Penalty U/s. 271AAA lieviable if Conditions precedent not satisfied

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

The appeal filed by the Revenue is against order of Commissioner (Appeals)-Central, Pune, dated 29-9-2014 relating to assessment year 2011-12 against deletion of penalty levied under section 271 AAA of the Income Tax Act 1961 (in short the ‘Act’).

2. The Revenue has raised the following grounds of appeal: —

1. On the facts and in the circumstances of the case, the learned Commissioner (Appeals) was not justified in deleting the penalty levied under section 271AAA of the Income Tax Act by holding that the conditions for penalty under section 271AAA were not satisfied, whereas the conditions for levying of penalty under section 271AAA were satisfied.

2. On the facts and in the circumstances of the case, the learned Commissioner (Appeals) has erred in deleting the penalty levied under section 271AAA of the Income Tax Act by holding that additional income on which penalty was imposed does not fall under the definition of “undisclosed income” in order to attract penalty under section 271AAA of the Income Tax Act, without appreciating the fact that certain movable and immovable assets were found during the course of search and the assessee had neither filed returns of income nor maintained books of account. On the basis of these assets/entries disclosure of undisclosed income was made by the assessee in the statement recorded under section 132(4) of the Income Tax Act, 1961.

3. On the facts and in the circumstances of the case, the learned Commissioner (Appeals) has erred in deleting the penalty levied under section 271AAA of the Income Tax Act even though the assessee had earned “undisclosed income” within the meaning of clause(a) of explanation of section 271AAA.

4. The learned Commissioner (Appeals) also erred in not following his previous orders for assessment year 2005-06 to 2010-11 wherein he confirmed penalty holding that it was evident that certain movable and immovable assets did come to the notice during the course of the search based on which disclosure was made by the assessee.

5. The order of learned Commissioner (Appeals) may be vacated and that of the assessing officer be restored.

3. The issue arising in the present appeal filed by the Revenue is against deletion of penalty levied under section 271AAA of the Act.

4. Briefly, in the facts of the case, search action under section 132 of the Act was conducted in the Palresha Group of cases on 10-2-2011. Search warrant was also issued in the case of assessee. The assessee filed the return of income on 5-3-2012 disclosing total income of Rs. 1,01,47,990. Subsequently, the assessee filed one more return for assessment year 2011-12 on 14-3-2013 declaring total income of Rs. 1,25,19,991. During the course of search action, the assessee had offered for taxation certain amounts of income in respect of various assessment years as tabulated under para 3 at page 2 of the assessment order. The income declared for the year under consideration was Rs. 1,02,47,991 and the total income declared was Rs. 2,39,16,863. The assessing officer noted that the additional/total income was offered for taxation only as a result of search action in the case of assessee, then penalty proceedings under section 271AAA of the Act were separately initiated in the case for concealing income and furnishing inaccurate particulars of income. The assessing officer thereafter, in the order levying penalty under section 271AAA of the Act, noted the contentions of assessee to have admitted and voluntarily declared the undisclosed income of Rs. 1.25 crores in his statement recorded under section 132(4) of the Act. The assessee was of the view that the conditions provided in sub-section (2) to section 271AAA of the Act were complied with since the amount of undisclosed income was assessed as part of the said disclosure only. In the written submissions filed before the assessing officer reproduced at page 4 of the penalty order, the assessee claims that he had already made part payment of assessment dues and was ready to pay the balance tax as early as possible. He then, requested that levy of penalty in addition to the above said tax/interest shall certainly over burden the assessee and cause great hardship and injustice on the taxpayer. The assessee thereafter, has pointed out that he was an uneducated person and did not have any income tax knowledge. Further, there was no conscious breach of law. The assessee thus, claimed that he did not conceal any income or facts and neither functionally furnished any inaccurate particulars of income. In view of the said facts and circumstances, he requested that penalty proceedings initiated under section 271(1)(c) of the Act be dropped. It may be pointed out herein that at the start of letter, he had referred to the provisions of section 271AAA of the Act and had also reproduced the said section. However, at the close, he requested for dropping the penalty proceedings initiated under section 271(1)(c) of the Act.

