FUTURE GAMING AND HOTEL SERVICES P LTD,COIMBATORE vs. ACIT, CENTRAL CIRCLE-2, COIMBATORE

5. The CIT (Appeals)-20 failed to appreciate that the additional sum assessed at Rs.5,70,00,000/- was based on loose sheets recovered during search without any substantiating evidence and further failed to appreciate that the penalty initiated u/s 271AAB in consequence to the erroneous order passed u/s 153A was wrong, incorrect, invalid, erroneous, unjustified and not sustainable both on facts and in law.

6. The CIT (Appeals)- 20, Chennai failed to appreciate that the rejection of explanation of the Appellant would not lead to the automatic application of the penalty provisions under consideration, there by vitiating the impugned order imposing penalty and in this regard ought to have appreciated that the rejection of the bonafide explanation offered for the cash received from BS Enterprises would constitute reasonable cause in substantiating the plea of the appellant for use of discretion vested in their office to drop the proposal to levy of penalty despite the jurisdictional error committed in initiating such proceedings.

7. The CIT (Appeals) - 20, Chennai erred in dismissing the explanation of the appellant and further erred in treating the Market Adjustment as undisclosed income of the appellant by relying on the inadmissible loose sheets.

8. The CIT (Appeals) - 20 further failed to appreciate that the levy of penalty at 60% of the quantum addition by invoking the provisions u/s 271AAB(1A)(b) had no application to the facts of the present case.

9. The CIT (Appeals) - 20, Chennai failed to appreciate that the objections filed were erroneously rejected and ought to have appreciated that the provisions of section 271AAB had no application to the facts of the present case.

10. The CIT (Appeals)-20, Chennai failed to appreciate that there was no scope for confirming the levy of penalty under Section 271AAB of the Act in consequence to incorrect assumption of jurisdiction to the appellant in terms of Section 153A of the Act, thereby vitiating the decision to confirm the levy of penalty under Section 271AAB of the Act.

11. The CIT (Appeals) - 20, Chennai failed to appreciate that that the findings in para no. 7 of the impugned order were wrong, incorrect, invalid, erroneous, unjustified and not sustainable both on facts and in law.

12. The CIT (Appeals) - 20, Chennai failed to appreciate that the assessment order under consideration was passed out of time, invalid, passed without jurisdiction and not sustainable both on facts and in law.

