RAJ KUMAR JAIN,JAIPUR vs. ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE – 2, JAIPUR, JAIPUR

PER SANDEEP GOSAIN, J.M.

This appeal by the assessee is directed against the order dated 08.07.2022 of the ld. CIT (A)-4, Jaipur for the assessment year 2014-15. The assessee has raised the following grounds of appeal :-

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section 132 of the Income Tax Act, 1961 and/or survey action under section

133A of the Act was carried out by the Income Tax Department on the members

of Okay Plus-JKD Group on 04.09.2013 of which the assessee is one of the

members. During the course of such actions referred above, cash, jewellery,

valuables, stock-in-trade, documents, books of account and/or loose papers

were found and seized from the premises of the members. The assessee

furnished the return of income on 31.07.2014 declaring income of Rs.

4,05,11,110/- for the assessment year 2014-15. Out of the above income, the

assessee declared Rs. 3,95,30,000/- as undisclosed income which was accepted

by the Department on the basis of the statement recorded during the course of

search under section 132(4) of the Act. During the course of search

proceedings, the AO found excess cash of Rs. 3,51,448/- from the residence of

the assessee which was not shown as surrendered income in the return of

income. The assessee admitted during the assessment proceedings that the

excess cash of Rs. 3,51,448/- is not recorded in his individual books of account,

therefore, same is the part of his undisclosed income for the year under

consideration and due to oversight/inadvertent mistake the amount of Rs.

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3,51,448/- could not be shown in the return filed under section 139(1). Thus the

assessment under section 143(3) read with section 153B(1)(b) of the Act was

completed at an income Rs. 4,08,62,560/- on 29.03.2016 by making an addition

of Rs. 3,51,448/- on account of cash found at the residence of the assessee. On

appeal, the ld. CIT (A) deleted the addition of Rs 3,51,448/- vide his order dated

12.06.2018.

2.1. Subsequently, the AO initiated the penalty proceedings and imposed

penalty of Rs. 1,18,59,000/- @ 30% on total undisclosed income of Rs.

3,95,30,000/- under section 271AAB(1)(c) of the Act. Aggrieved by the order of

the AO, the assessee preferred appeal before the ld. CIT (A) who confirmed the

penalty imposed by the AO.

Now aggrieved by the order of ld. CIT (A), the assessee has preferred

appeal before us.

as were raised by him before the ld. CIT (A) and he also relied on the written

submissions. The relevant portion of the same is reproduced below :-

“ Initiation of penalty is ab-initio void : The learned Assessing Officer issued penalty show cause notices on 29.03.2016 for imposing the penalty u/s 271AAB. Copies of these notices are scanned below :- NOTICE UNDER SECTION 274 READ WITH SECTION 271 READ WITH SECTION 271aab OF THE INCOME TAX ACT, 1961. Date : 29.03.2016.

To

Name Shri Raj Kumar Jain Address C-47, Arihant Vihar,

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Bapu Nagar, Jaipur. PAN ABDPJ 8188N

Whereas in the course of assessment proceedings for the AY 2014-15 penalty proceeding were initiated u/s 271 and 275 read with the section u/s 271AAB of the IT Act and a penalty notice was issued accordingly. You are hereby allowed further opportunity of being heard and to show cause why an order imposing penalty on you should not be made u/s 271AAB 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 date fixed for hearing on 29.04.2016 at 11.00 AM which will be considered before any such order(s) is/are made. Sd/- (Kamlesh Kumar Meena ) Dy. Commissioner of Income-tax, Central Circle-2, Jaipur.

The perusal of the aforesaid reveals the following :-

(i) The show cause notice issued along with the assessment order was in routine manner and the learned Assessing Officer has not mentioned that under which clause the assessee is liable for penalty. Section 271AAB sub-section (1) has three clauses (a) to (c). The Learned Assessing Officer has only mentioned the section 271AAB and a specific clause under which the assessee is liable for imposing penalty. In the assessment order also the Learned Assessing Officer has mentioned in para 4 as under: -

"The assessee filed a return of income for previous year 2013-14 relevant to Assessment Year 2014-15 declaring a total income at Rs. 40511110/- on 31.07.2014. It pertinent to mention here that the search operation relevant to this case has been conducted on 26.02.2014 i.e. Financial Year 2013-14 relevant to Assessment Year 2014-15 and as per clause (b)(i) of explanation to section 271AAB, the year under consideration falls within the definition of 'specified year'. The total income declared in the ROI for the 'specified year' included the undisclosed income of Rs. 3,95,30,000/- which represented the undisclosed income. Accordingly, penalty u/s 271AAB of the Act is initiated on such amount of Rs. 3,95,30,000/- by way of issue of notice u/s 274 r. w.s. 271AAB of the Act."

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And at the end of the Assessment in last para 9 he mentioned that"Penal proceedings u/s 271AAB are initiated separately by way of issue of notice u/s 271AAB of the Income Tax Act, 1961.

The notice has been issued in a very routine matter without (ii) application of mind. It no where specifies the undisclosed income/ which undisclosed income on which assessee is required show cause. In fact in the show cause notices the Learned Assessing Officer has not given any ground for levy of penalty for which the assessee could put his defense.

(iii) Although the show cause notices did not contain any particular of undisclosed income with reference to which penalty was leviable. In view of this assessee was not in a position to submit any cogent reply. But subsequently while levying penalty the Learned Assessing Officer has observed in the penalty order in the last page in para 7 that "(1) As per clause (c) of sub-section (1) of section (1) of section 271AAB of I.T. Act, 1961- a penalty of Rs. 1,18,59,000 being thirty percent of the undisclosed income of Rs. 3,95,30,000/- of the specified year. Therefore, a total amount of Rs. 1,18,59,000/-is hereby levied as penalty." Thus it would be seen that whereas show cause notice did not contain any ground whereas penalty has been levied without mentioning the default of the assessee and only clause (a) of sub-section (1) of section 271AAB of the Act is referred.

(iv) The slight indication of the applicability of the relevant penalty provision is that section 271AAB has been typed in bold letters. However even then the provisions have not been correctly quoted. The penalty u/s 271AAB is leviable @ 10%, 20@ & 30% u/s 271AAB(a), 271AAB(b) & 271AAB(c) respectively. The Learned Assessing Officer has not given a specific opportunity to the assessee as in his case which provision is made applicable. In the circumstances the initiation of penalty is unlawful.

(v) It is submitted that 271AAB has three different limbs for levy of penalty at three different rates (i) 10% u/s 271AAB(1)(a), (ii) 20% u/s 271AAB(1)(b) and (iii) 30% u/s 271AAB(1)(c). It is the submission of the assessee that a duty was cast upon the Learned Assessing Officer to initiate penalty proceedings specifically and seek reply of the assessee accordingly. But nothing was done of this sort. The show cause notice issued along with the assessment order is also silent regarding the applicability of the specific section for levy of penalty. In the absence of this the assessee was precluded in submitting a cogent reply. The Karnataka High Court in the case of Manjunatha Cotton & Ginning Factory 259 ITR 565 has held penalty not leviable in similar circumstances. In view of this it is submitted that this being a legal lacuna, penalty levied may kindly be deleted.

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(vi) In the aforesaid discussion it clearly brings out that the Learned Assessing Officer was very careless in initiating penalty proceedings, in issuing show cause notice before levy of penalty and also in issuing the demand notice. He has taken the penalty proceeding in a very light and trivial manner. Although penalty imposed is of a substantial amount. Even levying of penalty such a huge amount the Learned Assessing Officer has disclosed total non-seriousness. The case is fully covered by the ratio of Karnataka High Court decision in the case of Manjunatha Cotton & Ginning Factory 259 ITR 565. It is submitted that this decision has been followed by the Hon'ble ITAT in the case of Mradula Agarwal vs. Income Tax Officer in ITA No. 176/1P/2016 dated 16.09.2016. Besides ITAT Bangalore Bench in the case of H. Laxmi Narayan (2015) 41 ITR 465 and Mumbai ITAT Bench in the case of Sandhya Gadkari Sharma vs. DCIT (2016) 142 DTR 129 have also followed the decision. All these decision imposed a duty upon the Learned Assessing Officer for following the due procedure in the course of levy of penalty by issuing correct and relevant show cause notices. These decisions have laid importance to the fact that levy of penalty should not be taken lightly.

(vii) It is submitted that the notice issued for imitation of penalty u/s 271AAB is of very general nature. It contains all the three limbs of section 271AAB i.e. 271AAB(a), 271AAB(b) & 271AAB(c). By receiving such notice the assessee was not in a position as to reply of which default. In the circumstances issuance of such notice left the assessee bereft of proper opportunity and specific defense. It is settled position of law that assessee should be given specific opportunity by quoting the specific provisions under which penalty is imposable so that assessee furnishes his adequate defense. In this case the notice being of general nature. The assessee could not avail opportunity for proper defense.

(viii) The Rajasthan High Court is also following the above judgments. The Latest judgment of the Rajasthan High Court in the case of Sheveta Construction Company Pvt Ltd in DB IT Appeal No. 534/2008 order dated 06.12.2016 wherein it has been held that the Assessing Officer has to give a notice as to whether he proposes to levy penalty for concealment of income or furnishing inaccurate particulars. He cannot have both the conditions and if it is so he has to say so in the notice and record a finding in the penalty order, otherwise levy of penalty is illegal. The same preposition is applicable here and before imposing penalty u/s 271AAB the Learned Assessing Officer has to mention for undisclosed income and how e assessee has committed default in earning and not showing the income in the regular books of accounts.

