TMI Blog2018 (11) TMI 992X X X X Extracts X X X X X X X X Extracts X X X X ..... see has already deposited tax thereon. Now the only issue remains that whether the assessee has specified the ‘manner’ and ‘substantiated’ it or not. Assessee has to disclose the manner of earning income i.e. how it has been earned and further to substantiate it means ‘to prove it by the production of necessary evidence’’. We are also of the opinion that assessee has disclosed the manner of funding of the income from sale of artwork, paintings, and sculptures in her business and cash generated wherefrom. In view of this, it is apparent that assessee has disclosed the manner of earning of cash from the business of sale of artwork. She has also given source of cash generated in her hand that is the business of proprietary concern run by her form “Gallaerie Nvya.” Hence, we are of the opinion that assessee has given the manner of earning cash on hand of ₹ 1.34 crores and substantiated the same. For both the above-undisclosed income, assessee has disclosed the manner and stated that both are the business income of the assessee from the artwork/ paintings and Sculpture business . She has also shown how the same has been earned .Hence, it cannot be said that disclosure of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of section 271 (1)(c) shall be imposed upon the assessee in respect of the undisclosed income referred to in subsection 1 of that section. Therefore, if the penalty has already been levied under section 271AAA, no further penalty on it can be levied u/s 271 (1) (c) of the act. Penalty u/s 271AAA and 271 (1) (c) are mutually exclusive. Even on this ground, too penalty of ₹ 30 lakhs levied by the AO on protective basis is unsustainable. Penalty of ₹ 23 lakhs initiated and levied by the learned CIT – A is otherwise unsustainable in law as only the assessing officer is authorized to levy it. CIT A is not an ‘assessing officer’ as defined u/s 2 (7A). Therefore, according to us the penalty initiated by the learned commissioner appeals and levied by him of ₹ 23 lakhs is not sustainable, as he is not authorized to levy the same. If authority is given expressly by affirmative words upon a defined condition, the expression of that condition excludes the doing of the Act authorized under other circumstances than those as defined. It is also established principle of law that if a particular authority has been designated to perform an action on any particular issue, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee was assessed at ₹ 6,05,52,484/ against the return filed of ₹ 5,89,56,260/- making an addition of unexplained stock of ₹ 15,96,224/- over and above disclosure of ₹ 3 crores in the return of income. Penalty notices u/s 271AAA of the Act was issued to the assessee as she has disclosed a sum of ₹ 3 crores voluntarily during the course of search and offered the same as income in her return of income. 04. In response to notice, assessee submitted reply on 9/7/2014. Assessee also submitted that a further reduction in the gross profit by 39.2% from the tag price should be granted and therefore application u/s 154 of the Act was moved which was summarily rejected. 05. The learned assessing officer held that assessee has clearly concealed the particulars of her income and she is liable to pay penalty under the provisions of The Income Tax Act, 1961. He further stated that during the course of search, assessee has not substantiated manner in which the undisclosed income was derived and therefore assessee is not eligible for the benefit contained in subsection (2) of Section 271AAA of the Act. Therefore learned assessing officer imposed a pena ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of ₹ 3 crores is an undisclosed income and further sum of ₹ 2.30 crores representing cash and jewelry is also undisclosed income not recorded in the books of assessee on or before the date of search maintained in the normal course of business and nor has been disclosed before the date of search. Therefore, he held that the conditions specified in subsection (2) of section 271AAA are not met with in respect to ₹ 3 crores as well as with respect to ₹ 2.30 crores. Therefore he held that penalty at the rate of 10% is imposed on the undisclosed income of ₹ 2.30 Crs over and above of 10% on ₹ 3 crores imposed by the learned AO. He supported his decision by the decision of the Hon ble Supreme Court in case of MakData private Ltd versus CIT [358 ITR 593] rendered in context of section 271 (1) (c ) of the act , where the assessee surrendered additional income claiming it is a voluntary disclosure to avoid litigation and buy peace etc. Consequently, he passed an appellate order where he confirmed the penalty of ₹ 30 lakhs on disclosure of ₹ 3 crores and further enhanced the penalty by ₹ 23 lakhs on addition of undisclosed income not con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He stated that if in the statement the revenue cannot demonstrate that assessee was asked the manner and required to substantiate the undisclosed income, penalty u/s 271AAA cannot be levied. He further submitted a paper book wherein the submission dated 9/7/2014 before the assessing officer was relied upon. He further referred to the copy of statement-recorded u/s 132 (4) of the act of assessee on 20/9/2011 as well as the copy of reply filed before The Deputy Director of Income Tax (Investigation) on 28/11/2011. He further referred extensively the copy of statement recorded u/s 131 (1A) of the assessee and the details of Modus operandi of the operation of the art gallery disclosed before The Deputy Director (Investigation) . He extensively read all these documents and further referred to the letter dated 18/10/2011 written by The Deputy Director of Income Tax (Investigation) to Sri Parminder Singh Kalra regarding bifurcation of disclosure of ₹ 15.40 crores. In view of this, he submitted that the penalty u/s 271AAA levied by the learned assessing officer on ₹ 3 crores, enhanced, and confirmed by the learned CIT A on disclosure of ₹ 2.30 crores is not sus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... versus SSA International Ltd [94 Taxmann.com 17 (Delhi)] ii. The Principal Commissioner Of Income Tax versus Smt Ritu Singhal (2018) [ 92 taxman.com 224 (Delhi)] 12. He submitted that the decision of the Hon ble Delhi High Court in Smt. Ritu Singhal squarely covers the issue in favour of the revenue. 