J.R DIAMONDS P.LTD,MUMBAI vs. DCIT CEN CIR 1, MUMBAI

The only issue raised in all the grounds of appeal

The facts of the case are that a search and survey operation under section 132(1) was conducted on 22.8.2008 in the premises of Su-Raj Diamond and Jewellery Ltd and its group concerns including the assessee company. The assessee was one of the concern belonging to the said group of companies. During the course of search action Mr Jatin R Mehta, Chairman and Managing Director of the group M/s Su-Raj Diamond and Jewellery Ltd disclosed a sum of Rs.10 Cr as additional income of the assessee company for the assessment year 2007-08 and 2008-09 comprising Rs. 7.88 Cr on account of withdrawal of exemption u/s 10AA of the Income Tax Act, 1961 in respect of SEZ., Chennai and a sum of Rs.2.12 Cr on account of variation in valuation of stock and any such discrepency. The assessee in question was covered by the provisions of section 153C of the Act and filed return of income on 3.5.2010 declaring a total income of Rs.1,08,80,835/- which included additional income of Rs. 1.25 crores in the search operation in response to notice issued u/s 153C of the Act. The assessment were framed and completed by an assessment order dated 24.12.2010 passed under section 143(3) read with section 153C assessing the total income at Rs.1,76,38,130/-. A penalty proceedings under section 271(1)(c) of the Act was initiated by issuing notice dated 24.12.2010 u/s 274 r.w.s 4 I T A N o . 5 7 7 1 / M / 2 0 1 4 a n d I T A N o . 5 7 7 2 / M u m / 2 0 1 4 271(1)( c ) of the Act was duly served. Since assessee failed to reply the said notice , another fresh show cause notice dated 26.11.2012 was issued which was replied by the assessee vide letter dated 7.2.2013 which is reproduced by the AO in para 2.3 of the penalty order. The AO after considering the reply of the assessee came to the conclusion that the assessee has disclosed additional income to cover various discrepancies in the return of income filed before search operation and the additional income was only disclosed by the assessee in the return of income filed in response to the notice issued u/s 153C of the Act which was not disclosed in the return filed originally under section 139(1) of the Act. Had the assessee company and other group concerns not been subject to search/survey action, the assessee would not have disclosed additional income as the disclosure was made during the course of search action on the basis of specified facts ,information and materials. The AO further observed that the assessee could not allowed the benefit of absence of any specific discrepancy being pointed out in the assessment order as disclosure of additional income of Rs.1.25 crores was sufficient to impose penalty which was not disclosure in the return filed u/s 139(1) of the Act and thus imposed the penalty equal to 100% of the tax sought to be evaded i.e. Rs.42,07,500/- by invoking the Explanation 1 to section 271 of the Act vide order dated 28.3.2013 passed under section 271(1)( c) of the Act.

In the appeal proceedings, the ld. CIT(A) also dismissed the appeal of the assessee by holding that surrender/disclosure of income in the statement recorded u/s 132(4) of the Act during the search operation could not be considered as surrender/disclosure voluntarily made as surrender/disclosure was on the basis of information gathered during the search and survey which was based on the admission and non disclosure of income in the return filed u/s 139(1) of the Act. The ld. CIT(A) also observed that immunity provided u/s Explanation 5 of section 271(1)(c) would not be applicable to the assessee as he did not satisfy necessary parameters for falling the case of the assessee under the said explanation. It was also observed that the additional income was disclosed by the appellant in the return of income filed in response to the notice issued u/s 153C of the Act which could not be considered as voluntary disclosure made by the assessee. Finally, the ld. CIT(A) upheld the order of imposing the penalty u/s 271(1)( c) explanation (1) to the section by observing that the assessee had furnished inaccurate particulars of income filed under section 139(1) of the Act and also not furnished any satisfactory explanation to the income disclosed in the search proceedings.

The ld. AR vehemently submitted before us that the AO has wrongly imposed the penalty and the ld. CIT(A) wrongly confirmed the same specifically when no incriminating material was found during the search proceedings against the assessee. The ld. AR further submitted that the 6 I T A N o . 5 7 7 1 / M / 2 0 1 4 a n d I T A N o . 5 7 7 2 / M u m / 2 0 1 4 disclosure was made only to buy peace of mind without being any corroborating materials found by the search team during the search proceedings. The ld. AR drew our attention to question no. 28 and answer thereto by referring to the statement recorded on oath of Shri Jatin R Mehta on 22.8.2008, the relevant extract of which have been placed at pages 37 to 41 of the assessee’s paper book. The ld. AR argued that total of Rs.22 crores was disclosed during the course of search operation in the entire group, the details thereof were given to Investigation Wing on 23.10.2008 which is placed at pages 45 to 47 of the paper book. The ld. AR also submitted that the assessee has duly disclosed the income of Rs.1,25,00,000/- in the assessment year 2007- 08, Rs.6.7 crores in the assessment year 2008-09 which was subsequently revised to Rs.8.75 crores. The ld. AR drew our attention to page 27 of the assessment order which is placed at page 26 to 32 of the paper book and the relevant disclosure made by the assessee u/s 153C has been incorporated in the said assessment order as under : “3. In the returns of income filed u/s.153C, the assessee has incorporated disclosure made during search in the following manner: i) In return of income of AY.07-08, it has disclosed additional amount of Rs.1,25,00,0001- voluntarily offered for tax consequent to the search. ii) In return of income of AY.08-09, it has disclosed additional amount of Rs.6,75,00,0001- voluntarily offered for tax consequent to the search.