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In this case while levying the penalty the Learned Assessing Officer has mentioned on page 4 to 9 of the penalty order that —

(i) The assessee has failed to substantiate to documentary evidence how the undisclosed income surrendered during the course of search was derived.

(ii) The surrender was made to buy peace of mind and to avaoid further litigation.

(iii) It was duty of a person to substantiate and furnish evidence who derived the undisclosed income that how and in what manner it has been derived and with whom he had made such undisclosed transaction.

(iv) There should be an undisclosed income

(v) The undisclosed income should relate to the specified previous year.

The above observations of the Learned Assessing Officer are not complete. The relevant provisions of section 271AAB are quoted below which have also been quoted in the penalty order—

Sec 271AAB (1) reads as under" 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 1st day of July, 2012, the assessee shall pay byway of penalty, in addition to tax, if any, payable by him, -

8 ITA No. 323/JP/2022 Shri Raj Kumar Jain, Jaipur. (a)A sum computed at the rate of 10% of the undisclosed income of the specified previous year, if such assessee-

(i) In the course of the search, in a statement under sub section (4) of section 132, abmits the indisclosed income and species 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:"

The perusal of the aforesaid provisions reveals that the other major conditions which are required to be satisfied before levy of penalty are mentioned in 271AAB(1)(c) —

[Penalty where search has been initiated. 271AAB. (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 1stday of July, 2012, the assessee shall pay by way of penalty, in addition to tax, if any, payable by him,—

9 ITA No. 323/JP/2022 Shri Raj Kumar Jain, Jaipur. (a) a sum computed at the rate of ten per cent of the undisclosed income of the specified previous year, if such 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 twenty per cent of the undisclosed income of the specified previous year, if such assessee— (i) in the course of the search, in a statement under sub- section (4) of section 132, does not admit the undisclosed income; and (ii) on or before the specified date— (A) declares such income in the return of income furnished for the specified previous year; and (B) pays the tax, together with interest, if any, in respect of the undisclosed income;

(c) a sum which shall not be less than thirty per cent but which shall not exceed ninety per cent of the undisclosed income of the specified previous year, if it is not covered by tile provisions of clauses (a) and (b).

The Learned Assessing Officer has avoided mentioning these major conditions which are required to be satisfied before levy of penalty. In the penalty order there is no discussion of the statement of the assessee recorded u/s 132(4). In the penalty order there is no discussion regarding the admission of the undisclosed income and the manner in which such income was derived not to speak of substantiating the same. These major conditions have remained unfulfilled before levy of penalty. In these circumstances there was no case for levy of penalty: -

The penalty u/s 271AAB is leviable with reference to undisclosed income. The undisclosed income has been defined specifically under explanation (c) to the provisions of section 271AAB(3) the same is quoted below: -

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(c) -disclosed 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 such 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, 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.

It is submitted that in the penalty order the Learned Assessing Officer has not brought on record in what manner there was undisclosed income for which penalty has been made. The statement of the assessee has not been referred to or quoted. There is no discussion regarding money, bullion etc. found during the course of search which were not recorded in the books of accounts. In view of this levy of penalty deserves to be deleted.

5.Confession statement u/s 132(4) being under pressure is volatile of Board circular: -

It is submitted that in the case of the assessee during the course of search no undisclosed income was found as defied u/s 271AAB(3) explanation (c). But as is usual the revenue authorities exerted undue, uncalled for and unwarranted pressure and obtained surrender of income. Otherwise there was no undisclosed income in the hands of the assessee. It is submitted that such confessional statement violates board's circular quoted below: -

(i) F. No. 286/2/2003-IT (Inv) dated 10.03.2003 No confessional statement in the course of search, seizure and survey.

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March 10th, 2003 Confession of additional Income during the course of search & seizure and survey operation GOVERNMENT OF INDIA MINISTRY OF FINANCE &COMPANY AFFAIRS DEPARTMENT OF Revenue CENTRAL BOARD OF DIRECT TAXES Room No. 254/North Block, New Delhi, the 10th March, 2003 To All Chief Commissioners of Income Tax, (Cadre Contra) & All Directors General of Income Tax Inv.

Sir

Subject : Confession of additional Income during the course of search & seizure and survey operation -regarding

Instances have come to the notice of the Board where assessees have claimed that they have been forced to confess the undisclosed income during the course of the search &seizure and survey operations. Such confessions, if not based upon credible evidence, are later retracted by the concerned assessees while filing returns of income. In these circumstances, on confessions during the course of search &seizure and survey operations do not serve any useful purpose. It is, therefore, advised that there should be focus and concentration on collection of evidence of income which leads to information on what has not been disclosed or is not likely to be disclosed before the Income Tax Departments. Similarly, while recording statement during the course of search it seizures and survey operations no attempt should be made to obtain confession as to the undisclosed income. Any action on the contrary shall be viewed adversely.

Further, in respect of pending assessment proceedings also, assessing officers should rely upon the evidences/materials gathered during the course of search/survey operations or thereafter while framing the relevant assessment orders

Yours faithfully, Sd/- (S. R. Mahapatra] Under Secretary (Inv. II)

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(ii) F.No. 286/98/2013-IT (Inv.11) dated 18.12.2014 Admissions of Undisclosed Income under coercion/pressure during Search/Survey

Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes Dated- 18th December, 2014 To 1.

All Principal Chief Commissioners of Income Tax 2. All Chief Commissioners of Income Tax 3. All Directors General of IncomeTax (Inv.) 4. Director General of Income Tax (I & CI), New Delhi Subject: Admissions of Undisclosed Income under coercion/pressure during Search/Survey — reg. Ref: 1) CBDT letter F.No. 286/57/2002- IT(Inv.11) dt. 03-07-2002 2) CBDT letter F.No. 286/2/2003-IT(Inv.11) dt. 10-03-2003 3) CBDT letter F.No. 286/98/2013-IT(Inv.11) dt. 09-01- 2014 Sir/Madam, Instances/complaints of undue influence/coercion have come to notice of the CBDT that some assessees were coerced to admit undisclosed income during Searches/Surveys conducted by the Department. It is also seen that many such admissions are retracted in the subsequent proceedings since the same are not backed by credible evidence. Such actions defeat the very purpose of Search/Survey operations as they fail to bring the undisclosed income to tax in a sustainable manner leave alone levy of penalty or launching of prosecution. Further, such actions show the Department as a whole and officers concerned in poor light. 2. I am further directed to invite your attention to the Instructions/Guidelines issued by CBDT from time to time, as referred above, through which the Board has emphasized upon the need to focus on gathering evidences during Search/Survey and to strictly avoid obtaining admission of undisclosed income under coercion/undue influence. 3. In view of the above, while reiterating the aforesaid guidelines of the Board, I am directed to convey that any instance of undue influence/coercion in the recording of the statement during Search/Survey/Other proceeding under the I.T.Act,1961 and/or recording a disclosure of undisclosed income under undue pressure/ coercion shall be viewed by the Board adversely. 4. These guidelines may be brought to the notice of all concerned in your Region for strict compliance. 5. I have been further directed to request you to closely observe/oversee the actions of the officers functioning under you in this regard. 6. This issues with approval of the Chairperson, CBDT (K. Ravi Ramchandran) Director (Inv.)-11, CBDT -

It is the submission of the assessee that in this case there was no undisclosed income in the case of the assessee. The assessee was forced to admit and surrender income in statement recorded u/s 132(4). Such forceful admission does not comply with the spirit of the law. This declaration was made to purchase peace of mind and to avoid prolonged litigation only. It was not disclosed because of undisclosed income. The provisions of section 271AAB(1)(c) clearly

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requires that such undisclosed income admitted u/s 132(4) requires to be substantiated. That means the assessee is require the specify the manner in which such income has been derived and further substantiate the same by furnishing material available with him. In this case no such substantiate was done as in fact there existed no undisclosed income. The entire disclosure was on paper and assessee admitted such disclosure to avoid undue harassment and unwanted litigation. In the circumstances no penalty is called for u/s 271AAB of the Income Tax Act, 1961. The most important thing that there is no question regarding earning and specification of manner by which the assessee has earned undisclosed income in the statement recorded u/s 132(4) of the IT Act, 1961. It is settled law when no such specific question was asked to substantiate the matter of earning of undisclosed income then it is deemed that the assessee has discharged his onus to substantiate the manner. Therefore the levy of penalty is not sustainable.

