ASST. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1(1), PUNE, PUNE vs. GIRIRAJ ENTERPRISES, PUNE

However, the Assessing Officer was not satisfied with the arguments advanced by the assessee. According to him, during the course of search action the assessee firm had admitted the unaccounted sale of Gai Chap tobacco and other products. He referred to the provisions of section 271AAB(1A) of the Act and observed that as per the said provisions ‘undisclosed income’ includes any document or transaction found during the course of search action u/s 132 of the Act which has 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. Further, ‘specified previous year’ includes the year 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. Therefore, the contention of the assessee that due date for filing the return of income for assessment year 2021-22 had not been expired at the time of search and the impugned income disclosed in the return cannot be considered as undisclosed income, was rejected. He further noted that during the course of search action and the assessment proceedings the assessee has disclosed income of Rs.81,51,03,640/- which was assessed while passing the order u/s 143(3) of the Act. The penalty proceedings were initiated u/s 271AAB(1A) of the Act on the amount of Rs.81,51,03,640/-. Considering the submissions and the finality of the assessment order, he levied penalty @ 20% on the amount of Rs.81,51,03,640/- and imposed penalty of Rs.24,45,31,092/-.

Before the Ld. CIT(A) the assessee made two-fold arguments. It was argued that in the notice issued u/s 274 r.w.s. 271AAB of the Act the exact clause of section 271AAB under which the penalty proceedings were initiated was not mentioned. Therefore, the penalty proceedings are not in accordance with law and are void ab initio and therefore, such proceedings should be quashed.

So far as the merit of the case is concerned, it was argued that the assessee had paid the GST amount of Rs.65,24,14,109/- in respect of sales declared in the course of search. Accordingly it was argued that the GST so paid should be reduced from the gross profit of Rs.81,51,03,640/- and only on the balance amount, penalty may be levied. It was argued that the assessee had declared additional income on account of sale of Gai Chhap Jarda for assessment year 2021-22 and in the return for assessment year 2021-22 it has considered the sale of Rs.1,26,59,41,430/- and the gross profit thereon has been worked out at Rs.81,51,03,640/-. It was argued that the sales made by the assessee were inclusive of GST. As a result of search action the assessee paid GST amount of Rs.65,24,14,109/- on the sales declared at the time of search which was debited to the Profit & Loss Account for assessment year 2021-22. It was argued that the seized documents indicated that the unaccounted sales were made by the assessee firm and the rate per bag as per the seized papers is almost matching with the rate charged for accounted sales which was inclusive of GST. Accordingly it was argued that the GST paid of Rs.65,24,14,109/- should be reduced and penalty if at all is to be levied on the balance amount of Rs.16,26,89,531/-.

Without prejudice to the above, it was argued that at the time of search the concerned financial year has not ended and even the due date for filing the return had not expired. The assessee has offered the gross profit on the sales declared at the time of search in the return u/s 139(1) of the Act. Further, in the assessment order the income declared by the assessee pertaining to the sales declared at the time of search has been accepted and no addition has been made. It was argued that since the assessee had offered the income in the return filed u/s 139(1) of the Act, there is no reason to levy penalty on the gross profit of Rs.81,51,03,640/- declared on the sales offered in the course of search action.

However, the Ld. CIT(A) was not fully satisfied with the arguments advanced by the assessee. So far as the argument that the exact clause of section 271AAB under which the penalty proceedings were initiated was not mentioned and therefore, such proceedings are to be quashed is concerned, he dismissed the same by observing as under: “8. I have considered the facts of the case and the submissions made by the appellant. It is seen from the assessment order dated 22.04.2022 passed u/s. 143(3) of the Act for AY 2021-22 that the AO has specifically mentioned that the penalty proceedings u/s. 271AAB(1A) of the Act are initiated on the undisclosed income shown on cash sales. The appellant has contended that the AO has not mentioned specific clause of section 271AAB under which the penalty proceedings are initiated. Although, the appellant has not stated so but apparently, the appellant is trying to apply the principle laid down by the Hon'ble Bombay High Court in the case of Mohd. Farhan A. Sheikh vs DCIT 434 ITR 1 (Bombay) wherein the Hon'ble High Court has held that while initiating the penalty proceedings u/s. 271(1)(c) of the Act, the AO is required to strike off the irrelevant limb from the penalty notice. A perusal of the said decision suggests that the same was given in the context of section 271(1)(c) of the Act wherein the Hon. Bombay High Court observed that two limbs prescribed u/s 271(1)(c) carry different connotations and therefore, it is important for the Assessing Officer to convey the specific charge while issuing notice u/s 271(1)(c) of the Act. Observing this principle, the Hon. Bombay High Court has held that an omnibus penalty notice wherein the Assessing Officer has not struck off the irrelevant limb, shall not be a valid notice. The appellant is trying to apply the said principle in the context of penalty notice issued u/s 271AAB(1A) of the Act. However, a perusal of sec.