The ld.DR relied heavily relied on the orders passed by the authorities below by submitting that the assessee disclosed Rs.1.25 crores in the return of income filed in response to notice issued u/s 153C of the Act and not under section 139(1) of the Act. It was only after search action conducted on the assessee and the group companies that a disclosure was made and it was immaterial that no defect in the books of account of any corroborative evidence was found during the course of search action. The admission of the assessee was sufficient for the imposition of penalty u/s 271(1)(c) of the Act.

We have carefully considered the rival submissions and records including the impugned orders of authorities below. We find that the assessee during the course of search action conducted on 22.8.2008 made disclosure of Rs.22 crores in the group of companies, the details whereof were filed vide letter dated 23.10.2008 which is placed at pages 45 of the paper book. During the course of recording the statement u/s 132(4) of the Act on 22.7.2008 the in response to query No.28 the assessee replied that: “Ans : I have considered the discrepancies in the books of accounts, stock and claim u/s 10AA/10B of the IT Act, 1961. To compensate for the same, I hereby offer additional/undisclosed income of Rs.22 crores for taxation. The break up of the additional/undisclosed income will be submitted by me within 7 days after consulting my Chartered Accountant and also after going through my books of account and other documents. I will also submit the details of period to which this income relates and also the heads under which the same is earned within period of 7 days.”” In response to query no.30 qua payment of taxes , the assessee replied that : “I hereby confirm that the tax will be paid to the additional/undisclosed income of Rs.22 crores in installments of Rs.1 crores per month starting from September, 2008 and up to March, 2009)” On perusal of the above and also the assessment order passed u/s 143(3) r.w.s. 153C of the Act , it is clear that no specific defect justifying the initiation of penalty proceedings u/s 271(1)( c ) of the Act was given nor any specific observations was made while passing the penalty order justifying the imposition of penalty. In our view, the imposition of penalty 10 I T A N o . 5 7 7 1 / M / 2 0 1 4 a n d I T A N o . 5 7 7 2 / M u m / 2 0 1 4 under section 271(1)( c ) read with Explanation 1 was not correct as the assessee has made voluntary disclosure during the course of search action merely to buy peace of mind when there was no incriminating documents or material found by the search party or no specific defects were pointed out by the AO while framing the assessment order. We are not in agreement with the AO and the ld. CIT(A) that the admission made by the assessee during the course of search operation was sufficient to invoke the provisions of section 271(1)( c ) of the Act and the fact that the assessee has not disclosed the income in the return filed u/s 139(1) of the Act but the additional income was shown in the return of income filed in response to notice u/s 153C of the Act after search operation was conducted on the assessee. In our opinion, the act of the ld.CIT(A) in upholding the order of AO is not justified, particularly when the disclosure was made during the recording of statement u/s 132(4) of the Act qua exemption u/s 10AA in respect of SEZ Chennai and variation in valuation of stocks and others as stated in the letter dater 23.10.2008 to the Investigation Wing and thereafter the assessment was framed under section 143(3) read with section 153C of the Act vide order dated 24.10.2010 allowing exemption u/s 10AA at Rs. 1,02,10,433/- as claimed by the assessee. It cannot be a case of imposition of penalty when the assessee offered a disclosure towards withdrawal of exemption u/s 10AA of the Act which was duly allowed by the AO in the assessment order which itself proved that there 11 I T A N o . 5 7 7 1 / M / 2 0 1 4 a n d I T A N o . 5 7 7 2 / M u m / 2 0 1 4 is no application of mind on the part of the AO at the time of passing the assessment order u/s 143(3) r.w.s 153C of the Act. For the sake of better understanding of the issue and for convenience we reproduce the relevant extracts qua disclosure of Rs.22 crores made by the assessee in the letter dated 23.10.2008 as under :

Grounds of appeal

The common issue raised in the grounds of appeal

We find merit in the submissions of the ld.AR that in case of the 14 I T A N o . 5 7 7 1 / M / 2 0 1 4 a n d I T A N o . 5 7 7 2 / M u m / 2 0 1 4 assessee the search was carried out on 20.2.2008 which was after 1.6.2007 and penalty could only be imposed u/s 271AAA of the Act and not under section 271(1)(c) of the Act. The case of the assessee is supported by the decision of the Co-ordinate Bench of the Tribunal in the case of Smt.Hiral Himanshu Kanakia (supra), wherein it has been held as under : “5. We have heard both the parties and perused the material on record. The relevant A.Y. under consideration is 2008-09. It is an admitted fact that a search u/s 132 has been carried out on 19.07.2007 in Kanakia Group to which the assessee belongs. From the provisions of section 271 AAA of the Income Tax Act, it is clear that where search has been initiated under section 132 on or after 01.06.2007, penalty can be levied only under section 271 AAA and not u/s 271(1)(c) of the Act. Thus, in view of the fact that the AO has not invoked the correct provisions of law for levying the penalty in the present case, the Ld.CIT(A) is not justified in confirming the levy of penalty. In view of that matter, the impugned penalty is deleted” We, therefore, respectfully following the ratio laid down in the above mentioned decisions set aside the order of CIT(A) and direct the AO to delete the penalty.

In the result, the appeals filed by the assessee are allowed