5. The assessing officer however, took note of the conditions laid down in section 271AAA of the Act and noted that the assessee had not filed the return of income till the date of search i.e. 10-2-2011 starting from assessment year 2005-06 on wards. The assessee also did not pay any taxes. For the year under consideration, the return of income was due on 30-9-2011 and though the assessee filed the same on 30-9-2011 but he did not pay taxes due on the income disclosed by him. Therefore, the assessing officer held that the contentions of assessee that he had complied with the entire conditions provided in sub-section (2) of section 271AAA of the Act was factually incorrect. Reference was made to questions and answers raised during the course of recording of statement under section 132(4) of the Act, under which he made declaration of Rs. 2.30 crores on account of investment in movable and immovable properties, land, plots and unexplained expenditure. The assessing officer further held that where the assessee had failed to pay taxes on the total income offered at Rs. 1.25 crores, then the said income was the undisclosed income for the purpose of levy of penalty under section 271AAA of the Act. The assessing officer vide para 8 held that as per provisions of section 271AAA of the Act, immunity was available to the assessee if the conditions as mentioned in section 271AAA(2) of the Act were satisfied. However, in the case, the assessee had disclosed income in the statement recorded under section 132(4) of the Act but taxes on the undisclosed income were not paid. Thus, the assessee was held to have not fulfilled the conditions in clause (ii) of sub-section (2) of section 271AAA of the Act. The assessing officer thus, was satisfied that the assessee had defaulted as per provisions of section 271AAA of the Act and penalty of Rs. 12,53,999 was levied.

6. The Commissioner (Appeals) deleted the penalty. The Commissioner (Appeals) noted that search had taken place on 10-2-2011 and therefore, assessment year 2011-12 was the assessment year relevant to which search was conducted. The next question was whether the assessee had undisclosed income within the meaning of clause (a) of Explanation to section 271AAA of the Act. The Commissioner (Appeals) vide para 6.4 observed that there was not a whisper in either of the order about any money, bullion, jewelry or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of search or books of account maintained in the normal course. The Commissioner (Appeals) observed that the only basis for initiating penalty proceedings and levying the same was that the assessee had disclosed/offered additional income as a consequence of search. The Commissioner (Appeals) having regard to the definition of undisclosed income in relation to section 271AAA of the Act held that the additional income based on which penalty had been imposed by the assessing officer not being income represented by any asset found or any entry in either seized books or regular books, does not fall within the meaning of undisclosed income under section 271AAA of the Act. Accordingly, it was held that the question whether the assessee was entitled to the immunity under sub-section (2) of section 271AAA of the Act or not, does not arise, as threshold limits from brining the case under section 271AAA of the Act were not met with.

7. The Revenue is in appeal against the order of Commissioner (Appeals).

8. The learned Authorized Representative for the assessee referred to application filed under rule 27 of the Income Tax Appellate Tribunal Rules, 1963, (in short ‘the Rules’) wherein it had raised the issue and has pointed out that the order of Commissioner (Appeals) may be supported on the ground that the assessee was eligible for immunity under sub-section (2) of section 271AAA of the Act, wherein the assessee had admitted undisclosed income of Rs. 1.02 crores, filed the return of income declaring additional income and had paid entire taxes together with interest in respect of undisclosed income. He further pointed out that penalty levied was not legally sustainable in view of the definition of undisclosed income under Explanation (a) to section 271AAA of the Act. He further pointed out that where the assessing officer had failed to initiate penalty proceedings specifically for particular charge or an offence for which he wanted to levy penalty, then no penalty could be levied.