No difference between returned income and assessed income — 6. penalty not leviable :-

It is further submitted there are plethora of decisions in favour of the assessee holding that penalty u/s 271(1)(c)/271AAB cannot be levied when there is no variation of income between the assessed and returned income. The assessee filed return voluntarily before issue of any notice from the department. Further such return has been accepted and assessment has been completed on the returned income. There is no discussion regarding any undisclosed/ concealed income in the assessment order. The conditions mentioned in section 271AA(1)(c) that there was a statement u/s 132(4) of the assessee wherein there was admission of undisclosed income and also the manner in which such income was derived are absent. There is no such discussion in the assessment order. In view of this there was no case for levy of penalty u/s 271AAB of the Income Tax Act, 1961. There are pleathora of decisions which state that disclosure and concealment cannot co-exist. Levy of penalty has to be considered with reference to return filed. The following case laws are quoted in support: - (i) NEERAJ SINGAL vs. ASSISTANT COMMISSIONER OF INCOME TAX ITAT, DELHI TRIBUNAL (E) (2014) 101 DTR 0238 (Del)(Trib)

Penalty u/s 271AAA—Search was carried out at premises of assessee in which certain documents were seized, assessee had surrendered certain amount as an undisclosed income which was also declared in his return of income for AY 201011—Due taxes thereon was also paid before filing of return and same was accepted—In statement u/s 132 (4) assessee stated that said income was derived from forward / speculative and property transactions carried out by him during financial year 2009-10—AO being not satisfied with explanation of

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assessee imposed penalty u/s 271AAA—CIT(A) upheld findings of AO—Held, penalty u/s 271AAA is not leviable where assessee specify manner in which an undisclosed income was derived and also substantiate manner—In instant case no query was raised by authorized officer during course of recording of statement of assessee u/s 132 (4) about manner in which undisclosed income has been derived and about its substantiation—In absence of query raised by authorized officer, AO was not justified in imposing penalty u/s 271AAA specially when offered undisclosed income had been accepted and due tax had been paid by assessee—Penalty imposed u/s 271AAA set aside—Assessee's appeal allowed.

(ii) SPS STEEL & POWER LTD. vs. ASSISTANT COMMISSIONER OF INCOME TAX ITAT, KOLKATA TRIBUNAL (B) (2015) 122 DTR 0248 (Kol)(Trib) Penalty u/s 271AAA—Penalty where search has been initiated—Undisclosed Income—Search and seizure operation u/s 132 was conducted on business and residential premises of SPS Group—During course of search, one of Director of SPS Steel & Power Ltd, disclosed income of Rs.6.84 crores—That disclosure was explained by Assessee by filing detailed working and manner of earning of income in question—AO considered disclosure and accepted disclosure of Rs.6.84 crores—AO initiated penalty proceedings u/s 271AAA and 271(1)(c) in respect to disclosure u/s. 271AAA—Penalty could not be levied merely on admission of Assessee and there must be some conclusive evidence before AO that entry made in seized documents, represented undisclosed income of Assessee— With respect to amount of Rs.1,13,65,623/-, there was no evidence to prove that entries recorded in documents found during course of search was over and above income declared by Assessee as undisclosed income—Assessee's Appeal allowed—Cross-appeal by revenue dismissed.

(iii) It is submitted that the case of the assessee is fully covered by the Decision of the Hon'ble Bench in the case of Ajay Traders vs. DCIT in ITA No. 296/JP/2014 dated 06.05.2016.

ACIT Vs. Ashok Kumar Jain (ITAT Jaipur) ITA No. 830/1P/2011 (iv) dated 18.10.2012

In this case the Hon'ble ITAT has deleted penalty of Rs. 50,77,800/- levied u/s 271(1)(c) on the ground that in the revised return surrender was made to buy peace. Further held that mere surrendering the additional amount does not amount to concealed income or inaccurate particular of income. The Learned Assessing Officer did not gather any incriminating material during the course of survey or during post survey enquiry.

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Sejal Exports ITA No. 5724/Mum/2012 (v)

Where there is no difference between the income returned u/s 153A and assessed, no penalty would be leviable.

(vi) Kiriti Dayabhai Patel vs. Assistant Commissioner of Income Tax ITA No. 1181/2010 (Guj)

Penalty is to be levied on the income assessed over and above the returned income u/s 153A.

The learned AO has mentioned on page 5 para (v) that as per the explanatory note of Finance Bill 2012 the provisions of section 271AAB is mandatory in nature which is also evident from the provisio that "the assessee shall pay the penalty in addition to the tax on the undisclosed income surrendered u/s 132(4) of the Act.

The learned AO has stressed more on the language of explanatory note than the language of the Act. The provisions of the section start with 'may' and the word 'shall' is used which clearly indicates that it is not mandatory and it is discretionary. The provisions of section 271AAB and 158(2)BFA are paramateria.

It is clear from the provisions of section 271AAB of the Income Tax Act, 1961 that penalty under this section is not mandatory but discretionary because provisions of both the sections are parimateria.

271AAB (Penalty where search has been initiatedi:

(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 f1 day of July, 2012, 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 ten per cent of the undisclosed income of the specified previous year, if such assessee—

(i) in the course of 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) (iii) On or before the specified date

(A) pays the tax, together with interest, if any, in respect of the undisclosed income; and

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(B) furnishes the return of income for the specified previous year declaring such undisclosed income therein; (b) a sum computed at the rate of twenty per cent of the undisclosed income of the specified previous year, if such assessce— (i) in the course of the search, in a statement under sub-section (4_} of section 132, does not admit the undisclosed income; and (ll) on or before the specified date (A) declares such income in the return of income furnished for the specified previous year; and (B) pays the tax, together with interest, if and, in respect of the undisclosed income;

(c) a sum which shall not be less than thirty per cent but which shall not exceed ninety per cent of the undisclosed income of the specified previous year; if it is not covered by the provisions of clauses (a) and (b).

(2) 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). Section 158BFA(2):

(2) The Assessing Officer or the Commissioner (Appeals) in the course of any proceedings under this Chapter, may direct that a person shall pay by way of penalty a sum which shall not be less than the amount of tax leviable but which shall not exceed three times the amount of tax so leviable in respect of the undisclosed income determined by the Assessing Officer under clause (c) of section 1588C: Provided that no order imposing penalty shall be made in respect of a person if –

(i) such person has furnished a return under clause (a) of section 15SBC; (ii) the tax payable on the basis a such return has been paid or, if the assets seized consist of money, the assessee offers the money so seized to be adjusted against the tax payable. (i) Evidence of tax paid is furnished along with the return; and (ii) An appeal is not filed against the assessment of that part of income which is shown in the return:

Provided further that the provisions of the preceding proviso shall not apply where the undisclosed income determined by the Assessing Officer is in excess of the income shown in the return and in such cases the penalty shall be imposed on that portion of undisclosed income determined which is in excess of the amount of undisclosed income shoH,17 in the return.

Careful reading of section 271AAB of the Act, the words used are 'AO may direct' and 'the assessee shall pay by way of penalty'. Similar words are used section 158BFA(2) of the Act. The word may direct indicates the discretion to the AO. Further, sub section (3) of section 271AAB of the Act, fortifies this view.

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Sub section (3) of section 271AAB:

The provisions of section 274 and 275 shall, as far as may be, apply in relation to the penalty referred to in this section.

The legislature has included the provisions of section 274 and section 275 of the Act in 271AAB of the Act with clear intention to consider the imposition of penalty judicially. 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 A.O. Once the A.O. is bound by the Act to hear the assessee and to give reasonable opportunity to explain his case, there is no mandatory requirement of imposing penalty, because the opportunity of being heard and reasonable opportunity is not a mere formality but it is to adhere to the principles of natural justice. Hon'ble A.P. High Court in the case of Radhakrishna Vihar in ITTA No.740/2011 while dealing with the penalty u/s 158BFA held that 'we are of the opinion that while the words shall be liable under sub section (1) of section 158BFA of the Act that are entitled to be mandatory, the words may direct in sub section 2 there of intended to directory'. In other words, while payment of interest is mandatory levy of penalty is discretionary. It is trite position of law that discretion is vested and authority has to be exercised in a reasonable and rational manner depending upon the facts and circumstances of the each case. Plain reading of section 271AAB and 274 of the Act indicates that the imposition of penalty u/s 271AAB of the Act is not mandatory but directory. Therefore the finding of the Learned AO is not correct. 8. No undisclosed income: - In this case, a search u/s 132 of the Act was carried out in the assessee's premises but no evidence was found during the course of search except the loose papers placed on paper book page no. 14 to 19. Careful verification of the loose sheet found during the course of search shows that details of amount given for land dealings or advances made for some land purchases. As submitted by the assessee before the A.O., no other material was found during the search proceedings. Section 271AAB sub clause (c) of the Act defines undisclosed income 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

18 ITA No. 323/JP/2022 Shri Raj Kumar Jain, Jaipur.

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].

Penalty u/s 271AAB attracts on undisclosed income but not on admission made by the assessee u/s 132(4). The AO must establish that there is undisclosed income on the basis of incriminating material. In the instant case a loose sheet was found according to the A.O., it was incriminating material evidencing the undisclosed income. In the penalty order the AO observed nothing related to loose papers. However neither the AO nor the Ld.CIT(A) has verified the contents of the loose sheet with the books found at the time of search. No other material was found during the course of search indicating the undisclosed income. There was no money, bullion, jewellery or valuable article or thing or entry in the books of accounts or documents transactions were found during the course of search indicating the assets not recorded in the books of accounts or other documents maintained in the normal course, wholly or partly. The revenue did not find any undisclosed asset, any other undisclosed income or the inflation of expenditure during the search/ assessment proceedings. Though a loose paper was found that does not indicate any suppression of income. The AO was happy with the disclosure given by the assessee and did not verify the factual position with the books of accounts and other documents. The Hon'ble ITAT Delhi Bench in the case of Ajay Sharma Vs. DCIT (2012) 32 CCH 334 held that with respect to the addition on account of alleged receivables as per seized paper, there is no direct material which leads and establishes that any income received by the assessee has not been declared by the assessee. An addition has been made on the basis of loose document, which did not closely prove any concealment or furnishing of inaccurate particulars by the assessee. Hence penalty u/s 158BFA (2) of the Act is not leviable.

The facts of the assessee's case shows that there was no undisclosed income found during the course of search and no incriminating material was found, therefore the penalty levied by the Learned Assessing Officer deserves to be deleted.

