Penalty under Section 271AAB not applicable to income given up during a search
Fact and issue of the case
The assessee has filed an appeal against the order of the ld. CIT(A)-4 Jaipur dated 29-07-2022 for the assessment year 2013-14 raising therein following ground of appeal. ‘
That the ld. CIT(A) is wrong, unjust and has erred in law in confirming penalty of Rs.2.50 lacs imposed by the AO u/s 271AAB of the Act.
That the ld. CIT(A) is wrong and has erred in law in confirming the said penalty of Rs.2.50 lacs u/s 271AAB of the Act holding that it is mandatory in nature and not discretionary and so AO is correct in law while imposing penalty on assessee.
That the ld. CIT(A) is wrong and has erred in law in confirming the said penalty of Rs.2.50 lacs u/s 271AAB imposed by the AO although the notice issued by AO for initiating the penalty u/s 271AAB of the I.T. Act, 1961 is not in accordance with law and not being specifically pointing out the default for which the AO sought to impose penalty u/s 271AAB.
That the ld. CIT(A) is wrong in confirming penalty of Rs.2.50 lacs u/s 271AAB of the Act in as much the penalty was levied by AO simply on the basis that the assessee admitted the income of Rs.2.50 lacs and disclosed in the return without proving that the said income was ‘’undisclosed income” of assessee within the meaning of Section 271AAB of the I.T. Act, 1961
Brief facts of the case are that the assessee is engaged in business manufacturing, trading and export of precious &semi precious stones from last several years. A search u/s 132 of the I.T. Act, 1961 took place at residence and business premises of assessee 23-05-2013. In course of search, the assessee surrendered an income of Rs.25,00,000/-on account of land advance which he admitted as his additional business income for current year. The assessee filed original return on 29-09-2013 declaring total income of Rs. 89,40,360/- which included said additional income of Rs.25,00,000/- offered to tax in course of search. The assessment u/s 143 (3) r.w.s. 153B (1) (b) of I. T. Act, 1961 was completed on 21-03-2016 after disallowance of expenses on account of personal element/unverifiable expenses. The A.O. simultaneously initiated penalty proceedings u/s 271AAB of the Act. The A.O. thereafter took penalty proceedings initiated by him u/s 271AAB by issuing fresh show cause notice(s) to which assessee filed his explanation. The explanation filed by assessee has been held by A.O. as not sustainable at all and levied a penalty of Rs.2,50,000/- on assessee.
The assessee filed appeal before the ld. CIT (A) against said penalty order and in course of hearing filed written submissions which is reproduced in appeal order of ld. CIT (A). The Ld. CIT(A) in his order dated 29-07-2022 after considering reply filed by assessee confirmed the penalty levied by AO. The Ld. CIT (A) thus dismissed the appeal filed by assessee.
During the course of hearing, the ld. AR of the assessee prayed that the lower authorities have erred in sustaining the penalty of Rs.2.50 lacs u/s 271AAB of the Act for which the ld. AR of the assessee filed a detailed written submission concerning the issue in question.
‘’The groundwise submission of assessee are as under: –
The ground no.1and 3 are interlinked hence a combined submission is made here under:-
The Ld. A.O. has levied impugned penalty u/s 271AAB(1)(a)of the I T Act, 1961. In this connection it is submitted that the section 271AAB of Act has three limbs as specified in Section i.e. 271AAB (1) (a), (b) & (c) and the notice dated 21-03-2016 sent to assessee alongwith assessment order does not specify in which limb the penalty sought to be levied and only mentioning of Section271AAB in notice do not satisfy the requirement of law. The language of the said notice issued is“Whereas in the course of assessment proceedings before me for the A.Y. 2013-14 it appears to me that as per section 274 and 275 read with section 271AAB of the I T Act you are liable for penalty on assessed undisclosed income. The Ld. A.O. thereafter issued another show cause notice dated 17-08-2016by changing only date of notice stating the same wordings of earlier notice dated 21-032016 that “
“Whereas in the course of assessment proceedings before me for the A.Y. 2013-14 it appears to me that as per section 274 and 275 read with section 271AAB of the I T Act you are liable for penalty on assessed undisclosed income.”
