ACIT CENTRLA CIRCLE 1(1), CHENNAI vs. SHANTILAL KOTHARI, CHENNAI

आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeal by Revenue for Assessment Year (AY) 2013-14 arises out of the order of learned Commissioner of Income Tax (Appeals)-18, Chennai dated 31.05.2018 in the matter of penalty levied by Ld. AO U/S 271AAB vide order dated 29.09.2015. 2. This appeal was heard as a group case along with other assessees belonging to same group. It was admitted position that facts as well as

ITA No.2535/Chny/2018 - 2 - issues in all the appeals are pari-materia the same and the adjudication in any one appeal shall have equal application to the other appeals also. The lead order in this group case has been passed by us in the case of Shri Ghisulal Kothari (ITA No.2534/Chny/2018) order dated 13.07.2022. In the above background, the present appeal is disposed-off as under. 3.1 The brief facts are that the assessee group was subjected to search action u/s 132 on 18.12.2012. The assessee offered returned income of Rs.1071.76 Lacs on 31.01.2014 which was substantially accepted in the assessment order passed on 31.03.2015 u/s 144 r.w.s. 153(1)(b) of the Act. The only addition / disallowance made in the assessment order was disallowance u/s 14A and treatment of agricultural income for Rs.1.50 Lacs. However, since self-assessment tax was not paid and the assessee failed to rectify the defect, the return was treated as not filed and the assessment was made on best judgment basis u/s 144. 3.2 During the course of search, excess jewellery and cash was found besides allegation of unaccounted investment in purchase of land and development of various properties. The excess jewellery was valued at Rs.75 Lacs. The cash amounting to Rs.110.83 Lacs was also found out from the group as a whole, out of which Rs.88.10 Lacs was seized. Considering the same, the assessee and his three brothers decided to admit the income of Rs.10 Crores each. 3.3 Consequently, assessee was held liable to pay penalty u/s 271AAB @30% of the undisclosed income. However, upon further appeal, Ld. CIT(A), after appreciating the provisions of Sec.271AAB, restricted the penalty to the extent of excess jewellery and cash found during the

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course of search operations. The Ld. CIT(A) came to a conclusion that entire disclosure may not fall under the definition of ‘undisclosed income’ if it could not be relatable to some asset / documents / entry found during the course of search operations. The mandate of Sec.271AAB is to levy penalty on the ‘undisclosed income’. The determination of ‘undisclosed income’ should emanate from the search records / search material. Accordingly, the aforesaid voluntary admission would not fall within the purview of undisclosed income. The income undisclosed, in the present case, would be undisclosed income of Rs.25.92 Lacs representing excess jewellery and Rs.17.02 Lacs excess cash as stated in the Panchnama. The Ld. CIT(A) also held that the penalty would be leviable @10%. Aggrieved, as aforesaid the revenue is in further appeal before us. 4. This issue has been adjudicated by us in the lead order as under: - Our findings and Adjudication` 7. We find that the basic facts leading to imposition of penalty are not in dispute. The assessee group was subjected to search action u/s 132 on 18.12.2012. During the course of search, excess cash and jewellery was found. The excess jewellery was valued at Rs.75 Lacs whereas excess cash was found for Rs.110.83 Lacs. The admission of excess cash of Rs.100 Lacs has been made by the present assessee whereas the admission of Rs.75 Lacs has been made by all the four brothers in equal proportion. However, it also discernible that except for excess cash or jewellery, no other incriminating material or documents have been found by the searched team which is evident from the copies of Panchnama as placed on record. This fact has also been noted by Ld. CIT(A) in the impugned order and the same form the very basis of adjudication of Ld. CIT(A). 8. Upon perusal of documents on record, we find that during the course of search proceedings, a statement was recorded from the assessee u/s 132(4) which is placed on page nos.20 to 35 of the paper-book. The copy of the Panchnama in assessee’s case is also placed on record which shows seizure of cash from the assessee. Upon perusal of statement dated 18.12.2012, it could be gathered that it is a general statement wherein no incriminating material has been confronted to the assessee and no question with respect to undisclosed income has been put to the assessee. Another statement has been recorded on next day i.e., 19.12.2012. Upon perusal of question no.6, it could be seen that the assessee was required to explain the variance in the amount of cash found. The assessee, in the reply, has sought time to furnish the requisite details to reconcile the discrepancies. However, there is