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In view of the aforesaid discussion and various case laws cited above it is humbly requested that penalty in this case may not be levied because of the following facts: -

(i) There is no valid ground given in the assessment order for initiating penalty proceedings. (ii) The initiation of penalty is statutorily defective. (iii) The assessee filed the return in good faith and surrendered income to purchase peace of mind and avoid litigation. There was no undisclosed income. (iv) Assessment has been completed accepting the income declared by the assessee. (v) If at all there is any default it is technical. There is virtually no undisclosed income as per definition u/s 271AAB of the Income Tax Act, 1961. No undisclosed income was found during the course of search. It was found recorded in other documents as per provisions of section 271AAB explanation (c) of sub-section (3). (vi) The penalty u/s 271AAB is not mandatory and it is discretionary.

The Jurisdictional ITAT Jaipur Bench in a latest decision in the case of Rajaram Maheshwari in ITA No. 992/JP/2017 dated 10/01/2019 held as under: -

"In any case, the assessment proceedings have attained finality where such undisclosed income has been offered and brought to tax. For the purposes of levy of penalty, what has to be seen is that whether the surrender so made, in terms of statement of the assessee recorded u/s 132(4) during the course of search, falls in the definition of "undisclosed income" which has been specifically laid down in terms of clause (c) of explanation to section 271AAB which reads 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

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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."

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extended and applied automatically in context of section 271AAB. It is a well-settled legal proposition that the deeming provisions are limited for the purposes that have been brought on the statute book and have therefore to be applied in the context of provisions wherein they have been brought on the statue book and not otherwise. In the instant case, the deeming provisions are contained in section 69 and section 698 and therefore, the same have to be applied in the context of bringing to tax such investments to tax in the quantum proceedings. The same cannot be extended to the penalty proceedings which are separate and distinct from the assessment proceedings and more so, where the provisions of section 271AAB provide for a specific definition of undisclosed income. Where a specific definition of undisclosed income has been provided in Section 271AAB, being a penal provision, the same must be strictly construed and in light of satisfaction of conditions specified therein. In light of the same, the undisclosed investment by way of advance for purchase of land can be subject matter of addition in the quantum proceedings, however the same cannot be said to qualify as an undisclosed income in the context of section 271AAB read with the explanation thereto and penalty so levied deserve to be set- aside."

So the Hon'ble Jurisdictional ITAT Jaipur Bench has decided the issue regarding definition of undisclosed income as well as that provisions of section 271AAB are mandatory or not. So it has been decided that the provisions are not mandatory and even the penalty is not leviable if the income disclosed by the assessee does not fall in the definition of undisclosed income as provided in proviso to section 271AAB of the Income Tax Act, 1961.

In the case of the assessee the assessee has also disclosed income on the basis of loose papers which are on page 14 to 19 of the paper book and these are investment made by the assessee which has been offered for taxation in the current year for which no time was expired for filing the return showing the investment. Hence does not fall in the definition of undisclosed income so relying on the judgment of the Hon'ble ITAT in the case of Raja Ram Maheshwari in ITA no. 992/JP/2017 dated 10/01/2019 the penalty deserves to be deleted.”

The ld. Counsel for the assessee further submitted that the case of the

assessee is covered by the following decisions of Jurisdictional ITAT

Jaipur as under :-

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(i) Ravi Mathur ITA No. 969/JP/2017. (ii) Anuj Mathur ITA No. 971/JP/2017. (iii) Suresh Chand Mittal ITA No. 931/JPR/2017 (iv) Ritesh Agarwal ITA No. 418/JPR/2018. (v) Dinesh Kumar Agarwal ITA Nos. 855 & 856/JPR/2017. (vi) Silver and Art Palace ITA no. 236/JP/2018. (vii) Padam Chand Pungliya ITA No. 112/JP/2018 (viii) Vimal Chand Surana ITA No. 304/JP/2018. (ix) RajendraKumar Jain ITA No. 708/JP/2019 dated 14.09.20.

that the penalty was rightly levied on account of unexplained cash, unexplained

jewellery and unexplained valuables found at the premises of the assessee. It was

submitted by the ld. D/R that the assessee has not been able to substantiate the

grounds taken by him and since the assessee could not explain the undisclosed

income of Rs. 3,95,30,000/- found during the course of search, therefore, the

same was rightly treated as income of the assessee for the year under

consideration.

record, deliberated upon the judgments cited by the parties as well as the orders

of the Revenue authorities. The income surrendered by the assessee during the

course of search and seizure and in the statement recorded under section 132(4)

of the Act is on account of advances given for purchases of land. The assessee has

declared the income as salary received from partnership firm, interest from

partnership firm, capital gain short term and long term both and income from other

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sources, apart from the surrendered income of Rs. 3,95,30,000/-. Therefore, it is

clear that the assesee was not required to maintain regular books of account as

per section 44AA of the Act. The AO and ld. CIT (A) have proceeded on the

premises that the penalty under section 271AAB is mandatory in nature and,

therefore, the objections raised by the assessee before the AO as well as before

the ld. CIT (A) were not adjudicated while passing the impugned order. Once the

AO has to take a decision after giving an opportunity of hearing to the assessee for

levy of penalty under section 271AAB of the Act, then the explanation and

contentions raised by the assessee against the proposed levy of penalty are

required to be considered and disposed off in objective manner. The AO as well as

the ld. CIT (A) have failed to discharge the statutory duty to show cause the

assessee for applying the provisions of section 271AAB(b)(1)(c) of the Act and then

to consider the explanation of the assessee whether bonafide and beyond the

control of the assessee for not fulfilling the said condition. Thus the AO has not

mentioned in the show cause notice as to what would be the quantum of

penalty to be levied U/s 271AAB of the Act whether it would be 10% or 20%

or 30% of the undisclosed income in terms of clause-(a) to (c) of section

271AAB(1) of the Act. We further note that an identical issue was considered

by this Tribunal in case of Shri Ravi Mathur vs. DCIT vide order dated

13.06.2018 in ITA No. 969/JP/2017 in paras 4 to 7 as under:-

“4. We have considered the rival submissions as well as relevant material on record. A search was conducted under section 132 of the IT Act on 30th October, 2014 at the premises of the assessee. The assessee in his statement recorded under section 132(4) has disclosed an income of Rs. 10,02,00,000/- in pursuant to the entries of advances given for purchase of land recorded in the pocket diary which was found and seized during the course of search and seizure action. This is year of search and the financial year would end on 31st March, 2015. However, the assessee disclosed this

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amount of Rs. 10,02,00,000/- based on the entries in the diary regarding investment in real estate. The due date of filing of return of income under section 139(1) was 30th September, 2015. It is undisputed fact that the assessee is an Individual and was not maintaining regular books of account. Therefore, the transactions recorded in the pocket diary found during the course of search itself would not lead to the presumption that the assessee would not have offered this income to tax if the search is not conducted on 30th October, 2014. Further, the entries in the diary itself do no not represent the income of the assessee during the year under consideration though the assessee was required to explain the source of investment in question and that source would be the income of the assessee. It is most likely that the investment in question was made from the unaccounted income of preceding years. Hence the investment in the real estate itself would not reveal the nature of income and the source of income of the year under consideration. It is a pre-condition for invoking the provisions of section 271AAB that the assessee admitted the undisclosed income in the statement under section 132(4). The definition of ‘undisclosed income’ is provided in section 271AAB itself and, therefore, the AO in the proceedings under section 271AAB has to examine all the facts of the case and then arrive to the conclusion that the income disclosed by the assessee falls in the definition of undisclosed income as stipulated in the explanation to said section. The first question arises is whether the levy of penalty under section 271AAB is mandatory and consequential to the disclosure of income by the assessee under section 132(4) or the AO has to take a decision whether the given case has satisfied the requirements for levy of penalty under section 271AAB of the Act. In order to consider this issue, the provisions of section 271AAB are to be analyzed. For ready reference, we quote section 271AAB as under :-

“ 271AAB. (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 July, 2012 49[but before the date on which the Taxation Laws (Second Amendment) Bill, 2016 receives the assent of the President50], 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 ten per cent of the undisclosed income of the specified previous year, if such 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

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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 twenty per cent of the undisclosed income of the specified previous year, if such assessee— (i) in the course of the search, in a statement under sub-section (4) of section 132, does not admit the undisclosed income; and (ii) on or before the specified date— (A) declares such income in the return of income furnished for the specified previous year; and (B) pays the tax, together with interest, if any, in respect of the undisclosed income; (c) a sum 51[computed at the rate of sixty per cent] of the undisclosed income of the specified previous year, if it is not covered by the provisions of clauses (a) and (b). 52[(1A) 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 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).] (2) No penalty under the provisions of 53[section 270A or] 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) 52[or sub-section (1A)]. (3) The provisions of sections 274 and 275 shall, as far as may be, apply in relation to the penalty referred to in this section. Explanation.—For the purposes of this section,— (a) "specified date" means the due date of furnishing of return of income under sub- section (1) of section 139 or the date on which the period specified in the notice

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issued under section 153A for furnishing of return of income expires, as the case may be; (b) "specified previous year" means the previous year— (i) 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; or (ii) in which search was conducted; (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 the 54[Principal (B) otherwise not been disclosed to Chief or 54[Principal Commissioner or] Chief Commissioner 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.]”

