Penalty u/s. 271AAB cannot be levied based on disclosure of other person

ACIT Vs Arjun Lal Agarwal (ITAT Kolkata)

ITAT Kolkata held that penalty u/s 271AAB of the Income Tax Act cannot be levied on the assessee based on the disclosure made by other person during the course of search proceedings.

Facts-

Present appeal is preferred by the revenue against order of ld. Commissioner of Income Tax (Appeals) wherein the penalty imposed upon the respondent-assessee under section 271AAB of the Income Tax Act was deleted.

Conclusion-

If any disclosure was made, then it will not bind the assessee but it is just corroborative information against the assessee. The ld. CIT(D.R.) failed to appreciate the provision of section 132(4). Similarly he submitted that if penalty is not leviable under such circumstances under section 271AAB, then whole purpose of legislating provision of section 271AAB would be defeated because in such situation, no one is getting penalized for accumulating undisclosed income.

Held that it is totally a fallacious approach at the end of the ld. CIT(D.R.) and a fatuous attempt is being made to visit the assessee with penalty. It is pertinent to observe that 271AAB penalty is imposable on the person upon whom search was made. We have discussed it in the finding extracted supra. The other persons upon whom 153C assessment has been made would be covered by Explanation 5A of Section 271(1)(c). They could be visited with penalty for concealment but with the help of other provisions. It is not the case that on account of accumulation of undisclosed income, the other persons would be absolved for visiting any type of penalty. There are provisions under section 271(1)(c) read with Explanation 5 and 5A for taking care of such situation. But in the present situation, no penalty is imposable under section 271AAB upon the assessee. The ld. CIT(Appeals) has rightly deleted the penalty. We do not find any error in the order of ld. CIT(Appeals). Hence both the appeals are dismissed.

FULL TEXT OF THE ORDER OF ITAT KOLKATA 

Present two appeals are directed against the common order of ld. Commissioner of Income Tax (Appeals)-21, Kolkata dated 08.08.2019 passed for the assessment year 2015-16.

2. The ld. 1st Appellate Authority has decided the appeals of four assessees, namely Kalawati Devi Agarwal, Clean Coal Enterprises Pvt. Limited, Arjun Lal Agarwal and Savitri Devi Agarwal by way of the present common order. The ld. CIT(Appeals) has deleted the penalties imposed upon the respondent-assessees under section 271AAB of the Income Tax Act.

3. Appeal in the case of Clean Coal Enterprises Pvt. Limited was listed before the Tribunal on 03.08.2022 and it was decided on 04.08.2022 (ITA No. 2335/KOL/2019). At that point of time, it was not brought to our notice by the Revenue or by the assessee that appeals in other cases are pending before the Tribunal.

4. The ld. Counsel for the assessees, at the very outset, submitted that the issue in dispute is squarely covered by the decision of the Tribunal in the case of Clean Coal Enterprises Pvt. Limited. On the other hand, ld. CIT(D.R.) contended that the ld. CIT(Appeals) failed to construe the provision in right perspective and the Tribunal has erred in concurring with the ld. CIT(Appeals). The hearing was concluded with a liberty that Revenue would file a written submission on this aspect. The ld. CIT(D.R.) has submitted a written submission, which reads as under:-

“BEFORE THE HON’BLE ‘C’ BENCH. ITAT. KOKATA’

Re: Written submission in the case of Smt.Kalawati Devi Agarwal A.Y.2015-J6 1TA NO. 2333/Kol/2019 which was fixed before the Hon’ble’C’ Bench of ITAT Kolkata on 18.08.2022 .

In course of hearing of the aforesaid appeal on 18.08.2022, the Hon’ble Bench was pleased to allow me an opportunity to file a written submission , which is furnished as under:

The only issue involved in this appeal is – whether penalty u/s 271AAB can be levied only on an assessee when the Search & Seizure u/s 132(1) was conducted in the premises of the said assessee and assessments were framed u/s 153A of the Act or it can also be levied on an assessee where assessment was framed u/s 153C ?

3. Department filed appeal before the Hon’ble ITAT against the order of Ld. CIT(A), who deleted the penalty of Rs. 5,59,59,900/- u/s 271AAB imposed by the AO in the instant case, where the assessment was completed u/s 153C of the Act.

4. The relevant provisions of the Act are reproduced below for ready reference : 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’ am. playable by 0him,—

(a) a sum computed at the rate of ten 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. admits the undisclosed income and specifies the manner in which such income has been derived;

(ii) substantiates the manner in which the undisclosed income was derived; and (Hi) on or before the specified date—

(A) pays the tax, together with interest, if any, in respect of the undisclosed income; and

(B) furnishes the return of income for (he specified previous year declaring such undisclosed 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, docs 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……………………………….