9. The learned Departmental Representative for the Revenue referred to the statement recorded under section 132(4) of the Act from question No. 10 on wards. He then referred to question No. 25 under which, the assessee was asked to give explanation in respect of additional income offered and the sources of investments. The assessee in reply, only surrenders but does not give the manner in which the said income was earned. He further pointed out that the assessee had not filed any return of income and the same was filed only after the proceedings under section 153A of the Act were initiated against the assessee. He also referred to the statement of assessee itself before the Commissioner (Appeals) and pointed out that even taxes were not paid. The learned Departmental Representative for the Revenue further pointed out that rigors of section 271AAA(2) of the Act have not been complied with. Referring to the order of Commissioner (Appeals), he pointed out that he has come to a finding that income declared by the assessee is not undisclosed income, whereas the same was offered as additional income on account of transactions found and seized documents. He further pleaded that the Commissioner (Appeals) has imposed the provisions of section and has not taken into consideration the factual aspects of the case.

10. The learned Authorized Representative for the assessee on the other hand, referred to the application filed under rule 27 of the Rules and pointed out that language of immunity as per Explanation 5A to section 271(1)(c) of the Act and as per section 271AAA of the Act was the same. In this regard, he placed reliance on the ratio laid down by the Pune Bench of Tribunal in DCIT v. Inderchand Surajmal Bothra in (IT Appeal No.139 (PN) of 2010, dATE 30-11-2011. He further pointed out that even if the manner in which the said income was earned was not satisfied but the assessee is entitled to the immunity as per the ratio laid down by the Chandigarh Bench of Tribunal in Asst. CIT v. Munish Kumar Goyal (2015) 152 ITD 453. In respect of payment of taxes, he pointed out that the same were paid late, admittedly, but full taxes were paid. Our attention was drawn to the copy of 26AS placed in the Paper Book, wherein the taxes were shown to have paid in June, 2014 i.e. after passing of order levying penalty under section 271AAA of the Act. In this regard, he placed reliance on the ratio laid down by the Hon’ble Supreme Court in Asst. CIT v. Gebilal Kanhaialal HUF 348 ITR 561. He referred to the written submissions filed and pointed out that penalty was not legally sustainable and he also pointed out that penalty was initiated for concealment and furnishing of inaccurate particulars of income and it was levied for undisclosed income. In this regard, he placed reliance on the ratio laid down by the Pune Bench of Tribunal in ACIT v. Shri Vikas Bapurao Takawane in (IT Appeal No. 2245 (PUN) of 2014, date 26-7-2017).

11. We have heard the rival contentions and perused the record. Penalty under section 271AAA of the Act is attracted where search had been initiated under section 132 of the Act and undisclosed income has been detected, then the assessee is to pay by way of penalty, in addition to tax, if any, payable by him, sum computed @ 10% of undisclosed income. However, sub-section (2) provides exception to levy of penalty under section 271AAA of the Act in case the assessee fulfills the following conditions: —

(a) Assessee in the statement recorded under section 132(4) of the Act admits the undisclosed income;

(b) Assessee satisfies the manner in which the income has been derived;

(c) Assessee substantiate the manner in which the undisclosed income was derived; and

(d) pays the taxes together with interest, if any, in respect of undisclosed income.

