TMI Blog2019 (4) TMI 634X X X X Extracts X X X X X X X X Extracts X X X X ..... ble stock not found recorded in the books of accounts and also the cost of such stock which is not recorded in the books of accounts. There is no finding that there is any excess stock which has been physically found and which has not been recorded in the books of accounts as on the date of search. It is thus clear that difference in stock of goods as per books and as found at the time of search is on account of valuation of such stock at the market value instead of cost and the same cannot be a basis to hold that it represent undisclosed income so defined in explanation to section 271AAB and the penalty levied thereon is liable to be set-aside. Cash advances for land purchases in the statement recorded u/s 132(4) - HELD THAT:- The undisclosed investment by way of advance for purchase of land can be subject matter of addition in the quantum proceedings, as the same has been surrendered during the course of search in the statement recorded u/s 132(4) and offered in the return of income, 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 thereon deserved to be set-aside. Al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AV, A.M. This is an appeal filed by the assessee against the order of ld. CIT(A), Jaipur dated 15.12.2017 for the Assessment Year 2015-16 wherein the assessee has taken following grounds of appeal :- 1. Impugned order passed U/s 250 is bad in law and on facts being against the principal of natural justice and for many more other reasons. 2. Under the facts and circumstance, Ld. CIT(A) has erred by holding that penalty u/s 271AAB is mandatory in nature. 3. Under the facts and circumstances, Ld. CIT(A) has erred by confirming penalty of ₹ 2,65,05,088/- u/s 271AAB. The penalty confirmed is unjustified illegal or excessive. 2. Briefly the facts of the case are that the assessee is a partnership firm carrying on business of trading of gems, jewellery, precious and semi precious stones, diamonds, wooden and handicraft items in the name and style of M/s. Silver and Art Palace . A search and seizure action u/s 132 of the Act was carried out at the assessee s premises on 11.03.2015. During the course of search, statement of one of the partner s in the assessee firm u/s 132(4) of was recorded, wherein an amount of ₹ 26,50,50,888/- was surrendered (Rs. 25,80,25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been initiated under section 132 on or after the 1st day of July, 2012 but before 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 Section 158BFA(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 158BC. 7. The ld. AR further submitted that the interpretation of word may direct in context of Section 158BFA(2) of the Act has come up for judicial scrutiny before the Courts and our reference was drawn to the decision of the Hon ble Andhra Pradesh High Court in the case of M/s. Sri Radha Krishna Vihar Vs. Pr.CIT (in ITA No. 740 of 2017 dated 13.12.2017) wherein it was held as under: 7. While we respectfully agree with the views of both the High Courts referred to above, we notice an additional f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that the provisions of section 274 and 275 shall, as far as may be, apply in relation to the penalty referred to in this section. Section 274 says no penalty can be imposed unless the Assessee has been heard or has been given reasonable opportunity of being heard. It further re-affirms that penalty is not automatic otherwise making the provision for giving hearing or opportunity will not make any sense. 9. The ld. AR further submitted that the question whether penalty under Section 271AAB is mandatory or not, has also come up for scrutiny before various Benches of the Tribunal and it has been held to be discretionary in nature. In support, reliance was placed on decision in case of Mothukuri Somabrahman Vs. ACIT (ITA No. 126/Vizag/2017 dated 16.03.2018), ACIT, Central Circle-2 V/S. Marvel Associates (ITA No. 147/Vizag/2017), Manish Agarwal Vs. DCIT (ITA No. 1479/ Kol/2015, dated 09.02.2018), DCIT Vs. Subhas Chandra Agarwala (ITA No. 1470/Kol/2015 dated 19.02.2018), Ravi Mathur Vs. DCIT (ITA No. 969/JP/2017 dated 13.06.2018), Anuj Mathur vs. DCIT (ITA No. 971/JP/2017 dated 13th June 2018) and Shri Suresh Chand Mittal Vs. DCIT, CC-2 (ITA no. 931/JP/2017 order dated 02.07.2018). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee shall pay the penalty as per clause (a) to (c) so satisfied in sub-section (1) to Section 271AAB. Further, as per subsection (3) of Section 271AAB, the provisions of section 274 and section 275 as far as may be applied in relation to penalty under this section which means that before levying the penalty, the Assessing officer has to issue a show-cause granting an opportunity to the assessee. Thus, the levy of penalty is not automatic but the Assessing officer has to decide based on facts and circumstances of the case after giving a reasonable opportunity to the assessee. Similar view has been taken by the various Co-ordinate Benches and useful reference can be drawn to the decision of the Co-ordinate Bench in case of ACIT vs Marvel Associates 92 Taxmann.com 109 wherein it was held as under: 5. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. During the appeal hearing, the Ld. A.R. vehemently argued that the A.O. has levied the penalty under the impression that the levy of penalty in the case of admission of income u/s 132(4) is mandatory. The Ld. A.R. further stated that penalty u/s 271AAB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Accordingly we hold that the penalty u/s 271AAB is not mandatory but to be imposed on merits of the each case. 13. The contention of the ld DR that the provisions of Section 273B of the Act providing for non imposition of penalty are not applicable to the penalty provisions U/s 271AAB of the Act is correct but the same doesn t take away the discretionary nature of penalty as discernable from the plain reading of Section 271AAB. It is also correct that the provisions of section 271AAB have been further strengthened in comparison to section 271AAA and unlike Section 271AAA(2), there is no immunity clause provided in 271AAB of the Act, at the same time, we are of the considered view that the legislature has retained the phrase may and thus the Assessing officer has been empowered to exercise his discretion to levy penalty depend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ult, the ground of appeal is allowed. 