Situation II: (Where Prize is claimed from other outlets) S.No Particulars Stockist A Stockist B 1 Payments due to Distributor 5,00,000 10,00,000 2 Less: Prize Winnings as per Sales 7,00,000 1,00,000 3 Balance Payable to Distributor (2,00,000) 9,00,000 Temporary Market Adjustment is done to offset the shortage in liquidity faced by Stockists. Excess disbursement of Prize Winnings to be made goods Rs.5,00,000 Amount collected towards Market Adjustment from Stockists 'B' and Adjustment paid to Stockist "A" Rs. 5,00,000 2.3 In support of the same, the assessee furnished a letter dated 30- 06-2021 from Shri Vijay Antony Samy clarifying the nature of transaction. It was submitted that the stockists who disbursed excess prize-winning money compared to their sale will face cash liquidity problem. On the other hand, the stockists who have disbursed less price-winning money compared to their sale will have excess cash. In such a situation, the distributor would act as an intermediary between the stockists who have excess cash and give it to stockists who are short in cash. Therefore, such payments are neither income or expense for the assessee rather it is a temporary adjustment done by the assessee to offset the liquidity problems faces by its stockists. Nevertheless, to avoid protracted litigation, the assessee admitted income of Rs.570 Lacs and paid due taxes on the same. The assessee requested not to initiate penalty proceedings since the admitted income would not fall within the definition of "undisclosed income" as per explanation (c) to Section 271AAB. It was only market adjustment between stockists. Reliance was placed on the decision of Vizag Tribunal in the case of ACIT vs. deccan Jewellers Pvt Ltd. as well as the decision of Patna Tribunal in the case of Bhagwan Gupta vs. ACIT to support its case on penalty. 2.4 The Ld. AO noted that the sheet contained details of cash received from M/s B.S. Enterprises. When the same was confronted to Shri Vijay Anthony Samy, it was deposed that cash was received from Shri Mahendra Bhai of B.S. Enterprises for Kolkata. It was also deposed that, for the cash received, credit note of corresponding amount was issued to Shri Mahendra Bhai and the sheet containing these details was prepared by Shri Arokia Raja Durai of Coimbatore Office. The relevant portion of sworn statement of Shri Vijay Anthony Samy was extracted in the assessment order. 2.5 The Ld. AO also noted M/s B.S. Enterprises acted as area distributor of lottery tickets for the assessee and the transactions pertain to payment for lottery business. The working in the sheet clearly show that the receivable was worked out based on lottery draws and prize- winning against which the money was received in cash and in RTGS. Accordingly, the amount of Rs.570 Lacs was treated as unaccounted income of the assessee. Consequently, penalty u/s 271AAB (1A) was initiated in the assessment order and the assessee was show-caused vide notice dated 23-08-2021. 2.6 During penalty proceedings, the assessee stated that the addition was accepted only to avoid protracted litigation and the addition do not fall within the definition of "Undisclosed Income". The penalty u/s 271AAB was discretionary and would depend on the merits of each case. Finding or unearthing of undisclosed income in the course or as a result of search conducted u/s 132 of the Act and consequent assessment of undisclosed income is a condition precedent for levy of penalty u/s 271AAB of the Act. Every offer of the assessee to pay tax on his income in the course of recording of statement u/s 132 does not amount to finding of 'undisclosed income'. A mere offer or disclosure by an assessee to pay tax on some additional amount with a view to avoid litigation cannot amount to discovery of undisclosed income for the purposes of levy of penalty under section 271AAB of the Act. The stated penalty could be levied only in respect of the ‘undisclosed income' as defined in Explanation (c) to the said Section 271AAB which read as under: (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 (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). 2.7 It was thus stated by the assessee that the income so surrendered has to qualify as undisclosed income as defined above which means that it should be represented either by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other document or transaction found in the course of search which either have not been recorded before the date of search in the books of account or not disclosed to the Principal Chief Commissioner of Income Tax before the date of search. In the present case, during search, some loose sheets were recovered and seized. The same merely contain information of ‘market adjustments’ made by the assessee with their stockists and the same is not in the nature of income. However, the assessee agreed for the addition and paid tax due thereon in order to buy peace with the department. Nevertheless, the addition does not fall within the definition of undisclosed income and the provisions of Sec. 271AAB are not attracted. The assessee also pleaded that there was no undisclosed income found during the course of search and no incriminating material was found therein except some loose sheets which is recorded in the books of accounts. The assessee relied on various decisions of Tribunal as follows: - i) Kolkata Tribunal in ACIT v Kanwar Sain Gupta (ITA No.538/Kol/2017; 29.06.2018) ii) Vizag Tribunal in ACIT v. M/s. Marvel Associates, (2018) 166 DTR 409 iii) Delhi Tribunal in Ajay Sharma v. DCIT [2013] iv) Ranchi Tribunal in Rinku Agarwal in dated 30.11.2018. v) Chandigarh Tribunal in SEL Textiles Ltd v. DCIT (ITA No.695/Chd/2018; 18-4-2019). vi) Jaipur Tribunal in Om Prakash Modi v. DCIT (ITA No.196/JP/2018 dt.18-3-2021). vii) Jaipur Tribunal in Anil Ghatiwala v. DCIT (ITA No.845/JP/2018 dt.11-1-2021) viii) Ahmedabad Tribunal in Lajwantiben M.Manglani vs. DCIT (IT(SS)A. No. 260/Ahd/2017 dt.18-2-2020) 2.8 However, Ld. AO held that had the search not taken place, the assessee would not have admitted the said amount. There was undisclosed income which was found only after verification of the seized material as found during the course of search. The assessee agreed for addition and therefore, the assessee had concealed income by not offering the entire undisclosed income which would attract penalty u/s 271AAB(1A) of the Act. Since the assessee did not pay the taxes before filing of return of income, higher penalty of 60% would apply as per Sec. 271AAB(1A)(b). Finally. Ld. AO levied impugned penalty of Rs.342 Lacs. 2.9 The assessee reiterated its submissions during appellate proceedings. However, Ld. CIT(A) observed that the assessee failed to file evidences that the amount received from M/s B.S. Enterprises was collected towards 'market adjustment'. The other distributor to whom the funds have been transferred had not been identified. The cash receipts were found recorded in the loose sheets which were not recorded in the books which lead to a conclusion that there was unaccounted income in hands of assessee as per Explanation (C) (i) (A). Accordingly, the penalty was confirmed against which the assessee is in further appeal before us.

