2019 (3) TMI 2091 - AT - Income Tax

Penalty u/s 271AAB - income surrendered by the assessee on account of LTCG from purchase and sale of equity shares - scope of term undisclosed income - whether the surrender made by the assessee in the statement recorded u/s 132(4) will be regarded as undisclosed income without testing the same with the definition as provided under clause (c) of Explanation to section 271AAB? HELD THAT - The term undisclosed income has been defined in the Explanation to section 271AAB and therefore the penalty under the said provision has to be levied only when the income surrendered by the assessee falls in the ambit of undisclosed income as defined under this section. The mere disclosure of income in the statement recorded under section 132(4) would not ipso facto be regarded as undisclosed income unless and until it is tested as per the definition provided in the Explanation to section 271AAB of the Act. In the case in hand there is no dispute that the assessee has duly recorded the transaction of purchase and sale of equity shares of the listed companies in the books of account which has yielded the capital gain in question - The assessee has also shown these shares in the Balance Sheet as on 31st March 2014 and the AO has not doubted or disturbed the holding of shares by the assessee on the date of Balance Sheet ended on 31st March 2014. Once the transactions are duly recorded in the books of account then the documents in the shape of slips containing the details of LTCG found during the search would not amount to incriminating material disclosing any undisclosed income. The definition of undisclosed income is subjected to two conditions that the said income has 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. The second condition is not relevant for our purpose since these entries are undisputedly duly recorded in the books of account of the assessee. We further note that the seized material does not reveal the nature of transaction being genuine or bogus but the entry in the seized material is only the computation of long term capital gain on sale of shares. Therefore the documents which were found and seized during the course of search and seizure action contains the details of LTCG would not be regarded as incriminating material disclosing any income not recorded in the books of account. Hence the primary condition for treating such income as undisclosed income in terms of section 271AAB is not satisfied. Tribunal has taken a consistent view that the penalty u/s 271AAB is not automatic but the AO has to take a decision as per the provisions of section 271AAB and particularly in the light of the definition of the undisclosed income as prescribed in the Explanation to section 271AAB of the Act. Thus we hold that the income surrendered by the assessee in the statement recorded under section 132(4) does not fall in the ambit of definition of undisclosed income as contemplated in Explanation to section 271AAB of the Act. Accordingly the penalty levied by the AO and sustained by the ld. CIT (A) is not sustainable and the same is deleted. Assessee appeal allowed.

Summary

ISSUES:

Whether the penalty under section 271AAB of the Income Tax Act is mandatory or discretionary upon disclosure of income during search proceedings.Whether income surrendered in the statement recorded under section 132(4) constitutes "undisclosed income" as defined under section 271AAB.Whether penalty proceedings under section 271AAB can be initiated without specifying the particular clause of the section and the default committed by the assessee.Whether the levy of penalty under section 271AAB can be sustained when the surrendered income is duly recorded in the books of account or other documents maintained in the normal course.Whether the assessing officer (AO) is required to issue a valid show cause notice specifying grounds and afford a meaningful opportunity of hearing before imposing penalty under section 271AAB.Whether mere disclosure or surrender of income under section 132(4) automatically attracts penalty under section 271AAB.Whether the character of income (business or other sources) affects the requirement to maintain books of account and the applicability of penalty under section 271AAB.

RULINGS / HOLDINGS:

The penalty under section 271AAB is not automatic or mandatory but discretionary, as the AO "may direct" the penalty after considering the facts and circumstances and after giving the assessee a reasonable opportunity of hearing, in compliance with sections 274 and 275 of the Act.Income surrendered in the statement recorded under section 132(4) does not ipso facto constitute "undisclosed income" unless it satisfies the definition under the Explanation to section 271AAB, particularly that the income was not recorded on or before the date of search in the books of account or other documents maintained in the normal course.Penalty proceedings under section 271AAB are invalid if the show cause notice does not specify the clause under which penalty is initiated or the default committed, thereby violating principles of natural justice.When surrendered income is duly recorded in the books of account or other documents maintained in the normal course (such as share purchase and sale transactions recorded in books, bank statements, demat accounts, contract notes), it does not fall within the ambit of "undisclosed income" under section 271AAB; hence, penalty cannot be levied.The AO must issue a valid show cause notice specifying the grounds and default, and consider the assessee's explanations before imposing penalty under section 271AAB; failure to do so renders the penalty order unsustainable.Mere disclosure or surrender of income during search proceedings is not sufficient for levy of penalty under section 271AAB; the AO must determine if the conditions prescribed under the section are fulfilled.An individual assessee not engaged in business and deriving income under heads such as salary or other sources is not required to maintain books of account under section 44AA; entries found in other documents (e.g., diaries) maintained in the normal course cannot be treated as undisclosed income for penalty purposes.

RATIONALE:

The Court applied the statutory framework of section 271AAB of the Income Tax Act, which prescribes penalty for undisclosed income detected during search initiated under section 132, with the Explanation defining "undisclosed income".The Court emphasized the language of section 271AAB(1) using "may direct", indicating discretion vested in the AO, and the mandatory procedural safeguards under sections 274 and 275 requiring issuance of show cause notice and opportunity of hearing before penalty imposition.The Court relied on precedent decisions holding that penalty provisions are to be strictly construed and are discretionary, not automatic, and that the definition of undisclosed income must be rigorously applied to the facts.The Court noted that the mere recording of surrendered income in documents found during search does not amount to undisclosed income if such income was already recorded in books of account or other documents maintained in the normal course prior to the search date.The Court rejected the contention that surrender under section 132(4) automatically attracts penalty, holding that the AO must independently verify if the conditions for penalty are met and must specify the grounds and default in the notice to the assessee.The Court recognized that individuals not engaged in business are not mandated to maintain books of account under section 44AA, and thus entries in other documents maintained in the normal course cannot be treated as undisclosed income for penalty purposes.The Court followed consistent Tribunal and High Court precedents affirming that penalty under section 271AAB is discretionary, not mandatory, and that procedural fairness and strict interpretation of the definition of undisclosed income are essential.