Again, a third show cause notice dated 07-09-2018 was issued having the same wordings of earlier notice(s). The assessee after receiving this notice filed his explanation on 14-09-2018. The Ld. A.O. on receipt of explanation of assessee passed the penalty order on 23-03-2020. It is verifiable that all the three notices were issued in a routine manner without mentioning under which clause of section 271AAB of the Act the assessee is liable for penalty. It submitted that section 271AAB(1) has three clauses (a) to (c) and each clause of sub-section (1) to sec. 271AAB provides the circumstances and violation attracting the penalty @ 10% or 20% or 30% of undisclosed income of specified previous year. The assessee should know the grounds which he has to meet specifically. Otherwise, the principles of natural justice are violated. On the basis of such proceeding, no penalty could be imposed on the assessee. Thus, there is no application of mind at the time of issuing the show cause notice as the show cause notice issued by the AO do not specify the undisclosed income on which the assessee is required to show cause. Even the AO has not given any ground for levy of penalty for which the assessee could put his defense. Thus, in the absence of specific charge against the assessee, he was not in a position to counter the show cause notice issued by the AO as well as his cogent reply to the show cause notice. Though the AO while passing the impugned order has imposed the penalty as per clause (a) of section 271AAB(1) of the Act, however, no such ground was specified in the show cause notice issued under section 271AAB read with section 274 of the Act. In this respect Reliance is placed on the judgement of Hon’ble Karnataka High Court in the case of CIT Vs. M/s SSA’s EMERALD MEADOWS reported in 2015 (11) TMI 1620 – , wherein Hon’ble Court has held that: –
The Tribunal has allowed the appeal filed by the assessee holding the notice issued by the Assessing Officer under section 274 read with Section 271 (1) (c) of the Income Tax Act, 1961 (for short ‘the Act’) to be bad in law as it did not specify which limb of Section 271 (1) (c) of the Act, the penalty proceedings had been initiated i.e. whether for concealment of particulars of income or furnishing of inaccurate 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 COMMISSIONER OF INCOME TAX – VS – MANJUNATHA COTTON AND GINNING FACTORY (2013) 359 ITR 565.
In our view, since the matter is covered by judgement of the Division Bench of this Court, we are of the opinion, no substantial question of law arised in this appeal for determination by this Court. The appeal is accordingly dismissed.
The department has filed SLP in Hon’ble Supreme Court which has been dismissed. Therefore, Hon’ble Supreme Court has approved the findings made by Hon’ble Karnataka High Court in the case of CIT Vs. SSA’s Emerald Meadows And CIT Vs Manjunatha Cotton &Ginnign Factory & others [2013] 359 ITR 565. Hon’ble Karnataka High Court in the case of Manjunatha Cotton & Ginning Factory [2013] 359 ITR 565 (Karnataka) after referring to the decision of Hon’ble Supreme Court in the case of T. Ashok Pai (Supra) held as under:
Concealment, furnishing inaccurate particulars of income are different. Thus the Assessing officer while issuing notice has to come to the conclusion that whether is it a case of concealment of income or is it a case of furnishing of inaccurate particulars. The Apex Court in the case of Ashok Pai reported in 292 ITR 11 at page 19 has held that concealment of income and furnishing inaccurate particulars of income carry different connotations. The Gujarat High Court in the case of MA NU ENGINEERING reported in 122 ITR 306 and the Delhi High Court in the case of VIRGO MARKETING reported in 171 taxman 156, has held that levy of penalty has to be clear as to the limb for which it is levied and the position being unclear penalty is not sustainable. Therefore, when the Assessing officer proposes to invoke the first limb being concealment, then the notice has to be appropriately marked. Similar is the case for furnishing inaccurate particulars of income. The Standard proforma without striking of the relevant clauses will lead to an inference as to non application of mind….. ?
The Hon’ble ITAT, Jaipur Bench, Jaipur in the case of Anuj Mathur Vs DCIT, CC-4, Jaipur (ITA No. 971/JP/17) held that “As regards the validity of notice under section 274 for want of specifying the ground and default, we find that when the basic condition of the undisclosed income not recorded in the books of 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. In view of the above the show cause notice issued by the AO in the case of assesee is not sustainable. The appellant also relied on the following decision:-
DCIT vs. Shri R. Elangovan in ITA No. 1199/CHNY/2017 dated 05-04-2018 :
The Hon’ble Tribunal in the said case while considering the validity of show cause 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.
Hon’ble Jurisdictional High Court in the case of Sheveta Construction Co. Pvt. Ltd. in DBIT Appeal No. 534/2008 dated 06.12.2016 wherein the Hon’ble High Court at Para 9 of its order held as under: –
Taking into consideration the decision of the Andhra Pradesh High Court which virtually considered the subsequent law and the law which was prevailing on the date the decision was rendered on 27.08.2012. In view of the observation made in the said judgement, we are of the opinion that the contention raised by the appellant is required to be accepted and in the finding of Assessing officer in the assessment order it is held that the A.O. has to give a notice as to whether he proposes to levy penalty for concealment of income or furnishing inaccurate particulars. He cannot have both the conditions and if it is so he has to say so in the notice and record a finding in the penalty order ….”
(Emphasis Supplied).