12. Explanation under the said section defines the term ‘undisclosed income’. Now, coming to the facts of the case, wherein search under section 132 of the Act was conducted upon the assessee on 10-2-2011 and warrant of authorization was issued under section 132(1) of the Act. During the course of proceedings, statement of assessee was recorded under section 132(4) of the Act, copy of which is placed on record. The assessee till the date of search had never filed the return of income and he also claimed that he had not maintained regular books of account for recording his business and professional receipts and expenditure. The assessee was receiving professional fees and was also earning business income i.e. profit on sale of plots, also agricultural income, dividend, interest on FDRs. The assessee in a joint venture with other persons had purchased 98 Guntas of land at Manjri Budruk in January, 2010 from Pritam Sanas and family for consideration of Rs. 2.32 crores. The assessee was asked to give his investment in Home Corporation i.e. partnership concern, wherein in answer to question, he stated that approximately Rs. 1.80 crores to Rs. 2.20 crores was contributed as his share capital in the said concern. He further explained that approximately 20 plots out of 34 plots of Manjari property were sold by him. Vide question No.10, search team confronted the assessee with diary No.1 of the seized document and he was asked to explain the contents of page 44 of the diary on which words written were W & B. He admitted that the contents of said page were for land purchase from Pritam Sanas and his family for consideration of Rs. 3.03 crores, which was actual payment made by all of them jointly. He also admitted that purchase consideration shown in the purchase agreement was Rs. 2.32 crores and he further admitted that the words written ‘W’ means payment in white i.e. by cheque or accounted for and the word ‘B’ means payments made in cash. He was asked to explain the contents of page 5 and the words written in W&B. He admitted that the same also relates to the Sanas deal. Then page 42 of diary No.1 was also confronted and pages 39 and 40. Vide question No. 14, he was asked to give the details of foreign trip and expenses. Vide question Nos. 15, 16 and 17, he was again confronted with the contents of diary. The assessee vide question No. 19 was asked to give the details of immovable property which was given by him, bearing serial numbers (a) to (h). He also claimed that he incurred Rs.10 lakhs for renovation of house and for furniture and fixtures of Rs. 4 lakhs during financial year 2010-11. Search team as per question No. 25 asked him How will you explain the above mentioned investments in land/plots and movable and immovable asset, considering the non filing of income tax return. His answer to the said question is I hereby voluntarily declare the amount of Rs. 2,30,00,000 (Two Crores and Thirty Lacs) towards my capital in Home Corporation, investment in movable and immovable assets, land/plots, and my unexplained expenditure of foreign trip and drawings. Further I will file my return of income on the basis of either source or application whichever is higher, and its yearwise break-up shall be submitted in due course. The assessee thereafter, for the year under consideration first furnished the return of income on 5-3-2012 declaring total income of Rs. 1.02 crores, which was later revised on 14-3-2013 declaring total income of Rs. 1.25 crores. The assessing officer noted that the assessee had not filed any return of income and had offered gross income which included his regular income also in the return of income filed subsequent to the issue of notice under section 153A of the Act. The assessing officer noted that since the total/ additional income was offered for taxation only as a result of search action, then penalty proceedings under section 271AAA of the Act were separately initiated in the case. It is qualified by the words for concealing income and furnishing inaccurate particulars of income. However, it may be noted that the assessing officer has taken into consideration the additional/total income offered pursuant to search action on the assessee. Thereafter, penalty was levied on the ‘undisclosed income’. The assessing officer observed that in the present case, the assessee had disclosed income in the statement recorded under section 132(4) of the Act and offered the same in return of income, but the taxes on undisclosed income were not paid. Thus, the assessee had not fulfilled the conditions as mentioned in clause (iii) of sub-section (2) of section 271AAA of the Act and hence, he was held to have defaulted and penalty of Rs. 12,53,999 was levied under section 271AAA of the Act. The said penalty levied by the assessing officer was deleted by the Commissioner (Appeals) on the ground that the additional income, based on which penalty was imposed by the assessing officer was not the income represented by any asset found or any entry in either seized books or regular books and hence, does not fall within the definition of undisclosed income in order to attract levy of penalty. The Commissioner (Appeals) thereafter, holds that there is no need to go into the clauses of immunity provided under section 271AAA(2) of the Act as the threshold conditions for bringing the case under section 271AAA were not met with.

13. In order to adjudicate the issue, first we shall refer to Explanation under section 271AAA of the Act, which defines ‘undisclosed income’. Undisclosed income means any income of 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 search under section 132 of the Act. The Commissioner (Appeals) while deciding the issue has referred to part of definition of ‘undisclosed income’ though in the first part of para 6.4 of the appellate order, he refers that in the assessment order as well as penalty order, there is no whisper either of about any money, bullion, jewelry or other value article or thing or any entry in the books of account or other documents or transactions found in the course of search or books of account maintained in the normal course but in the later part of para 6.4, he restricts the definition of ‘undisclosed money’ to income represented by any asset found or any entry in either seized books or regular books. He has lost sight of the transactions found as one of the conditions i.e. entry in the books of account or other documents and also transactions found in the course of search. As pointed out by us in the paras herein above, during the course of search, diary was found in which there was mention of transactions in white and black, other documents of expenditure were found and also the list of investments and investments in various assets both movable and immovable were declared by the assessee during search and in view of the said position, the assessee made a declaration of income which admittedly, falls within the definition of ‘undisclosed income’ and hence, we find no merit in the observations of Commissioner (Appeals) in this regard and the same are reversed.

