CHOICE INTERNATIONAL LTD,MUMBAI vs. ASST CIT CEN CIR 29, MUMBAI

The present appeal is filed by assessee, challenging the order of CIT(A)-40, Mumbai dated 29 September 2014 for AY 2011–12, wherein the penalty order under section 271 AAA was partially confirmed.

The brief facts of the case are that assessee filed return of income for relevant assessment year, declaring total income of Rs 2,08,88,520/-. A search and seizure action under section 132 of the Act was carried at M/s. Vakrange Software Ltd and its group on 13 December 2010. During the search and seizure statement of Shri Kamal Poddar was recorded under section 132(4) of the Act, wherein Shri Kamal Poddar offered an amount of Rs 2.00/- crore as undisclosed income in the hands of assessee-company. The said amount of Rs 2.00/- crore was duly included in the return of income filed by assessee for the year under consideration. While completing the assessment, the AO made addition of Rs.29,19,753/-. The AO ITA 6987/M/2014 AY -2011-12 Choice International observed that, had the search not been concluded, the assessee would have successfully concealed its income. The AO initiated penalty u/s 271AAA of the Act. After considering the contention of the assessee, the AO and concluded that the condition specified in section 271 AAA (2) are not fully satisfied .Accordingly, AO levied the penalty of Rs 19,34,494/-. The AO has levied the penalty under section 271 AAA in respect of an amount of Rs 1,93,44,937/-, which were in respect of addition on account of bogus claim of depreciation (Rs.1,0395,000/-), disallowance of notional interest (Rs.15,95,548/-). Disallowance under section 40(a) (ia) (Rs 573534) addition on account of cash seized (Rs. 10,00,000/-) and disallowance out of expenses for the want of bills (Rs.57,80,855/-). Aggrieved by the order of AO assessee filed appeal before the Commissioner of Income Tax Appeals, wherein the penalty was restricted only respect of unaccounted cash of Rs. 10.00/- Lacs found during the course of search, disallowance of Rs 15,94,548/- and undisclosed income of Rs.70,10,452/-. Further aggrieved by the order of Commissioner Appeals, the assessee has approached us in this appeal.

We have heard ld AR of assessee and ld DR for revenue and perused the material available on record. Ld AR of the assessee argued that assessee had offered undisclosed income of Rs 2.00/- crore during the search and the same was accounted for in the profit and loss account and the tax thereon has been paid before filing return of income. The Learned AR further argued that the assessee has satisfy the conditions specified under section 271AAA (2) of the Act, and hence the penalty is not leviable. Ld AR of assessee further argued that no penalty could be levied in respect of the disallowance as there was no concealment of income or furnishing inaccurate particulars of income on the part of the assessee. Ld AR for assessee prayed that the entire penalty levied upon the assessee should be deleted. Ld DR for the Revenue argued that the assessee has not substantiated the manner in which the undisclosed income was derived and mere payment of tax would not absolve the assessee from the penalty provided u/s 271AAA of the Act.

We have considered the rival contention of the parties and perused the material available on record. We have seen that while passing the penalty order AO completely failed to adhere the provisions of subsection (2) of section 271AAA of the Act. The AO not discussed in its order, if the assessee has substantiated the manner in which the undisclosed income was derived or not. The order of AO is absolutely illegal. However, the Learned CIT(A) while considering the contention of the assessee discussed the scope of section 271AAA of the Act, and deleted the penalty, except on unaccounted cash of Rs. 10.00/- lacs found during the course of search, disallowance of Rs 15.94,548/- and undisclosed income of ITA 6987/M/2014 AY -2011-12 Choice International Rs.70,10,452/-. We have noticed that during the first appellate proceedings, Ld CIT(A) asked the assessee to specify the manner in which the undisclosed income of sized cash of Rs.10.00/- lac and Rs.70,10,452/- were derived. The contents of impugned order passed by ld. CIT(A) shows that assessee fail to provide any satisfaction. The ld CIT(A) has not referred in its order as to what explanation was offered by assessee. Similarly, the impugned order does not disclosed as to how, the undisclosed income was confronted with the assessee to substantiate the manner in which this income was derived. The order of ld. CIT(A) further disclosed that disallowance of interest was worked out by Assessing Officer for calculating notional interest@ 15% on the amount of Rs.1.25 crore and was to be disallowed u/s 36 (i)(iii) of the Act. As per our considered opinion the addition on account of notional interest cannot be a part of penalty u/s 271 AAA of the Act. Considering the vagueness in the order of ld. CIT(A) in confirming the penalty in respect of unaccounted cash of Rs. 10.00/- lac, disallowance of interest of Rs.15,94,548/- and undisclosed income of Rs.70,10,452/- are restored to the file of Assessing Officer to decide the matter afresh and in accordance with the provisions of sub section (2) of section 271 AAA of the Act. The Assessing Officer shall also consider the statement of Sh Kamal Poddar recorded during the search, the manner in which undisclosed income offered and substantiated by him. With this observation the appeal of the assessee is allowed for statistical purposes. Order pronounced in the open court on 12th August, 2016.