So far as the merit of the argument challenging the levy of penalty is concerned, he partly allowed the appeal filed by the assessee by observing as under: “10. I have considered the facts of the case and the submissions made by the appellant. The first issue arises in this appeal is whether in the facts of present case, any penalty u/s 271AAB(1A) is leviable or not. In this connection, it is seen that during the search operation various documents containing the details of undisclosed cash sales were found and seized. These documents were confronted with Shri Rajesh Malpani, partner of the appellant firm wherein he admitted that these documents contain details of unaccounted sales of the appellant firm. The relevant portion of the said statement recorded u/s. 132(4) on 16.04.2021 is as under: Q10. Now I am showing you Page No. 1 & 2 of Loose paper Bundle No.1 found and seized from residential premises of Mr. Manish Malpani during course of P.O. operation at Royal Palms, Shivajinagar, Sangamner- 422605. Mr. Manish Malpani has stated that explanation in respect of these papers shall be provided by you. Kindly go through the same and provide the explanation for the same. Ans. I have gone through these papers. On page no 1 there is no title and on page 2 title is 2019/20. This is summary of sales of Gai Chhap Tobacco and other products prepared by our General Manager Sales Mr. Mahindra Rathod. Sales mentioned in these papers remained to be accounted. He had prepared month wise details of total undisclosed sales for the period for Financial year 2019-2020 and from April 2020 to December 2020. I wish to submit that the practice of generating unaccounted sales in respect of Gai Chhap Tobacco product was started from July, 2019 onwards and hence, no such unaccounted sales are mentioned for the months of April to June 2019 in the said summary.

Thus, in the statement recorded u/s. 132(4) of the Act, Shri Rajesh Malpani admitted that for the year under consideration, the appellant firm made an unaccounted cash sales amounting to Rs.126,59,41,430/- which was not recorded in the books of accounts maintained for FY 2020-21. He also agreed to offer income on such unaccounted sale of Rs.126,59,41,430/- after considering the cash expenses on purchase of raw tobacco, packaging material, labour charges, transportation, loading and unloading expenses and other incidental expenses. The facts of the case thus suggest that the income corresponding to such unaccounted sale falls in the definition of 'undisclosed income' as provided in clause (c) of Explanation to section 271AAB of the Act. It is further seen that FY 2020-21 being a year of search, is a "specified previous year" as per the definition provided in clause (b) of Explanation to section 271AAB of the Act. Thus, penalty u/s. 271AAB(1A) is leviable on the undisclosed income corresponding to such unaccounted sales found during the search. Since, the appellant admitted the undisclosed income in the statement recorded u/s. 132(4) of the Act and also specified the manner in which such undisclosed income was earned, the AO has rightly held that penalty is leviable u/s 271AAB(1A)(a) of the Act.

The second issue arises in this appeal is the quantum of undisclosed income on which such penalty u/s. 271AAB(1A) is leviable. The AO has held that the penalty is leviable on the undisclosed income of Rs.81,51,03,640/- being the income corresponding to undisclosed sale. On the other hand, the appellant has contended that Rs.81,51,03,640/- was offered as gross profit on the cash sales of Rs.1,26,59,41,430/- after considering the cash expenses on purchase of raw tobacco, packaging material, labour charges, transportation, loading and unloading expenses, etc and the amount of GST paid on such cash sales was not accounted for while offering gross profit. The appellant has submitted that subsequent to the search on 07.02.2021, these unaccounted cash sales were duly disclosed in the GST Returns filed for the month of February and March 2021 and GST plus interest was paid on these cash sales. The appellant has submitted that a total of Rs.65,24,14,109/- was paid as GST and interest which was debited in the P&L Account. Thus, the net profit on the unaccounted cash sales comes to Rs.16,26,89,531/- (81,51,03,640 - 65,24,14,109) and therefore the penalty should be leviable only on such net income earned on the unaccounted cash sales.

