Section 271AAB Penalty Deleted on Search Disclosure Additions: ITAT Visakhapatnam

ACIT Vs Mothukuri Somabrahmam (ITAT Visakhapatnam)

Material Facts: The Revenue and the assessee filed cross appeals against the order of the Commissioner of Income Tax (Appeals)-3, Visakhapatnam dated 14.12.2016 for Assessment Year 2013-14.

A search under Section 132 of the Income-tax Act, 1961 was conducted on 20.12.2012 in the Gayatri Group. The assessee was a partner in construction firms. During the search, incriminating material, bank passbooks relating to the assessee’s wife and certain employees, and gold, jewellery, diamonds and silver articles were found. Verification of employees’ bank accounts revealed cash deposits. The assessee admitted additional income of ₹1,63,73,191 for Assessment Year 2013-14 comprising:

• Cheques deposited in employees’ and ex-employees’ bank accounts – ₹56,74,868
• Gold jewellery – ₹55,94,482
• Diamonds – ₹11,79,350
• Silver articles – ₹7,43,568
• Income from construction business (Sanjeevini Mansion) – ₹30,01,421
• Income admitted towards other discrepancies – ₹1,79,502

The Assessing Officer levied penalty of ₹49,11,957 at 30% under Section 271AAB.

Procedural History

The Commissioner (Appeals):

• deleted penalty relating to construction business income of ₹30,01,421 and other discrepancies of ₹1,79,502, observing that the financial year had not ended and the Assessing Officer had not established that the income would not have been disclosed. The Revenue did not appeal against this relief.
• deleted penalty relating to deposits in employees’ bank accounts.
• granted partial relief regarding jewellery, diamonds and silver by deleting penalty relating to part of the jewellery and sustaining penalty on the balance.

The Revenue appealed against deletion of penalty relating to employees’ bank accounts, while the assessee challenged the sustained penalty relating to jewellery, diamonds and silver.

Legal Issues

The Tribunal considered:

• Whether penalty under Section 271AAB is mandatory.
• Whether the admitted income constituted “undisclosed income” within the meaning of Section 271AAB.
• Whether penalty was leviable on deposits in employees’ bank accounts.
• Whether penalty was leviable on gold jewellery, diamonds and silver articles admitted during the search.

Relevant Statutory Provisions

The Tribunal considered:

• Sections 132, 132(4), 143(3), 271AAB, 271(1)(c), 274 and 158BFA(2) of the Income-tax Act, 1961.

Revenue’s Submissions

The Assessing Officer held that once a search under Section 132 had been conducted, levy of penalty under Section 271AAB was mandatory. The Revenue challenged the Commissioner (Appeals)’s deletion of penalty relating to deposits in employees’ bank accounts.

Assessee’s Submissions

The assessee contended that:

• penalty under Section 271AAB is discretionary and not mandatory.
• disclosure was made only to buy peace and avoid prolonged litigation.
• employees themselves owned the bank accounts and operated them.
• the jewellery and diamonds belonged to family members including his wife, brother’s wife and brother’s daughter.
• the Assessing Officer had not established that the admitted amounts represented undisclosed income within the meaning of Section 271AAB.

Tribunal’s Findings and Reasoning

The Tribunal held that the language of Section 271AAB, particularly the words “may direct”, read with Section 274, indicates that levy of penalty is discretionary and not mandatory. It observed that reasonable opportunity of hearing under Section 274 requires the Assessing Officer to exercise discretion based on the facts of each case.

Deposits in Employees’ Bank Accounts

The Tribunal noted that:

• the employees owned the bank accounts and filed affidavits regarding them.
• the Assessing Officer conducted no further enquiry to establish that the accounts actually belonged to the assessee.
• although the assessee admitted the peak deposits during search, the Revenue failed to establish that they represented the assessee’s undisclosed income.

Accordingly, it upheld the Commissioner (Appeals)’s order deleting the penalty on ₹56,74,868.

Gold Jewellery, Diamonds and Silver

The Tribunal observed that the assessee consistently explained that substantial quantities of jewellery belonged to his wife, brother’s wife and brother’s daughter. After the disclosure was made, the Assessing Officer did not investigate these explanations or establish that the jewellery had been acquired from undisclosed income.

