TMI Blog2019 (4) TMI 867X X X X Extracts X X X X X X X X Extracts X X X X ..... section 44AA of the IT Act, however, the AO in the assessment proceedings rejected the books of accounts of the assessee under section 145(3) and assessed the income from the activity of civil contract on estimated basis by making a lump sum addition of ₹ 4,50,000/-. The diary found during the course of search and seizure at the business premises of the assessee contains the entries of advances given for purchase of land. However, until and unless the said transaction is carried out as part of regular business activity, the same is not required to be recorded in the regular books of account and, therefore, the said amount of advance given for purchase of land can be recorded in the capital account of the assessee. Thus the transactions found recorded in the diary are to be recorded in the capital account of the assessee as well as in the balance sheet prepared as on 31st March, 2014 and not on the date of search as on 4th/5th September, 2013. The nature of transactions if not carried out or entered into as part of the business activity are not required to be recorded in the regular books of accounts maintained for the purpose of business activity of the assessee. Foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e seized material and accordingly the assessee in his statement to question no. 15 has disclosed total undisclosed income of ₹ 10,01,00,000/- on account of advance for purchase of land. The assessee explained the source of the amount as the business of civil contract. In the return of income filed on 29.11.2014 the assessee declared total income of ₹ 13,51,13,640/- including surrendered income of ₹ 10,01,00,000/-. The AO completed the assessment under section 143(3) read with section 153A on 29th February, 2016 on a total income of ₹ 13,55,63,640/-. Thus the AO made an addition of ₹ 4,50,000/- to the returned income. The AO thereafter initiated the penalty proceedings under section 271AAB in respect of the income surrendered by the assessee of ₹ 10,01,00,000/- vide show cause notice dated 29th February, 2016 and 16.08.2016. The assessee raised objections against the initiation of penalty proceedings as well as the levy of penalty. However, the AO did not accept the contention of the assessee and levied the penalty of ₹ 1,00,10,000/- under section 271AAB vide order dated 30.08.2016. The assessee challenged the action of the AO before the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court dismissing the SLP filed by the revenue in the case of CIT vs. SSA s Emerald Meadows, 242 Taxman 150 (SC) held that the notice issued under section 274 read with section 271AAB of the Act not specifying the ground and clauses for levy of penalty was not valid and consequently the penalty order was set aside. The ld. A/R has also relied on the decision of Hon ble Jurisdictional High Court in the case of Sheveta Construction Co. Pvt. Ltd. in DBIT Appeal No. 534/2008 dated 06.12.2016. Thus the ld. A/R has submitted that the order of imposing penalty under section 271AAB is unlawful and not sustainable in law. The second leg of contention of ld. A/R is that without giving the finding that the income in question is an undisclosed income as per sec. 271AAB and particularly the explanation under section 271AAB defining the term undisclosed income the order passed by the AO is a non-speaking illegal order. He has further submitted that no undisclosed income was found during the course of search under section 132 though a pocket diary was found and seized during the search which contains the advances given by the assessee for purchase of land. However, the said entry in the pocket ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see u/s 132(4) about manner in which undisclosed income has been derived and about its substantiation. In the absence of query raised by authorized officer, the AO was not justified in imposing penalty u/s 271AAB specially when offered undisclosed income had been accepted and due tax had been paid by assessee. The ld. A/R submitted that in section 271AAB the word may is used instead of shall so it is not mandatory but it is discretionary. Secondly, the intention of the legislature is clear by making the order passed u/s 271AAB as appealable order by amending sub clause (B) of clause (hb) of section 246A w.e.f. 01.07.2012 that it is discretionary and not mandatory to give relief to the assessee where the authorities have not used their discretion to provide relief to the assessee. It is settled position of law that penalties are not compulsory, not mandatory but are always discretionary considering the overall facts and circumstances of the case. In imposition of penalty mens-rea also plays a vital role before imposing the penalty, it is always compulsory to prove the mens-rea of the assessee as malafide for concealment of income or for avoidance of any provision of law in force ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 126/Vizag/2017 dated 16.03.2018. Shri Raja Ram Maheshwari vs. DCIT in ITA No. 992/JP2017 dated 10.01.2019 The ld. A/R submitted that in view of the aforesaid discussion and various case laws cited above the penalty in this case would 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. (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 concealment of income. No particulars of income have been filed inaccurately. 