To sum up, the facts of the present case suggest that undisclosed cash sales of Rs.126,59,41,430/- was found recorded in the seized document. In the statement recorded u/s. 132(4) of the Act, the partner of the appellant firm accepted the same and agreed to offer income after considering expenses. A perusal of reply to question no. 10 of the statement u/s. 132(4) recorded on 16.04.2021 suggests that the undisclosed income on such cash sales was not quantified at that time. Subsequently, the appellant applied a gross profit rate of 64.38% on such sales and the resulting amount of Rs.81,51,03,640/- was directly offered in the computation of income. The facts of the case further suggest that subsequent to search operation, such cash sales were disclosed in the GST returns by considering the cash sales inclusive of GST and the GST payment of Rs.59,51,19,109/- (corresponding to unaccounted cash sales) was debited in the P&L Account. Since, the said GST amount is directly related to the unaccounted cash sales, the undisclosed income corresponding to unaccounted sale is required to be computed after considering said GST payment. In this manner, in the return of income, the appellant has actually offered net income of Rs.21,99,84,531/- (81,51,03,640-59,51,19,109) on undisclosed cash sales. While completing the assessment, the AO has accepted the same without making any addition on this account. Thus, the assessed undisclosed income on the unaccounted cash sales comes to Rs.21,99,84,531/-.

A perusal of definition of 'undisclosed income as provided in Explanation to section 271AAB of the Act broadly means an income which has not been recorded in the books of accounts before the date of search and found during the search. As discussed above, the undisclosed income on the unaccounted cash sales comes to Rs.21,99,84,531/- and therefore the said amount is required to be considered for the purpose of levying penalty u/s. 271AAB(1A)(a) of the Act. The AO is accordingly directed to recompute the quantum of penalty on such undisclosed income. The grounds no. 3 to 6 are disposed accordingly.

To conclude, the appeal of the appellant for A.Y. 2021-22 is PARTLY ALLOWED.”

The Ld. Counsel for the assessee referring to the provisions of section 271AAB of the Act submitted that as per the said sub-section the penalty is either leviable under clause (a) or clause (b). Under clause (a) the penalty is leviable @ 30% of the undisclosed income and under clause (b) the penalty is leviable @ 60% of the undisclosed income. Further, under clause (a), there are certain conditions which are required to be fulfilled and in case the said conditions are not met, in that event, penalty is leviable under clause (b). Therefore, there are two different sections in section 271AAB(1A) under which penalty can be levied. Since the Assessing Officer in the instant case has only mentioned that a search was conducted and the assessee was found to have undisclosed income and has not specified the exact clause i.e. (a) or (b) under which he wants to levy the penalty, therefore, such penalty notice issued by the Assessing Officer is invalid.

So far as the decision distinguished by the Ld. CIT(A) in case of Mohd. Farhan A. Sheikh vs DCIT (supra) is concerned, he submitted that although the same is in the context of 271(1)(c) of the Act, however, the ratio laid down in the said decision is applicable to the facts of the present case. Relying on the following decisions, he submitted that since the Assessing Officer in the instant case has not specified the correct clause under which the penalty is being levied, therefore, such notice issued by the Assessing Officer being not in accordance with law, the penalty levied by him and partly sustained by the Ld. CIT(A) has to be deleted:

So far as the order of the Ld. CIT(A) dismissing the grounds challenging the argument that the Assessing Officer had not specified the exact clause of section 271AAB is concerned, he heavily relied on the order of the Ld. CIT(A).

We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer in the instant case levied the penalty of Rs.24,45,31,092/- u/s 271AAB of the Act on the ground that the assessee during the course of search had admitted the undisclosed sales in respect of Gai Chhap tobacco and other products of Rs.1,26,59,41,430/- on which the assessee has offered income of Rs.81,51,03,640/-. He accordingly levied penalty u/s 271AAB on the undisclosed income of Rs.81,51,03,640/-. We find in appeal, the Ld. CIT(A) held that since the assesse, subsequent to the search action, has disclosed cash sales by considering such sales as inclusive of GST and has paid the GST of Rs.59,51,19,109/- relating to assessment year 2021-22, therefore, the same should be reduced from the amount of Rs.81,51,03,640/- and penalty is leviable on the balance income of Rs.21,99,84,531/-.

We find the provisions of section 271AAB(1A) read as under: “271AAB(1)…. (1A) The Assessing Officer [or the Commissioner (Appeals)] may, notwithstanding anything contained in any other provisions of this Act, direct that, in a case where search has been initiated under section 132 on or after the date on which the Taxation Laws (Second Amendment) Bill, 2016 receives the assent of the President, the assessee shall pay by way of penalty, in addition to tax, if any, payable by him,— (a) a sum computed at the rate of thirty per cent of the undisclosed income of the specified previous year, if the assessee— (i) in the course of the search, in a statement under sub-section (4) of section 132, admits the undisclosed income and specifies the manner in which such income has been derived; (ii) substantiates the manner in which the undisclosed income was derived; and (iii) on or before the specified date— (A) pays the tax, together with interest, if any, in respect of the undisclosed income; and (B) furnishes the return of income for the specified previous year declaring such undisclosed income therein; (b) a sum computed at the rate of sixty per cent of the undisclosed income of the specified previous year, if it is not covered under the provisions of clause (a).”