The Tribunal held that Section 271AAB authorises penalty only on undisclosed income. Since the Assessing Officer failed to establish that the jewellery, diamonds and silver represented undisclosed income, there was no justification for imposing penalty.

The Tribunal therefore cancelled the remaining penalty sustained by the Commissioner (Appeals).

Final Ruling

The Tribunal held that penalty under Section 271AAB is discretionary and not automatic.

It upheld the deletion of penalty relating to deposits in employees’ bank accounts, cancelled the remaining penalty relating to jewellery, diamonds and silver articles, dismissed the Revenue’s appeal and allowed the assessee’s appeal. The order was pronounced on 16.03.2018.

Cases Discussed

• Radhakrishna Vihar (A.P. High Court), ITTA No.740/2011
• SSP Steel and Power Limited Vs. CCIT (ITAT Kolkata), 171 TTJ 749 (2015)
• Sadhu Ram Goyal Vs. DCIT, 128 ITD 436 (2011)
• Commissioner of Income-tax Vs. Rajiv Garg (Punjab & Haryana High Court), 313 ITR 256 (P&H)
• CIT vs. M. Pachamuthu (Madras High Court), 295 ITR 502 (Mad)
• CIT Vs. Haji Gaffar Haji Dada Chini (Bombay High Court), 169 ITR 033 (Bom)
• CIT vs. M. George & Brothers (Kerala High Court), 59 CTR 298 (Ker)
• CIT v. Sarda Rice and Oil Mills (Calcutta High Court), 117 ITR 917 (Cal)

FULL TEXT OF THE ORDER OF ITAT VISAKHAPATNAM

These cross appeal filed by the assessee and the revenue are directed against order of the Commissioner of Income Tax (Appeals)-3 {CIT(A)}, Visakhapatnam vide ITA No.66/2015-16/CIT(A)-3/VSP/2016-17 dated 14.12.2016 for the assessment year 2013-14.

2. A search u/s 132 of the Income Tax Act, 1961 (hereinafter called as ‘the Act’) was carried out in the group cases of ‘Gayatri’ on 20.12.2012. The assessee is partner in M/s. Creative Engineering Constructions and Global Constructions, which are engaged in the business of constructions of apartment buildings. During the search u/s 132 of the Act in the residential premises of the assessee, certain incriminating material, bank pass books related to his wife Smt. Lakshmi Prabha and some of his ex-employees were found. Verification of bank account statements of his employees revealed that there were several cash deposits in these accounts. Similarly, gold, jewellery and diamonds were found to the extent of `75.16 lacs. Consequent to the search operations, the assessee had admitted the additional income of ` 2.5 crores for the assessment year 2009-10 to 2012-13 and accordingly filed the return of income. The assessment was completed u/s 143(3) of the Act on total income of ` 1,67,59,177/- for the year under consideration. The A.O. initiated penalty u/s 271(1)(c)/271AAB of the Act. The assessee admitted additional income for the assessment year 2013-14 with the following breakup:

The AO has imposed the penalty of Rs.49,11,957/-@ 30% on the above income under section 271AAB of IT act.

3.(i) With regard to item No.5 and 6 i.e. income from business of construction of apartment complex in the name of Sanjeevini Mansion and the income admitted by the assessee towards discrepancies amounting to ` 30,01,421/- and ` 1,79,502/-, the Ld. CIT(A) deleted the penalty imposed by the A.O., holding that the financial year was not yet complete and the A.O. has not made out a case that the assessee would not have disclosed the profit from sale of apartments and the revenue has not preferred any appeal.

3 (ii) With regard to the gold jewellery weighing around 1530.40 gms. of the value of ` 55,94,482/-, diamonds of ` 11,79,350/- and silver articles 13.28 kgs. Valued at ` 7,43,568/-, the A.O. levied penalty @ 30% and the CIT(A) allowed partial relief and the assessee is in appeal.

3.(iii).  The addition made with regard to the cheques deposited into the bank account of employees, the Ld.CIT(A) has deleted the penalty and department is in appeal.