14. Now, coming to the main provisions of section 271AAA of the Act. The first grievance of assessee is that penalty proceedings have been initiated for furnishing of inaccurate particulars of income and concealment of income and hence, the satisfaction is incorrect. In case the assessment order and observations of the assessing officer are read, then he is only talking about additional income offered by the assessee. He also while concluding states that the additional/total income was offered for taxation only as a result of search action and since it was so offered, penalty proceedings under section 271AAA of the Act were initiated. Though, he mentions concealment of income and furnishing of inaccurate particulars of income but that limb does not decide the action undertaken by the assessing officer under section 271AAA of the Act and at best it is superfluous.

15. Coming to the order levying penalty under section 271AAA of the Act. Vide para 8, it is clearly mentioned that where the assessee had disclosed the income in the statement recorded under section 132(4) of the Act but taxes on the undisclosed income were not paid, that the assessee had not fulfilled the conditions of clause (iii) of sub-section (2) of section 271AAA of the Act. Hence, the assessing officer talks about the ‘undisclosed income’ which was basis for levying penalty under section 271AAA of the Act. Hence, the order levying penalty merits to be upheld in case the assessee has not fulfilled the conditions laid down in sub-section (2) of said section. In this regard, reliance was placed upon by the assessee on the Pune Bench of Tribunal in Vikas Bapurao Takawane (supra) is misplaced, where satisfaction was for initiating penalty for concealment of income and furnishing of inaccurate particulars of income and the order levying penalty was also for concealment of income. The Tribunal notes that there was no reference of undisclosed income either in the assessment order or the order levying penalty under section 271AAA of the Act and where the assessing officer had failed to specify undisclosed income unearthed during the course of search as envisaged under the provisions of section 271AAA of the Act, penalty levied under the said section was deleted. We have already referred to the facts of the present case and order of assessing officer while recording satisfaction, wherein he talks about the income unearthed during the course of search and order levying penalty under section 271AAA of the Act, which specifically talks about undisclosed income and consequently, we find no merit in the reliance placed upon by the learned Authorized Representative for the assessee in Vikas Bapurao Takawane (supra).

16. Now, coming to the conditions to be fulfilled. In cases where the assessee claims the immunity from levy of penalty under section 271AAA of the Act, sub- section (2) provides that three conditions to be fulfilled but in actual fact there are four steps are to be undertaken before grant of any immunity under section 271AAA of the Act, which are as under: —

(a) Assessee in the statement recorded under section 132(4) of the Act admits the undisclosed income;

(b) Assessee satisfies the manner in which the income has been derived;

(c) Assessee substantiate the manner in which the undisclosed income was derived; and

(d) pays the taxes together with interest, if any, in respect of undisclosed income.

17. The assessee claims that it has fulfilled all the conditions of said sub- section (2) of section 271AAA of the Act and hence, there is no merit in the levy of penalty. Admittedly, yes, the assessee in the course of search while statement under section 132(4) of the Act was recorded had admitted the undisclosed income. However, he failed to specify the manner in which the income was derived. Vide question No.25, he was specifically asked to explain the investments made in land/plots and movable & immovable assets, considering the non-filing the income tax returns. In reply, he does not give any explanation about the said investments and the sources from where he has made the said investments but he voluntarily declared sum of Rs. 2.30 crores towards his capital in Home Corporation, investment in movable and immovable assets, unexplained expenditure, drawings, etc. He also admitted that he would file yearwise breakup in due course, which he consequently, filed and the said breakup is tabulated at page 2 of the assessment order. The assessee in assessment years 2005-06 to 2011-12 in all, declared sum of Rs. 2.39 crores as his additional income out of which sum of Rs. 1.02 crores related to assessment year 2011-12. In the absence of assessee having satisfied the manner in which the income was derived and also specifying the manner, clause (i)(part) and clause (ii) under sub-section (2) of section 271AAA of the Act are not fulfilled.