3…………………………………

[ Emphasis provided]

5. The Ld.CIT(A) observed that the assessment order and the penalty order undisputedly points out that no search had taken place in the case of the assessee as per section 132(1) of the Act and assessment was completed u/s 153C. Section 271AAB leaves no doubt that provisions of the said section are applicable only to those cases where search u/s 132 was initiated and consequently only to those assessments which are completed either u/s 153A r.w.s. 143(3) or are regular assessments u/s 143(3) in such cases.

6. Extracts from the Explanatory Memo to Finance Bill,2012: Penalty on undisclosed income found during the course of search –

271 AAB Introduced : Under the existing provisions of section 271 AAA of the Income-tax Act, no penalty is levied if the assessee admits the undisclosed income in a statement under sub-section (4) of section 132 recorded in the course of search and specifies the manner in which such income has been derived and pays the tax together with interest, if any, in respect of such income. As a result, undisclosed income (for the current year in which search takes place or the previous year which has ended before the search and for which return is not yet due) found during the course of search attracts a tax at the rate of 30% and no penalty is leviable.

In order to strengthen the penal provisions, it is proposed to provide that the provisions of section 271AAA will not be applicable for searches conducted on or after 1st July, 2012. It is also proposed to insert a new provision in the Act (section 271 AAB) for levy of penalty in a case where search has been initiated on or after 1st July, 2012. The new section provides that,- (i) If undisclosed income is admitted during the course of search, the taxpayer will be liable tor penalty at the rate of 10% of undisclosed income subject to the fulfillment of certain conditions.

If undisclosed income is not admitted during the course of search but disclosed in the return of income filed after the search, the taxpayer will be liable for penalty at the rate of 20% of undisclosed income subject to the fulfillment of certain conditions, (iii) In a case not covered under (i) and (ii) above, the taxpayer will be liable for penalty at the rate ranging from 30% to 90% of undisclosed income. These amendments will take effect from the 1st day of July, 2012 and will, accordingly, apply to any search and seizure action taken after this date. [Clauses 89, 95, 96]

[ Emphasis provided]

6.1. Since section 271AAB was introduced in place of 271AAA for searches conducted after 01.07.2012, relevant extracts from from Explanatory Memo to Finance Bill, 2007 vide which section 271 AAA was introduced, are reproduced as under :

“It is also proposed to insert a new section 271 AAA so as to provide that, in a case where search has been initiated under section 132 on or after 1st June, 2007, the assessee shall be liable to pay by way of penalty, in addition to tax, if any, payable by him, a sum computed at the rate of ten per cent of the undisclosed income of the specified previous year. However, provisions of this section shall not be applicable if the assessee- (i) in a statement under sub­section (4) of section! 32 in the course of the search, admits the undisclosed income and specifies the manner in which such income has been derived; (ii) substantiates the manner in which the undisclosed income was derived; and pays the tax, together with interest, if any, in respect of the undisclosed income. It is further proposed to provide that no penalty under the provisions of clause (c) of sub-section (1) of section 271 shall be levied or imposed upon the assessee in respect of the undisclosed income referred to in proposed new section. It is also proposed to provide that the provisions of section 274 and section 275 shall, so far as may be, apply in relation to the penalty leviable under the proposed new section. For the purposes of this section it has been proposed to define undisclosed income so as to mean- (i) any income of the specified previous years 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 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 which has otherwise not been disclosed to the Chief Commissioner or Commissioner before the date of the 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. For the purposes of this section, it has also been proposed to define specified previous year so as to mean the previous year— (i) which has ended before the date of search, but the date of filing the return of income under sub-section (1) of section 139 for such year has not expired before the date of search and the asscssec has not furnished the return of income for the previous year before the said date; or (ii) in which search was conducted. It is also proposed to provide an appeal to the Commissioner against levy of penalty under the proposed new section 271 AAA. This amendment will take effect from 1st April, 2007 and will accordingly apply in relation to assessment year 2007- 2008 and subsequent years in cases where search under section 132 is initiated on or after 1st June. 2007. [Clauses 62, 67 and 68]

NOTE-1: UNDER SECTION 271AAA NO PENALTY WAS TO BE IMPOSED ON INCOME ADMITTED U/S 132(4). HOWEVER, PENALTY U/S 271 AAB IS LEVIABLE EVEN IF INCOME IS ADMITTED U/S 132(4) AND SUCH PENALTY IS TO BE LEVIED ON THE AMOUNT OF UNDISCLOSED INCOME ADMITTED U/S 132(4).THEREFORE, PENALTY UNDER NEWLY SUBSTITUTED SECTION 271AAB SHOULD BE QUA ADMISSION OF INCOME U/S 132(4) AND NOT QUA THE ASSESSEE WHOSE PREMISES WAS SEARCHED U/S 132(1).

