ACIT CEN CIR 11, MUMBAI vs. PRAKASH C. KANUGO, MUMBAI

This appeal by the revenue is directed against the order of the CIT (Appeals)- 37, Mumbai dt. 31/05/2012 for Asst. Year 2009-10, challenging the cancellation of the penalty of Rs. 12,96,600/- levied u/s 271AAA of the Income Tax Act, 1961 (in short ‘the Act’).

2.1 A search and seizure action u/s 132 and survey u/s 133A of the Act was conducted at the residential and business premises of the Prakash Steelage group on 09/02/2009. For Asst. year 2009-10, the assessee filed its return of income declaring income of Rs. 2,24,29,560/-. The assessment was concluded u/s 143(3) of the Act vide order dt. 3/12/2010, wherein the assessee’s income was determined at Rs. 2,30,47,690/-.

2.2 Among other things, Penalty proceedings u/s 271AAA of the Act were initiated. In the course of search proceedings, cash amounting to Rs. 30,95,970/- was found out of which Rs.30,00,000/- was seized, which was offered to tax. Since the source of the cash and the manner in which such income was derived could not be explained by the assessee, the Assessing Officer (‘AO’) proceeded to levy penalty u/s 271AAA of the Act thereon. In the course of the same search, material was seized indicating cash expenses incurred towards construction of farm house, and expenses incurred on marriage and ornaments in respect of which the assessee offered Rs. 99,66,000/-to tax and disclosed the same in his return of income. In respect of this also the A.O levied penalty u/s 271AAA of the Act.

2.3 On appeal, the CIT(Appeals)-37, Mumbai vide order dt. 31/05/2012 for Asst. year 2009-10, cancelled the penalty levied u/s 271AAA of the Act by the A.O.

3.1 Revenue, being aggrieved by the order of the CIT(Appeals)-37, Mumbai has preferred this appeal raising the following grounds:-

On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the penalty order u/s 271AAA relying on the decision of Gujarat High Court in the case of CIT vs. Mahendra Shah 299 ITR 205 (Guj) without appreciating the fact that the decision relied upon was not squarely applicable in the instant case as it related to explanation 5A of section 271(1)(c) and not u/s 271AAA.”

On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the appeal of the assessee without appreciating the fact that the assessee failed to fulfill the preconditions stipulated in section 271AAA particularly the condition u/s 271AAA(2)(ii) of the I.T. Act.

3.2 At the outset of the hearing, both the counsels for the assessee as well as revenue brought to the notice of the Bench, that a co-ordinate bench of this Tribunal in the case of the assessee’s group concern i.e. Prakash Steelage Ltd., in respect of cancellation of penalty levied by the A.O u/s 271AAA of the Act by the very same CIT(A)-37, Mumbai also for A.Y 2009-10 in its order in dt. 28/01/2015, set aside that order of the Ld. CIT(A) and restored the matter to the file of the CIT(A) for consideration afresh i.e. the issue on merits on the applicability of Sec. 271AAA in the facts of that case. It was prayed the facts issues, and grounds of appeal being identical, the impugned order may be set aside and the matter of penalty u/s 271AAA of the Act be restored to the file of the CIT(A) for fresh consideration on merits.

3.3 We have carefully perused the decisions of the co-ordinate bench in the case of Prakash Steelage Ltd. in dt. 28/01/2015 for Asst. year 2009-10 in respect of the decision therein on the issue of levy of penalty u/s 271AAA of the Act. The relevant portion of the decision dt. Paras 4.1 to 4.4 of that order are exacted have for the sake of clarity:-

4.1 At the outset, we observe, even as would be apparent from the foregoing narration of events, and as also sought to be brought forth by the Revenue per its first ground of appeal, that the ld. CIT(A) has grossly misapplied himself in the matter; examining the levy of penalty under a provision (section 271(1)(c)) which was neither invoked by the Assessing Officer (A.O.) nor could in fact be in the facts and circumstances of the case. Penalty in the instant case stands levied u/s.271AAA, which reads as under: ‘Penalty where search has been initiated. 271AAA. (1) The Assessing Officer may, notwithstanding anything contained in any other provisions of this Act, direct that, in a case where search has been initiated under section 132 on or after the 1st day of June, 2007 but before the 1st day of July, 2012, the assessee shall pay by way of penalty, in addition to tax, if any, payable by him, a sum computed at the rate of ten per cent of the undisclosed income of the specified previous year. (2) Nothing contained in sub-section (1) shall apply if the assessee,— (i) in the course of the search, in a statement under sub-section (4) of section 132, admits the undisclosed income and specifies the manner in which such income has been derived; (ii) substantiates the manner in which the undisclosed income was derived; and (iii) pays the tax, together with interest, if any, in respect of the undisclosed income. (3) No penalty under the provisions of clause (c) of sub-section (1) of section 271 shall be imposed upon the assessee in respect of the undisclosed income referred to in sub-section (1). (4) The provisions of sections 274 and 275 shall, so far as may be, apply in relation to the penalty referred to in this section. Explanation.—For the purposes of this section,— (a) “undisclosed income” means— (i) any income of the specified previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search under section 132, which has— (A) not been recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous year; or (B) otherwise not been disclosed to the 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; (b) "specified previous year" means the previous year— (i) which has ended before the date of search, but the date of filing 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 said date; or (ii) in which search was conducted.’

