SHRI SUBHASH TYAGI,NEW DELHI vs. DCIT, CENTRAL CIRCLE-, GHAZIABAD

That the penalty aggregating to Rs.15,63,35,410/- u/s. 271AAB(1) of IT Act levied by the AO and Rs.5,23,35,140/- as sustained by the Ld. CIT(A) deserves to be deleted as the AO vide notice u/s.271AAB(1) dated 14/06/2019 did not specify as to under which limb of section 271AAB(1), the penalty was proposed to be levied.

10. To support the Additional Ground, the ld. counsel for the assessee contended that the above additional ground is purely a legal issue which strikes to the root of the matter. Hence, the legal ground, for which necessary facts are available on record, deserves to be entertained and adjudicated upon in the light of judgment rendered in the case of NTPC Ltd. vs. CIT, 29 ITR 383 (SC).

11. The assessee has also filed Cross Objection Memo [CO no. 59/Del/2023] wherein grounds akin to additional ground has been raked up.

12. The Grounds of Cross Objection of the assessee are also reproduced hereunder:

“1. That the penalty of Rs.10,40,000 u/s.271AAB(1) of the IT Act as sustained by the Ld. CIT(A) out of Rs.15,63,35,140/- as imposed by the AO deserves to be deleted as the AO vide notice u/s.271AAB(1) dated 14.06.2019 did not specify as to under which limb of section 271AAB(1), the penalty was proposed to be levied.”

16.1 The provision of Section 271AAB(1), as applicable at the relevant time, lays down that in a case where search has been initiated on or after 1-7-2012 (but before 15-12-2016), the assessee shall be liable to penalty [ in addition to tax, if any, payable by him] of varied sum computed at the rates prescribed in different limbs of sub section (1) to section 271AAB, as may be applicable to the assessee, depending on the situation the assessee is placed in. The penalty is essentially attracted qua the undisclosed income of specified previous year detected in the course of search.

16.2 As the facts emerges from record, in the search and seizure operations conducted in the premises of the assessee on 11/08/2016, the revenue found several incriminating documents [marked as various annexures] from the premises of the assessee as copied and scanned in the assessment order. It was inter alia found by the search team that the list of computerized sundry creditors recorded in the books [aggregating Rs. 1,05,55,24,297] also include an account head titled ‘creditors for material’ showing outstanding payable amount of Rs. 1,02,56,32,400/-. The assessee was confronted on such vague and innocuous outstanding payable entry in the books in the course of recording statement under s. 132(4) of the Act. In response, the assessee readily admitted under s. 132(4) that such amount has been entered in the books for the purposes of determination of profits as per profit & loss account and such amount denotes material purchase which goes to reduce the profts. On further enquiry seeking bifurcation and break up of such outstanding amount party wise and expense wise, the deponent of the statement categorically expressed his inability to provide any particulars of such amount to the extent of Rs. 52 crs. A query was further raised by the search team to caution that in the absence of any particulars on such amount made available, why such amount should not be taken as bogus purchase or bogus liability of the assessee wrongly entered in the books. As per the statement recorded, the assessee admitted the non existence of any liability and also volunteered to say that he is not liable to pay to the unidentified creditors against such liabilities found recorded in the books. The assessee readily agreed to offer a sum of Rs. 52 crore booked for the purposes of suppression of income as cessation of liabilities and further expressed his willingness to pay taxes on such sum. As a necessary corollary, in the wake of total absence of any particulars available on such unexplained entries entered in books towards creditors and corresponding inflated purchases, the assessee agreed to admit such entries as undisclosed income and offered to pay taxes thereon. The existence of undisclosed income found in the course of search is thus both explicit and implicit. A nuanced reading of statement recorded under s. 132(4) would reveal that the manner of creating such bogus creditors towards material purchases during the year was apparently quizzed and the assessee was found blank and wanting. The name of beneficiary creditors were not revealed despite pointed enquiry. The ‘manner’ giving rise to such credits thus did not surface in the course of enquiry. The next step of ‘substantiation’ of such entries was never achieved by the assessee nor could be, in the absence of availability of basic particulars being name and address of creditors providing bills towards material purchase. There is however no dispute on the fact that the admission made in the statement made under s. 132(4) was honoured and maintained and was offered for taxation while filing ROI. The taxes due on such admission were duly paid. The AO initiated penalty proceedings in the course of search assessment proceedings by invoking s. 271(1)(c), which on realization of mistake, was later amended to S. 271AAB. The AO ultimately imposed penalty under s. 271AAB(1)(c) @ 30% on three counts (i) Rs. 63,790 on addition of Rs. 2,12,640/- on unrecorded hotel expenses in cash (ii) Rs. 2,71,350/- on unexplained money additions of Rs. 9,04,500/- & (iii) Rs. 15,60,00,000 on amount admitted towards non-existent liabilities Rs. 52 Crs. named in the statement under s. 132(4) as cessation of liabilities. In the first appeal, the CIT(A) upheld the action of the AO to levy penalty @30% under sub-clause (c) to s. 271AAB(1) towards undisclosed income of Rs. 2,12,640/- and Rs. 9,04,500/- in the absence of any disclosure in the course of search proceedings. The CIT(A) however scaled down and modified the levy of penalty from 30% imposed by the AO to 10% in terms of sub-clause (a) to s. 271AAB(1) instead of 30% rate applicable as per sub-clause (c) applied by AO qua the undisclosed income detected of Rs. 52 cr. towards anonymous liability booked on account of material purchases. The CIT(A) thus granted partial relief.