Our findings and Adjudication 3. From the facts, it emerges that a loose sheet has been found during search proceedings u/s 132. The same contained details of cash receipt by the assessee for Rs.570 Lacs from M/s B.S. Enterprises who acted as lottery tickets stockists for the assessee. It was explained by the assessee that the receipts were on account of ‘market adjustments’ and the same do not partake the character of income for the assessee. The ‘market adjustment’ was stated to be a methodology to square-off the accounts of various stockists acting for assessee. The stockists would sell the lottery tickets. The prize-winner could claim prize money from any of the distributors which would necessitate adjustments of accounts of stockists inter-se. This methodology is prevalent in this line of trade. The same is also evident from settlement application filed by assessee’s sister concern M/s Future Trade Solutions LLP for AYs 2016- 17 to 2020-21 before Hon’ble Interim Board for Settlement Bench-II, New Delhi (IBS). A copy of the same is on record. The issue of ‘market adjustments’ has been elaborated in the order of Hon’ble IBS on Page Nos. 165 to 169 of Paper book, Volume-I. The Hon’ble IBS, in para 11.5.3.3 has accepted the issue of ‘market adjustments’ in assessee’s favor and held that this item could not form part of income of the assessee. Thus, it is quite evident that this practice of ‘market adjustment’ is quite prevalent in assessee’s line of business.

Upon perusal, it could be seen that ‘undisclosed income’ in the explanation would mean any income which is represented wholly or partly by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or the other documents or transactions found in the course of a search under section 132 which has remained unrecorded or otherwise not disclosed to the specified revenue authorities. Thus, there is a clear and direct association between the income on one hand and assets / documents on the other hand found during the course of search. A logical deduction could be made that the ‘undisclosed income’ has to be necessarily represented by any money, bullion, jewellery or other valuable article or thing or any book entry or transactions found in the course of a search u/s 132 which has remained unrecorded or otherwise not disclosed to the specified revenue authorities. If the ‘undisclosed income’ is not represented as aforesaid, the same could not be considered as ‘undisclosed income’ within the meaning of this Section. Applying the same to the facts of the present case, it could be concluded that voluntary admission which is so unrepresented could not be held to be ‘undisclosed income’ for the purpose of imposition of penalty u/s 271AAB.

13. Similar is the decision of Patna Tribunal in Shiv Bhagwan Gupta V/s ACIT (125 Taxmann.com 306; 11.02.2021) which, after considering catena of decisions on the issue, held as under: - 8. So far as issue of levy of penalty u/s 271AAB of the Act whether is mandatory or not is concerned, the issue has been dealt with by the Co-ordinate Chandigarh Bench of the Tribunal in the case of SEL Textiles Ltd. v. Dy. CIT [IT Appeal No. 695 (Chd.) of 2018, dated 18-4-2019]. The Tribunal in the above case has relied upon the decisions of the Coordinate Benches of the Tribunal in the cases of Asstt. CIT v. Marvel Associates [2018] 92 taxmann.com 109/170 ITD 353 (Visakhapatnam); Dy. CIT v. Rashmi Metaliks Ltd. [IT Appeal No. 1608 (Kol.) of 2017, dated 1-2-2019]; Dy. CIT v. Rashmi Cement Ltd. [IT Appeal No. 1606 (Kol.) of 2017, dated 28-2-2019]. The co-ordinate Chandigarh bench of the Tribunal (supra) after analyzing the aforesaid decisions, wherein, reliance has also been placed on the decisions of the Hon'ble High Courts has held that levy of penalty u/s 271AAB of the Act is not mandatory. It has also been noted that the Legislature has consciously used the word 'may' in contradistinction to the word 'shall' in the opening words of section 271AAB of the Act. That the choice of the expression 'may' and not 'shall' in the opening section of 271AAB shows that the Legislature did not intend to make the levy of penalty statutory, automatic and binding on the Assessing Officer but the Assessing Officer has been given discretion in the matter of levy of penalty. Further that as per sub section (3) of section 271AAB of the Act, the provisions of sections 274 and 275 of the Act have been made applicable in relation to the penalty referred to section 271AAB of the Act. It has been further observed that 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 competent authority. It has also been held that the penalty u/s 271AAB will not be attracted if the surrendered income would not fall in the definition of 'undisclosed income' as defined under explanation to section 271AAB of the Act.