4. During the course of assessment proceedings, the A.O. found that bank pass books and cheque books of its employees were found in the residential premises of the assessee indicating several cash deposits in the accounts. The assessee was asked to explain the transactions and the assessee denied the transactions as belonged to him. He explained that the bank pass books and cheque books are relating to the employees concerned and they are being operated by them. During the assessment proceedings, the employees of the assessee have filed affidavits owning the bank accounts but initially stated that the transactions were belonging to the assessee. However, the assessee had admitted the peak cash deposits of the employees as his undisclosed income and filed the return of income. With respect of gold and jewellery, of 1530.400 gms found during the search the assessee explained that 770 gms. stated to be belonged to his brother’s daughter Miss Sarat Chandrika, 500 gms. belonged to his brother’s wife, 250 gms belonged to the assessee’s wife and balance 10.400 gms. belonged to the assessee. The diamonds of value of ` 12,60,650/- said to be belonged to the assessee’s wife. The assessee also explained that marriage of Miss Sarat Chandrika was scheduled on 11.5.2013 and she stays in their house as she was brought up by him and his wife right from her childhood. However, the assessee hadadmitted the   of gold jewellery in his hands and filed the return of income. The A.O. issued a show cause notice u/s 271AAB and in response to the show cause notice, the assessee submitted that the gold and jewellery was not belonging to him. Only to purchase peace with the department and to avoid unnecessary litigation, pending the marriage of his brother’s daughter, he had admitted the gold jewellery as his additional income. But the assessee stated that it was neither his income nor he has owned up the gold jwellery as acquired out of undisclosed income. Similarly, with regard to the cash deposits, the assessee argued before the assessing officer that he has no connection with the bank accounts and they are opened and operated by the employees themselves. He came forward and admitted the peak deposits as his income only to buy peace and save himself from protracted litigation. Therefore, requested to drop penalty proceedings. The A.O. not being convinced with the explanation of the assessee imposed the penalty @ 30% of the undisclosed income. The A.O. was of the view that once the search is conducted u/s 132 of the Act, as per the provisions of section 271AAB of the Act, levy of penalty is mandatory.

5. Aggrieved by the order of the A.O., the assessee went on appeal before CIT(A) and the Ld. CIT(A) held that the imposition of penalty is not mandatory. Mere admission of income u/s 132(4) of the Act cannot automatically lead to penalty u/s 271AAB of the Act. The Ld. CIT(A) relied on the decision of ITAT Kolkata Bench in the case of SSP Steel and Power Limited Vs. CCIT 171 TTJ 749 (2015), which reads as under:

“13. In view of the above facts and circumstances, and legal position discussed above, the penalty to be levied for undisclosed income as per the provision of Sec. 271AAA of the Act, we have to understand the meaning of undisclosed income and the relevant provision define undisclosed income as under:-

(a) “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 accounts or other documents or transactions found in the course of a search under section 132 which has-

A. Not been recorded on or before the date of search in the books of accounts or other documents maintained in the normal course relating to such previous year; or

B. Otherwise not been disclosed to the Chief Commissioner or Commissioner before the date of the search ; or”

From the above, it is clear that undisclosed income means ‘any income represented by any documents” found during the course of search, which are not recorded in the books of accounts of the assessee. In the instant case, the additions of cash expenses and payments of Rs. 71,90,623/- is the result of cash available out of the disclosed cash of Rs. 6.84 crores which was included in the disclosure petition. Further, addition of Rs. 15 lakh on account of alleged cash receipts from Sampoorna Logistics, which was alleged to be reimbursement, it is clear that expenditure recorded in the books of accounts can be held to be undisclosed income of the assessee if the said expenditure is found to be false. It is the Department on whom, onus of proving that expenditure recorded in the books is bogus or false based on documentary evidences found in the course of search. Here in the present case, no documentary evidences establishing the falsity of claim of transportation charges paid to Sampoorna Logistics was found in the course of search. According to us the said expenditure cannot be held to be undisclosed income of the assessee for the purpose of levying penalty u/s. 271AAA of the Act.