We find the notice issued u/s 274 r.w.s. 271AAB of the Act dated 22.04.2022, copy of which is placed at page 132 of the paper book reads as under:

A perusal of the same would show that the Assessing Officer has not mentioned the specific limb of section 271AAB(1A) which was applicable to the case of the assessee. Therefore, the question that arises is as to whether in absence of mentioning the specific limb for levy of penalty u/s 271AAB(1A), such penalty notice is invalid and the subsequent proceedings are also invalid? We find an identical issue had come up before the Hon’ble Madras High Court in the case of PCIT vs. Shri R. Elangovan vide Tax Case Appeal Nos.770 & 771 of 2018 & CMP No.18581 of 2018, order dated 31.03.2021. The relevant observations of the Hon’ble High Court read as under: “14. In our considered view, the Tribunal is fully right in vacating the penalty on the ground that the notice was defective. The provisions of the Act have clearly laid down the procedure to be followed and adhered to while imposing the penalty. The proposal for such penalty proceedings was separately initiated upon completion of assessment and there may be cases where the assessee would not even contest the order of assessment. But, that would not preclude the assessee from challenging the penalty proceedings, as penalty proceedings are independent and the procedure required to be followed cannot be dispensed with.

As rightly pointed out by the learned counsel appearing for the assessee, Section 271AAB of the Act, which deals with penalty consists of three contingencies. Therefore, the Assessing Officer should point out to the assessee as to under which of the three clauses, he chooses to proceed against the assessee so as to enable the assessee to give an effective reply. Since the same has not been mentioned, the assessee has been denied reasonable opportunity to put forth their submissions. The Tribunal, in paragraph 5 of the impugned order, has verbatim reproduced the penalty notice and we find that the notice is absolutely vague and none of the irrelevant portions had been struck off nor the relevant portions had been marked or indicated. Hence, the Tribunal is right in observing that the penalty could not have been levied based on such defective notice and more particularly, when the assessee has been strenuously canvassing the jurisdictional issue from the inception.

In so far as the decision of the Allahabad High Court in the case of Sandeep Chandak is concerned, the factual position is slightly different. This decision is for the principle that where the assessee, in the course of search, makes a statement, in which, he admits the undisclosed income and specifies the manner, in which, such income has been derived, then the provisions of Section 271AAB of the Act would automatically get attracted. There can be no quarrel over this proposition. But, once the provisions get attracted, it is incumbent on the part of the Assessing Officer to specify as to under which clause in Section 271AAB(1) of the Act, he intends to proceed against the assessee. In the instant case, in the absence of such material in the penalty notice, it has to be held that the notice is defective.

The decisions of the Karnataka High Court in the cases of Manjunatha Cotton and Ginning Factory and SSA's Emerald Meadows and the decision of this Court in the case of Babuji Jacob clearly support our above conclusion. For all the above reasons, we find no grounds to interfere with the common order passed by the Tribunal.

We find following the above decision, the Chennai Bench of the Tribunal in the case of Shri Krishnappa Gowder Kalyanasundaram v. DCIT (supra) has quashed the penalty proceedings on account of such defective notice.

We find the Delhi Bench of the Tribunal in the case of Shri Naveen Goswami v DCIT (supra) has also quashed the penalty proceedings initiated u/s 271AAB of the Act on the ground that the failure on the part of the Assessing Officer in not pinpointing the relevant limb of section 271AAB(a) to (c) vitiates the entire proceedings. Therefore, in absence of non-mentioning of the relevant limb u/s 271AAB(a) to (c), the penalty proceedings initiated by the Assessing Officer are not in accordance with law and therefore, the same are liable to be quashed.

