TMI Blog2018 (7) TMI 2010X X X X Extracts X X X X X X X X Extracts X X X X ..... stment 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 When the assessee is not required to maintain the books of account as per section 44AA, then the matter is required to be examined whether the alleged undisclosed income is recorded in the other documents maintained in the normal course as per clause (c) to Explanation to section 271AAB. Undisputedly the alleged income was found recorded in the diary which is nothing but the other record maintained in the normal course, thus the same would not fall in the definition of undisclosed income. Once the said income is found as recorded in the other documents maintained in the normal course, then it cannot be presumed that the assessee would not have disclosed the same in the return of income to be filed after about one year from the date of search. Hence, in view of the above facts and circumstances of the case as well as the various decisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I.T. Act on the members of Okay plus-JKD Group on 4th September, 2013. During the course of search, certain incriminating material was found and seized containing the transactions of advances given for purchase of land. The assessee in the statement recorded under section 132(4) has admitted and disclosed an amount of ₹ 7,22,00,000/- as undisclosed income. The assessee filed his return of income on 31.01.2015 declaring total income of ₹ 12,61,51,540/- which included undisclosed income of ₹ 7,22,00,000/-. The AO completed the assessment under section 143(3) read with section 153B(1)(b) of the Act on 28.03.2016 at a total income of ₹ 12,96,93,610/- by making an addition of ₹ 35,42,067/- on account of disallowance of interest as part of the cost of the assets while computing long term capital gain. The AO initiated penalty proceedings under section 271AAB of the Act against the surrendered amount of ₹ 7,22,00,000/- by issuing show cause notice dated 28th March, 2016 and 12.08.2016. The assessee raised the objections against the initiation of penalty proceedings under section 271AAB as well as the levy of penalty before the AO. However, the AO impos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notice and initiation of proceedings under section 271AAB and following the decision of Hon ble Karnataka High Court in the case of CIT vs. Manjunatha Cotton Ginning Factory (supra) as well as the decision of Hon ble Supreme 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assed by the AO is contrary to the provisions of the Act and, therefore, liable to be quashed. In the instant case no query was raised by the authorized officer during the course of recording of statement of assessee 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 penalt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h interest on the surrendered amount, however, the delay in filing the return is due to the paucity of funds and, therefore, the reasons for delay in filing the return of income was beyond the control of the assessee. The ld. A/R has further submitted that when the delay in filing the return is neither willful nor deliberate but due to the circumstances which were beyond the control of the assessee, then the AO without considering the reasons for delay in filing the return cannot levy the penalty @ 30%. He has further contended that in the show cause notice issued by the AO there is no indication of levy of penalty @ 30% of the undisclosed income and, therefore, without giving specific opportunity to the assessee for explaining the reasons for delay in filing the return of income, the AO cannot invoke the provisions of clause (c) of section 271AAB(b)(1) of the Act. The ld. A/R has further pointed out that the due date of filing of return for the assessment year under consideration was extended by the CBDT to 31st December, 2014 and, therefore, the delay in filing the return of income on 31st January, 2015 is only of 31 days. The ld. A/R placed reliance on the following case laws :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aised by the assessee that the AO has not specified the clause under section 271AAB(1) of the Act has no merit when the assessee himself has explained the nature of income disclosed and surrendered and also paid the tax on the same. The ld. D/R has submitted that as per the explanatory note of Finance Bill, 2012, the provisions of section 271AAB are mandatory in nature and AO has no discretion but the assessee shall pay the penalty in addition to the tax on the undisclosed income surrendered under section 132(4) of the Act. She has relied upon the orders of the authorities below. 3.2. The ld. D/R has also relied upon the decision of Hon ble Allahabad High Court in case of Principal CIT vs. Sandeep Chandak and Others dated 27th November, 2017 in I.T. Appeal No. 122, 128 and 129 of 2017 and submitted that even otherwise if the show cause notice does not mention the section correctly it will not be invalid as the AO will get the benefit of section 292BB of the Act. The ld. D/R has also relied upon the decision of Kolkata Bench of the Tribunal in the case of DCIT vs. Amit Agarwal, 88 taxmann.com 288. 4. We have considered the rival submissions as well as the relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act on 30th October, 2014 at the premises of the assessee. The assessee in his 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 que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 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 spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 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 hea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und to come to the conclusion that the case of the assessee is fit for levy of penalty under section 271AAB and then only the quantum of penalty being 10% or 20% or 30% has to be determined subject to the explanation of the assessee 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Ld. A.R. further stated that penalty u/s 271AAB of the Act is not mandatory but discretionary. The provisions of section 271AAB of the Act is parimateria with that of section 158BFA of the Act relating to block assessment and accordingly argued that the levy 