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no admission in the statement of the assessee regarding any ‘undisclosed income’. No question with respect to any other incriminating material is shown to have been put to the assessee in this statement also. 9. Subsequently, during post search proceedings, the assessee group has agreed to offer lump sum Rs.40 Crore collectively to tax which has been confirmed by another assessee i.e., Shri Sardarmal M. Kothari in statement recorded on 14.02.2013 which is placed on page nos. 63 to 65 of paper-book. However, in this statement also, no incriminating material or documents have been confronted to that assessee. The relevant extract of this statement is as under: -

Q.4. During the course of lifting of prohibitory order today at your residence and also at the residence of your brothers, the following jewellery, diamonds and silver were found and inventorized. On the basis of the same the following figures are arrived at:

No. Name of the assessee Gold (in Diamond Silver (in gram) (in carat) kgs) 1 Ghisulal Kothari and family members a) As per wealth tax return 11804.500 128.400 172 b) As per physical inventorization 13240.600 210.750 163 2 Sardarmal Kothari and family members a) As per wealth tax return 3920.85 37.5 62 3 Shanthilal Kothari & family members a) As per wealth tax return 9975.700 10.50 107 b) As per physical inventorization 7071.800 170.090 113 4 Kewalchand Kothari a) As per wealth tax return 9667.05 93.350 102 b) As per physical inventorization 3541.900 3.26 59 Total weight jewellery of all family members a) As per wealth tax return 33136.15 354.750 443 b) As per physical inventorization 33322.400 496.790 466 Difference/ Discrepancy 186 grams 142 carats 23 kilos

From the above it can be seen that there is discrepancy of about 186 grams in gold, 142 carats of diamond and 23 kgs. in silver. Please explain why there is apparent discrepancy on these jewellery items. Ans. Sir, during the course of our family functions etc. we used to get gifts mostly in gold and silver. The figures shown as per the return are as on 31.03.2012. Now almost 10 months have passed and during the period small purchases in respect of gold and silver might have been made by my family In respect of diamond, I want to say that my brother's son members. Shri Mukesh was married recently and daughter-in-law brought some gold and diamonds as stridhan. The exact quantity as per wealth tax return could be furnished very shortly. I am told that the mother of daughter-in-law gave the gold and diamond out of her declared wealth. I will furnish the confirmation shortly. Despite all these things, I do admit there is an excess of diamonds about 100 carats.

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Q.5. During the course of post search proceedings Rs.40 crores was offered as Kindly tell me the breakup of the unaccounted income assessee wise year wise. Ans. Sir, permit me a day's time to file detailed letter/affidavit in respect of the above. 10. At this juncture, it would be useful to take note of statutory provisions of Sec.271AAB. As per the provisions, the assesseing officer may direct the assessee to pay, by way of penalty, a sum computed at specified rates of 10%, 20% or 30% of undisclosed income. The undisclosed income has been defined in explanation (c) 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 the 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 courses 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 have been found to be so had the search not been conducted. 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. 11. We are also of the considered opinion that imposition of penalty is not automatic but it would apply on peculiar facts and circumstances of each case. Merely because the voluntary admission has been made by the assessee which is not represented by any incriminating material found during the course of search action, the same would not justify the imposition of penalty. The same is also evident from Clause (3) of Sec.271AAB which provide that the provisions of Section 274 and 275 would apply in relation to the penalty referred to in this Section. As per the provisions of Sec.274, no order imposing penalty shall be made unless the assessee has been heard or has been given a reasonable opportunity of being

