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TMI Blog2019 (6) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 82,655 was made on account of interest and Rs. 42,677 on account of undisclosed turnover. The AO then initiated the proceedings for levy of penalty under section 271AAB of the IT Act by issuing a show cause notice dated 27.12.2017. The AO while passing the penalty order dated 27th June, 2018 has levied the penalty under section 271AAB(1) of the IT Act @ 30% of the undisclosed income of Rs. 4,68,22,918/- which was admitted during the search. The assessee challenged the action of the AO before the ld. CIT (A). The ld. CIT (A) has reduced the levy of penalty under section 271AAB from 30% to 10%. Hence both the assessee as well as the Revenue has challenged the impugned order of the ld. CIT (A) by filing these cross appeals. The grounds raised by the assessee as well as by the Revenue in the cross appeals are as under:- ITA No.1379/JP/2018 (Assessee's Appeal) : " 1. On the facts and in the circumstances of the case and in law the ld. CIT (A) erred in not holding the penalty order as wrong, bad in law, invalid and void-ab-initio as the ld. AO initiated the penalty u/s 271AAB of Income Tax Act, 1961 without specifying the clause of section 271AAB of the Act in the penalty notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of earning of undisclosed income was not disclosed by the assessee." 2. During the course of hearing, the ld. A/R of the assessee has submitted that the transaction of purchase and sale of shares which has resulted in Long Term Capital Gains are duly recorded in the books of account of the assessee. Though the LTCG arising on sale of shares of listed companies is exempt under section 10(38) of the IT Act, however, during the course of search and seizure action on 2nd July, 2015 the assessee in the statement recorded under section 132(4) has surrendered the LTCG to tax. The ld. A/R has further contended that the shares purchased in the financial year 2012-13 were duly shown in the Balance Sheet as on 31st March 2015 and the AO has not disturbed the transaction of purchase of shares. The purchase consideration as well as sale consideration has been paid and received respectively through banking channel. The fact of purchase of shares as well as sale of shares and payment and receipt of consideration are independently verifiable from the Demat Account, bank account statement as well as the record of the Stock Exchange. The ld. A/R has further contended that the assessee produced al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esh Kumar Agarwal vs. ACIT in ITA No. 855 & 856/JP/2017 as well as decision dated 13.06.2018 in case of Shri Ravi Mathur vs. DCIT in ITA No. 969/JP/2017 and submitted that the Tribunal has held that the penalty under section 271AAB is not automatic but the AO has to issue a show cause notice and give a proper opportunity of hearing to the assessee and, thereafter take a decision to impose the penalty. It is statutory requirement that the explanation of the assessee for not fulfilling the conditions as prescribed under section 271AAB of the IT Act is required to be considered by the AO while passing the penalty order. The penalty under section 271AAB is not consequential to the assessment or surrender of income during the course of search but the AO has to first initiate proceedings by issuing a show cause notice and after considering the explanation and reply of the assessee has to take a decision. The ld. A/R has contended that it is settled law that penalty should not be imposed unless the case falls under the four corners of law mandating the penalty. The ld. A/R has referred to the definition of undisclosed income as provided in the Explanation to section 271AAB and submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was a case of bogus claim of LTCG exempt under section 10(38) of the IT Act. However, during the course of search and seizure action, it was found that the claim was bogus and consequently the assessee declared the income and surrendered to tax. Therefore, bogus claim was detected only during the course of search and seizure action which was admitted by the assessee in the statement recorded under section 132(4). The disclosure of undisclosed income is in reference to the seized material which was found during the course of search. Once the assessee has surrendered the undisclosed income based on the incriminating material found and seized during the search, then the said income was rightly treated by the AO as undisclosed income in terms of provisions of section 271AAB of the Act. Further, the assessee has not substantiated the manner in which the undisclosed income was derived during the statement under section 132(4) or during the assessment or penalty proceedings. Therefore, the penalty @ 30% is leviable in the case of the assessee when the assessee failed to satisfy the condition (a)(ii) of section 271AAB(1) of the IT Act. The ld. CIT (A) has committed an error while restr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of undisclosed income as per clause (c) of Explanation to section 271AAB reads as under :- "undisclosed income" means- "(c) (i) any income of the specified previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search under section 132, which has- (A) 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; or (B) otherwise not been disclosed to the 54[Principal Chief Commissioner or] Chief Commissioner or 54[Principal Commissioner or] Commissioner before the date of search; or (ii) any income of the specified previous 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 levy of penalty under section 271AAB does not dependent on the addition made dur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 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. Apart from the fact that these transactions were duly recorded in the books of account, the assessee has also produced relevant documents, the details of which are as under :- (A) IN RELATION TO SHARES PURCHASE : Summary of shares purchased during the FY 2012-13 (page No. 87 of paper book) Copy of share allotment Advice in support of share purchased (page No. 88 of paper book. Copy of relevant page of bank statement showing the payment made against purchases of shares (page No. 89 of paper book) Copy of Corporate Action of the Company informed to Bombay Stock Exchange (Effect of Stock Split)(page No. 90 of paper book) Acknowledgement of ITR filed on 07.10.2013 u/s 139(1) of Income-tax Act, 196 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. The AO while passing the assessment order under section 153A for the assessment year 2015-16 has not disturbed the holding of the shares shown in the Balance Sheet as on 31st March, 2014. These transactions were also carried out from the capital account of the assessee which was also part of the record of the assessment year 2014-15. But the AO has accepted all these details without any adverse finding or comments while passing the assessment order under section 153A or the Act. The assessee has also produced sale bills/contract notes regarding sale of shares, copy of ledger account of the assessee in the books of share broker in respect of sale transactions, bank statement showing receipt of sale consideration and Demat account having the entries of credit of shares at the time of purchase and debit of shares at the time of sale. The equity shares in question are of listed companies in the Stock Exchange and were purchased and sold by the assessee through Stock Exchange. Therefore, the transactions of purchase and sale are verifiable from the independent source including the record of the Stock Exchange without having any influence of the assessee. Hence the document ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in section 271AAB, the word 'may' is used instead of 'shall' so it is not mandatory but same is discretionary. It was submitted that it is settled position of law that penalties are not compulsory, not mandatory but are also discretionary considering the overall facts and circumstances of the case. In support, reliance was placed on provisions of section 158BFA(2) wherein similar phraselogy has been used by the legislature and decision of Hon'ble A.P High Court in case of RadhaKrishna Vihar (ITA no. 740/2011). 13. In this regard, we refer to the provisions of Section 271AAB which begins with the stipulation that the Assessing officer may direct the assessee and the assessee shall pay the penalty as per clause (a) to (c) so satisfied in sub-section (1) to Section 271AAB. Further, as per sub-section (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losed income therein; (b) a sum computed at the rate of twenty per cent of the undisclosed income of the specified previous 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 which shall not be less than thirty per cent but which shall not exceed ninety per cent of the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is no mandatory requirement of imposing penalty, because the opportunity of being heard and reasonable opportunity is not a mere formality but it is to adhere to the principles of natural justice. Hon'ble A.P. High Court in the case of Radhakrishna Vihar in ITTA No.740/2011 while dealing with the penalty u/s 158BFA held that 'we are of the opinion that while the words shall be liable under sub section (1) of section 158BFA of the Act that are entitled to be mandatory, the words may direct in sub section 2 there of intended to directory'. In other words, while payment of interest is mandatory levy of 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." 14. Therefore, we agree with the contentions of the ld AR that the levy of penalty under section 271AAB i ..... 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