimateria with that of section 158BFA of the Act relating to block assessment and accordingly argued that the levy of penalty under section 271AAB is not mandatory but discretionary. When there is reasonable cause, the penalty is not exigible. The Ld. A.R. taken us to the section 271AAB of the Act and also section 158BFA(2) of the Act and argued that the words used in section 271AAB of the Act and the words used in section 158BFA(2) of the Act are identical. Hence, argued that the penalty section 271AAB of the Act penalty is not automatic and it is on the merits of each case. For ready reference, we reproduce hereunder section 158BFA (2) of the Act and section 271AAB of the Act which reads as under;
18 ITA NO. 969/JP/2017 Shri Ravi Mathur, Jaipur.
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).
(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).
19 ITA NO. 969/JP/2017 Shri Ravi Mathur, Jaipur.
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.
Careful reading of section 271AAB of the Act, the words used are ‘AO may direct’ and ‘the assessee shall pay by way of penalty’. Similar words are used section 158BFA(2) of the Act. The word may direct indicates the discretion to the AO. Further, sub section (3) of section 271AAB of the Act, fortifies this view. Sub section (3) of section 271AAB:
The provisions of section 274 and 275 shall, as far as may be, apply in relation to the penalty referred to in this section.
The legislature has included the provisions of section 274 and section 275 of the Act in 271AAB of the Act with clear intention to consider the imposition of penalty judicially. Section 274 deals with the procedure for levy of penalty, wherein, it directs that no order imposing penalty shall be made unless the assessee has been heard or has been given a reasonable opportunity of being heard. Therefore, from plain reading of section 271AAB of the Act, it is evident that the penalty cannot be imposed unless the assessee is given a reasonable opportunity and assessee is being heard. Once the opportunity is given to the assessee, the penalty cannot be mandatory and it is on the basis of the facts and merits placed before the
20 ITA NO. 969/JP/2017 Shri Ravi Mathur, Jaipur.
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.
As regards the validity of notice under section 274 for want of specifying the
ground and default, we find that when the basic condition of the undisclosed income
not recorded in the books of accounts does not exists, then the same has to be
specified by the AO in the show cause notice and further the AO is required to give a
finding while imposing the penalty under section 271AAB. Even if the AO is satisfied
and come to the conclusion that the assessee has not recorded the undisclosed
income in the books of accounts or in the other documents / record maintained in
normal course relating to specified previous year, the show cause notice shall
also specify the default committed by the assessee to attract the penalty
21 ITA NO. 969/JP/2017 Shri Ravi Mathur, Jaipur.
@ 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
22 ITA NO. 969/JP/2017 Shri Ravi Mathur, 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?
The Tribunal has allowed the appeal filed by the assessee holding the notice issued by the Assessing Officer under Section 274 read with Section 271(1)(c) of the Income Tax Act, 1961 (for short ‘the Act’) to be bad in law as it did not specify which limb of Section 271(1)(c) of the Act, the penalty proceedings had been initiated i.e., whether for concealment of particulars of income or furnishing of inaccurate particulars of income. The Tribunal, while allowing the appeal of the assessee, has relied on the decision of the Division Bench of this Court rendered in the case of CIT vs. Manjunatha Cotton and Ginning Factory (2013) 359 ITR 565.
In our view, since the matter is covered by judgment of the Division Bench of this Court, we are of the opinion, no substantial question of law arises in this appeal for determination by this Court. The appeal is accordingly dismissed’’.
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’’.
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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.
Even otherwise, without restricting ourselves to the validity of show cause
notice, we note that section 271AAB of the Act contemplates imposition of penalty
pursuant to the disclosure of undisclosed income in the statement recorded under
section 132(4) and, therefore, the levy of penalty under this section does not
depend on the addition made during the assessment proceedings. Hence the penalty
proceedings under section 271AAB are completely independent of the enquiry and
finding of the AO in the assessment order except for the limitation provided as per
section 275 of the Act. We have already held that the penalty is not automatic but
the AO has to take a decision to impose the penalty after giving an opportunity of
hearing to the assessee in terms of section 274 of the Act. Thus the AO in the
proceedings under section 271AAB of the Act has to first decide that the conditions
prescribed under the said section are satisfied for levy of penalty and then to further
24 ITA NO. 969/JP/2017 Shri Ravi Mathur, Jaipur.
take a decision after considering the explanation of the assessee for non compliance
of any of the conditions under clauses (a) to (c) of sub-section (1) regarding the
quantum of penalty. The primary condition for levy of penalty is the existence of
undisclosed income as per the disclosure made by the assessee under section
132(4). The term ‘undisclosed income’ has been defined in Explanations to section
271AAB. Therefore, as per the definition provided in the Explanation, the
undisclosed income may have various forms and the same is not recorded in the
books of accounts or other documents maintained in normal course relating to the
specified previous year. As per sub-clause (i) of clause (c) of the Explanation,
the undisclosed income means any income of the specified previous year
represented by any money, bullion, jewellery or valuable article or things or any
entry in books of accounts or other documents or transactions found in the course of
search. This definition is further subject to two conditions that the said income has
not been recorded on or before the date of search in the books of accounts or other
documents maintained in the normal course relating to such previous year or
otherwise not being disclosed to the Principal Chief Commissioner, Principal
Commissioner or Commissioner before the date of search. The other forms of
undisclosed income as defined in sub clause (ii) is any entry in respect of expenses
recorded in the books of accounts or other documents maintained in the normal
course. Therefore, the clause (ii) contemplates undisclosed income in the form of
false entries of expenses recorded in the books of accounts which is not relevant for
the case in hand.