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heard. The logic is simple. The principle of natural justice would demand that the aggrieved party is given an opportunity of hearing to defend its case. It is only after the defense of the accused has been considered, the authorities could proceed with penal consequences. Had the imposition of penalty been automatic, such an opportunity would have no relevance and no opportunity would be required to be given to the assessee. It is only after the assessee has been heard and Ld. AO finds it a fit case for imposition of penalty, the penalty could be levied on the assessee. 12. Our aforesaid views find support from the decision of co-ordinate bench of Nagpur Tribunal in Chandra Suresh Kothari V/s DCIT (135 Taxmann.com 275; 20.12.2021) which held as under: - 16. On a perusal of the provisions of section 271AAB, it is evident that the section 271AAB is self-contained. There can be no doubt that there is no discretion with the AO as the parameters by which the AO or the tax authorities are bound in regard to the rate of penalty and the circumstances on the basis of which the penal provision can be attracted are self- explanatory. It can be noticed that the Co-ordinate Benches of the Tribunal have categorically held that the expression 'undisclosed income' is given a definite and specific meaning and the word has not been described in an inclusive manner so as to enable the tax authorities to give wider or elastic meaning which enables them to bring within its ambit the species of income not specifically covered by the definition. Moreover, such penal provisions are required to be interpreted in a strict, specific and restricted manner and not in an inclusive manner. If the surrendered income does not fall in the definition of "undisclosed income" as defined u/s. 271AAB of the Act, the penalty is not warranted. It can be further noted that the penalty under section 271AAB can be initiated in respect of undisclosed income as defined in the section 271AAB itself found during the search action, independent of the assessment proceedings. Though, the fact in a case that the assessee has been able to explain the source of the alleged 'undisclosed income' maybe relevant for final imposition of the penalty, however, for initiation of the penalty proceedings, the provisions of section 271AAB are self-contained and are not dependent upon commencement or finalization of the assessment proceedings. It is further pertinent to note here it is not mandatory for the AO to invoke provisions of section 271AAB of the Act in each and every case of levy of penalty pursuant to search action. 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 and we direct to delete the penalty levied u/s. 271AAB of Rs. 10,87,500/-. 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

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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. 9. On a perusal of the provisions of section 271AAB, it is evident that the Section 271AAB is self-contained. There can be no doubt that there is no discretion with the AO as the parameters by which the AO or the tax authorities are bound in regard to the rate of penalty and the circumstances on the basis of which the penal provision can be attracted are self- explanatory. It can be noticed that the Co-ordinate Benches of the Tribunal have categorically held that the expression 'undisclosed income' is given a definite and specific meaning and the word has not been described in an inclusive manner so as to enable the tax authorities to give wider or elastic meaning which enables them to bring within its ambit the species of income not specifically covered by the definition. Moreover, such penal provisions are required to be interpreted in a strict, specific and restricted manner and not in an inclusive manner. If the surrendered income does not fall in the definition of "undisclosed income" as defined u/s 271AAB of the Act, the penalty is not warranted. It can be further noted that the penalty under section 271AAB can be initiated in respect of undisclosed income as defined in the section 271AAB itself found during the search action, independent of the assessment proceedings. Though, the fact in a case that the assessee has been able to explain the source of the alleged 'undisclosed income' may be relevant for final imposition of the penalty, however, for initiation of the penalty proceedings, the provisions of section 271AAB are self contained and are not dependent upon commencement or finalization of the assessment

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proceedings. It is further pertinent to note here it is not mandatory for the AO to invoke provisions of section 271AAB of the Act in each every case of levy of penalty pursuant to search action. There is no bar to the assessing Officer to initiate penalty proceedings u/s 271(1)(c) of the Act even in cases involving search actions if in the facts and circumstances of the case, it is so warranted. The only bar is that no penalty under the provisions of section 270A or section 271(1)(c) of the Act shall be imposed in respect of the undisclosed income, as defined u/s 271AAB of the Act, unearthed during the search action carried out u/s 132 of the Act. It is to be noted that the provisions of section 271AAB and section 271(1)(c) of the Act simultaneously existed and were operational till the provisions of section 271AAC become effective from 1-4-2017. 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