14. Hon’ble Calcutta High Court in the case of CIT v. Sot^– do Rice and Oil Mills 117 /TR 917 (Cat) held:^–

“the ITO and the IAC had proceed entirely on the basis of the disclosure made by the assessee. The Tribunal had found as a fact that the disclosure had no evidentiary value and was nothing but a scrap of paper and the finding had not been challenged by the revenue as perverse or based on irrelevant evidence or no evidence at all. Therefore, the finding of the Tribunal that the provisions of s. 271(1) were not attracted was not erroneous.”

Similarly, the Hon’ble Madras High Court in case of CIT vs. M. Pachamuthu 295 ITR 502 (Mad) held:-

“Mere addition agreed to by the assessee during the course of survey would not empower the Assessing Officer to levy the penalty under section 271(1)(c) of the Income-tax Act, 1961 -.. The fact that the assessee had agreed to additions to income was not proof of concealment.”

Even Hon ’ble Kerala High Court in the case of CIT vs. M. George & Brothers 59 CTP. 298 (Kel) held that:

where the assessee for one reason or the other agrees or surrenders certain amounts for assessment, the imposition of penalty solely on the basis of the assessees surrender will not be well-founded. Depending upon the facts and circumstances of each case the Court has to decide whether penalty is justified. It is always for the Revenue to bring the case under the ambit of Sec. 271(1)(c) by establishing there is concealment on the part of the assessee. The Explanation to sec. 271(1)(c) inserted w.e.f. 1st day of April, 1964 merely raises a rebuttable presumption but the basic principle that there should be have been concealment still remains.

Further Honble Punjab & Haryana High Court in case of Commissioner of Income-tax Vs. Rajiv Garg 313 ITR 256 (P&H) upheld the order of the Tribunal where it was observed that –

Merely because an income has been offered by the assessee in response to the notice under section 148, it cannot be ipso facto inferred that the penal provisions of section 271(1)(c) are attracted. In order to apply the penal provisions of section 271(1)(c) it is to be necessarily inferred that there is positive act of concealment of income or furnishing of inaccurate particulars of such income by the assessee.

It is further held that The Department had simply rested its conclusion on the act of the assessee of having offered additional income in the return filed in response to notice under section 148 of the Act. As noted earlier, the additional income so offered by the assessee was done in good faith and, therefore, in our view, penalty under section 271(1)(c) of the Act could not be levied.

Further Honble Bombay High Court in case of CIT Vs. Haji Gaffar Haji Dada Chini 169 ITR 033 (Born) held that:

“on the facts of the case, the Tribunal had taken a possible view on the question before it and, therefore, there was no reason to interfere with its conclusion that the letter addressed by the assessee to the Income-tax Officer offering credits in respect of hundi loans for assessment and also stating that the penalty under section 271(1)(c) of the Income-tax Act, 1961, may be decided on the merits, did not amount to an admission of concealment of income and the levy of penalty on such basis was liable to be quashed.”

From the above, it is clear that penalty cannot be levied merely on the admission of the assessee and there must be some conclusive evidence before the Assessment Officer that entry made in the seized documents, represents undisclosed income of the assessee. In the instant case, in respect to the amount of Rs. 1,13,65,623/-, there is no evidence which proves that the entries recorded in the documents found during the course of search is over and above the income as declared by the assessee at Rs. 6.84 crores as undisclosed income and accepted by Revenue, in view of the above, we delete the penalty and allow the appeal of the assessee.”

6. Further, the Ld. A.R. relied on the decision in respect of section 158BFA(2) in the case of Sadhu Ram Goyal Vs. DCIT 128 ITD 436 (2011).

7. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. During the appeal hearing, the Ld. A.R. vehemently argued 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(2) of the Act relating to block assessment and accordingly argued that the levy of penalty under section 271AAB is not mandatory but directory. When there is reasonable cause, the penalty is not exigible. The Ld. A.R. has 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 and sub section (1) of section 271AAB of the Act are identical. Hon’ble courts in respect of penalty u/s 158BFA held the penalty is not mandatory but discretionary. Hence, argued that the penalty under section 271AAB of the Act penalty is also not automatic and it is on the basis of merits of the case. For ready reference, we extract 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 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—

i. in the course of 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

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;

(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 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) No penalty under the provisions of clause (c) of sub-section (1) of section 271 shall be imposed upon the assessee in respect of the undisclosed income referred to in sub-section (1).

