Validity of Penalty under section 271AAA if amount surrendered is not treated as undisclosed income

Short Overview:

As AO accepted surrendered amount as miscellancous income as declared by the assessee in return of income and levied the income-tax on it accordingly, amount surrendered could not therefore, be termed as undisclosed income so as to levy penalty under section 271AAA.

During the course of search, assessee surrendered certain income of as per the observations of the assessing officer, since the assessee did not specify the manner in which undisclosed income was derived and also not substantiate the same, therefore, penalty proceedings under section 271AAA of the Act were accordingly initiated and levied penalty accordingly.

It is held that, AO accepted surrendered amount as miscellaneous income as declared by the assessee in return of income and levied income tax on it accordingly. The quantum assessment order has nowhere stated that the surrendered amount was an undisclosed income. Thus, initiation of proceedings under section 271AAA was based on surrendered amount which could not be termed as undisclosed income and accordingly, penalty under section 271AAA, being specifically a penalty relating to undisclosed income could not be levied.

Decision: In assessee’s favour.

Referred: CIT & Anr. v. SSA’s Emerald Meadows (2016) 73 Taxmann.com 248 (SC) : 2016 TaxPub(DT) 4242 (SC), Bhagirath Aggarwal v. CIT, 2013-TIOL-82-HC-DEL-IT : 2013 TaxPub(DT) 0672 (Del-HC), CIT v. Manjunatha Cotton and Ginning Factory & Ors. 2013-TIOL-536-HC-KAR-IT : 2013 TaxPub(DT) 2014 (Karn-HC), CIT v. ECS Ltd. 2010-TIOL-287-HC-DEL-IT : 2010 TaxPub(DT) 1450 (Del-HC), Abu Mansur Ali v. Dy. CIT 2017-TIOL-587-ITAT-KOL, SPS Steel & Power Ltd. and others v. Asstt. CIT & Ors. [ITA Nos. 1391/KOL/2011, dt. 30-6-2015] : 2015 TaxPub(DT) 2667 (Kol-Trib), Dy. CIT v. Brij Bhushan Singal HUF 2015 TaxPub(DT) 1009 (Del-Trib), Asstt. CIT v. Satyapal Wassan (2007) 295 ITR (AT) 352 (Jabalpur) : 2007 TaxPub(DT) 0938 (Jab-Trib) and Valuelines Securities India Ltd. v. Asstt. CIT (2007) 108 ITD 639 (Hyd-Trib) : 2007 TaxPub(DT) 1728 (Hyd-Trib).

IN THE ITAT, DELHI BENCH

N.K. BILLAIYA, A.M. & SUCHITRA KAMBLE, J.M.

Rajendra Aggarwal v. DCIT

I.T.A. No. 2702/DEL/2015

22 January, 2019

Appellant by: V.K. Bindal, CA

Respondent by: Ashima Neb, Sr. DR

Suchitra Kamble, J.M.

This appeal is filed by the assessee against the Order, dated 18-3-2015 passed by Commissioner (Appeals)-XXIV, New Delhi for assessment year 2009-10.

2. The grounds of appeal are as under:–

“1. The Commissioner (Appeals) erred in law and on facts in confirming the penalty of Rs. 5,16,410, @ 10% of the amount offered as undisclosed income at the time of search, under section 271AAA of the Act ignoring the fact that the appellant filed complete details regarding source of shares, cash and jewellery found and surrendered during the course of the assessment proceedings though the appellant also deposited the due tax alongwith interest on the surrendered amount in order to buy peace. Thus the penalty so confirmed must be deleted.

2. The Commissioner (Appeals) erred in law and facts in confirming the above penalty and not appreciating the fact that the penalty of Rs. 20,000 could not have been imposed by the assessing officer being the DCIT without seeking prior approval of the Additional/Joint Commissioner of the Income Tax as has been provided under section 272(2) of the Act which is as under:

Section 274

(1) No order………

(2) No order imposing a penalty under this Chapter shall be made–

(a) by the Income Tax Officer, where the penalty exceeds ten thousand rupees:

(b) by the Assistant Commissioner or Deputy Commissioner, where the penalty exceeds twenty thousand rupees. except with the prior approval of the Joint Commissioner

Since the assessment order does not show any such approval therefore penalty imposed is illegal and must be deleted.