15. Now coming to ground no. 3 of the assessee s appeal wherein the assessee has challenged the finding of the ld. CIT(A) on merits in confirming the levy of penalty U/s 271AAB of the Act. 16. In this regard, the ld. AR submitted that the proceeding under consideration has been initiated u/s 271AAB, which is penal in nature and has to be distinguished with the assessment proceedings. Tax, penalty and interest are different concepts under the Income Tax Act, as held by the Hon ble Supreme Court in the case of Harshad Shantilal Mehta v. Custodian and Ors. wherein it was held as under:- ...Tax, penalty and interest are different concepts under the Incometax Act. The definition of 'tax under section 2(43) does not include penalty or interest. Similarly, under section 156, it is provided that when any tax, interest, penalty, fine or any of other sum is payable in consequence of any order passed under this Act, the Assessing Officer shall serve upon the assessee a notice of demand as prescribed. The provisions for imposition of penalty and interest are distinct from the provisions for imposition of tax... 17. It was further submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C-2 (Supra) has observed that merely on the basis of surrender and subsequently showing the same in return of income, penalty cannot be imposed under Section 271AAB. The A.O. is duty bound to examine the facts of the case in light of provision 271AAB including the definition of the word undisclosed income given in the said section. Penalty u/s 271AAB is attracted on undisclosed income but not on admission made by the assessee u/s 132(4) or disclosing income in return of income. 20. It was submitted by the ld AR that in the instant case penalty have been imposed and confirmed solely on the basis of admission u/s 132(4) and disclosure in return of income. It is important to note that during the penalty proceeding and before CIT(A), a detailed factual and legal submission was made and without pointing out any error in facts or contentions, penalty has been imposed and confirmed merely on the basis of above referred premises. Therefore, we submit hereinafter the facts viz.-a-viz. legal provision contained in Section 271AAB to examine whether income under consideration falls under undisclosed income as defined in the said Section. 21. It was submitted by the ld AR that during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 53,64,75,551/-. Valuable items were valued by the approved valuer, while valuing the items the rate of precious metals as well as other valuables has been taken the value as of 10.03.2015. The other than valuable items have been valued on the basis of market value as on date of search; which is further on tentative basis as evident from the facts that same is not on the basis of any documentary support and perusal further show almost all items have been taken in round off on lump-sum basis such as (i) old textile readymade (stitched) without mentioning the number, size, quality, only on lump sum estimated basis has been valued at ₹ 98.50 lakhs, (ii) silver foiled wooden figure, all items have been valued at ₹ 50 per gram, it is important to note that it is only silver foil not of silver and major weight is of wooden but valued at silver rate, (iii) Brass goods have been valued without taking into account number, nature, size etc. on lump sum, (iv) Marble goods have been valued at ₹ 18 lakhs whereas during the year there is no purchase and value of opening stock taken at ₹ 13.09 lakhs, (v) sand stone goods have been valued without mentioning number, quali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions, which says it should be worked out in consistent manner. Due to the defective method of working out excess stock, assessee have been in fact taxed on expected profit on the stock in hand, which is not the intent of law and does not fall within the definition of term undisclosed income . 25. It was submitted that an analysis of definition of term undisclosed income given in section to 271AAB shows that there must be undisclosed income which is represented either wholly or partly by any money, bullion etc. It is important to note that according to Section, there are two limbs of undisclosed income, one is income and second is assets or expenditure. Both are exclusive to each other and cumulative in nature. By using the word represented , the legislature has departed from its intention and the meaning of the word undisclosed income from the meaning previously given to the undisclosed income u/s 158B(b) which is again reproduced for ready reference:- undisclosed income includes any money, bullion, jewellery or other valuable article or thing or any income based on any entry in the books of account or other documents or transactions, where such money, bullions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifference in value is due to such estimation and due to probable profit on stock in trade to be accrued. There is no real income and no real excess stock. Without establishing real income, no penalty can be imposed presuming the hypothetical income. 29. It was submitted that in the instant case, the surrender has been made on account of excess stock, it is not a case where during search, unaccounted sales or unexplained purchases have been found. Therefore, whenever the assessee will sell these stocks, the resulted profit will automatically get incorporated in its taxable profits. Under the facts and circumstances, in no case there would be any undisclosed income of the assessee, therefore, provision of this section is not attracted in the instant case. 30. It was accordingly submitted that forgoing discussions of the facts shows that it is not the case where Department either found any income or any assets or any expenses not recorded in the regular books of accounts or documents, hence, does not met the definition of undisclosed income given in Section 271AAB. It is clear that increase in value of stock will automatically reduce the profit in future at the time of sale, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility statement. There is no evidence to establish that projections reflected in the loose sheet is real. 