4.2 The matter stands dealt with by the ld. CIT(A) vide sub-para 6 of his order, which stands perused by us. Para 6.1.1 records the assessee’s grounds before him. Sub-para 6.2 notes briefly the facts of the case and the basis of the levy of penalty as recorded by the A.O. Sub-para 6.3 reproduces the assessee’s submissions before the ld. CIT(A). Vide sub-para 6.4.1, the ld. CIT(A) records having considered the rival submissions and perused the materials on record. Sub-para 6.5 details his ‘Decision’, which we may reproduce as under: ‘6.5.1 Penalty u/s.271AAA has been levied by the Ld. A.O. on the following undisclosed income /additions:- a. Undisclosed interest Income declared by the assessee of Rs.99,13,210/- b. Undisclosed Income relating to stock of Rs.5,62,62,475/- declared by the assessee and addition due to discrepancy in stock of Rs.3,46,632/-.

6.5.2 Ld. A.O. has initiated penalty u/s.271AAA only because the appellant could not specify the manner in which such income had been derived and failed to substantiate the same. In this regard, it is pertinent to look into the provisions of sec.271AAA, relevant part of which are as under:- “(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 ……….”

6.5.3 It may also be profitable to refer to Explanation 5A substituted by the Finance Act, 2009 w.r.e.f. 01.06.2007 which is as under:- “Where, in the course of a search initiated under section 132 on or after the 1st day of June, 2007, the assessee is found to be the owner of- (i) Any money, bullion, jewellery or other valuable article or thing (hereafter in this Explanation referred to assets) and the assessee claims that such assets have been acquired by him by utilizing (wholly or in part) his income for any previous year; or (ii) Any income based on any entry in any books of account or other documents or transactions and he claims that such entry in the books of account or other documents or transactions represents his income (wholly or in part) for any previous year,

Which has ended before the date of search and – (a) Whether the return of income for such previous year has been furnished before the said date but such income has not been declared therein; or (b) The due date for filing the return of income for such previous year has expired but the assessee has not filed the return, Then, notwithstanding that such income is declared by him in any return of income furnished on or after the date of search, he shall, for the purposes of imposition of a penalty under clause (c) of sub- section (1) of this section, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income.”

6.5.4 On perusal of the same it is to be seen that an explanation has been provided in the aforesaid provisions on fulfillment of which penalty is not to be levied. The same being: 1. A statement is made u/s. 132(4) admitting the undisclosed income, 2. Specifying the manner in which the undisclosed income was derived and 3. The assessee pays the tax together with interest, if any, on the same.

6.5.5 I find that the appellant has already made a statement admitting the undisclosed income and also stated that it has paid all the taxes together with interest on the sum offered for taxation in the statement u/s.132(4) as reflected in the return of income filed for the year. The appellant group has also stated during and immediately after the search that the income of the group was earned from undisclosed business based on the entries found in the seized documents. While dealing with similar circumstances, in respect of Explanation-5 to sec. 271(1)(c) which also contained similar requirements of disclosing the manner in which the income was earned and substantiating the same Hon’ble Gujarat High Court in the case of CIT vs. Mahendra Shah 299 ITR 305 (Guj.) has held as under: (Paras 7 to 15 of the decision stand reproduced)

6.5.6 In view of the above, it is clear that even if the statement does not specify the manner in which income is derived but the income is declared and tax thereon is paid, there would be substantial compliance not warranting on further denial of the benefit under Explanation 5A to sec. 271(1)(c) which is similarly worded as Expl.

4.3 The ingredients of section 271AAA, for which reference may be made to subsections (1) and (2) thereof, and which provision only is applicable for the current year –the year of search (s. 271AAA(1) r/w Explanation thereto), and in fact applied by the A.O., vary substantially from that of section 271(1)(c) (Explanation 5), noted at para 6.5.4 of the impugned order, inasmuch as the former provides for substantiation of the manner in which the undisclosed income, as disclosed per s. 132(4), is derived by the assessee. In fact, the ld.