3. The Commissioner (Appeals) erred in law and on facts in confirming the penalty ignoring that the offer of this additional income assessing officer accepted was conditional that no penalty would be imposed under the Act on the said amount.

2. The appellant craves the leave to add, substitute, modify, delete or amend all or any ground of appeal either before or at the time of hearing.

3. A search and seizure operation was conducted in this case on 31-7-2008 and assessment proceedings in this case was computed under section 153A of the Income Tax Act, 1961 on 30-12-2010 at a total income of Rs. 69,34,690. During the course of search & seizure operation conducted on 31-7-2008, the assessee surrendered income of Rs. 51,64,100. As per the observations of the assessing officer, since the assessee did not specify the manner in which undisclosed income was derived and also not substantiate the same, therefore, penalty proceedings under section 271AAA of the Act were accordingly initiated vide notice dated 30-12-2010. Another show cause notice dated 10-6-2011 was issued. In response thereto, assessee filed reply. The assessing officer did not find the submissions of the assessee tenable therefore, imposed the penalty of Rs. 5,16,410 which is equal to 10% of the undisclosed income of Rs. 51,64,100 surrendered by the assessee.

4. Being aggrieved by the Assessment Order, the assessee filed appeal before the Commissioner (Appeals). The Commissioner (Appeals)dismissed the appeal of the assessee.

5. The learned AR submitted that in this case, a search was conducted on 31-7-2008 in the residential premises of the assessee. The return of income for the assessment year 2009-10 was filed on 30-7-2009 (wrongly mentioned as on 27-8-2010 in the assessment order) and notice under section 143(2) was issued on 27-8-2010. Assessment order was passed on 30-12-2010.On perusal of the panchnama dated 1-8-2008 in respect of the search conducted in the premises of the assessee, it is clear that the search commenced on 31-7-2008 and was concluded on 01-8-2008. Similarly, in respect of the bank locker No. 12 with Axis Bank, Shakti Nagar, Delhi of the assessee which was the only bank locker, the assessee had, as per the panchnama dated 1-8-2008, it would be seen that the locker was opened in August 2008 and the search thereon was also concluded on the very same day. Thus, the income-tax search proceedings under section 132 of the Act stood completed before 31-8-2008.

6. The learned AR pointed out that the assessee had no business/professional income and he was receiving salary, rent, interest on FDR and other bank accounts. (Please refer answer to the question No. 4 of the statement recorded under section 132(4) of the Act on 31-7-2008 in this regard). The assessee in his return of income filed under section 139(1) after the search included miscellaneous income of Rs. 51,64,100. The learned AR submitted that certain documents of the two Pvt. Ltd. companies belonging to the assessee’s family were found during the search. The documents as detailed in Question nos. 17 to 18 of the statement under section 132(4) of the Act dated 1-8-2008 were:

1. Application for shares by named corporate-applicants

2. Blank transfer forms by those applicants

3. POA by applicants which were not completely filled

4. Blank receipt for the sale of shares

5. Blank but signed sale bill which is undated

6. Signed but undated delivery note for shares

It is important to appreciate that no share certificates against the said blank papers.