16.3 Several pertinent questions have been raised by the assessee to assail the imposition of impugned penalty namely (a) whether penalty can be imposed under the shelter of s. 271AAB(1) in the backdrop of factual matrix narrated in the preceeding paragraph (ii) whether the AO is under statutory obligation to identify the specific limb of sub-section 1 to s. 271AAB at the threshold by way of show cause notice for the purposes of initiation of penalty under erstwhile section 271AAB?

16.4 On appraisal of facts noted above, it is ostensible that incriminating documents were admittedly found in the course of search which revealed that the assessee has indulged in recording unsupportable entries by way of material purchase and corresponding unidentifiable creditors to suppress true profits of the assessee concern. Likewise, entries for expenses incurred were not found recorded on or before the date of search in the books. Confronted with such tell-tale facts, the assessee admitted non existence of sundry creditors liability. The income arising from the incrementing documents found and admitted were included in the Return of Income filed after search and taxes etc. thereon were also paid. The assessee however seeks to allege that the pre-requisites of 271AAB (1) is not fulfilled in the instant case as there is no allegation of existence of any undisclosed income by the revenue. Besides, the assessee has duly specified the manner and also substantiated the manner qua the so called undisclosed income. The CIT(A) modified and scaled down the rate of levy of penalty from 30% to 10% on the ground that the assessee has provided the list of creditors and thus provided the manner of deriving undisclosed income and also substantiated such manner.

16.5 The plea of assessee towards non applicability of s. 271AAB, in our view, is devoid of any rationale. On the face of cogent evidences detected and admitted to be un-explainable liability, one may wonder as to what is the nature of such admitted suppression of income etc. The entries found recorded in the books as a result of creative accounting towards un-explained liabilities is noting but undisclosed income as defined in s. 271AAB of the Act. Likewise, the entries found not recorded in the books towards expenditure incurred also squarely meets the requirement of definition of ‘undisclosed income’ appended in s. 271AAB of the Act. The Assessee has, by his express conduct, has rather accepted the existence of undisclosed income. The plea of assessee towards non existence of any ‘undisclosed income’ per se seeks to obfuscate reality and thus cannot be accepted. The existence of undisclosed income discovered in the course of search qua the specified previous year provides sound basis for applying s. 271AAB of the Act in the present case. The substantive and main ground of the assessee towards legality of imposition of penalty under s. 271AAB of the Act is thus liable to be dismissed.

16.6 We now advert to second question raised on legal requirement to specify the limb in the show cause notice which is claimed to be attracted in the instant case. As pleaded, all the three limbs of Section 271AAB(1) have different ramifications. The AO was thus called upon in law to inform the assessee as to which limb of subsection (1) of Section 271AAB are attracted at the first instance and how the case of the assessee falls under an appropriate clause.