CIT(A) records the ingredients of Explanation 5 to section 271(1)(c) at para 6.5.4 of his order, while Explanation 5A to s. 271(1)(c) alone is relevant for a search initiated u/s.132 on and after 01.06.2007, as in the instant case; the former applying only in case of a search initiated before 01.06.2007. Even the decision relied upon by him (at para 6.5.5), i.e., Mahendra C. Shah (supra), is only in the context of section 271(1)(c). The two sections, i.e., s. 271(1)( c) and s. 271AAA, are not only worded differently, with thus different concomitant scopes, are rather mandated to operate exclusively (refer section 271AAA(3)). The foregoing, we believe, would bring forth the basis as well as the validity of our initial observation at para 4.1 of this order, i.e., of the ld. CIT(A) having grossly misapplied himself in the matter. We, therefore, accepting the Revenue’s Ground # 1, vacate the findings by the ld. CIT(A) as well as his consequent decision as recorded in the concluding sub-para (# 6.5.6) of his order.

The same, however, would not by itself imply a positive satisfaction of the conditions of section 271AAA, only on the basis of which the penalty as levied could be sustained. The matter would therefore; the ld. CIT(A) having examined the levy on the basis and anvil of a different provision, require being restored back to him for a consideration afresh, i.e., the issue on merits, and toward which the Revenue has raised its Ground No. 2 before us. We, accordingly, restore the matter back to the file of the ld. CIT(A) to adjudicate the issue arising, i.e., the applicability of s. 271AAA in the facts of the case, and after allowing the asssessee an opportunity to state its case before him.

4.4 In this regard, we also consider it relevant to state our prima facie observations, so that the same are kept in view by the ld.