When questioned, the assessee vide reply 17 informed that “I have no full knowledge of these documents. However, I would like to add that these papers were taken from the seller in good faith with the intentions to buy the same from the sellers. Since the rate of the share and its premium could not be settled therefore, the documents were not filled and remained unfilled.” The learned AR submitted that unquestionably, nothing can be inferred from these documents. It cannot be determined whether shares were actually purchased or the documentation was preparatory, who was intended/actual buyer, date of transfer, amount of sale consideration etc. Thus, these were in fact dumb documents unless the signatory (seller) was questioned about these documents, narrations thereupon or necessity of blank signatures etc. The learned AR relied upon the decision in case of in ACIT v. Satyapal Wassan (2007) 295 ITR (AT) 352 (Jabalpur) : 2007 TaxPub(DT) 0938 (Jab-Trib). Further, the assessee vide Ans. 31 stated that the cash of Rs. 3.61 lakhs was out of his family drawings and cash in hand shown in the books of account. Similarly, the jewellery worth 16,45,500 was, vide question No. 32, was explained as of his mother and wife disclosed in their Wealth-tax returns. Thus, specific replies were given then. After conclusion of the search, the assessee sent a letter dated 12-9-2008 i.e. during the relevant financial year itself, to the DDIT-Inv. and offered to surrender a sum of Rs. 51.641 lakhs as his income and categorically submitted that this offer was for buying peace of mind and to avoid litigation and to cooperate ‘on the specific condition that no penalty proceedings and prosecution proceedings’ would be initiated. The assessee indicated that Rs. 45 lakhs was paid for purchasing shares and further, lump sum Rs. 6.641 lakhs on account of cash in hand, jewellery and any other items, without any specific break up/details.

7. The learned AR submitted that the Hon’ble jurisdictional Delhi High Court in case of Bhagirath Aggarwal v. CIT, 2013-TIOL-82-HC-DEL-IT : 2013 TaxPub(DT) 0672 (Del-HC) held that where the assessee make a voluntary surrender, income-tax officials are bound to record a statement under section 132(4) of the Act to make it reliable and to be used as evidence. Further, it has been held that a letter written after one and a half month after the search cannot be treated as a statement under section 132(4) of the Act. In fact, this view has also been held by the Commissioner (Appeals) in the concluding para of his appellate order. The assessing officer completed the assessment by accepting the return of income filed by the assessee which included this ‘surrender’ of Rs. 51,64,100 without any reference to above mentioned letter or any independent investigation to determine income sans the voluntary inclusion by the assessee and that too without any comment regarding acceptance/rejection of the offer to buy peace of mind. However, the assessing officer added another sum of Rs. 14,00,000 as unexplained cash found at the time of search which in the second round after the Hon’ble ITAT’s order was deleted by the assessing officer himself accepting that this cash belonged to the other entities. Further, penalties were initiated after mentioning as “Initiate penalty under section 271(l)(c). Penalty proceeding under section 271AAA are also being initiated as the assessee has failed to substantiate the manner in which the surrender income of Rs. 51,64,100 was earned. Issue necessary forms’. It is submitted that the impugned penalty has been initiated without application of mind and in a mechanical manner. The provisions of 271AAA are as under:

271AAA. (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 June, 2007 but before the 1st day of July, 2012, the assessee shall 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.

(2) Nothing contained in sub-section (1) shall apply if the 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) pays the tax, together with interest, if any, in respect of the undisclosed income.

(3) 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).

(4) The provisions of sections 274 and 275 shall, so far as may be, apply in relation to the penalty referred to in this section.

Explanation.–For the purposes of this section,–

(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 account 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 account or other documents maintained in the normal course relating to such previous year; or

(B) otherwise not been disclosed to the Principal Chief Commissioner or Chief Commissioner or Principal 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;