Narayana Heihts& Towers, Vs. I.T.O. Ward – 2- 4 Jaipur ITA No. 1033/JP/2016 (iv). The ITAT, Jaipur Bench, Jaipur in case of La! Chand Mitta! Vs. DCIT (ITA No. 772/JP/2016 order dated 29-12-2011 and various other cases decided by it held that on the basis of such notice issued by sending printed where only all the ground of section 271 (1) (c) are mentioned or where show cause notice u/s 271 (1) (c) for imposing of penalty without specifying the limb for reasons to impose penalty whether for concealment of income or furnish inaccurate particulars of income is not as per law and assessing officer did not have any jurisdiction to impose penalty u/s 271 (1) (c). In the case(s) Radha Mohan Maheshwari Vs. DCIT (ITA No. 773/JP/2013) Mohd. Sharif Khan Vs. DCIT (ITA No. 441/JP/2014) Shankar Lal Khandelwal Vs. DCIT (ITA No. 878/JP/2013)Murari Lal Mittal (ITA No. 334/JP/2015 order dated 9-11-2016 and Mridula Agarwal (ITA No. 176/JP/2016) the Hon’ble Bench upheld the same view. (v). The Hon’ble ITAT, Jaipur Bench, Jaipur in a recent case of Gopal Das Sonkia DCIT, CC-2, Jaipur (ITA No. 306/JP/2018 ) order dated 11-04-2019 held that “it is clear that both the show cause notices issued by the AO for initiation of penalty proceedings under section 271AAB are very vague and silent about the default of the assessee and further the amount of undisclosed income on which the penalty was proposed to be levied. Even the Hon’ble Jurisdictional High Court in case of Shevata Construction Co. Pvt. Ltd in DBIT Appeal No. 534/2008 dated 06.12.2016 has concurred with the view taken by Hon’ble Karnataka High Court in case of CIT Vs. Manjunatha Cotton & Ginning Factory, 359 ITR 565 (Karnataka) which was subsequently upheld by the Hon ’ble Supreme Court by dismissing the SLP filed by the revenue in the case of CIT Vs. SSA’s Emerald Meadows, 242 taxman 180(SC). Accordingly, following the decision of the Coordinate Bench as well as Hon’ble Jurisdictional High Court, this issue is decided in favour of the assessee by holding that the initiation of penalty is not valid and consequently the order passed under section 271AAB is not sustainable and liable to be quashed. (VI) The Hon’ble ITAT, Jaipur Bench, Jaipur in a recent case of Mukund Sharan Goyal Vs. DCIT, CC-2, Jaipur (ITA No. 293/JP/2018 ) order dated 23-09-2019 held that “On similar facts, the Tribunal has already decided this issue in favour of the assessee by holding that the initiation of penalty is not valid and consequently the order passed under section 271AAB is not sustainable and liable to be quashed. Following the earlier orders and taking a consistent view, we hold that when the AO has failed to specify the default attracting the levy of penalty in terms of clauses (a) to (c) of section 271AAB(1) of the Act, the said show cause notice suffers from illegality and consequently the order passed by the AO under section 271AAB is not sustainable and liable to be quashed.” Thus, it is submitted that notice issued u/s 271AAB by Ld. A.O. to assessee is wrong and bad in law and consequently the penalty levied u/s 271AAB (1) (a) is also wrong and bad in law which deserves to be deleted.
Observation of the court
We have heard both the parties and perused the materials available on record. Brief facts of the case are that the assessee is engaged in business manufacturing, trading and export of precious & semi precious stones from last several years. A search u/s 132 of the I.T. Act, 1961 took place at residence and business premises of assessee 23-05-2013. In course of search, the assessee surrendered an income of Rs.25,00,000/-on account of land advance which he admitted as his additional business income for current year. The assessee filed original return on 29-09-2013 declaring total income of Rs. 89,40,360/- which included said additional income of Rs.25,00,000/- offered to tax in course of search. The assessment u/s 143 (3) r.w.s. 153B (1) (b) of I. T. Act, 1961 was completed on 21-03-2016 after disallowance of expenses on account of personal element/unverifiable expenses. The A.O. simultaneously initiated penalty proceedings u/s 271AAB of the Act. The A.O. thereafter took penalty proceedings initiated by him u/s 271AAB by issuing fresh show cause notice(s) to which assessee filed his explanation. The explanation filed by assessee has been held by A.O. as not sustainable at all and levied a penalty of Rs.2,50,000/- on assessee.The assessee filed appeal before the ld. CIT (A) against said penalty order and in course of hearing filed written submissions which is reproduced in appeal order of ld. CIT (A). The Ld. CIT(A) in his order dated 29-07-2022 after considering reply filed by assessee confirmed the penalty levied by AO. The Ld. CIT (A) thus dismissed the appeal filed by assessee. It is noted from the records that the Department had carried out the search and seizure operation on the assessee group and thus did not find any evidence which could show that the assessee was having undisclosed income and the ld. AR submitted that the revenue authorities had exerted undue pressure and obtained surrender of income from the assessee. It is worthwhile to mention that CBDT Circular F.No.286/2/2003-IT(Inv.) dated 10-03-2003 indicates that practice of confession of additional income during search and seizure operation does not serve any useful purpose and there should be concentration on collection of evidence of income which leads to information on what has not been disclosed or is not likely to be disclosed before the Income Tax Department. The Bench noted that the Board Circular dated 10-03-2003 (supra) submitted by the ld. AR assessee through its written submission has merit. We have taken into consideration the case laws cited by both the parties and also kept in mind the citations as mentioned by the ld. CIT(A) in his order, however, we find that the recent judgement of ITAT Jaipur Bench in the case of Rajendra Kumar Gupta vs DCIT in ITA No. 359/JP/2017 dated 18-01-2019 finds favour in the case of the assessee as the Bench has discussed the issue in its order very elaborately and judiciously and the relevant extract of the same is reproduced as under:-