7. Relevant extracts from section 153C :

Assessment of income of any other person. 153C.

153C. (1)] [Notwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153, where the Assessing Officer is satisfied that,—

a person other than the person referred to in section 153 A, then, the books of account or documents or assets, seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other person] ⁷⁵[and that Assessing Officer shall proceed against each such other person and issue notice and assess or reassess the income of the other person in accordance with the provisions of section 153A, if, that Assessing Officer is satisfied that the books of account or documents or assets seized or requisitioned have a bearing on the determination of the total income of such other person ⁷⁶[for six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted or requisition is made and] for the relevant assessment year or years referred to in sub-section (1) of section 153 A]:]

[ Emphasis provided]

The above provisions clearly indicate that apart from identification of the ‘ other person’ section 153C makes no distinction with section 153A so far as the manner of completion of assessment or reassessment is concerned. This view is also reinforced by the fact that in the list of appelable orders u/s 246A(1), assessment orders u/s 153A appears in Clause (ba) , but assessment orders u/s 153C does not find any separate mention. This would not have been the case ,had the intention of the legislature been to strictly distinguish between the two categories of assessments. However, it does not mean that the assessees in whose case assessments are completed u/s 143(3) r.w.s. 153C are debarred from filing any appeal. What it probably indicates is that the line of distinction between assessments completed u/s u/s 143(3) r.w.s. 153A and assessments completed u/s 143(3) r.w.s. 153C is not so perceptible that it would prevent the AO from initiating and imposing penalty u/s 271AAB in the latter category of assessments, as sought to be established by the Ld.CIT(A).

NOTE-2 : LEVY OF PENALTY U/S 271AAB SHOULD NOT DEPEND ON THE SECTION UNDER WHICH THE ASSESSMENT WAS COMPLETED VIZ: 153A OR 153C OR AS A REGULAR ASSESSMENT BUT ON THE ADMISSION OF INCOME U/S 132(4) IN THE HANDS OF THE ‘ OTHER PERSON’. THE PENALTY IS TO BE LEVIED ON THE AMOUNT OF UNDISCLOSED INCOME ADMITTED U/S 132(4).

7. Section 132(4): The authorised officer may, during the course of the search or seizure, examine on oath any person who is found to be in possession or control of any books of account, documents, money, bullion, jewellery or other valuable article or thing and any statement made by such person during such examination may thereafter be used in evidence in any proceeding under the Indian Income-tax Act, 1922 (11 of 1922), or under this Act.

Explanation.—For the removal of doubts, it is hereby declared that the examination of any person under this sub-section may be not merely in respect of any books of account, other documents or assets found as a result of the search, but also in respect of all matters relevant for the purposes of any investigation connected with any proceeding under the Indian Income-tax Act, 1922 (11 of 1922), or under this Act.

[ Emphasis provided]

NOTE-3:  THE PERSON WHO IS DEPOSING U/S 132(4) IS RESPONSIBLE FOR DISCLOSURE OF ADDITIONAL INCOME IN RESPECT OF ASSESSEES COVERED U/S 153C.