Section 158BFA(2):

(2) The Assessing Officer or the Commissioner (Appeals) in the course of any proceedings under this Chapter, may direct that a person shall pay by way of penalty a sum which shall not be less than the amount of tax leviable but which shall not exceed three times the amount of tax so leviable in respect of the undisclosed income determined by the Assessing Officer under clause (c) of section 158BC:

Provided that no order imposing penalty shall be made in respect of a person if—

i. such person has furnished a return under clause (a) of section 158BC;

ii. the tax payable on the basis of such return has been paid or, if the assets seized consist of money, 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.

8. 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 were 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 interpretation and the same reads as under;

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.

9. The legislature has included this provisions of section 274 and section 275 of the Act in sub-section 3 with an intention to consider the imposition of penalty judicially. Section 274 deals with the procedure for levy of penalty, wherein, it directs that no order imposing penalty shall be made unless the assessee has been heard or has been given a reasonable opportunity of being heard. Therefore, from combined reading of section 271AAB and section 274 of the Act, it is established that the penalty cannot be imposed unless the assessee is given a reasonable opportunity and assessee is being heard.  Once the opportunity is given to the assessee, the penalty cannot be mandatory and it is on the basis of the facts and materials placed before the A.O. Once the A.O. is bound by the Act, to hear the assessee and to give reasonable opportunity to explain his case, there is no mandatory requirement of imposing penalty because the opportunity of being heard and reasonable opportunity is not a mere formality but it is to adhere to the principles of natural justice. Hon’ble A.P. High Court in the case of Radhakrishna Vihar in ITTA No.740/2011 while dealing with the penalty u/s 158BFA(2) held that ‘we are of the opinion that while the words shall be liable under sub section (1) of section 158BFA of the Act that are entitled to be mandatory, the words may direct in sub section 2 there of intended to directory’. In other words, while payment of interest is mandatory levy of penalty is discretionary. It is trite position of law that discretion is vested and authority has to be exercised in a reasonable and rational manner depending upon the facts and circumstances of the each case. Plain reading of section 271AAB and 274 of the Act indicates that the imposition of penalty u/s 271AAB of the Act is not mandatory but directory. Accordingly we hold that the penalty u/s 271AAB is not mandatory but to be imposed on merits of the each case.

10. Having held that the penalty u/s 271AAB of the Act is not mandatory Now we proceed to decide the issue with regard to the circumstances under which the penalty is exigible u/s 271AAB of IT act. Section 271AAB reads as under:

“(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-

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

iii. on or before the specified date—

iv. pays the tax, together with interest, if any, In respect of the undisclosed income; and

v. furnishes the return of income for the 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. 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 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)

b. No penalty under the provisions of clause (c) of sub-section (1) of section 271 shall be Imposed upon the assessee in respect of the undisclosed income referred to in sub-section (1).

c. The provisions of sections 274 and 275 shall, as for as may be, apply in relation to the penalty referred to In this section.

Explanation.—For the purposes of this section,

(a) “specified date” means the due date of furnishing of return of income under subsection (1) of section 139 or the dote on which the period specified in the notice issued under section 153A for furnishing of return of income expires, as the case may be;

(b)  “specified previous year” means the previous year

i. which has ended before the date of search, but the date of furnishing the return of income under sub-section (1) of section 139 for such year has not expired before the date of search and the assessee has not furnished the return of income for the previous year before the date of search; or

ii. in which search was conducted;

(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—

ii. 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

iii. otherwise not been disclosed to the Chief 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.”

From plain reading of section 271AAb penalty is leviable on undisclosed income. Income admitted u/s 132(4) of the Act need not be undisclosed income and every undisclosed income need not necessarily be admitted by the assessee u/s 132(4) of the Act.