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessment of that part of income which is shown in the return: Provided further that the provisions of the preceding proviso shall not apply where the undisclosed 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounts does not exists, then the same has to be specified by the AO in the show cause notice and further the AO is required to give a finding while imposing the penalty under section 271AAB. Even if the AO is satisfied and come to the conclusion that the assessee has not recorded the undisclosed income in the books of accounts or in the other documents / record maintained in normal course relating to specified previous year, the show cause notice shall also specify the default committed by the assessee to attract the penalty @ 10% or 20% or 30% of the undisclosed income. There is no dispute that the AO has not specified the default and charge against the assessee which necessitated the levy of penalty under section 271AAB of the Act. Consequently, the assessee was not given an opportunity to explain his case for specific default attracting the levy of penalty in terms of clauses (a) to (c) of section 271AAB(1) of the Act. The Channai Bench of the Tribunal in the case of DCIT vs. Shri R. Elangovan (supra) at pages 7 to 10 has held as under :- It is clear from the Sub Section (3) of Section 271 AAB that Sections 274 and Section 275 of the Act shall, so far as may be, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... particulars of income. The Tribunal, while allowing the appeal of the assessee, has relied on the decision of the Division Bench of this Court rendered in the case of CIT vs. Manjunatha Cotton and Ginning Factory (2013) 359 ITR 565. 4. In our view, since the matter is covered by judgment of the Division Bench of this Court, we are of the opinion, no substantial question of law arises in this appeal for determination by this Court. The appeal is accordingly dismissed . In the earlier case of Manjunatha Cotton and Ginning Factory (supra) their lordship had observed as under:- Notice under section 274 of the Act should specifically state the grounds mentioned in section 271(1)(c), i.e., whether it is for concealment of income or for furnishing of incorrect particulars of income. Sending printed form where all the grounds mentioned in section 271 are mentioned would not satisfy the requirement of law ; The assessee should know the grounds which he has to meet specifically. Otherwise, the principles of natural justice are offended. On the basis of such proceedings, no penalty could be imposed on the assessee ; ) taking up of penalty proceeding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms of section 274 of the Act. Thus the AO in the proceedings under section 271AAB of the Act has to first decide that the conditions prescribed under the said section are satisfied for levy of penalty and then to further take a decision after considering the explanation of the assessee for non compliance of any of the conditions under clauses (a) to (c) of sub-section (1) regarding the quantum of penalty. The primary condition for levy of penalty is the existence of undisclosed income as per the disclosure made by the assessee under section 132(4). The term undisclosed income has been defined in Explanations to section 271AAB. Therefore, as per the definition provided in the Explanation, the undisclosed income may have various forms and the same is not recorded in the books of accounts or other documents maintained in normal course relating to the specified previous year. As per sub-clause (i) of clause (c) of the Explanation, the undisclosed income means any income of the specified previous year represented by any money, bullion, jewellery or valuable article or things or any entry in books of accounts or other documents or transactions found in the course of search. This defin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion that penalty under section 271AAB is leviable and further whether it is 10% or 20% or 30% of such undisclosed income. Therefore, the AO is under statutory obligation to examine all the issues during the proceedings under section 271AAB after giving the assessee an opportunity to explain the charges/grounds on which the penalty is proposed to be levied. Hence it is a pre-requisite condition that the AO first specify the charges against the assessee and to make known the assessee of his default so as to afford an opportunity to explain the default/charges so brought against the assessee. Without considering the explanation of the assessee on the specific default, the order passed by the AO under section 271AAB suffers from serious illegality and therefore not sustainable in law. When a stringent action is provided in the Statute against the default committed by the assessee, then it also cast an equally stringent and strict duty on the authority responsible to take such action. Therefore, when the provisions for levy of penalty under section 271AAB is a specific provision to deal with the undisclosed income and it provides a strict penal action then the corresponding duty of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vied ten percent of ₹ 3 cr., which have been deleted by the impugned order of Ld. CIT(A). 4. The Ld. DR brought to our notice that in the very same group case of Manoj Beswal Ors. the Tribunal had confirmed the levy of penalty and contended before us that penalty u/s. 271AAB of the Act is mandatory and therefore, according to Ld. DR, the Ld. CIT(A) erred in deleting the penalty by stating that the assessee did not had any mens rea not to disclose the amount in question. According to him, penalty has to be mandatorily levied u/s. 271AAB of the Act on the undisclosed income found during search. On the other hand, Ld. AR Shri Miraz D. Shah, supporting the decision of Ld. CIT(A) made contentions though taken up before the Ld. CIT(A) but has not been adjudicated on those averments, which the Ld. AR urges before us to consider while adjudicating the appeal of the Revenue. The Ld. AR also pointed out that the contentions which he is going to raise has been taken up before the AO also, however, according to Ld. Counsel, those legal arguments were not considered by the AO in the right