3.1. On the other hand, the ld. D/R has submitted that the assessee was very well aware about the default and the nature of income he has disclosed and surrendered during the statement recorded under section 132(4) of the IT Act. The surrender in question was made because the assessee was unable to explain the source of the investment in question. It is clear case of undisclosed inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statement recorded under section 132(4) has disclosed an income of ₹ 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 amount of ₹ 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 likel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evious 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 explana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of penalty under section 271AAB is not mandatory but discretionary. When there is reasonable cause, the penalty is not exigible. The Ld. A.R. taken us to the section 271AAB of the Act and also section 158BFA(2) of the Act and argued that the words used in section 271AAB of the Act and the words used in section 158BFA(2) of the Act are identical. Hence, argued that the penalty section 271AAB of the Act penalty is not automatic and it is on the merits of each case. For ready reference, we reproduce hereunder section 158BFA (2) of the Act and section 271AAB of the Act which reads as under; 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 undiscl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disclosed 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. 6. 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. 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. 7. 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO when the show cause notice issued U/s 274 r.w.s. 271AAB of the Act mentions in its caption only Section 271 and not 271AAB. The Hon ble High Court after considering the fact that body of the show cause notice and particularly the last line of the notice clearly mentions Section 271AAB of the Act and therefore, the AO will get the benefit of Section 292BB of the I.T. Act. There was no question before the Hon ble High Court regarding the mandatory or discretionary nature of the levy of penalty U/s 271AAB of the Act and the observations of the Hon ble High Courts were only in the context the typographical mistake in mentioning the section in the show cause notice. Therefore, the said decision cannot be applied on the issue before us. Accordingly, following the earlier decisions of this Tribunal, we hold that the levy of penalty U/s 271AAB of the Act is not mandatory but the AO has discretion to take a decision about the undisclosed income. 5. On merits of the levy of penalty U/s 271AAB of the Act, we note that an identical issue has been considered by this Tribunal in case of Ravi Mathur vs. DCIT (supra) has held in para 8 9 as under:- 8. Even otherwise, without restr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 9. The Kolkata Bench of the Tribunal in the case of DCIT vs. Madan Lal Beswal (supra) has considered this issue of the alleged income found recorded in the other documents would fall in the definition of undisclosed income in para 3 and 4 as under :- 3. We have heard rival submissions and gone through the facts and circumstances of the case. We find that the issue involved herein 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dicated 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 obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 5. The third contention of the Ld. AR is that the assessee is an individual, who was drawing salary income. So, according to him, he need not maintain any books of account as per the Act. According to Ld. AR, undisputedly the assessee was engaged for the first time this AY only in trading of commodities, that too which was conducted in a nonsystematic manner and the income from it was duly offered to tax by the assessee in his return of income under the head Income from Other Sources , which, according to Ld. AR was accepted as such by the AO and drew our attention to page one of assessment order, (not the penalty ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 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 incometax 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 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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. 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 3 cr. during search and later returned income of ₹ 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 ₹ 3 cr. offe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntil and unless the said transaction is carried out as part of regular business activity, the same is not required to be recorded in the regular books of account and, therefore, the said amount of advance given for purchase of land can be recorded in the capital account of the assessee. Thus the transactions found recorded in the diary are to be recorded in the capital account of the assessee as well as in the balance sheet prepared as on 31st March, 2014 and not on the date of search as on 4th/5th September, 2013. The nature of transactions if not carried out or entered into as part of the business activity are not required to be recorded in the regular books of accounts maintained for the purpose of business activity of the assessee. This Tribunal in case of Shri Raja Ram Maheshwari Vs. DCIT in ITA No. 992/JP2017 vide order dated 10.01.2019 has again considered this issue of undisclosed income as per definition given in the explanation to section 271AAB of the Act and held in para 12 to 14 as under: 12. Now, coming to another contention of the ld AR where he has challenged the findings of the ld. CIT(A) that penalty U/s 271AAB is mandatory in nature and there is no discretio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he words used in section 158BFA(2) of the Act are identical. Hence, argued that the penalty section 271AAB of the Act penalty is not automatic and it is on the merits of each case. For ready reference, we reproduce hereunder section 158BFA (2) of the Act and section 271AAB of the Act which reads as under: 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 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- (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; an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. 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. 7. 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 plac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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