11. In the assessee’s case, the assessee had admitted the undisclosed income in respect of the deposits of the employees, ex-employees in their bank accounts. The assessee admitted the peak deposit in the accounts of employees as his undisclosed income amounting to ` 56,74,868/-. At the time of search, the assessee has submitted before the A.O. that the bank accounts are not belonged to the assessee and they were belonged to the employees who opened the accounts and operating the same. However, the assessee had admitted peak deposits u/s 132(4) of the Act. The A.O. did not make any further enquiries and accepted the admission given by the assessee. Though peak deposits were admitted by the assessee as additional income u/s 132(4) of the Act, the A.O. has not established that the impugned bank accounts were belonged to the assessee, therefore, we hold that there is no undisclosed income in respect of the deposits in the name of the employees of the assessee. The Ld.CIT(A) also has expressed the same view. For ready reference, we extract relevant paragraph of the CIT(A), which reads as under:

ITA No.126&132 /Vizag/2017 Mothukuri Somabrahmam, VSKP

“6.7) I have gone through the facts of the case and also the submissions of the appellant. It is found that the Assessing Officer, though initiated penalty proceedings for the earlier assessment years u/s 271(1)(c) of the Act has chosen to drop the proceedings. The admission towards deposits in the bank accounts of the employees was very much there in the earlier assessment years as well. Apart from this, I have also found that the bank accounts were not in the name of the appellant and the account holders have owned up the bank accounts and also the transactions in the affidavits filed by them. No material was found during the course of search and seizure operations to establish any nexus between these bank accounts and the transactions of the appellant. The Assessing Officer has not brought on record any such material to show that this income belonged to the appellant. Merely because, the appellant admitted the income u/s 132(4) it cannot be concluded that the same represented the undisclosed income of the appellant. Therefore, I direct the Assessing Officer to cancel the penalty levied with regard to this amount of ` 56,74,868/- admitted by the appellant towards deposits in the accounts of the employees/ex-employees.”

12. Since the A.O. did not collect any evidence to hold that the bank accounts were belonged to the assessee and being operated by the assessee, there is no case to hold that the admission made by the assessee represented the undisclosed income of the assessee with in the meaning of section 271AAB of the act Accordingly, we uphold the order of the Ld.CIT(A) and dismiss the appeal of the revenue.

13. With regard to the appeal of the assessee in ITA No.132/Vizag/2017 during the course of search proceedings, the A.O. found that the gold and jewellery of 1530.400 gms., the assessee explained that the gold and jewellery said to be belonging to (1) S. Chandrika, daughter of his brother of 770 gms (2) Smt. Sita, wife of his brother of 500 gms. (3) his wife of 250 gms. (4) balance 10.400 gms. belonging to the assessee. Similarly, in the case of diamonds amounting to ` 12,63,650/- were said to be belonged to his wife, though assessee had admitted the same as income in his hands. The Ld. CIT(A) has allowed the relief to the extent of permissible deduction as per board’s circular and sustained the penalty to the extent of ` 27,41,676/- as under:

“I have considered the submissions of the appellant, perused the facts of thecase and gone through the proceedings of search and seizure operations. Though the appellant claimed that except 10.400 grams of jewellery belongs to him, the rest of the jewellery belonged to his wife, his sister-in-law and his brother’s daughter, he could not furnish any specific evidence in this regard. At the same time, a part of the jewellery can certainly be held to be belonging to them. In the absence of specific evidence in this regard, I would consider 500 gms as belonging to the wife of the appellant and 250 gms as belonging to Ms.Sarat Chandrika who was staying with the appellant even at the time of search and seizure operations. Jewellery of brother’s wife cannot be given credit in the hands of the appellant. Therefore, to the extent of 750 gms, though the appellant admitted income u/s 132(4), the same would not fall within the scope of ‘undisclosed income’ as defined in S.271AAB of the Act. The Assessing Officer is directed to cancel the penalty u/s 271AAB with regard to value of 750 gms of gold jewellery i.e., Rs.27,41,676/- and the remaining penalty with regard to balance amount of jewellery, silver articles and diamonds i.e., Rs.47,75,724/- is sustained”.

14. During the appeal hearing, the Ld. A.R. argued that the assessee made disclosure only to purchase peace from the department and the assessee had explained the source of jewellery and diamonds at the time of search, thus, there is no undisclosed income as such, hence there is no case for penalty.