So far as the order of the Ld. CIT(A) upholding the penalty notice by distinguishing the decision in the case of Mohd. Farhan A. Sheikh vs DCIT (supra) is concerned, we are of the considered opinion that the Ld. CIT(A) is not justified in doing so. Even though the said decision was in context of section 271(1)(c) of the Act, however, the Hon’ble Bombay High Court has observed that the two limbs prescribed u/s 271(1)(c) carry different connotations and therefore, it is important for the Assessing Officer to convey the specific charge while issuing notice u/s 271(1)(c) of the Act. We find the provisions of section 271AAB(1A) have also got two parts. As per the said sub-section, the penalty is either leviable under clause (a) or (b). Under clause (a) the penalty is leviable @ 30% of the undisclosed income and under clause (b) the penalty is leviable @ 60% of the undisclosed income. Further, under clause (a), there are certain conditions which are required to be fulfilled and in case the said conditions are not met, in that event, penalty is leviable under clause (b). Therefore, the Ld. CIT(A) in our opinion was not justified in distinguishing the decision of the Hon’ble Bombay High Court in the case of Mohd. Farhan A. Sheikh vs DCIT (supra). Even otherwise also, since the Hon’ble Madras High Court has taken a view directly on this issue and no contrary decision of any other Hon’ble High Court was brought to our notice, therefore, the decision of the Hon’ble Madras High Court will be binding on the Revenue. We, therefore, hold that the failure on the part of the Assessing Officer to mention the specific limb which is applicable to the case of the assessee for levy of penalty u/s 271AAB(1A) vitiates the entire proceedings. We, therefore, quash the penalty proceedings initiated by the Assessing Officer and partly sustained by the Ld. CIT(A).

We further find under the same set of facts the Assessing Officer for assessment year 2020-21 has not levied any penalty u/s 271AAB of the Act.

We find following the above decision, the Delhi Bench of the Tribunal in the case of Arvind Gupta vs. ITO (supra) has held that where the Assessing Officer had dropped the penalty proceedings for one assessment year on same set of facts, the Assessing Officer could not take a different stand for the subsequent year on the same set of facts. We therefore, hold that since the Assessing Officer for assessment year 2020-21 has dropped the penalty proceedings and not levied the penalty on the undisclosed income, therefore, he is not justified in levying penalty u/s 271AAB(1A) for the impugned assessment year.

Even otherwise on merit also, we find force in the argument of the Ld. Counsel for the assessee that no penalty is leviable. It is an admitted fact that the assessee has declared undisclosed sale of Rs.1,26,59,41,430/- and offered income thereon at Rs.81,51,03,640/-. A perusal of the sample invoices filed by the assessee shows that the notings in the seized papers contain the total number of bags sold, total sale amount for a particular month, rate per bag etc. Copy of the sample invoice would show that the rate per bag as per the seized papers is almost matching with the rate charged for the accounted sales which was including the GST. Therefore, we find merit in the argument of the Ld. Counsel for the assessee that the unaccounted sales noted on the seized papers are cum duty i.e. including the GST amount. Therefore, once the assessee pays the GST amount of Rs.59,51,19,109/- relating to the impugned assessment year which is not in dispute, the same should be deducted from the amount of Rs.81,51,03,640/- which is the gross profit. Further, the assessee during the impugned assessment year i.e. A.Y. 2021-22 has also paid an amount of Rs.60,30,88,325/- towards GST for the assessment year 2020-21. Admittedly, the said GST was not deducted from the gross profit for assessment year 2020-21, therefore, we find merit in the argument of the Ld. Counsel for the assessee that the same should also be deducted from the gross profit of the impugned assessment year.

So far as the grievance of the Revenue that the assessee has never made any such claim during the assessment proceedings and has admitted such undisclosed income without any claim of deduction on account of payment of GST in the statement recorded u/s 132(4) of the Act is concerned, we are of the considered opinion that the same is without any force. It is the settled proposition of law that the assessment proceedings and penalty proceedings are distinct and separate. An assessee can always make fresh argument during the penalty proceedings which was not taken during the assessment proceedings. It is also the settled proposition of law that the addition made during assessment proceedings do not automatically attract the levy of penalty. Since the sale price as per the seized documents which is inclusive of GST almost tallies with the invoices as per the accounted sales and the gross profit rate declared by the assessee on account of such accounted sales also matches with the unaccounted sales, therefore, the GST paid during the year in our opinion has to be allowed as deduction from the gross profit while computing the penalty. Further, it is also pertinent to mention here that when the search took place the accounts of the assessee were not closed and the return was also not due. The assessee filed the return of income and the same was accepted without any further addition / disallowance. Under these circumstances, if the GST for the impugned assessment year as well as the GST for the preceding assessment year which was not claimed from the undisclosed profit of assessment year 2020-21 but paid during the assessment year 2021-22 is excluded, then no undisclosed income remains with the assessee for levy of penalty. We, therefore, hold that the Ld. CIT(A) should have deleted the entire penalty levied by the Assessing Officer instead of giving part relief. In this view of the matter, the grounds raised by the Revenue are dismissed and the grounds raised by the assessee are allowed.

In the result, the appeal filed by the assessee is allowed and the appeal filed by the Revenue is dismissed.