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 sheet of page No. 107 of Annexure A/GS/MA/1 was found that does not indicate any suppression of income but it is only projection of profit statement. The amount of ₹ 3,571/- mentioned in the projections refers to cost and profit which is approximate sale price but not the cost as stated by the AO in the penalty order. The cost of construction in the projections projected at ₹ 2,177/- which is in synch with the statement given by the assessee. The AO was happy with the disclosure given by the assessee and did not verify th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets is missing in the instant case. The penalty provision has to read strictly without importing any word or meaning to unambiguous words and sentences used in the Section. Under the facts, circumstances and law, it is requested to delete the penalty which is imposed @ 10% u/s 271AAB by Ld.AO and confirmed by Ld. CIT(A). Penalty on advance given to parties 36. It was submitted that ₹ 70,25,000/- was surrendered as advance to parties, which were not recorded in the books of account in the statement recorded u/s 132(4). Perusal of the facts shows that there is a diary which was placed in the drawer of a table. On the five pages of the diary, certain noting was there. Out of which noting contained on Page Nos. 1, 2 and 4 have been considered as an income. It is an important to note that entries in diary itself do not represent income of the assessee. It also does not represent that it is related to the year under consideration. In the instant case, no incriminating documents found which suggest that assessee has earned any undisclosed income pertaining to year under consideration. Therefore, in all probabilities, it may be related to the preceding years, hence, investm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e valuation made by the Department valuer during the search proceedings was accepted to be true and fair by the assessee firm in the statement recorded u/s 132(4). A reference may also made to schedule 16 relating to significant accounting policies and notes on accounts wherein it has been mentioned that the assessee firm does not maintain item wise purchase and sales and no stock register has been maintained and the estimated cost or that realizable value involves technical judgments of partner, which has been relied upon by the auditors. Thus, now no issue can be raised about the valuation of stock found during the course of search. Further, the assessee firm has incorporated the excess stock in its books of accounts for the year under consideration. The assessee firm has accepted the same as undisclosed income in its statement recorded u/s 132(4) of the Act. Thus, the excess stock is clearly covered under the definition of undisclosed income. It was further submitted that undisputed fact that the entries relating to advances made for purchases of land were not recorded in the regular books of accounts maintained in the normal course of business. Thus, in view of the above discus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h. These are goods which are regularly traded by the assessee and are thus stock-in-trade of the assessee firm. In this regard, what has to be determined is the income of such previous year which is represented by such stock of goods which is not found recorded in the books of accounts maintained by the assessee in the normal course relating to such previous year. The valuation of such excess stock is required to determine the investment which has been made in such excess stock and which has remained undisclosed to the Revenue authorities. The investment in stock is thus the function of price or cost at which stock has been purchased by the assessee and therefore, what is to be determined at the cost price of such stock and not the market price. Where such stock is ultimately sold, any profit arising therefrom would be brought to tax in regular course and the determination of market price would be relevant at that point in time. In other words, the value at which such stock has been acquired by the assessee and not the value which such stock can fetch in the market or the fair market value of such stock is to be determined. 41. In the instant case, it is noted that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the books of accounts. There is no finding that there is any excess stock which has been physically found and which has not been recorded in the books of accounts as on the date of search. In light of above discussions, it is thus clear that difference in stock of goods as per books and as found at the time of search is on account of valuation of such stock at the market value instead of cost and the same cannot be a basis to hold that it represent undisclosed income so defined in explanation to section 271AAB of the Act and the penalty levied thereon is liable to be setaside. 42. Now, coming to surrender made on account of cash advances for land purchases in the statement recorded u/s 132(4) of the Act. During the course of search, a diary has been found wherein there are notings relating to advance given to various persons towards purchase of land. Therefore, what has been found during the course of search is certain entries relating to undisclosed investment in purchase of land. Besides the said entries, there are no other documents/material in terms of any agreement to sell, the description of the property etc, which has been found during the course of search. As per the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utomatically 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, 69A and section 69B and therefore, the same could have been applied in the context of bringing to tax such investments to tax in the quantum proceedings, though the fact of the matter is that the AO has not even invoked the said deeming provisions in the quantum proceedings in the instant case. Therefore, even on this account, the deeming fiction 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 and it is not expected to examine oth ..... X X X X Extracts X X X X X X X X Extracts X X X X
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