25 ITA NO. 969/JP/2017 Shri Ravi Mathur, Jaipur.
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
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
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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 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.
27 ITA NO. 969/JP/2017 Shri Ravi Mathur, Jaipur.
The Kolkata Bench of the Tribunal in the case of DCIT vs. Madan Lal Beswal
(supra) has considered this issue of the alleged income found recorded in the other
documents would fall in the definition of undisclosed income in para 3 and 4 as
under :-
“3. We have heard rival submissions and gone through the facts and circumstances of the case. We find that the issue involved herein is squarely covered in favour of the assessee in the case of DCIT vs Manish Agarwala (another member in the same Nezone Group) in ITA No. 1479/Kol/2015 for AY 2013-14 dated 9.2.2018 by the order of this tribunal , wherein it was held as under:-
We have heard rival submissions and gone through the facts and circumstances of the case. We note that the AO has levied the penalty u/s. 271AAB on the ground that the income from commodity profit has been found during search u/s.132 of the Act which is not reflected in the regular books of account. The AO has accepted that during search the assessee has admitted u/s. 132(4) of the Act the income from speculative trading. The undisputed facts the AO has given finding pertaining to this case is as follows: i) The assessee has substantiated the manner in which the income was derived. ii) Furnished the return of income therein and iii) Paid the tax along with interest. Based on the said finding, according to AO, the assessee satisfies the conditions enumerated in sec. 271AAB(i)(a) of the Act and thereafter levied ten percent of Rs.3 cr., which have been deleted by the impugned order of Ld. CIT(A). 4. The Ld. DR brought to our notice that in the very same group case of Manoj Beswal & Ors. the Tribunal had confirmed the levy of penalty and contended before us that penalty u/s. 271AAB of the Act is mandatory and therefore, according to Ld. DR, the Ld. CIT(A) erred in deleting the penalty by stating that the assessee did not had any ‘mens rea’ not to disclose the amount in question. According to him, penalty has to be mandatorily levied u/s. 271AAB of the Act on the undisclosed income found during search. On the other hand, Ld. AR Shri Miraz D. Shah, supporting the decision of Ld. CIT(A) made contentions though taken up before the Ld. CIT(A) but has not been adjudicated on those averments, which the Ld. AR urges before us to consider while adjudicating the appeal of the Revenue. The Ld. AR also pointed out that the contentions which he is going to raise has been taken up before the AO also, however, according to Ld. Counsel, those legal arguments were not considered by the AO in the right perspective. The first contention of the Ld. AR is that since Sec. 271AAB
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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 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
29 ITA NO. 969/JP/2017 Shri Ravi Mathur, Jaipur.
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.
The third contention of the Ld. AR is that the assessee is an individual, who was drawing salary income. So, according to him, he need not maintain any books of account as per the Act. According to Ld. AR, undisputedly the assessee was engaged for the first time this AY only in trading of commodities, that too which was conducted in a non- systematic manner and the income from it was duly offered to tax by the assessee in his return of income under the head “Income from Other Sources”, which, according to Ld. AR was accepted as such by the AO 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
30 ITA NO. 969/JP/2017 Shri Ravi Mathur, Jaipur.
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]]
(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.
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(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
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 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
32 ITA NO. 969/JP/2017 Shri Ravi Mathur, Jaipur.
/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 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
33 ITA NO. 969/JP/2017 Shri Ravi Mathur, Jaipur.
contesting and making a finding against the claim of the assessee in the assessment order as discussed above. 7. Finally, the Ld. AR submitted that during the search, the search party found the records of the assessee’s transactions in speculative commodity from the drawer of assessee’s accountant from which the AO could compute the income of the assessee from the said transaction which amount assessee declared during search and which was duly returned and which figure was accepted by the AO. According to Ld. AR, the fact that search happened on 01.08.2012 need to be taken note of since undisputedly there was enough and more time for the assessee to submit the accounts during assessment proceedings which fact has been taken note of and concurred by the Ld. CIT(A). Thereafter, the Ld. AR drew our attention to the definition of undisclosed income given under section 271AAB which reads as under:
“Penalty where search has been initiated. '271AAB. (1) The Assessing Officer may, notwithstanding anything contained in any other provisions of this Act, direct that, in a case where search has been initiated under section 132 on or after the 1st day of July, 2012, the assessee shall pay by way of penalty, in addition to tax, if any, payable by him,— (a) a sum computed at the rate of ten per cent of the undisclosed income of the specified previous year, if such assessee—
******** Explanation – For the purposes of this section, - (a) ……….
(b) ………. (c) "undisclosed income" means—
(i) any income of the specified previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search under section 132, which has—
(A) not been recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous year; or
(B) otherwise not been disclosed to the [Principal Chief Commissioner or] Chief Commissioner or [Principal Commissioner or] Commissioner before the date of search; or
34 ITA NO. 969/JP/2017 Shri Ravi Mathur, Jaipur.
(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.
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 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
35 ITA NO. 969/JP/2017 Shri Ravi Mathur, Jaipur.
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. 10. In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 13/05/2018.
Sd/- Sd/- ¼ HkkxpUn½ ¼ fot; iky jkWo ½ (BHAGCHAND) ( VIJAY PAL RAO ) ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member Tk;iqj@Jaipur fnukad@Dated:- 13/05/2018. das/ आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. vihykFkhZ@The Appellant- Shri Ravi Mathur, Jaipur. 2. izR;FkhZ@ The Respondent- The DCIT CC-4. 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. 969/JP/2017} vkns'kkuqlkj@ By order, सहायक पंजीकार@Aेेज. त्महपेजतंत