9. According to the information contained in the assessment order, in the present case a disclosure of Rs. 18,65.69,001/- was made in the hands of the assessee Smt. Kalavati Devi Agarwal in the statement recorded u/s 132(4). This disclosure must have been a part of the total amount disclosed on behalf of the concerned Group namely, the Hind Energy Group. In this case,the search had taken place before the end of the relevant previous year 2014-15. The assessee has declared such undisclosed income admitted u/s 132(4) in the return filed for A.Y.2015-16. However, assuming but not admitting that since in this case no search action u/s 132 was initiated, penalty cannot be levied u/s 271AAB, then can penalty be levied in the hands of the person who was searched u/s 132(1), deposed u/s 132(4) and responsible for admission of the income in the hands of the assessee ? If not, then the whole purpose of legislating the provisions of 271 AAB is defeated because in such a situation no one is getting penalised for accumulating undisclosed income, its detection and admission and there will be revenue loss. Therefore, when the provisions were introduced specifically “ In order to strengthen the penal provisions”….the case of any person in respect of whom income has been disclosed u/s 132(4) should clearly fall under the ambit of section 271 AAB irrespective of the fact whether search action was conducted u/s 132 in the particular assessee’s premise or not or whether assessment was completed u/s 153A or 153C or as a regular assessment. It is respectfully submitted that the expression – “in a case where search has been initiated under section 132 on or after the 1st day of July, 2012”- in the provisions of section 271 AAB perhaps qualifies the date of search only to make sure that provisions of the particular section shall apply in respect of searches conducted on or after the said cut off date. It may not have any other significance. It may be mentioned in this context that a similar expression – “in a case where search has been initiated under section 132 on or after 1st June. 2007, the assessee shall be liable to pay ” appears in section 271 AAA, where however no penalty was to be levied when undisclosed income was admitted u/s 132(4), subject to fulfillment of certain specified conditions.

10. The expression ‘in a case where search has been initiated¹ is distinctly different from the expression * if any person Jails’ or * where any person fails’ used in other penal provisions under Chapter XXI of the Income-tax Act. Even in the provisions of section 271 and more specifically in section 271(1)( c) itself, different expressions are used in the Explanations to distinguish between concealment of income in a non-search case and in a search case. For example, Explanation-3 starts with the expression ¹ where any person fails ‘ whereas Explanation-4 starts with ‘ in a case where search has been initiated. The intent of legislature to use different expressions for search cases and non-search cases could be to distinguish between a ‘ person’ and a ‘case’ and to give the latter a much wider import, because search & seizure actions are usually not confined to a single person but carried out on a group of persons and a ‘Search Case’ refers to a Group of assessees rather than one particular assessee. A statement recorded u/s 132(4) most often contains declaration of undisclosed income not only in the hands of the person whose premises are searched but also in the hands of other persons belonging to the group including those in respect of whom any money, bullion, jewellery or other valuable article or thing, seized or requisitioned,belongs to; or any books of account or documents, seized or requisitioned, pertains or pertain to, or any information contained therein relates to, and in whose case assessment is going to be completed u/s 153C.

11. In view of the above, the conclusions of the Ld.CIT(A) that 271AAB penalty is attracted only in respect of an assessee-

(A) Who has been searched u/s 132(1)

(B) Who has made a disclosure u/s 132(4) and

(C I n whose case assessment was completed u/s 143(3) r.w.s. 153A do not appear to be logical.

11.1. There can be many instances where the person who was searched and who also had given a statement u/s 132(4) has made a disclosure in such statement of an amount ( say Rs.5 cr.)in the hands of another person, whose books of account or documents or assets etc.were found and seized from the former, and such amount is much higher than the amount declared in his own hands in the same statement ( say Rs.1 Cr.). In other words, the disclosure in the case of 153C person is higher than the 153A person. If the decision of Ld.CIT(A) is to be accepted, then the former having declared undisclosed income of 1 Cr: will be liable to penalty, but the latter in whose hands Rs.5 Cr. was declared will escape the mischief of section 271BBA and revenue will lose out substantially. This could not have been the legislative intent behind enacting the provisions of this section, especially with a view to ‘strengthen the penal provisions’ in search & seizure assessments . It is also pertinent to note that in the hands of the 153A person the department would initiate penalty proceedings on 1 Cr. and not the aggregate amount of disclosure Le. 5 cr. declared by him in the statement u/s 132(4).

Therefore, the order of the Ld.CIT(A) deserves he annulled so far as the applicability of the provisions of section 271BBA in 153C assessment is concerned.

12. As regards which Clause (a), (b) or ( c) of section 271 AAB will apply and the percentage of penalty, these arc facts borne out by the records and 1 rely on the order of the AO who had imposed 30% penalty on the undisclosed income after considering the facts and circumstances of the case.

Submitted for kind consideration of Hon’ble ‘C’ Bench of ITAT, Kolkata before finalizing the order in the instant appeal.

Sd/-
(Abhijit Kundu)
C1T(DR)”

5. Our finding in the case of Clean Coal Enterprises Pvt. Limited read as under:-

“The Revenue is in appeal before the Tribunal against the order of ld. Commissioner of Income Tax (Appeals)-21, Kolkata dated 08.08.2019 passed for the assessment year 2015-16.

2. The solitary grievance of the Revenue is that the ld. CIT(Appeals) has erred in deleting the penalty levied under section 271AAB of the Income Tax Act, 1961.