The section begins with the stipulation that the AO “may” direct the assessee shall pay by way of penalty if the conditions as prescribed under clauses (a) to (c) are satisfied. As per sub-section (3) of section 271AAB the provisions of section 274 and 275 as far as may be applied in relation to the penalty referred in this section which means that before imposing the penalty under sec. 271AAB, the AO has to issue a show cause notice and give a proper opportunity of hearing to the assessee. Thus the levy of penalty u/s. 271AAB is not automatic but the A.O. has to take a decision to impose the penalty after giving a proper opportunity of hearing to the assessee. It is statutory requirement that the explanation of the assessee for not fulfilling the conditions as prescribed u/s 271AAB of the Act is required to be considered by the AO and particularly whether the explanation furnished by the assessee is bonafide and non-compliance of the same is due to the reason beyond the control of the assessee. Therefore, the penalty u/s 271AAB is not a consequential act but the AO has to first initiate proceedings by issuing a show cause notice and after considering the explanation and reply of the assessee has to take a decision. This requirement of giving an opportunity of hearing itself makes it clear

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that the penalty u/s 271AAB is not mandatory but the AO has to take a decision based on the facts and circumstances of the case otherwise there is no requirement of issuing any notice for initiation of proceedings but the levy of penalty would be consequential and only computation of the quantum was to be done by the AO as in the case of levy of interest and fee u/s 234A to E. Even the quantum of penalty leviable u/s 271AAB is also subject to the condition prescribed under clauses (a) to (c) of sub-section (1) and the AO has to again give a finding for levy of penalty @ 10% or 20% or 30% of the undisclosed income. Thus the AO is bound to take a decision as to what default is committed by the assessee and which particular clause of section 271AAB(1) is attracted on such default. Further, mere disclosure of income under section 132(4) would not ipso facto par take the character of undisclosed income but the facts of each case are required to be analyzed in objective manner so as to attract the provisions of section 271AAB of the Act. Since it is not automatic but the AO has to give a finding that the case of the assessee falls in the ambit of undisclosed income as defined in Explanation to the said section. Therefore, the provisions of section 271AAB stipulate that the AO may come to the conclusion that the assessee shall pay the penalty. The only mandatory aspect in the provision is the quantum of penalty as specified under clauses (a) to (c) of Sec. 271AAB(1) of the Act as 10% to 30% or more as against the discretion given to the AO as per the provisions of section 271(1)(c) of the Act where the AO has the discretion to levy the penalty from 100% to 300% of the tax sought to be evaded. Thus the AO is duty bound to come to the conclusion that the case of the assessee is fit for levy of penalty under section 271AAB and then only the quantum of penalty being 10% or 20% or 30% has to be determined subject to the explanation of the assessee for the defaults. 5. Before we proceed further, the decisions relied upon by the ld. D/R are to be considered. In the case of Principal CIT vs. Sandeep Chandak & Others (supra) the issue before the Hon’ble High Court was the defect in the notice issued under section 271AAB on account of mentioning wrong provision of the Act being 271(1)(c) of the Act. The Hon’ble High Court after considering the fact that the show cause notice issued by the AO though mentions section 271(1) in the caption of the said notice, however, the body of the show cause notice clearly mentions section 271AAB, which was fully comprehended by the assessee as reveals in the reply filed by the assessee against the said show cause notice. Hence the Hon’ble High Court has held as under :-

“ The ld. A.Rs have also challenged that the caption of the notice mentioned only Section 271 and not 271AAB. In this respect, the copy of notice has been produced by the ld. A.R. before me. It is seen that the ld. A.R is correct in observing that the section of

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penalty has not been correctly mentioned by the AO in the caption. However, the AO will get the benefit of section 292BB of the Income Tax Act, 1961 because firstly, the assessee has raised no objection before the AO in this regard. Secondly, last line of the notice clearly mentions section 271AAB. Thirdly, the assessee has given reply to said notice which shows that the assessee fully comprehended the implication of the notice that it is for section 271AAB. The assessee has also challenged that the principles of natural justice has not followed by the AO. The detailed submissions of A.R in this regard has already been reproduced above. The A.R did not produce any evidence to show that he was not given proper opportunity of hearing. It is clear from the penalty order that the AO has given penalty notice and which was also replied by the assessee. Therefore, in my opinion, principle of natural justice has not been violated. Thus in view of above discussion penalty imposed by AO u/s 271AAB of the Act is confirmed.”

Thus it was found by the Hon’ble High Court that the mistake in mentioning the section in the show cause notice is covered under section 292BB and the AO will get the benefit of the same. The said decision will not help the case of the revenue so far as the issue involves the merits of levy of penalty under section 271AAB. As regards the decision of Kolkata Benches of the Tribunal in the case of DCIT vs. Amit Agarwal (supra), we find that the said decision was subsequently recalled by the Tribunal and a fresh order dated 14th March, 2018 was passed by the Tribunal in favour of the assessee. Therefore, the decision relied upon by the ld. D/R is no more in existence. 6. The question whether levy of penalty under section 271AAB by the AO is mandatory or discretionary has been considered by the Visakhapatnam Bench of this Tribunal in case of ACIT vs. M/s. Marvel Associates (supra) in para 5 to 7 as under :-

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271AAB [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 1 st day of July, 2012, 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 ten per cent of the undisclosed income of the specified previous year, if such assessee—

(i) in the course of 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 twenty per cent of the undisclosed income of the specified previous year, if such assessee—

(i) in the course of the search, in a statement under sub-section (4_) of section 132, does not admit the undisclosed income; and

(ii) on or before the specified date— (A) declares such income in the return of income furnished for the specified previous year; and

(B) pays the tax, together with interest, if any, in respect of the undisclosed income; (c) a sum which shall not be less than thirty per cent but which shall not exceed ninety per cent of the undisclosed income of the specified previous year, if it is not covered by the provisions of clauses (a) and (b).

(2) 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).

Section 158BFA(2): (2) The Assessing Officer or the Commissioner (Appeals) in the course of any proceedings under this Chapter, may direct that a person shall pay by way of penalty a sum which shall not be less than the amount of tax leviable but which shall not exceed three

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times the amount of tax so leviable in respect of the undisclosed income determined by the Assessing Officer under clause (c) of section 158BC:

Provided that no order imposing penalty shall be made in respect of a person if— (i) such person has furnished a return under clause (a) of section 158BC; (ii) the tax payable on the basis of such return has been paid or, if the assets seized consist of money, the assessee offers the money so seized to be adjusted against the tax payable.

(iii) Evidence of tax paid is furnished along with the return; and (iv) An appeal is not filed against the assessment of that part of income which is shown in the return:

Provided further that the provisions of the preceding proviso shall not apply where the undisclosed income determined by the Assessing Officer is in excess of the income shown in the return and in such cases the penalty shall be imposed on that portion of undisclosed income determined which is in excess of the amount of undisclosed income shown in the return.

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not mandatory but directory. Accordingly we hold that the penalty u/s 271AAB is not mandatory but to be imposed on merits of the each case.”

Thus the Tribunal has held that the levy of penalty under section 271AAB is not mandatory but the AO has the discretion to take a decision and shall be based on judicious decision of the AO. Hence we fortify our view by the above decisions of Tribunal in case of ACIT vs. Marvel Associates.

“ It is clear from the Sub Section (3) of Section 271 AAB that Sections 274 and Section 275 of the Act shall, so far as may be, apply. Sub Section (1) of Section 274 of the Act mandates that order imposing penalty has to be imposed only after hearing the assessee or giving a assessee opportunity of hearing. Opportunity that is to be given to the assessee should be a meaningful one and not a farce. Notice issued to the assessee reproduced (supra), does not show whether penalty proceedings were initiated for concealment of income or for furnishing inaccurate particulars of income or for having undisclosed income within the meaning of Section 271AAB of the Act. Notice in our opinion was vague. Hon’ble Karnataka High Court in the case of SSA’s Emerald Meadows (supra) relying in its own judgment in the case of Manjunatha Cotton and Ginning Factory (supra) had held as under:-

‘’2. This appeal has been filed raising the following substantial questions of law:

(1) Whether, omission if assessing officer to explicitly mention that penalty proceedings are being initiated for furnishing of inaccurate particulars or that for concealment of income makes the penalty order liable for cancellation even when it has been proved beyond reasonable doubt that the assessee

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had concealed income in the facts and circumstances of the case?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the penalty notice under Section 274 r.w.s. 271(1)(c) is bad in law and invalid despite the amendment of Section 271(1B) with retrospective effect and by virtue of the amendment, the assessing officer has initiated the penalty by properly recording the satisfaction for the same?

(3) Whether on the facts and in the circumstances of the case, the Tribunal was justified in deciding the appeals against the Revenue on the basis of notice issued under Section 274 without taking into consideration the assessment order when the assessing officer has specified that the assessee has concealed particulars of income?

In the earlier case of Manjunatha Cotton and Ginning Factory (supra) their lordship had observed as under:-

‘’Notice under section 274 of the Act should specifically state the grounds mentioned in section 271(1)(c), i.e., whether it is for concealment of income or for furnishing of incorrect particulars of income. Sending printed form where all the grounds mentioned in section 271 are mentioned would not satisfy the requirement of law ;

The assessee should know the grounds which he has to meet specifically. Otherwise, the principles of natural justice are offended. On the basis of such proceedings, no penalty could be imposed on the assessee ; ) taking up of penalty proceedings on one limb and finding the assessee guilty of another limb is bad in law ; penalty proceedings are distinct from the assessment proceedings : though proceedings for imposition of penalty emanate from proceedings of assessment, they are independent and a separate aspect of the proceedings ;

33 ITA No. 323/JP/2022 Shri Raj Kumar Jain, Jaipur.

The findings recorded in the assessment proceedings in so far as “concealment of income” and “furnishing of incorrect particulars” would not operate as res judicata in the penalty proceedings. It is open to the assessee to contest the proceedings on the merits. However, the validity of the assessment or reassessment in pursuance of which penalty is levied, cannot be the subject matter of penalty proceedings. The assessment or reassessment cannot be declared invalid in the penalty proceedings’’.