During the course of search, a note book (diary) has been found referred to as Ann. AS wherein there are certain notings relating to cash advances given to various persons totaling to Rs. 82,80,000. Referring to the statement of the assessee in respect of these notings recorded u/s 132 (4), Ld. CIT (A) has given a finding that the assessee has given a generalized statement without specifying the complete particulars of persons to whom loans were given and also failed to substantiate the same. The said findings have not been disputed by the Revenue and therefore, merely based on surrender and generalized statement of the assessee, in absence of anything specific to corroborate such entries, can it be said that such entries/notings represent undisclosed income of the assessee. As per the definition of undisclosed income u/s 271AAB, the said cash advances cannot be stated to be income which is represented by any money, bullion, jewellery or other valuable particle or thing. Whether it can then be said that such undisclosed cash represents income by way of any entry in books of account or other documents or transactions found in the course of a search under section 132. A cash advance per se represents an outflow of funds from the assessee’s hand and an income per se represents an inflow of funds in the hands of assessee. Therefore, once there is an inflow of funds by way of income, there can be subsequent outflow by way of an advance to any third party. Giving an advance and income thus connotes different meaning and connotation and thus cannot be used inter-changeably. In the definition of undisclosed income, where it talks about “income by way of any entry in the books of account or other documents or transactions found in the course of a search under section 132”, what perhaps has been envisaged by the legislature is an inflow of funds in the hands of the assessee which has been found by way of any entry in the books of accounts or other documents, and which has not been recorded before the date of search in the books of accounts or other documents maintained by the assessee in the normal course and not vice-versa. We are also conscious of the fact that there are deeming provisions in terms of section 69 and 69B wherein such amounts may be deemed as income in absence of satisfactory explanation. In our view, the deeming fiction so envisaged under Section 69 and Section 69B cannot be extended and applied automatically in context of section 271AAB. It is a well-settled legal proposition that the deeming provisions are limited for the purposes that have been brought on the statue book and have therefore to be applied in the context of provisions wherein they have been brought on the statue book and not otherwise. In the instant case, the deeming provisions contained in section 69 and section 69B could have been applied in the context of bringing to tax such investments to tax in the quantum proceedings, though the fact of the matter is that the A.O. has not even invoked the said deeming provisions in the quantum proceedings. Therefore, even on this account, the deeming fiction cannot be extended to the penalty proceedings which are separate and distinct from the assessment proceedings and more so, where the provisions of section 271AAB provide for a specific definition of undisclosed income. Where a specific definition of undisclosed income has been provided in Section 271AAB, being a penal provision, the same must be strictly construed and in light of satisfaction of conditions specified therein and it is not expected to examine other provisions where the same has been defined or deemed for the purposes of bringing the amount to tax. In light of the same, the undisclosed investment by way of advances can be subject matter of addition in the quantum proceedings, as the same has been surrendered during the course of search in the statement recorded u/s 132 (4) and offered in the return of income, however the same cannot be said to qualify as an undisclosed income in the context of section 271AAB read with the explanation thereto and penalty so levied thereon deserves to be set-aside.”
Respectfully following the above decision in the case of Rajendra Kumar Gupta (supra) and in view of the above deliberation that the income surrendered is not an undisclosed income as specified in Explanation © of Section 271AAB of the Act, therefore, we do not concur with the findings of the ld. CIT(A) as the ld. AR of the assessee has very explicitly narrated the case in his written submission countering the decision taken by the ld. CIT(A) in his order. Thus, the grounds of appeal raised by the assessee in his appeal are allowed
In the result, the appeal of the assesee is allowed .
Order pronounced in the open court on 22/06/2023.
Conclusion
In the result, appeal of the assessee is allowed and ruled in favour of the assessee
Read the full order from here
Paras-Mal-Jain-Vs-DCIT-ITAT-Jaipur-2