16.6.1 A nuanced reading of different limbs/clauses of sub- section (1) of s. 271AAB would show that penalty is leviable in all circumstances with varied rate depending on gravity of conduct of the assessee. Different limbs/clauses of sub-section 271AAB provides for quantification of penalty having regard to the factual matrix. The incidence of penalty is lower where the assessee provides due cooperation in the matter of admission of undisclosed income and payment of taxes coupled with revealing manner of earning such income with substantiation thereof etc. This un- hindered co-operation from the searched assessee helps the deptt. to understand modus operandi of the assessee in earning impugned undisclosed income coming to surface owing to search as also indulgence of other parties in tax evasions. Where however, the assessee takes an ambivalent position to stonewall the incisive understanding on the matter, the quantum of penalty goes higher.

The quantum of imposable penalty thus depends on appreciation of facts in perspective after taking the response of the assessee in account. It is, at times, difficult to pre-conceive and show cause the assessee qua the exact quantification of penalty at the initial stage of issue of show cause notice. Noticiably, for the purposes of s. 271AAB, there is no requirement in law to form any ‘satisfaction’ [as contemplated under s. 271(1B) for the purposes of s. 271(1)(c)] before initiating penalty proceedings. The provisions of s. 271AAB thus can not be read pari materia with that of s. 271(1)(c) of the Act. The scheme of Act merely provides for reasonable opportunity to the assessee while imposing penalty which opportunity was duly provided and availed. It is not the case of the assessee that no opportunity was provided in the course of penalty proceedings. The assessee has not raised any objections on such aspect before the AO. The assessee was also privy to all relevant facts.

16.6.2 There being no substance in the plea, the additional ground raised by the assessee on this score is liable to be dismissed. The cross objection raising the grievance similar to additional ground is also a damp squib.

(Revenue’s Appeal) – A.Y. 2016-17

18.1 As noted above, while the AO imposed penalty @30% on the amount surrendered under clause (c) to Section 271AAB(1) of the Act, the CIT(A) applied clause (a) to Section 271AAB(1) of the Act and reduced the penalty @ 10% of the admitted amount towards non existent sundry creditors liabilities of Rs. 52 crores. The Revenue has challenged the correctness of applicability of clause (a) approved by the CIT(A) rather than clause (c) applied by the AO in the facts of the case.

18.2 The revenue contends that it is an admitted position that the assessee failed to provide any whereabouts of so called ‘creditors for material’ to the extent of Rs. 52 cr. out of Rs. 102.56 cr. found entered in books. The Assessee rather admitted that such liability towards material purchase is without any substantiation and corroboration in the statement under s. 132(4) of the Act. The assessee also admitted that the liability created on account of material purchase is not liable to be paid. The creditors were clearly admitted to be non-existent giving rise to impugned undisclosed income. In such facts, mere providing a list of the so called creditors without any particulars, PAN, address and invoices, bank payments if any etc. do not lend support to identity and veracity of the names provided in the list. The burden cast under clause (a) towards manner and substantiation is apparently not discharged. A muted list showing names of creditors cannot be regarded as compliance of providing ‘manner’ of generating undisclosed income as contemplated under clause (a). Be that as it may, it is a matter of record that the assessee has not provided any explanation towards ‘substantiation’ of the manner of deriving impugned undisclosed income. The AO, thus guided by the mandate of the Act, rightly invoked clause (c) of sub-section 1 to s. 271AAB of the Act. The CIT(A), on the other hand, acted contrary to statutory mandate and mere furnishing of a non descript list of creditors was regarded as sufficient compliance of clause (a) to justify imposition of penalty at concessional rate of 10% under that clause rather than 30% under clause(c). The revenue thus contends that the action of the CIT(A) seeking to reduce the incidence of penalty is devoid of legal and factual basis and hence calls for restoration of action of the AO.

18.3 Per contra, the assessee contends that imposition of penalty under s. 271AAB itself is bad in law owing to non compliance of pre-requisites. Notwithstanding & without prejudice, the CIT(A) has adopted pragmatic approach and modified the penalty order in keeping with the factual matrix of the case.

Order pronounced in the open Court on 09th December, 2024.