View taken by the Hon’ble Karnataka High Court in the above judgment was indirectly affirmed by the Hon’ble Apex Court, when it dismissed an SLP filed by the Revenue against the judgment in the case of SSA’s Emerald Meadows (supra), specifically observing that there was no merits in the petition filed by the Revenue. Considering the above cited judgments, we hold that the notice issued u/s.274 r.w.s. 271AAB of the Act, reproduced by us at para 5 above was not valid. Ex- consequenti, the penalty order is set aside.

In view of the decision of the Chennai Bench (supra), the show cause notice issued by the AO in the case of the assessee is not sustainable.”

Thus, the Tribunal in the said decision has arrived to the conclusion that the levy

of penalty U/s 271AAB of the Act is not mandatory but the AO has discretion to

take a decision and the same shall be based on judicious decision of the AO.

5.1. As regards the validity of notice U/s 274, for want of specifying the ground

and default of the assessee, the Tribunal has held that the AO is required to

specifically state in the show cause notice the ground and the default committed

by the assessee as to attract the penalty U/s 271AAB of the Act @ 10% 20% or

30% of the undisclosed income. In the absence of specifying the default and

charge against the assessee for which the penalty was proposed to be levied the

show cause notice issued by the AO and initiation of proceeding for levy of penalty

U/s 271AAB are not valid. Hence, following the earlier order of this Tribunal we

34 ITA No. 323/JP/2022 Shri Raj Kumar Jain, Jaipur.

hold that the show cause issued by the AO in the case assessee is not sustainable

and liable to the quashed.

submitted that in the statement recorded U/s 132(4) the assessee has very

specifically stated that he was declaring/surrendering income subject to his request

that no penalty and prosecution proceedings will be initiated. In view of this it was

requested to the AO not to impose any penalty in the case as the assessee

furnished return in good faith. The return was filed disclosing income in order to

avoid litigation and to purchase peace of mind. The ld. AR has further submitted

that provisions of Section 271AAB are deeming provisions. In the case of the

assessee there is virtually no concealment and no penalty should be levied for a

technical default. The assessee furnished return in good faith to purchase peace of

mind and with a strong hope that the department would honor the assurance given

for not levying penalty. Income declared by the assessee in the return of

income accepted with minor variation. There cannot be any concealment

prior to filing of return. Question of considering whether assessee is liable

for action u/s 271(1)(c) would arise only when return of income is

scrutinized by Assessing Officer and he finds some more items of income

or additional income over and above what is declared in the return. Where

the Assessing Officer accepted the income then assessee cannot be

charged for any contumacious conduct and there is no question of

penalty. The basis of levy of penalty is return of income. There can be no

concealment until there is duty to disclose. The duty to disclose

particulars of income arises at the time when the assessee furnishes

return of income and if in filing his return he conceals the particulars of

income or furnishes inaccurate particulars he incurs penalty u/s 271(1)(c)

35 ITA No. 323/JP/2022 Shri Raj Kumar Jain, Jaipur.

that the income was surrendered on the basis of some documents on

which the name of some persons and some amount is mentioned. The

Learned Assessing Officer has not made any enquiry regarding those

documents whether the person the name of which mentioned is an

existing person or the amount mentioned was advanced to him. Actually

the documents on the basis of which surrender was made were never

examined and no evidences were brought on record that the amounts

mentioned on those documents are concealed income of the assessee.

The contents of the documents were never proved to be true. The

assessee has surrendered income on the basis of those documents only

to buy peace and avoid prolonged litigation. In actual those documents

on the basis of which surrender was made after thought documents

prepared during the course of search for making surrender in various

years and no such persons exit. The assessee has paid tax and interest

on those surrendered income. Now in penalty proceedings it is

requested that assessee should not be penalized for cooperating the

departmental authorities and payment of tax because in actual there

were no concealment and the total surrender was divided in earlier

years and the assessee was having bonafide belief that no penalty was

leviable on such surrender. The legal help was also not available at the

time of surrender so the assessee was not knowing the consequences of

surrender in earlier years and the surrender was made by the assessee

with a bonafide belief that no penalty was leviable. The Ld. Assessing

officer in the para 4 on page no. 2 of the assessment order has mentioned

that the total income declared in the ROI for the specified year includes

this undisclosed income of Rs. 3,95,30,000/- which represented the

36 ITA No. 323/JP/2022 Shri Raj Kumar Jain, Jaipur.

undisclosed income. Accordingly, penalty u/s 271AAB of the Act is initiated

on such amount of Rs. 3,95,30,000/- by way of issue of notice u/s 274

r.w.s. 271AAB of the Act. It is not clarified that why the Learned Assessing

Officer has treated the income of Rs. 3,95,30,000/- as undisclosed income.

The assessee was maintaining a separate account for the income

surrendered during the course of search. All the transactions are for the

current year which had not been ended before the date of the search

or for which the return was already filed. All the transactions are

recorded. Nothing adverse was found which suggest that the

assessee's intention was not to disclose the income recorded in the

seized documents. Therefore, without bringing any adverse material on

record no penalty can be levied u/s 271AAB of the Income Tax Act,

1961. He has relied upon the same decision of this Tribunal in case of

Shri Ravi Mathur vs. DCIT order dated 13.06.2018 in ITA No.

969/JP2017.

disclosure was made on the basis of the incriminatory material found

during the search and seizure action then the income so disclosed by

the assessee is an undisclosed income as per the provisions of 271AAB

of the Act. Though, the assessee has paid the tax by the specified date

however, as per clause-(c) of Section 271AAB(1) of the Act the penalty

@ 30% of undisclosed income is leviable. The ld. DR has relied upon

the orders of the authorities below.

material on record. During the course of search and seizure

proceedings some loose papers/documents were found and seized

37 ITA No. 323/JP/2022 Shri Raj Kumar Jain, Jaipur.

containing entries of various amount against the different persons.

When this seized material was confronted with the assessee he

surrendered undisclosed income of Rs. 3,95,30,000/-. The Assessing

Officer has accepted the explanation of the assessee regarding

substantiation of the manner for earning the undisclosed income in

question. The details of the entries in the seized material disclose

certain amounts are recorded as advance to the persons. Thus amount

of undisclosed income consisted of sundry advances. All these

transactions do not pertain to the business activity of the assessee but

these are advances given by the assessee. Therefore, the entries in the

seized material are not the transactions generating income except

some interest income. At the outset we note that the Coordinate Bench

of this Tribunal in case of Shri Ravi Mathur vs. DCIT (supra) has

considered the issue of levy of penalty U/s 271AAB in paras 8 and 9 as

under:-

“8. Even otherwise, without restricting ourselves to the validity of show cause notice, we note that section 271AAB of the Act contemplates imposition of penalty pursuant to the disclosure of undisclosed income in the statement recorded under section 132(4) and, therefore, the levy of penalty under this section does not depend on the addition made during the assessment proceedings. Hence the penalty proceedings under section 271AAB are completely independent of the enquiry and finding of the AO in the assessment order except for the limitation provided as per section 275 of the Act. We have already held that the penalty is not automatic but the AO has to take a decision to impose the penalty after giving an opportunity of hearing to the assessee in terms of section 274 of the Act. Thus the AO in the proceedings under section 271AAB of the Act has to first decide that the conditions prescribed under the said section are satisfied for levy of penalty and then to further take a decision after considering the explanation of the assessee for non compliance of any of the conditions under clauses (a) to (c) of sub- section (1) regarding the quantum of penalty. The primary condition

38 ITA No. 323/JP/2022 Shri Raj Kumar Jain, Jaipur.

for levy of penalty is the existence of undisclosed income as per the disclosure made by the assessee under section 132(4). The term ‘undisclosed income’ has been defined in Explanations to section 271AAB. Therefore, as per the definition provided in the Explanation, the undisclosed income may have various forms and the same is not recorded in the books of accounts or other documents maintained in normal course relating to the specified previous year. As per sub- clause (i) of clause (c) of the Explanation, the undisclosed income means any income of the specified previous year represented by any money, bullion, jewellery or valuable article or things or any entry in books of accounts or other documents or transactions found in the course of search. This definition is further subject to two conditions that the said income has not been recorded on or before the date of search in the books of accounts or other documents maintained in the normal course relating to such previous year or otherwise not being disclosed to the Principal Chief Commissioner, Principal Commissioner or Commissioner before the date of search. The other forms of undisclosed income as defined in sub clause (ii) is any entry in respect of expenses recorded in the books of accounts or other documents maintained in the normal course. Therefore, the clause (ii) contemplates undisclosed income in the form of false entries of expenses recorded in the books of accounts which is not relevant for the case in hand. Since in the case of assessee the transactions of investment were found in the diary, therefore, whether these entries in the diary constitute undisclosed income as per clause (c)(i) of Explanation to Section 271AAB of the Act. The assessee is an Individual and for the year under consideration the assessee has not reported any business income nor it was assessed by the AO. Therefore, it is clear that the assessee was not required by any mandate of law to maintain regular books of accounts. In the computation of income, the assessee has shown income from Salary, income from house property and income from other sources. The returned income was accepted by the AO while framing the assessment under section 143(3) and hence assessee’s case does not fall in the category where the regular books of accounts are mandatory. The entries of investment in real estate were found recorded in the diary and in the absence of any other document maintained in the normal course relating to the year under consideration, the entries in the diary are to be considered as recorded in the documents maintained in the normal course. It is not the case of the revenue that the assessee has recorded the other transactions in the other documents maintained in the regular course relating to the year under consideration and only these entries are recorded in the diary. Since the levy of penalty under section