13. In rejoinder, the learned authorized representative submitted that it is not, the allegation of the revenue that assessee has not paid tax thereon. He further submitted that assessee has also disclosed the manner of earning such income as far as the discrepancy of ₹ 3 crores in the valuation of artwork and sculpture as well as cash of ₹ 1.34 Crores is concerned. He submitted that though these incomes are derived from the business of the assessee. He further stated that assessee has also disclosed the manner and substantiate the disclosure of cash found during the course of search. With respect to jewelry, he submitted that that assessee is a woman having strong faith in traditional and Indian cultural values. He further stated that according to the common prevalent tradition in the family since long, she is accumulating jewelry and it is a practice common in Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents which is not recorded in the books of the assessee 15. Hon ble Delhi High Court in case of CIT versus Mrs. Ritu Singhal [2018] 403 ITR 97 (Del) has held that unless the assessee describes the manner of earning undisclosed income and also substantiate the same, the assessee is not eligible for escape from penalty as provided under section 271AAA (2) of the act. This decision has considered the principles enunciated by the decision cited by the parties before us and therefore it would be a binding precedent before us to be followed. The undisclosed income earned by the assessee is required to be tested on the principles upheld by the Hon ble Delhi High Court in this case. Honourable High court has held facts of that case in para no 13 and 16 of that decision as under :- 13. In the present case, during the course of the statement made by the assessee, during the course of the search on March 4, 2010, that she had lent ₹ 16 crores in aggregate to three individuals during the financial year 2009-10. This was in response to a query by the Revenue officials during the course of search when the basis of page 81 of Exhibit A-3 was sought to be questioned. To the next qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e conditions mentioned in the provision, (as held in Gebilal Kanhaialal in respect of pari materia provisions) have to necessarily be fulfilled. In the present case, the assessee, while declaring the undisclosed income also stated, that the surrender is being made subject to no penal action of section 271(1)(c) . 17. Further, in para no 15 Hon High court following the decision of the Honourable Supreme court in case of Makdata has stated what amounts to substantiation of the manner of earning income. 15. While dealing with a case of similar surrender-but made in the course of survey proceedings, by an assessee (which led to imposition of penalty), the Supreme Court, in MAK Data (P) Ltd. v. CIT [2013] 358 ITR 593 (SC) held as follows (page 597) : The Assessing Officer, in our view, shall not be carried away by the plea of the assessee like 'voluntary disclosure', 'buy peace' 'avoid litigation', 'amicable settlement', etc. to explain away its conduct. The question is whether the assessee has offered any Explanation for con cealment of particulars of income or furnishing inaccurate particulars of income. Explanation to section 271( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, which has been bifurcated amongst the family member, and assessee is one of them. There is no dispute that assessee has already deposited tax thereon. Now the only issue remains that whether the assessee has specified the manner and substantiated it or not. The Assessee has to disclose the manner of earning income i.e. how it has been earned and further to substantiate it means to prove it by the production of necessary evidence . The income disclosed are to be tested to ascertain whether manner is disclosed and substantiated or not. We deal with each of them as under :- a. Disclosure of ₹ 3 Crores on account of undervaluation of closing stock b. Disclosure of cash of ₹ 1.34 Crores c. Disclosure of jewelry of ₹ 96 lakhs. 20. With respect to disclosure of ₹ 3 crores made by the assessee, it is part of the combined disclosure of ₹ 15.40 crores made by the group. This fact is narrated in the statement under section 132 (4) of the income tax Act recorded on 20/9/2011. In answer to question number 13, it has been stated that she has offered ₹ 15.40 crores as part of the group disclosure and requested to not to take any panel act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pendent upon number of persons like artists, staff and other skilled persons to help her in running the business activities. Thus the peculiarities of the business conducted can be broadly classified in two categories: (a) Peculiarities attached with nature of trade , market. (b) Other complexities specifically attributed to business conducted 5.1.5 Peculiarities attached with nature of trade , market (a) Competition The Art work is being exhibited and sold by various persons i.e. from a street vendor to highly reputed international competitors. (b) Dependence upon skill of the artists The art work is normally sold on the name fame of the artist at the same time such art work of famous artists is not easy to obtain. Thus the market price which an art work can fetch is largely governed by the name, fame and goodwill of the artist as well as the historical, cultural and social importance of the paintings. For example the paintings of historical or archeological interest and importance normally fetch extraordinary price whereas corresponding painting of lesser known importance/artist will fetch many times lower price irrespective its quality etc. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground finally created a total mess in business and records. (d) Difficulty in locating permanent/trustworthy staff (e) Artist dictating terms. (f) Artists not willing or opposing maintenance of such records and documents. As such either such documents not furnished by artists and wherever furnished these are not even proper containing all particulars and details. (g) Frequent visits of the artist at business place which leads to development of a relation between them and employees as such there is always a risk that such artists may collate with employees in many manner injurious and prejudicial to the business of proprietor. (h) The Proprietor also not having any accounting knowledge or background. As such not only the business but the documents as required were also in total mess. Such complexities and mess was even noticed by the investigating authorities as well. It is a fact on record as borne out by record of search proceedings that proper records were not found to be maintained : * Indicating the stock with source and cost whereas the major stock is on consignment. * The entire stock was found with grossly exaggerated tag price which is estima ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions and credits involved. This may thus lead to unnecessary litigation in the matters. 5.1.10 Thus in order to buy peace a sum of ₹ 370 lakhs is being on higher side towards paintings, sculptures, other things etc investment in gallerie business and matters incidental thereto for the financial year relevant to the A.Y. 2012-13. The offer as made with stipulation to grant immunity from penalty is sufficient to cover up any discrepancy or any other matter or any inference as a result /outcome of search pertaining to my business activities stated above. However, the exact details shall be filed dur.ng the course of assessment proceedings. 21. As per her statement recorded under section 131 (1A) of the Act on 5/12/2011 vide question number 2 onwards , She has explained about the source of the income and the nature of the profile of the artwork, painting and sculpture business. She has also explained the modus operandi of the art gallery business. With respect to the evidence in support of the modus operandi , she has also replied question number 4 onwards to substantiate the modus operandi of the whole business. She has further referred to various annex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are mentioned before the assessing officer. The proof of ownership of that artwork was also given. In para no 24 of the letter, she has also given the breakup of ₹ 3.70 crores with respect to the various years in which the income as been earned. In view of the above facts, we are of the opinion that the assessee has disclosed the manner of earning of the income with respect to ₹ 3 crores on account of undervaluation of the closing stock found during the course of search of various artworks/sculptures/ paintings. 22. Similarly, the assessee has also explained the ownership of the cash from the business of the assessee of ₹ 1.34 crores, which is part of the overall disclosure made by the group of ₹ 15.40 crores. She has explained in para number 5.1.7 of the letter dated 28/11/2011 that the cash of ₹ 13398500/ is on income in cash accumulated out of her business. She has also enumerated detail of her business and how the income is earned. In view of this, we are also of the opinion that assessee has disclosed the manner of funding of the income from sale of artwork, paintings, and sculptures in her business and cash generated wherefrom. In view of thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 3 crores on account of undervaluation of the closing stock of artwork/ paintings/ sculptures etc. and cash of ₹ 1.34 crores found during the search, for which the manner of earning was disclosed and substantiated. 26. Further on plain look at penalty order, Ld AO has levied penalty of ₹ 30 lakhs stating that since in this case the penalty under section 271 (1) (c ) is being imposed on substantive basis on the same issue, therefore, he held that penalty under section 271AAA would be on protective basis. We do not find any provision under the act to levy penalty under this section in the manner ld AO has envisaged. According to the provisions of section 271AAA (3) of the act provides that no penalty under the provisions of section 271 (1)(c ) shall be imposed upon the assessee in respect of the undisclosed income referred to in subsection 1 of that section. Therefore, if the penalty has already been levied under section 271AAA of the Act , no further penalty on it can be levied u/s 271 (1) (c) of the act. Penalty u/s 271AAA and 271 (1) (c) are mutually exclusive. Even on this ground, too penalty of ₹ 30 lakhs levied by the AO on protective basis is unsust ..... 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