MEGHA PRAKASH CHAUDHARI,,NASHIK vs. INCOME-TAX OFFICER,,

Both the appeals relating to related persons on similar issue were heard together and are being disposed of by this consolidated order for the sake of convenience. However, in order to adjudicate the issues, reference is being made to the facts and issues in ITA No.741/PUN/2016.

The assessee in ITA No.741/PUN/2016 has raised the following ground of appeal:- On the facts and in the circumstances of the case and in law, the Lower Authorities have erred in levying the penalty u/s. 271AAA to the extent of amount of sum of Rs.2,00,000/- by disregarding appellant’s contention.

The issue raised in the present appeal is against levy of penalty under section 271AAA of the Act.

Briefly, in the facts of the case, search and seizure action under section 132 of the Act was conducted in Chaudhari Group of cases, Nashik on 21.03.2012. The assessee pertains to said group of cases. The residential premises of assessee was searched under section 132 of the Act and survey action was also carried out under section 133A of the Act at the business premises of assessee. Certain documents were seized and statements of assessee and his employees were recorded during the course of search. The assessee was in the business of land development and building construction

The Assessing Officer thus, levied penalty of ₹ 2 lakhs @ 10% of undisclosed income of ₹ 20 lakhs, under section 271AAA of the Act.

The CIT(A) has upheld the levy of penalty rejecting the contention of assessee that additional income was on account of under-valuation of stock and there were no changes in purchases, hence no merit in levy of penalty. The CIT(A) upheld the order of Assessing Officer on the ground that assessee

The assessee is in appeal against the order of CIT(A).

The learned Authorized Representative for the assessee pointed out that as against offer of total additional income of ₹ 2.50 crores which was made in the return of income, the assessee in his hands declared additional income of ₹ 1.24 crores and his wife Megha P. Chaudhari declared additional income of ₹ 1.73 crores majorly which were on the basis of documents found during the course of search. Further, additional stock of ₹ 20 lakhs was declared by assessee and ₹ 35 lakhs by his wife Megha P. Chaudhari. The said additional income was offered not because of any documents found on account of unaccounted purchases but was offered on account of increased valuation of stock. He further stated that once the assessee had made its offer of additional income, which was made during the course of search, then additional income once added in the hands of assessee could at best attract the levy of penalty under section 271(1)(c) of the Act. However, there was no merit in levy of penalty under section 271AAA of the Act as the offer of additional stock was not on the basis of any documents found during the course of search. He also referred to the definition of ‘undisclosed income’ as defined in Explanation (a) under section 271AAA of the Act, which talked of undisclosed income found during the course of search represented by some asset, valuable article or thing but additional income offered by assessee does not fall within the said definition. He stated that this plea of assessee was de hors plea of immunity

The learned Departmental Representative for the Revenue on the other hand, referred to para 6 of assessment order, wherein the Assessing Officer has discussed addition on account of additional income offered and then, he referred to para 8 of order imposing penalty under section 271AAA of the Act. He stressed that observations in the said orders were that the assessee declared additional income during search and it cannot be said that it was not found during the course of search. He placed reliance on the ratio laid down by the Hon’ble High Court of Delhi in Pr.CIT Vs. Smt. Ritu Singal in ITA No.672/2016, judgment dated 12.03.2018 and he stressed that where the assessee has not substantiated the manner in which additional income was earned, then there is no immunity from levy of penalty under section 271AAA of the Act.

The learned Authorized Representative for the assessee in rejoinder stated that additional income though related to the year of search but during the course of search noting was found from the premises of assessee, which reflected that it was additional income found during the course of search. He again reiterated that additional income was offered not on the basis of any

We have heard the rival contentions and perused the record. The issue which arises in the present appeal is against levy of penalty under section 271AAA of the Act. Section 271AAA of the Act along with Explanation reads as under:- “271AAA. 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 1st day of June, 2007, the assessee shall pay by way of penalty, in addition to tax, if any, payable by him, a sum computed at the rate of ten per cent of the undisclosed income of the specified previous year. (2) Nothing contained in sub-section (1) shall apply 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) pays the tax, together with interest, if any, in respect of the undisclosed income. (3) 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). (4) The provisions of sections 274 and 275 shall, so far as may be, apply in relation to the penalty referred to in this section. Explanation.—For the purposes of this section,— (a) "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 Chief Commissioner or Commissioner before the date of the 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

Main section provides that where search has been initiated under section 132 of the Act on or after 1st day of June, 2007 but before 1st day of July, 2012 and then the assessee as per order of Assessing Officer, shall pay by way of penalty, in addition to tax, if any, payable by him, a sum computed at the rate of 10% of undisclosed income of specified previous year. Sub-section (2) further provides that nothing contained in sub-section (1) shall apply where the assessee in the course of search in the statement recorded under section 132(4) of the Act admits undisclosed income and specifies manner in which such income was derived; substantiate the manner in which undisclosed income was derived; and pays taxes together with interest, if any, in respect of undisclosed income. Sub-section (3) further lays down that no penalty under section 271(1)(c) of the Act shall be imposed upon assessee in respect of undisclosed income referred to in sub-section (1). Clause (a) of Explanation defines undisclosed income, which means income represented either or partly by any money, bullion, jewellery or other valuable article, thing, or any entry in the books of account or other documents or transactions found during the course of search under section 132 of the Act. In other words, income should be on account of any asset found during search or any entry in the books of account or documents or transactions found in the course of search under section 132 of the Act, which relates to specified previous year i.e. year of search or / and the year which is ended before the date of search but the date

Applying the said provisions to the facts of present case, the additional income had been offered by the assessee on account of valuation of stock. It is not case of the Department that any unaccounted stock was found during the course of search or any entry was found in any document or transaction or the books of account, during the course of search, which depicts the said stock. The assessee on the other hand, had not modified the quantity of stock but had declared additional income on account of valuation of stock, which had been recorded in books of account. Such disclosure made by assessee in the return of income filed for the search year was not on account of any surrender made at the time of assessment and at best was additional income offered on appraisal of totality of facts of the case. The basic condition of additional income being offered on the basis of seized document during the course of search had not been fulfilled in the present case. In this regard, we find support from the ratio laid down by the Delhi Bench of Tribunal in Mahavir Prasad Jaipuria Vs. ACIT (2017) 167 ITD 253 (Delhi – Trib.), wherein it was held that where the amount was not surrendered at the time of search but was surrendered subsequently during course of assessment proceedings; as per specific provisions of section 271AAA of the Act, said amount did not specifically fall under definition of ‘undisclosed income’ found during course of search, thus, levy of penalty was not justified.

The learned Departmental Representative for the Revenue has placed reliance on the ratio laid down by the Hon’ble High Court of Delhi in Pr.CIT Vs. Smt. Ritu Singal (supra), wherein the issue was decided on additional income

Consequently, we hold that the assessee is not exigible to levy of penalty under section 271AAA of the Act. In such circumstances, where the conditions of section 271AAA of the Act have not been fulfilled i.e. additional income does not fulfill the definition of ‘undisclosed income’ provided in section 271AAA of the Act, there is no merit in holding the assessee liable to levy of aforesaid penalty. Accordingly, we hold so. The Assessing Officer is thus, directed to delete penalty levied under section 271AAA of the Act. The ground of appeal raised by assessee is thus, allowed.

The facts and issues in ITA No.748/PUN/2016 are identical to the facts and issues in ITA No.741/PUN/2016 and our decision in ITA No.741/PUN/2016 shall apply mutatis mutandis to ITA No.748/PUN/2016.

In the result, both the appeals of assessee are allowed.