39 ITA No. 323/JP/2022 Shri Raj Kumar Jain, Jaipur.

271AAB is not based on the addition and enquiry conducted by the AO in the assessment proceedings, therefore, it is incumbent on the AO to conduct a proper examination of facts, circumstances and explanation furnished by the assessee before arriving to the conclusion that penalty under section 271AAB is leviable and further whether it is 10% or 20% or 30% of such undisclosed income. Therefore, the AO is under statutory obligation to examine all the issues during the proceedings under section 271AAB after giving the assessee an opportunity to explain the charges/grounds on which the penalty is proposed to be levied. Hence it is a pre-requisite condition that the AO first specify the charges against the assessee and to make known the assessee of his default so as to afford an opportunity to explain the default/charges so brought against the assessee. Without considering the explanation of the assessee on the specific default, the order passed by the AO under section 271AAB suffers from serious illegality and therefore not sustainable in law. When a stringent action is provided in the Statute against the default committed by the assessee, then it also cast an equally stringent and strict duty on the authority responsible to take such action. Therefore, when the provisions for levy of penalty under section 271AAB is a specific provision to deal with the undisclosed income and it provides a strict penal action then the corresponding duty of the tax authority is also equally stringent. The AO cannot escape from following the strict mandatory requirement of law and particularly the principle of natural justice. The AO has neither specified the grounds and clause of section 271AAB nor has dealt with the same in the impugned order passed under section 271AAB. The AO has also not given a finding that the case of the assessee falls in the definition of undisclosed income provided under clause (c)(i) of Explanation to section 271AAB. When the transactions of investment in real estate are recorded in the diary being other documents maintained by the assessee for the said purpose, then in the absence of any requirement of maintaining regular books of accounts by the assessee, the case of the assessee would not fall in the definition of undisclosed income as per clause (c) of Explanation to section 271AAB of the Act.

“3. We have heard rival submissions and gone through the facts and circumstances of the case. We find that the issue involved herein

40 ITA No. 323/JP/2022 Shri Raj Kumar Jain, Jaipur.

is squarely covered in favour of the assessee in the case of DCIT vs Manish Agarwala (another member in the same Nezone Group) in ITA No. 1479/Kol/2015 for AY 2013-14 dated 9.2.2018 by the order of this tribunal , wherein it was held as under:-

“3. We have heard rival submissions and gone through the facts and circumstances of the case. We note that the AO has levied the penalty u/s. 271AAB on the ground that the income from commodity profit has been found during search u/s.132 of the Act which is not reflected in the regular books of account. The AO has accepted that during search the assessee has admitted u/s. 132(4) of the Act the income from speculative trading. The undisputed facts the AO has given finding pertaining to this case is as follows:

i) The assessee has substantiated the manner in which the income was derived. ii) Furnished the return of income therein and

iii) Paid the tax along with interest.

Based on the said finding, according to AO, the assessee satisfies the conditions enumerated in sec. 271AAB(i)(a) of the Act and thereafter levied ten percent of Rs.3 cr., which have been deleted by the impugned order of Ld. CIT(A).

41 ITA No. 323/JP/2022 Shri Raj Kumar Jain, Jaipur.

that sec. 271AAB of the Act is not mandatory because Parliament in its wisdom has used the word ‘may’ and not ‘shall’. So, according to him, it is the discretion bestowed upon the AO whether to initiate and impose penalty u/s. 271AAB of the Act. We agree with the said contention of Ld. AR because when a similar issue was adjudicated by ITAT Lucknow (the author of this order was a member of the Bench) in Sandeep Chandak & Ors. Vs. CIT (2017) 55 ITR (Trib) 209 and 2017 (5) TMI 675- ITAT-Lucknow in ITA No. 416, 417 and 418/LKW/2016 dated 30.01.2017 while adjudicating a case where penalty was levied under section 271AAB of the Act it was held that the provisions of Sec. 271AAB of the Act are not mandatory, which means that penalty need not be levied in each and every case wherever the assessee has made default as stated in clauses (a), (b) and (c) of the Act. Sub-section (1) of Sec. 271AAB of the Act uses the word “may” not “shall”. “May” cannot be equated with “shall” especially in penalty proceeding. Using the word “may” in our opinion, gives a discretion to the AO to levy the penalty or not to levy, even if the assessee has made the default under the said provision.” Therefore, the 2nd ground of Revenue fails and we hold that penalty u/s. 271AAB of the Act is not mandatory and is discretionary. Before proceeding further, we note that the ex parte order passed by the Coordinate Bench relied upon by Ld. DR, Manoj Beswal, supra, have been recalled in MA Nos. 218 to 220/Kol/2017 dated 12.01.2018 by observing as under:

“By virtue of these miscellaneous applications, the assessee seeks to recall the order passed by this Tribunal in I.T.A. Nos. 1471, 1475&1476/Kol/2015 in the hands of Amit Agarwal, Madan Lal Beswal and Manoj Beswal respectively for the assessment year 2013-14 on the ground that notice was not served on the assessee for the hearing and on certain factual error that had crept in the order of the Tribunal. The first preliminary objection raised by the Ld. AR was that the notice of hearing was not served on the assessee for the hearing scheduled on 06.11.2017 and hence, the assessee could not be present on the said date by way of personal appearance. The second objection raised by the Ld. AR was that the Tribunal had stated in para 9 of its order that the assessee himself had accepted that he is engaged in commodities trading business and therefore mandated to maintain books of accounts in terms of section 44AA of the Act and thereby inferring that the assessee had reported the profit from commodities trading business under the head “income from business or profession”. Based on this crucial finding, the

42 ITA No. 323/JP/2022 Shri Raj Kumar Jain, Jaipur.

Tribunal had concluded that since the transaction of commodities trading had not been entered by the assessee in his books of accounts as on the date of search on 01.08.2012 and thereby it takes the character of undisclosed income for which penalty u/s 271AAB of the Act is exigible. In this regard, we find that the Ld. AR drew our attention to the computation of the total income wherein the assessee had offered income from commodity trading only under the head income from other sources. We also find that the Ld. AO had also specifically stated in the body of the assessment order vide column no. 10 that the assessee is having only salary income and income from other sources. We find that due to the absence of the assessee at the time of hearing this particular fact had escaped the attention of the Tribunal. On perusal of the fact available on record, we find that the finding recorded by this Tribunal in para 9 of its order dated 10.11.2017 that the assessee is mandated to maintain books of accounts u/s 44AA of the Act is factually incorrect and deserves to be rectified. This mistake of primary fact had lead to a conclusion of upholding the levy of penalty u/s 271AAB of the Act. Hence, in these facts and circumstances and in view of the aforesaid mistake of primary fact rightly pointed out by the ld. AR , we deem it fit to recall the orders of this Tribunal dated 10.11.2017 in the case of aforesaid assessees.”

In the aforesaid scenario, the legal position is that an order which has been recalled for de novo adjudication, is no order in the eyes of law and so it cannot be treated as a precedent. Hence, the reliance placed by the Ld. DR in respect of assessee’s in the same group concern cases as decided by the Tribunal no longer survives and cannot be treated as covered against the assessee.

43 ITA No. 323/JP/2022 Shri Raj Kumar Jain, Jaipur.

and expenditure for AY 2013-14 under the head “income out of speculative business from sale of commodities”, and thereafter the AO confirmed the assessee’s claim and thereafter total income was assessed by the AO as per the return submitted by the assessee. In the light of the aforesaid facts discerned from assessment order, the assessee’s case is that for the first time in this AY he was doing unsystematic speculative activity which earned income and, it was brought under the head “Income from Other Sources”, and so, accordingly, he is not required to maintain books of account as stipulated in Sec. 44AA or Sec. 44AA(2)(ii) of the Act because, these provisions are only for assesses who are earning income under the head “Business or profession”. We note that Sec. 44AA or Sec. 44AA(2)(ii) of the Act casts a duty upon the assessee who are into “Business or Profession” and such assessee’s are bound to maintain books of account as stipulated therein. For appreciating this submission let us go through the provisions of law.

“44AA. (1) Every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette shall keep and maintain such books of account and other documents as may enable the [Assessing] Officer to compute his total income in accordance with the provisions of this Act. (2) Every person carrying on business or profession [not being a profession referred to in subsection (1)] shall,—

(i) if his income from business or profession exceeds [one lakh twenty] thousand rupees or his total sales, turnover or gross receipts, as the case may be, in business or profession exceed or exceeds [ten lakh] rupees in any one of the three years immediately preceding the previous year; or

(ii) where the business or profession is newly set up in any previous year, if his income from business or profession is likely to exceed [one lakh twenty] thousand rupees or his total sales, turnover or gross receipts, as the case may be, in business or profession are or is likely to exceed [ten lakh] rupees, [during such previous year; or

(iii) where the profits and gains from the business are deemed to be the profits and gains of the assessee under [section 44AE] [or section 44BB or section 44BBB], as the case may be, and the assessee has claimed his income to be lower than the

44 ITA No. 323/JP/2022 Shri Raj Kumar Jain, Jaipur.

profits or gains so deemed to be the profits and gains of his business, as the case may be, during such [previous year; or]]

(iv) where the profits and gains from the business are deemed to be the profits and gains of the assessee under section 44AD and he has claimed such income to be lower than the profits and gains so deemed to be the profits and gains of his business and his income exceeds the maximum amount which is not chargeable to income-tax during such previous year,]

keep and maintain such books of account and other documents as may enable the [Assessing] Officer to compute his total income in accordance with the provisions of this Act.