15. On the other hand, the Ld. D.R. relied on the orders of the CIT(A).

16. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. In this case, on the day of the search and subsequently, the assessee has categorically explained the source of acquisition of gold and jewellery stating that the said gold and jewellery was said to be belonging to his brother’s daughter Miss S. Chandrika and also to his brother’s wife. Though he has admitted the income, the above gold and jewellery required to be examined in the hands of Miss S. Chandrika and Mrs. Sita wife of his brother and his wife for levy of penalty u/s 271AAB. The A.O. stopped his enquiries once the disclosure has been made by the assessee and did not make any further enquiry, therefore, the A.O. has not established that gold and jewellery was acquired from the sources of undisclosed income. As per the provisions of section 271AAB of the Act, the penalty is leviable only on undisclosed income. In the instant case, the A.O. has failed to establish the undisclosed income, hence, we hold that there is no case for imposing penalty u/s 271AAB of the Act, accordingly, we cancel the penalty and set aside the order of the lower authorities.

17. The Ld. CIT(A) has confirmed the penalty of ` 14,32,717/- in respect of the gold jewellery as under:

“6.8) With regard to admission made by the appellant towards jeweltery, silver articles and diamonds, the appellant submitted that the gold jewellery found at the residence was 1530.400 gms and, out of this, 770 gms belonged to his brothers daughter Ms.Sarat Chandrika and 500 gra-ms belonged to Smt. Sita, wife of his brother. Out of the balance, 250 gms belonged to wife of the appellant and only 10.400 gms belonged to the appellant. The gold jewellery and diamonds of the value of Rs. 12,63,650/-belonged to wife of the appellant. It was further explained that marriage of Ms.Sarat Chandrika was scheduled for ₁ 11h May, 2013 and she stays in their house only as she was brought up by him and his wife right since her childhood. The jewellery of 770 grains was kept ready for her marriage and the said jewellery does not belong to the appellant. Likewise, the appellant submitted that the remaining jewellery also did not belong to him. Further, the appellant submitted that the admission was given in anticipation that the jewellery will be released once the same is admitted as income and the taxes are paid.

6.9) I have considered the submissions of the appellant, perused the facts of the case and gone through the proceedings of search and seizure operations. Though the appellant claimed that except 10.400 grams of jewellery belongs to him, the rest of the jewellery belonged to his wife, his sister-in-law and his brother’s daughter, he could not furnish any specific evidence in this regard. At the same time, a part of the jewellery can certainly be held to be belonging to them. In the absence of specific evidence in this regard, I would consider 500 gms as belonging to the wife of the appellant and 250 gms as belonging to Ms.Sarat Chandrika who was staying with the appellant even at the time of search and seizure operations. Jewellery of brother’s wife cannot be given credit in the hands of the appellant. Therefore, to the extent of 750 gms, though the appellant admitted income u/s 132(4), the same would not fall within the scope of ‘undisclosed income’ as defined in S.271AAB of the Act. The Assessing Officers directed to cancel the penalty u/s 271 MB with regard to value of 750 gms of gold jewellery i.e., Rs.27,41,676/- and the remaining penalty with regard to balance amount of jewellery, silver articles and diamonds i.e. ` 47,75,724/- is sustained.”

18. Aggrieved by the order of the Ld. CIT(A), assessee is in cross appeal before this Tribunal raising following grounds:

1. The order of the learned Commissioner of Income Tax (Appeals) is contrary to the facts and also the law applicable to the facts of the case.

2. The learned Commissioner of Income Tax (Appeals) is not justified sustaining penalty to the extent of Rs. 14,32,717 out of total penalty of Rs. 49,1 1,957 levied u/s 271 AAB of the Income Tax Act, 1961.

3. The notice issued u/s 271AAB is liable to be quashed as the same is not in accordance with law.

4. Any other ground that may be urged at the time of appeal hearing.

19. In the revenue’s appeal with regard to the gold jewellery found in the residential premises of the assessee, we have held that there is no undisclosed income, accordingly, the penalty levied by the assessing officer was deleted. Hence, the cross appeal filed by the assessee stands allowed.

20. In the result, the appeal filed by the revenue is dismissed and the cross appeal filed by the assessee is allowed.

The above order was pronounced in the open court on 16^th Mar’18.