18. The assessee in this regard has placed reliance on the decision of Chandigarh Bench of Tribunal in Munish Kumar Goyal (supra) and pointed out that where the assessee had furnished income in the course of search and filed the return of income and taxes were paid, there was sufficient compliance of provisions of section 271AAA(2) of the Act and it was held that the impugned penalty order deserves to be set aside. Reference is made to para 10 of the said order, wherein questions asked to the assessee during the course of search proceedings have been extracted. The question which was put to the assessee was do you want to say anything more. He replied that he voluntarily surrenders sum of Rs. 4 crores for assessment year 2010-11 to cover all the discrepancies in the seized papers. The Tribunal thus, in view thereof, observed that where the Revenue has not asked the assessee to disclose the manner in which said income was earned, then during search, the assessee must have disclosed the manner. However, in the facts of present case, there is variance that vide question No. 25, the assessee was specifically asked to explain the investments in land and plots, movable and immovable assets and non filing of return of income. In reply, he did not give an explanation as to manner in which the income was earned and he only surrendered additional income in his hands for the year under consideration. The year before us is the year of search and in view of declaration made by the assessee on account of undisclosed income, then in view of sub-section (1) to section 271AAA of the Act, the assessee is to pay penalty in addition to taxes, if any, payable by him on such undisclosed income. Accordingly, we hold so.

19. Now, coming to the last clause of immunity under sub-section (2) of said section, wherein it is provided that the assessee is to pay taxes together with interest, if any, in respect of undisclosed income immediately preceding the assessment year relating to previous year in which search is conducted or any requisition is made. In the facts of present case, search action under section 132 of the Act on 10-2-2011 i.e. in the financial year under consideration. The assessee furnished the return of income on 5-3-2012 disclosing total income of Rs. 1.01 crores. Subsequently, he filed the revised return on 14-3-2013 declaring income of Rs. 1.25 crores. The assessment in the case was completed on 28-3-2013 and the order levying penalty under section 271AAA of the Act was passed on 20-9-2013. The assessee till the date of passing of penalty order under section 271AAA of the Act had not deposited the taxes due on the return of income. Even in the written submissions filed before the assessing officer in penalty proceedings under section 271AAA of the Act, the assessee has pointed out that he had only made part payment of taxes due. The assessee having defaulted to make the payment of taxes which were due, cannot be said to have fulfilled the conditions laid down in clause (iii) of sub-section (2) of section 271AAA of the Act. The learned Authorized Representative for the assessee had placed reliance on the ratio laid down by the Hon’ble Supreme Court in Gebilal Kanhaialal HUF (supra), wherein it has been held that while levying penalty under section 271(1)(c) of the Act, Explanation 5 is attracted in cases of search proceedings. The Hon’ble Supreme Court held that to grant immunity from payment of penalty, no time limit for payment of taxes is prescribed under clause (ii) of Explanation 5 to section 271(1)(c) of the Act. In the facts of said case, the apex court noted that the assessee had paid taxes with interest up to the date of payment and hence, three conditions stood fulfilled. The issue before the Hon’ble Supreme Court was with regard to return filed in response to notice under section 158BC of the Act, which was in addition to the regular returns of income for respective years of search period. On the other hand, penalty under section 271AAA of the Act is leviable in respect of regular return of income of search year. In the facts of present case before us, the assessee has not paid the taxes due on returned income (not additional income under section 158BC of the Act) till the date of passing the assessment order and even till date of passing the order levying penalty. The assessee claims to have paid the taxes thereafter, but such payment of taxes which does not accompany the return of income, cannot be held to be compliance to the conditions laid down in sub-section (2) to section 271AAA of the Act. It may be pointed out that major portion of taxes have been paid after September, 2013 and consequently, we find no merit in the plea of assessee in this regard and the same is rejected. Accordingly, we reverse the findings of Commissioner (Appeals) and uphold the levy of penalty under section 271AAA of the Act. The application moved under rule 27 of the Rules is thus, dismissed and the grounds of appeal raised by the Revenue are allowed.

20. In the result, appeal of Revenue is allowed.