The only issue arising in the instant appeal is the maintainability or otherwise in law, and in the facts and circumstances of the case, of the deletion of the penalty levied u/s. 271AAA of the Act by the ld. CIT(A) vide his impugned order, which is in fact a combined order for A.Ys. 2004-05, 2008-09 and 2009-10.
The facts of the case in brief are that there was a search and seizure action u/s. 132 of the Act in the case of Prakash Steelage group of companies, of which the assessee company forms a part, on 09.02.2009. Several incriminating materials were found, leading to a disclosure of undisclosed income of Rs. 15,00,21,000/- for the entire group vide statement u/s. 132(4) dated 06/3/2009, to be appropriated by the ‘assessee’ amongst the various group concerns. The disclosure in the case of the assessee was for A.Ys. 2008-09 and 2009-10, at Rs.49,21,666/- and Rs.99,13,210/- respectively. The assessee subsequently filed its return of income for the relevant year on 29.11.2009, declaring a total income of Rs.7,52,43,818/-. Its assessment was completed u/s. 143(3) on 3 1.12.2010, determining the total income at Rs.7,55,90,450/-, i.e., at an increase of Rs. 3,46,632/- over that returned, also initiating penalty proceedings u/s.271AAA vide notice u/s.274 of even date. The same was subsequently levied at Rs.66,52,232/-, being 10% of the undisclosed income of Rs.6,65,22,317.
In appeal, the ld. CIT(A) deleted the penalty on the basis of a finding as to substantial compliance (of the provision), not warranting any further denial of benefit of Explanation 5A to section 271(1)(c), which is worded similar to Explanation 5, after noting the decision in the case of CIT vs. Mahendra C. Shah  299 ITR 305 (Guj).
Aggrieved, the Revenue is in appeal.
HELD BY ITAT
Firstly, any income to be subject to penalty u/s.271AAA should be an ‘undisclosed income’, as defined vide Explanation below sub-subsection (4) the said section. The penalty in the instant case, however, has been levied on the income of Rs.3,46,632/-, which, as it would appear to us on a reading of the assessment and penalty order, is only on account of a difference in the valuation of stock. Thus a finding as to the impugned incomes being undisclosed incomes is a pre-requisite for the application of the provision.
Further, each of the three ingredients as specified u/s. 271AAA(2) would need to be separately examined for their satisfaction by the assessee if the penalty there-under is not to be levied and, thus, sustained. While this may seem axiomatic and, therefore, superfluous for us to be stating so, liable to be construed as an expression of over anxiety, we do so as we observe a gross overlooking of this vital aspect of the matter. As we observe, the undisclosed income of Rs.562.62 lacs relating to stock was declared by the assessee, i.e., for the first time, only per its return of income filed on 29.11.2009, and not per the declaration vide a statement/deposition u/s. 132(4) of the Act; the disclosure following search extending only to an income of Rs.99. 13 lacs, i.e., by way of interest. The only finding by the ld. CIT(A) in the matter is that vide para 6.5.5 of his order, which states of tax and interest having been paid on the incomes offered u/s. 132(4), and which find due reflection in the return of income. The only income, of the three incomes under reference, which satisfies this requirement, is the interest income, i.e., presuming that the manner of its derivation stands also specified. The admission u/s. 132(4) is to specify the undisclosed income, or at least the manner in which it is to be arrived at; the whole premise for extending immunity from the penalty, statutorily mandated, being that the assessee commits himself, providing the necessary details under a condition of oath.
Further, surprisingly again, we observe no finding by the ld. CIT(A) in respect of substantiation of the manner of deriving the undisclosed income, which stipulation, while missing in section 271(1)(c), stands incorporated in section 271AAA. The A.O. clearly records a finding, both in respect of the assessee having failed to specify the manner in which the undisclosed income is derived as well as of the assessee having failed to substantiate the same, and which in fact the ld. CIT(A) notes vide para 6.5.2 of his order. Clearly, these findings of fact would need to be addressed by the ld. CIT(A), either endorsing or reversing or otherwise modifying the same, i.e., based on his reappraisal of the materials found from the possession of, or otherwise furnished by, the assessee, or even the evidences led by it before him for the first time, of-course by and upon observing the due process of law (refer r. 46A). The onus to satisfy the conditions of the provision though, would only be on the assessee. In fact, all this would precisely be the purview of the first appellate authority in the set aside proceedings.