(3) The Board may, having regard to the nature of the business or profession carried on by any class of persons, prescribe, by rules, the books of account and other documents (including inventories, wherever necessary) to be kept and maintained under sub-section (1) or sub- section (2), the particulars to be contained therein and the form and the manner in which and the place at which they shall be kept and maintained.

(4) Without prejudice to the provisions of sub-section (3), the Board may prescribe, by rules, the period for which the books of account and other documents to be kept and maintained under sub-section (1) or sub- section (2) shall be retained.]”

So from a reading of the above provisions which clearly stipulates that assessee who are carrying on business or profession shall keep and maintain such books of account and other documents which may enable the AO to compute the total income. We note that assessee in the statement of total income filed before the AO has shown income only under two heads (i) salary income (ii) income from other sources. We would like to reproduce the summary of total income of the assessee filed along with the return:

Income from Salary Rs. 45,57,600 Income from Other sources Rs.3,00,24,047 Rs.3,45,81,647

45 ITA No. 323/JP/2022 Shri Raj Kumar Jain, Jaipur.

from “Income from Business”. The confusion that has arisen in this case, we note is on the misdirection of AO in the assessment proceedings wherein the assessment order of the assessee, the AO has observed “during search and seizure operation, Shri Manoj Beswal had made a consolidated disclosure of Rs.32 crore vide his disclosure petition. Out of this consolidated disclosure, the assessee owned up Rs. 3 cr. In the disclosure petition Shri Manoj Beswal it was stated that the source of such undisclosed income was out of commodity profit. It has been submitted that the amount has already been disclosed in his Income & Expenditure account for the AY 2013-14 under the head ‘Income out of Speculative Business from sale of commodities’. Verification of accounts confirms his claim.” This observation is flawed because, we note that AO got carried away by perusal of the “Income & Expenditure Account for AY 2013-14” submitted by the assessee before him, wherein it was shown in the income side that is right hand column as “Income from Speculative Business from sale of commodities” and left hand side column reflects the expenditure; and AO came to the conclusion that assessee has disclosed under the heading income out of Speculative Business from sale of commodities. The character of a receipt and the head under which it has to be taxed is not based on the nomenclature of receipt of income shown in Income & Expenditure Account. All the incomes of revenue nature will be posted in the right hand side column of ‘income’ in the Income & Expenditure Account and the description given therein cannot determine the head of income prescribed under chapter IV of the Act. Therefore, the observation of the AO in assessment order in the light of his action of accepting the statement of total income filed by the assessee along with return which without being contested, is erroneous, unless the AO was able to negate the claim of the assessee by bringing the income from commodity transactions as part of business income. It should be remembered that under the Income Tax Act 1961, the total income of an assessee individual/company is chargeable to tax u/s. 4 of the Act. The total income has to be computed in accordance with the provisions of the Act. Section 14 of the Act lays down that for the purpose of computation, income of an assessee has to be classified under five heads. It is possible for an assessee/individual/company to have five different sources of income, each one of it will be chargeable to Income Tax Act. Profits and gains of business or profession is only one of the heads under which an assessee’s income is liable to be assessed to tax. If an assessee has not commenced business there cannot be any question of assessment of its profits and gains of business. That does not mean that until and unless the assessee commences its business, its income from any other source will not be taxed as held by the Hon’ble Supreme Court in the case of Tuticorin Alkali & Chemicals Ltd. Vs. CIT (1997) 227 ITR 172 (SC). It has been further held that when the question is whether a receipt of money is taxable or not or whether certain deduction from that receipt is principles of law and not in

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accordance with accountancy practice. Further, the Hon’ble Apex Court held that the question as to whether a principal receipt is of the nature of income and falls within the charge of sec. 4 of the Act is a question of law which has to be decided by the Court on the basis of the provisions of the Act and interpretation of the term ‘income’ given in a large number of decisions of the Hon’ble Supreme Court, High Court and Privy Council. After taking note of the Apex Court order as above, we note that the AO in the assessment order after having accepted the statement of total income (supra) and the return wherein the assessee has shown the income from commodities under the head “Income from Other Sources” cannot now after perusal of “Income & Expenditure Account” determine the character of transaction in the penalty proceedings as “Income from Business or Profession” which approach/action is erroneous. We note that the assessee in his statement of total income along with return has classified his income under two heads (i) Salary and (ii) from other sources and the income of Rs. 3 cr. as income from other sources, which we find the AO has not contested in the assessment order, has thus crystallized and the necessary inference drawn is that assessee an individual who was admittedly a salaried person engaged in the previous year relevant to the assessment year under consideration (that too for the first time) in an activity from which he derived “Income from Other Sources” are not required to maintain books of account which are applicable only if the assessee was engaged in Business or Profession. However, we further note that the transactions which yielded income, the assessee had in fact maintained records from which the AO was able to deduce the true income and expenditure of the assessee. We note the AO in the assessment order has accepted the returned income comprising of income from salary and income from other sources by observing as under :

“Total income assessed as per return Rs.3,44,65,120/-”.

And further we note that the AO had specifically stated in the body of the assessment order vide column no. 10 that the assessee is having only salary income and income from other sources. Thus from a perusal of the assessment order, it is not in dispute that assessee is not engaged in any business. And the AO cannot change the character of income in a derivative proceeding which is an off-shoot of assessment proceedings i.e. the penalty proceedings without contesting and making a finding against the claim of the assessee in the assessment order as discussed above.

47 ITA No. 323/JP/2022 Shri Raj Kumar Jain, Jaipur.

figure was accepted by the AO. According to Ld. AR, the fact that search happened on 01.08.2012 need to be taken note of since undisputedly there was enough and more time for the assessee to submit the accounts during assessment proceedings which fact has been taken note of and concurred by the Ld. CIT(A). Thereafter, the Ld. AR drew our attention to the definition of undisclosed income given under section 271AAB which reads as under:

“Penalty where search has been initiated. '271AAB. (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 July, 2012, 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 ten per cent of the undisclosed income of the specified previous year, if such assessee—

********

Explanation – For the purposes of this section, -

(a) ……….

(b) ……….

(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

48 ITA No. 323/JP/2022 Shri Raj Kumar Jain, Jaipur.

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.”

According to the Ld. AR, from the facts and circumstances described above, since the assessee is not engaged in business or profession, he does not require to maintain the books of account as per sec. 44AA or sec. 44AA(2) of the Act, therefore, the assessee’s case falls in the second limb i.e. “or other documents” as stipulated u/s. 271AAB Explanation (c) (supra) which describes undisclosed income for the purposes of this section which is very important to adjudicate this issue. Therefore, the question is when the search took place, the assessee’s transactions (in this case, the speculative transaction) has been found to be recorded in the “other documents” which is (retrieved from the assessee’s accountant’s drawer) and based on that the assessee declared Rs. 3 cr. during search and later returned income of Rs. 3 cr. as income under the head “Income from Other Sources” which was accepted by the AO in toto. We note that since the income under question (Rs. 3 cr.) was in fact entered in the “other documents” maintained in the normal course relating to the AY 2013-14, which document was retrieved during search, hence, the amount of Rs. 3 cr. offered by the assessee does not fall in the ken of “undisclosed income” defined in Sec. 271AAB of the Act. So, Rs. 3 cr. which was commodity profit recorded in the other document maintained by the assessee which was retrieved during search cannot be termed as “undisclosed Income” in the definition given u/s. 271AAB of the Act. Since Rs. 3 cr. cannot be termed as “Undisclosed Income” as per sec. 271AAB of the Act, no penalty can be levied against the assessee. Therefore, we uphold the order of the Ld. CIT(A) on the aforesaid reasoning rendered by us.

Therefore, when the assessee is not required to maintain the books of account as per section 44AA, then the matter is required to be examined whether the alleged undisclosed income is recorded in the other documents maintained in the normal course as per clause (c) to Explanation to section 271AAB. Undisputedly the alleged income was found recorded in the diary which is nothing but the other record maintained in the normal course, thus the same would not fall in the definition of undisclosed income. Once the said income is found as recorded in the other documents

49 ITA No. 323/JP/2022 Shri Raj Kumar Jain, Jaipur. maintained in the normal course, then it cannot be presumed that the assessee would not have disclosed the same in the return of income to be filed after about one year from the date of search. Hence, in view of the above facts and circumstances of the case as well as the various decisions on this point, we hold that the penalty levied under section 271AAB is not sustainable and the same is deleted.”

We find that the said decision of this Tribunal is applicable in the facts of the present case and accordingly, in view of the decision in case of Shri Ravi Mathur vs. DCIT (supra) we delete the penalty levy U/s 271AAB of the Act.

Order pronounced in the open court on 8/12/2022.

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50 ITA No. 323/JP/2022 Shri Raj Kumar Jain, Jaipur.

51 ITA No. 323/JP/2022 Shri Raj Kumar Jain, Jaipur.