perspective. The first contention of the Ld. AR is that since Sec. 271AAB of the Act is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n raised by the Ld. AR was that the Tribunal had stated in para 9 of its order that the assessee himself had accepted that he is engaged in commodities trading business and therefore mandated to maintain books of accounts in terms of section 44AA of the Act and thereby inferring that the assessee had reported the profit from commodities trading business under the head income from business or profession . Based on this crucial finding, the Tribunal had concluded that since the transaction of commodities trading had not been entered by the assessee in his books of accounts as on the date of search on 01.08.2012 and thereby it takes the character of undisclosed income for which penalty u/s 271AAB of the Act is exigible. In this regard, we find that the Ld. AR drew our attention to the computation of the total income wherein the assessee had offered income from commodity trading only under the head income from other sources. We also find that the Ld. AO had also 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. We find that due to the absence of the assessee at the time of hearing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordingly, he is not required to maintain books of account as stipulated in Sec. 44AA or Sec. 44AA(2)(ii) of the Act because, these provisions are only for assesses who are earning income under the head Business or profession . We note that Sec. 44AA or Sec. 44AA(2)(ii) of the Act casts a duty upon the assessee who are into Business or Profession and such assessee s are bound to maintain books of account as stipulated therein. For appreciating this submission let us go through the provisions of law. 44AA. (1) Every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette shall 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. (2) Every person carrying on business or profession [not being a profession referred to in subsection (1)] shall,- (i) if his income from business or profession exceeds [one lakh twenty] thousand rupees or his total sales, turnover or gross re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee in the statement of total income filed before the AO has shown income only under two heads (i) salary income (ii) income from other sources. We would like to reproduce the summary of total income of the assessee filed along with the return: Income from Salary ₹ 45,57,600 Income from Other sources ₹ 3,00,24,047 ₹ 3,45,81,647 6. We note that the AO has accepted the aforesaid statement of total income filed before him without contesting the claim of the assessee as to whether the assessee s claim of income other than from salary should be from Income from Business . The confusion that has arisen in this case, we note is on the misdirection of AO in the assessment proceedings wherein the assessment order of the assessee, the AO has observed during search and seizure operation, Shri Manoj Beswal had made a consolidated disclosure of ₹ 32 crore vide his disclosure petition. Out of this consolidated disclosure, the assessee owned up ₹ 3 cr. In the disclosure petition Shri Manoj B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mences its business, its income from any other source will not be taxed as held by the Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals Ltd. Vs. CIT (1997) 227 ITR 172 (SC). It has been further held that when the question is whether a receipt of money is taxable or not or whether certain deduction from that receipt is principles of law and not in accordance with accountancy practice. Further, the Hon ble Apex Court held that the question as to whether a principal receipt is of the nature of income and falls within the charge of sec. 4 of the Act is a question of law which has to be decided by the Court on the basis of the provisions of the Act and interpretation of the term income given in a large number of decisions of the Hon ble Supreme Court, High Court and Privy Council. After taking note of the Apex Court order as above, we note that the AO in the assessment order after having accepted the statement of total income (supra) and the return wherein the assessee has shown the income from commodities under the head Income from Other Sources cannot now after perusal of Income Expenditure Account determine the character of transaction in the penalty proceedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oceedings which fact has been taken note of and concurred by the Ld. CIT(A). Thereafter, the Ld. AR drew our attention to the definition of undisclosed income given under section 271AAB which reads as under: Penalty where search has been initiated. '271AAB. (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- ******** Explanation For the purposes of this section, - (a) . (b) . (c) undisclosed income means- (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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foresaid reasoning rendered by us. 8. In the result, the appeal of the revenue is dismissed. 4. We find that the facts in the aforesaid case and the decision rendered thereon are squarely applicable to the facts of the instant cases before us and respectfully following the same, we dismiss the appeals of the revenue. Therefore, when the assessee is not required to maintain the books of account as per section 44AA, then the matter is required to be examined whether the alleged undisclosed income is recorded in the other documents maintained in the normal course as per clause (c) to Explanation to section 271AAB. Undisputedly the alleged income was found recorded in the diary which is nothing but the other record maintained in the normal course, thus the same would not fall in the definition of undisclosed income. Once the said income is found as recorded in the other documents maintained in the normal course, then it cannot be presumed that the assessee would not have disclosed the same in the return of income to be filed after about one year from the date of search. Hence, in view of the above facts and circumstances of the case as well as the various ..... X X X X Extracts X X X X X X X X Extracts X X X X
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