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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). 15. Considering the ratio of all the decisions as aforesaid, we are of the considered opinion that Ld. CIT(A) has clinched the issue in the right perspective. Therefore, we confirm the impugned order, however, with enhancement. It could be observed that excess cash was found for Rs.68.55 Lacs from the premises of M/s Kamachi Steel Ltd. which was owned up by the assessee and disclosure was made. Therefore, besides own cash, the assessee would be liable for penalty on this excess cash of Rs.68.55 Lacs also. We order so. 16. Regarding the rate of penalty also, we concur with the adjudication of Ld. CIT(A) since it is undisputed fact that part payment of taxes was already made by the assessee along with return of income. The substantial refunds were due to the associated entities which aggregated to more than Rs.341.49 Lacs for AYs 2009-10 and 2013-14 to 2015-16 (page no.59 of the paper book). More refunds of Rs.508.24 Lacs were due for AYs 2016-17 & 2017-18 (page no.60 of the paper book). The assessee had filed ‘No objection letters’ and requested for adjustment of the same which was rejected. Subsequently, when the refunds were issued, the tax liability was settled by the assessee. Further, a part of the tax liability was also settled by the assessee group by way of seizure of cash of Rs.88.10 Lacs by the department. Nevertheless, the amount seized as well as paid by the assessee along with return of income would amount to more than the penalty sustained by Ld. CIT(A) in the impugned order, which we have substantially confirmed. Therefore, we confirm the stand of Ld. CIT(A), in this regard. 17. In the result, the appeal of the revenue stands partly allowed. Assessee’s Petition u/r 27 18. The Ld. AR has assailed the penalty on legal grounds. The Ld. AR relied on various judicial pronouncements and submitted that the notice was defective and

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bad-in-law. The notice did not specify the specific clause of Sec.271AAB which was applicable to the case of the assessee. The Ld. AR submitted that each of the clauses of Sec.271AAB carries a specific charge and rates of penalty varies. The Ld. CIT-DR, on the other hand, vehemently contested the legal grounds, and likewise relied on various judicial pronouncements to support the case of the assessee. 19. We find that while framing the assessment order, Ld. AO initiated penalty proceedings in the body of assessment order as under: - Assessed. Demand Notice is issued. Penalty proceedings u/s 271AAB and 271(1)(c) is initiated separately. Penalty u/s 271F is also initiated. It could be seen that Ld. AO initiated penalty under various provisions and subsequently, issued show-cause notice to the assessee to defend the proposed penalty u/s 271AAB. Subsequently, a show-cause notice was issued by Ld. AO to the assessee on 31.03.2015 the substantial portion of which read as under: - Whereas in the course of proceedings before me for the A.Y 2013-14, it appears to me that you # have without reasonable cause failed to furnish a valid return of income which you were required to furnish under section 139(1) or by a notice given under section 139(2)/148 of the Income tax Act, 1961, No…………… dated……..or have without reasonable cause failed to furnish it within the time allowed and the manner by the said section 139(1) or by such section – 271F. Have without reasonable cause to comply with a notice under section 142(1)/143(2) of the Income Tax Act, 1961 No…………………dated………… # Have concealed the particulars of your income or have furnished inaccurate particulars of such income – 271(1)(c) # Have admitted income of ₹ 10 crores, but has not substantiated the manner in which the income has been earned and also has not filed a valid return of income by paying the tax on the admitted income – 271AAB. You are hereby requested to appear before me at 11:30 AM on 26/05/2015 and show cause why an order imposing a penalty on you should not be made u/s. 271 of the Income Tax Act, 1961. If you do not wish to avail yourself of this opportunity of being heard in person or through authorized representative, you may show cause in writing on or before the said date which will be considered before any such order is made under section 271. Upon perusal of the same, it could be seen that besides penalty u/s 271F, Ld. AO has proposed penalty u/s 271(1)(c) as well as u/s 271AAB in the assessment order. For the same, the assessee has been put to notice and the specific amount has been mentioned against Sec.271AAB for which the penalty was proposed by Ld. AO. Upon perusal of these documents, we find that there was no room of any confusion or doubt. The penalty was initiated under specific provisions which was confronted to the assessee with specific mention of the amount which was subject matter of penalty proceedings. In fact, the assessee defended the penalty proceedings before Ld. AO as well as during appellate proceedings and submitted that the provisions of Sec.271AAB would not apply to the disclosure made by the assessee. This being the case, the arguments of Ld. AR could not be accepted.

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Sd/- Sd/- (MAHAVIR SINGH) (MANOJ KUMAR AGGARWAL) उपा12 /VICE PRESIDENT लेखा सद: / ACCOUNTANT MEMBER

चे,ई / Chennai; िदनांक / Dated : 13-07-2022 EDN/- आदेश की Xितिलिप अ7ेिषत/Copy of the Order forwarded to : 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु� (अपील)/CIT(A) 4. आयकर आयु�/CIT 5. िवभागीय �ितिनिध/DR 6. गाड� फाईल/GF