CIT(A) while deciding the assessee’s case before him. Firstly, any income to be subject to penalty u/s.271AAA should be an ‘undisclosed income’, as defined vide Explanation below sub- subsection (4) the said section. The penalty in the instant case, however, has been levied on the income of Rs.3,46,632/-, which, as it would appear to us on a reading of the assessment and penalty order, is only on account of a difference in the valuation of stock. Thus a finding as to the impugned incomes being undisclosed incomes is a pre-requisite for the application of the provision. Further, each of the three ingredients as specified u/s. 271AAA(2) would need to be separately examined for their satisfaction by the assessee if the penalty there-under is not to be levied and, thus, sustained. While this may seem axiomatic and, therefore, superfluous for us to be stating so, liable to be construed as an expression of over anxiety, we do so as we observe a gross overlooking of this vital aspect of the matter. As we observe, the undisclosed income of Rs.562.62 lacs relating to stock was declared by the assessee, i.e., for the first time, only per its return of income filed on 29.11.2009, and not per the declaration vide a statement/deposition u/s.132(4) of the Act; the disclosure following search extending only to an income of Rs.99.13 lacs, i.e., by way of interest. The only finding by the ld. CIT(A) in the matter is that vide para 6.5.5 of his order, which states of tax and interest having been paid on the incomes offered u/s. 132(4), and which find due reflection in the return of income. The only income, of the three incomes under reference, which satisfies this requirement, is the interest income, i.e., presuming that the manner of its derivation stands also specified. The admission u/s.132(4) is to specify the undisclosed income, or at least the manner in which it is to be arrived at; the whole premise for extending immunity from the penalty, statutorily mandated, being that the assessee commits himself, providing the necessary details under a condition of oath. Further, surprisingly again, we observe no finding by the ld. CIT(A) in respect of substantiation of the manner of deriving the undisclosed income, which stipulation, while missing in section 271(1)(c), stands incorporated in section 271AAA. The A.O. clearly records a finding, both in respect of the assessee having failed to specify the manner in which the undisclosed income is derived as well as of the assessee having failed to substantiate the same, and which in fact the ld. CIT(A) notes vide para 6.5.2 of his order. Clearly, these findings of fact would need to be addressed by the ld. CIT(A), either endorsing or reversing or otherwise modifying the same, i.e., based on his reappraisal of the materials found from the possession of, or otherwise furnished by, the assessee, or even the evidences led by it before him for the first time, of-course by and upon observing the due process of law (refer r. 46A). The onus to satisfy the conditions of the provision though, would only be on the assessee. In fact, all this would precisely be the purview of the first appellate authority in the set aside proceedings. Coming to the decision in the case of Mahendra C. Shah (supra), relied upon by the ld. CIT(A), the same, as afore-stated, is firstly in respect of section 271(1)(c), the parameters as well as ingredients of which are different from that of section 271AAA. While the former provision is applicable in the case of concealment of or furnishing inaccurate, particulars of income, considering the deeming provisions in its respect under the section, s. 271AAA provides for a mandatory levy of penalty except where the assessee satisfies the conditions of section 271AAA(2). Even the saving upon proving a reasonable clause, as provided under section 273B, is not applicable for a penalty imposable u/s.271AAA, which is only in respect of undisclosed income, so that what alone is relevant is the applicability of the provision in the facts of the case. It is apparent from the reading of the said decision that the environmental conditions existing at the time of the search, including the manner in which the statement u/s.132(4) is generally recorded, prevailed with the hon’ble court in holding of a substantial compliance in the facts of the case, i.e., qua the condition of admission of undisclosed income and the statement of the manner in which it is derived, also provided u/Expl.5 to s. 271(1)(c), saving penalty. As explained by it, this is as the assessee had no occasion to state or make averments in the manner as required by or under the law. Its prescription is therefore to be read contextually. The legal proposition that thus arises from the said judgment is that the satisfaction of the conditions must be considered in the background and the context of the obtaining facts and circumstances of the case. In the instant case, the statement u/s.132(4), which is by Shri Prakash C. Kanugo, a director of the assessee-company, was recorded only on 06.03.2009 (copy on record), i.e., nearly a month after the search. The assessee cannot be said to be constrained for want of time - which was ample, to deliberate in the matter, as well as seek legal advice. In fact, the statement was made only in the presence of its counsel, Shri Vinay Doshi, CA, and itself makes a plea for grant of condonation from the levy of penalty (in answer to Q.11). Could it be therefore be said that the assessee had no occasion to aver with regard to the manner of deriving the income being disclosed? A company acts through the human agency of its management, which alone could depose qua the manner in which its undisclosed income stood earned/ derived, being rather in its exclusive knowledge? All that the law postulates is a honest disclosure qua the said income. A finding as to the satisfaction or otherwise of the said condition, or for that matter its’ substantiation, i.e., of the manner in which the undisclosed income was derived, it needs to be appreciated, are pure findings of fact. The hon’ble high courts can interfere with such a finding/s only where it is in its view either perverse or without evidence or based on irrelevant material, or which is partly relevant and partly irrelevant (refer, inter alia, CIT v. Daulat Ram Rawatmull [1973] 87 ITR 349 (SC)). Further, even where so, the province of the hon’ble court is to restore the matter back to the tribunal, stating its reasons, as clarified by the hon’ble court in Janatha Contract Co. v. CIT [1976] 105 ITR 627 (Ker), following the binding decisions by the apex court in CIT v. Greaves Cotton & Co. Ltd. [1968] 68 ITR 200 (SC) and CIT v. Indian Mollasses & Co. (P.) Ltd. [1970] 78 ITR 474 (SC). The authorities on the law in the matter could in fact be multiplied. Then, again, we wonder, rather than reading down the provision, so as to operate to negate the mandatory requirement of the section, defeating the legislative intent, which, as explained by the hon’ble courts as well as the official pronouncements explaining the provision, is of plugging the generation of undisclosed income and the consequent leakage of revenue for future, why could the same be not read so as to allow the assessee the latitude for providing the necessary details subsequently, i.e., where the disclosure u/s.132(4) is made under excruciating or difficult circumstances. The same of course would be under oath, making it a part of and refer to the earlier statement u/s. 132(4), complying thus substantially and effectively, with the substantive provision of law. Further, the further condition of ‘substantiation’, as provided u/s. 271AAA(2)(ii), which was not there in the case, being u/s. 271(1)(c), before the hon’ble court in Mahendra C. Shah (supra), could only be interpreted to mean of the law casting a further obligation on the assessee to demonstrate the manner of deriving the undisclosed income, as specified per the statement u/s.132(4), as valid and true, i.e., stands validated and is on a firm basis; the presumption as to the truth of the materials found being already provided for u/s. 292C. The said decision would thus be of little assistance to the assessee.

3.4 On an appreciation of the aforesaid decision of the co-ordinate bench of this Tribunal in the case of Prakash Steelage Ltd for A.Y. 2009-10(supra), we find that the grounds raised by revenue before the same CIT(A)-37, Mumbai, the issue involved being the levy of penalty u/s 271AAA of the Act, on similar set of facts, for A.Y. 2009-10, in the case of assessee’s group concern, we are of the view it would only be in the fitness of things for us to follow the aforesaid decision of the co-ordinate bench with which we have no quarrel. We, therefore following the decision of the Co-ordinate bench in the case of Prakash Steelage Ltd. (supra) set aside the decision of the Ld. CIT(A) in the impugned order cancelling the penalty levied by the A.O. u/s 271AAA of the Act for Asst. year 2009-10 and restore this issue of levy of penalty u/s 271AAA of the Act to the file of the Ld. CIT(A) for fresh consideration of this issue on merits in accordance with the grounds raised by revenue in this appeal (supra), after affording the assessee adequate opportunity of being heard and to file details /submissions required. The Ld. CIT(A) is further advised to note the observations and follow the directions and guidelines laid down in the decision of the co-ordinate bench in the case of Prakash Steelage Ltd. (extracted supra) while adjudicating the matter. We hold and direct accordingly. Consequently, revenues grounds are treated as allowed for statistical purposes.