3. Brief facts of the case as emerging out from the assessment order are that the assessee belongs to “THE HIND ENERGY GROUP OF COMPANIES”, where a search was conducted under section 132(1) of the Income Tax Act on 27.03.2015. Incriminating material belonging to the assessee was found and, therefore, notice under section 153C of the Income Tax Act was issued and served upon the assessee. In response to the notice, the assessee has filed its return of income under section 153C on 26.12.2016 declaring total income at Rs.1,25,82,290/-. An assessment order was passed on 31.12.2016 accepting the returned income declared by the assessee.

4. The ld. Assessing Officer has initiated the penalty proceedings under section 271AAB of the Income Tax Act, 1961. The assessee pleaded that Section 271AAB is not applicable as no search was initiated in its case, but the ld. Assessing Officer rejected the contention of the assessee and imposed a penalty of Rs.1,98,31,170/-. The ld. Assessing Officer was of the view that in the Group Company, a disclosure under section 132(4) amounting to Rs.6,61,03,900/- was made and, therefore, penalty is to be imposed on such disclosure.

5. Dissatisfied with the penalty order, the assessee carried the matter in appeal. The ld. CIT(Appeals) has decided appeals of four assessees, namely Kalawati Devi Agarwal, Arjun Lal Agarwal, Savitri Devi Agarwal and that of assessee. The ld. 1st Appellate Authority has deleted the penalty by holding that penalty under section 271AAB can only be imposed if search has been conducted on the premises of the assessee. The assessments were not framed under section 153A, rather these were framed under section 153C of the Income Tax Act.

6. Before us, in response to the notice of hearing, an adjournment application has been filed by Sanjay Modi & Company under the signature of Shri Amit Agarwal, CA, appeared before us and sought an adjournment. We have perused the record. We find that the assessee has been taking adjournment time and again without any reason. Therefore, we refuse the adjournment and heard the appeal with the assistance of ld. D.R.

7. On due consideration of the facts and circumstances, we do not find any merit in this appeal because the opening line of section 271AAB contemplates that there should be a search for invoking this provision. For the facility of reference, we take note the relevant provision, which reads as under:-

“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 percent of the undisclosed income of the specified previous year, if such assessee-

(i) in the course of the search, in a statement under sub­section (4) of section 132, admits the undisclosed income and specifies the manner in which such income has been derived;

(ii) substantiates the manner in which the undisclosed income was derived; and

(iii) on or before the specified date-

(A)pays the tax, together with interest, if any, in respect of the undisclosed income; and

(B) furnishes the return of income for the specified previous year declaring such undisclosed income therein.

8. A perusal of the above clause would reveal that it is applicable where search has been initiated under section 132 of the Income Tax Act. It is pertinent to observe that in the Scheme of Income Tax Act, if a search is being conducted upon the assessee and incriminating material was found, then notice under section 153A of the Income tax Act would be served inviting the assessee to file return of his income. However, during the course of search, if any incriminating material belonging to some other person than the searched person was found, then ld. Assessing Officer of the searched person would record his satisfaction demonstrating the fact that material belonging to other person was found and it exhibits the escapement of some income from taxation. This satisfaction note is to be transmitted to the ld. Assessing Officer, who is having jurisdiction on such other person and the ld. Assessing Officer of other person would issue notice under section 153C. Therefore, sections 153A and 153C deal with two different categories of assessees. The penalty leviable under section 271AAB is with respect to those assessees where search has been conducted. The case of the present assessee falls under second category. The assessment was made under section 153C of the Income Tax Act. We fail to understand from where the ld. Assessing Officer has brought this statement of disclosure. Statement under section 132(4) is to be recorded during the course of search to find out, whether any declaration is to be made by an assessee or not. The next fatuous attempt at the end of ld. Assessing Officer is that taxable income determined by him in the assessment order is of Rs.1,25,82,290/-, which is almost equivalent to the returned income disclosed by the assessee. The penalty is to be computed by taking cognizance of the assessed income. Here the ld. Assessing Officer has imposed a penalty of Rs.1.98 crores without making any reference to the income determined in the hands of assessee, rather taking cognizance of the statement of searched person, who might have disclosed Rs.6.6 crores. It is totally against the law and the ld. 1^st Appellate Authority has rightly appreciated the facts and circumstances by deleting the penalty. We do not find any merit in the appeal. Hence it is dismissed.

9. In the result, the appeal of the Revenue is dismissed.

Order pronounced in the open Court on August 4^th, 2022.