10. The Assessing Officer has levied penalty @ 10% of the alleged undisclosed income, however, it is a matter of record in this case that the assessee has not made any surrender of any undisclosed income during the search action. The assessing officer has not initiated the penalty proceedings u/s 271AAB of the Act on the basis of or in consequence of the said search action, rather the assessing officer, has initiated the penalty proceedings during the assessment proceedings solely on the ground that the assessee has disclosed certain income from undisclosed sources in the return of income and paid due taxes thereupon. The relevant part of the assessment order in this respect is reproduced as under: "The assessee has filed return u/s 139 showing income of Rs. 2808270/-The assessee has disclosed income of Rs. 2179221/-during the year on account of undisclosed jewellery. Penalty u/s 271AAB is initiated." A perusal of the above reproduced relevant part of the assessment order reveals that the assessing officer has not mentioned about unearthing of any undisclosed income as defined u/s 271AAB of the Act during search action carried out at the premises of the assessee. In my view, the income declared by the assessee in the return of income or found or assessed by the Assessing officer in the assessment proceedings may be relevant for assessment of the income under section 68/69 and other related provisions of the Act and also for the levy of penalty under section 271(1)(c) of the Act in view of the relevant provisions of section 68/69 and 271(1)(c) of the Act. However, for the levy of penalty u/s.271AAB, the case must fall within the four corners of the definition of expression "undisclosed income" as defined u/s 271AAB itself. The assessee in this case is an individual and has earned income from partnership firm and interest income. The assessee has neither earned any business income nor earned any income exceeding Rs. 50 lakhs so as to require mandatory filing of personal assets and liabilities or to maintain books of account; even the assessee is not required to otherwise disclose any such income to the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner before the date of search; the alleged income is not any income 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. Assessee has neither made any surrender of any undisclosed income during the search action nor the penalty has been initiated on the basis of undisclosed income found during such search action. In view of the above factual position, the impugned order of the AO imposing the penalty on the assessee under section 271AAB of the Act does not pass the mandate of the provisions of section 271AAB of the Act, therefore, the same being bad in law is hereby quashed. 14. The coordinate bench of Chennai Tribunal in ACIT V/s Shri S.Martin (ITA No.2382/Chny/2016 & ors; 05.10.2018) similarly held as under: - 20. This is the only definition available for “undisclosed income” in the Income-tax Act, 1961. Therefore, on the basis of material found during the course of search operation, if the Assessing Officer comes to a conclusion that the material found represents wholly or partly of the assessee’s income, which would not have been disclosed but for the purpose of search, may be construed as undisclosed income. In this case, it is not the case of the Revenue that any incriminating or other material was found during the course of search operation which represents wholly or partly the undisclosed income of the assessee. It is a definite case of the Revenue that the assessee offered an additional income of ₹50 Crores. Therefore, offer made by the assessee is not admitted on the basis of any material or document, bullion, etc.

Therefore, as rightly found by the CIT(Appeals), this cannot be construed as undisclosed income for the purpose of levy of penalty under Section 271AAB of the Act. Hence, the CIT(Appeals) has rightly deleted the penalty levied by the Assessing Officer. This Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed. The facts of the present case match with the facts of the above case law of Chennai Tribunal. Similar is the decision of Ahmedabad Tribunal in Bharatkumar N.Parikh V/s DCIT (ITA No.2493/Ahd/2018; 23.09.2019).

The above decisions support the case of the assessee that mere admission of income would not automatically lead to imposition of penalty u/s 271AAB.