Coming to the decision in the case of Mahendra C. Shah (supra), relied upon by the ld. CIT(A), the same, as afore-stated, is firstly in respect of section 271(1)(c), the parameters as well as ingredients of which are different from that of section 271AAA. While the former provision is applicable in the case of concealment of or furnishing inaccurate, particulars of income, considering the deeming provisions in its respect under the section, s. 271AAA provides for a mandatory levy of penalty except where the assessee satisfies the conditions of section 271AAA(2). Even the saving upon proving a reasonable clause, as provided under section 273B, is not applicable for a penalty imposable u/s.271AAA, which is only in respect of undisclosed income, so that what alone is relevant is the applicability of the provision in the facts of the case. It is apparent from the reading of the said decision that the environmental conditions existing at the time of the search, including the manner in which the statement u/s. 132(4) is generally recorded, prevailed with the hon’ble court in holding of a substantial compliance in the facts of the case, i.e., qua the condition of admission of undisclosed income and the statement of the manner in which it is derived, also provided u/Expl.5 to s. 271(1)(c), saving penalty. As explained by it, this is as the assessee had no occasion to state or make averments in the manner as required by or under the law. Its prescription is therefore to be read contextually. The legal proposition that thus arises from the said judgment is that the satisfaction of the conditions must be considered in the background and the context of the obtaining facts and circumstances of the case.
In the instant case, the statement u/s.132(4), which is by Shri Prakash C. Kanugo, a director of the assessee-company, was recorded only on 06.03.2009 (copy on record), i.e., nearly a month after the search. The assessee cannot be said to be constrained for want of time – which was ample, to deliberate in the matter, as well as seek legal advice. In fact, the statement was made only in the presence of its counsel, Shri Vinay Doshi, CA, and itself makes a plea for grant of condonation from the levy of penalty (in answer to Q.1 1). Could it be therefore be said that the assessee had no occasion to aver with regard to the manner of deriving the income being disclosed?
A company acts through the human agency of its management, which alone could depose qua the manner in which its undisclosed income stood earned! derived, being rather in its exclusive knowledge? All that the law postulates is a honest disclosure qua the said income. A finding as to the satisfaction or otherwise of the said condition, or for that matter its’ substantiation, i.e., of the manner in which the undisclosed income was derived, it needs to be appreciated, are pure findings of fact. The hon’ble high courts can interfere with such a finding’s only where it is in its view either perverse or without evidence or based on irrelevant material, or which is partly relevant and partly irrelevant (refer, inter alia, CIT v. Daulat Ram Rawatmull  87 ITR 349 (SC)). Further, even where so, the province of the hon’ble court is to restore the matter back to the tribunal, stating its reasons, as clarified by the hon’ble court in Janatha Contract Co. v. CIT  105 ITR 627 (Ker), following the binding decisions by the apex court in CIT v. Greaves Cotton & Co. Ltd.  68 ITR 200 (SC) and CIT v. Indian Mollasses & Co. (P.) Ltd.  78 ITR 474 (SC). The authorities on the law in the matter could in fact be multiplied. Then, again, we wonder, rather than reading down the provision, so as to operate to negate the mandatory requirement of the section, defeating the legislative intent, which, as explained by the hon’ble courts as well as the official pronouncements explaining the provision, is of plugging the generation of undisclosed income and the consequent leakage of revenue for future, why could the same be not read so as to allow the assessee the latitude for providing the necessary details subsequently, i.e., where the disclosure u!s.132(4) is made under excruciating or difficult circumstances. The same of course would be under oath, making it a part of and refer to the earlier statement u!s. 132(4), complying thus substantially and effectively, with the substantive provision of law. Further, the further condition of ‘substantiation’, as provided u!s. 271AAA(2)(ii), which was not there in the case, being u!s. 271(1)(c), before the hon’ble court in Mahendra C. Shah (supra), could only be interpreted to mean of the law casting a further obligation on the assessee to demonstrate the manner of deriving the undisclosed income, as specified per the statement u/s.132(4), as valid and true, i.e., stands validated and is on a firm basis; the presumption as to the truth of the materials found being already provided for u/s. 292C. The said decision would thus be of little assistance to the assessee.