8. Thus, the learned AR submitted that a plain reading clearly shows that the said penalty is leviable in respect of “undisclosed income” of the previous year as defined in the Explanation and not for substantiating the manner of the earning “undisclosed income” The issue regarding substantiation is relevant only for exemption from the said penalty. But, the question of exemption comes only when there is “undisclosed income” as mentioned in the Explanation. The assessment order and the penalty initiation part therein are totally silent on the assets found during the search, which particular entry was found not entered in the appropriate books of account. The Assessing officer is bound to furnish at least some basis for initiating the penalty. Even the impugned penalty notice is silent as in this notice, section has been reproduced but nothing has been scored off or tick marked. It is well established law that the SCN must indicate precise charge as penalty has civil consequences. It has been held in CIT v. Manjunatha Cotton and Ginning Factory, 2013-TIOL-536-HC-KAR-IT : 2013 TaxPub(DT) 2014 (Karn-HC) that a reading of section clearly indicates that the assessment order should contain a direction for initiation of penalty proceedings. The meaning of the word direction is of importance. Merely saying that penalty proceedings are being initiated will not satisfy the requirement. The direction to initiate proceedings should be clear and not be ambiguous. It is well settled law that fiscal statutes are to be construed strictly and more so the deeming provisions by way of legal fiction are to be construed more strictly. They have to be interpreted only for the said issue for which it has deemed and the manner in which the deeming has been contemplated to be restricted in the manner sought to be deemed. As the words used in the legal fiction or the deeming provisions of section 271(1B) are directive, it is imperative that the assessment order contains a direction. The learned AR submitted that use of the phrases like (a) penalty proceedings are being initiated separately and (b) penalty proceedings under section 271(l)(c) are initiated separately, do not comply with the meaning of the word direction as contemplated even in the amended provisions of law. The direction should be clear and without any ambiguity…… As the provision stands, the penalty proceedings can be initiated on various ground set out therein. If the order passed by the Authority categorically records a finding regarding the existence of any said grounds mentioned therein and then penalty proceedings is initiated, in the notice to be issued under section 274, they could conveniently refer to the said order which contains the satisfaction of the authority which has passed the order. However, if the existence of the conditions could not be discerned from the said order and if it is a case of relying on deeming provision contained in Explanation-1 or in Explanation-1(B), then though penalty proceedings are in the nature of civil liability, in fact, it is penal in nature. In either event, the person who is accused of the conditions mentioned in section 271 should be made known about the grounds on which they intend imposing penalty on him as the section 274 makes it clear that assessee has a right to contest such proceedings and should have full opportunity to meet the case of the Department and show that the conditions stipulated in section 271(1)(c) do not exist as such he is not liable to pay penalty. The practice of the Department sending a printed form where all the ground mentioned in section 271 are mentioned would not satisfy requirement of law when the consequences of the assessee not rebutting the initial presumption is serious in nature and he had to pay penalty from 100% to 300% of the tax liability. ” The above has been duly affirmed by the Apex Court in SSA’s Emerald Meadows (2016) 73 taxmann.com 248 (SC) : 2016 TaxPub(DT) 4242 (SC). The learned AR further submitted that in case of CIT v. ECS Ltd. 2010-TIOL-287-HC-DEL-IT : 2010 TaxPub(DT) 1450 (Del-HC) it was held that “The net effect of the aforesaid judgment is that even when the assessing officer has not recorded his satisfaction in explicit terms, the assessment order should indicate that the assessing officer had arrived at such a satisfaction. Though the assessment order need not reflect every item, viz., addition or disallowance, yet we have to find out that the order is couched in such a manner and the discussion herein leads towards the opinion of the assessing officer that the assessee had concealed particulars of income or furnishing inaccurate particulars. This has to be discerned from the reading of the assessment order.”

The learned AR further submitted that though this order is in respect of concealment penalty under section 271(1)(c) of the Act, but legal ratio would equally apply to the section 271AAA of the Act which is leviable in respect of (i) assets (ii) entries in books/documents relating to income not entered in regular books and (iii) unrecorded expenses. The assessment order and the SCN must indicate prima facie reason for initiating penalty and failure of the assessing officer would lead to cancellation of penalty. The learned AR submitted that in the present case, even the penalty order is silent on subject of undisclosed income. The learned AR submitted that the assessing officer has also not mentioned in the impugned notice that it is a notice under section 274 read with section 271AAA of the Act. The assessment order does not show that any approval under section 153D read with section 153B(l)(b) of the Act was received from the Addl./Jt. CIT by the assessing officer. The same has been left blank. No approval of the Addl. CIT to the assessment order seems to be there as no such approval is mentioned in the assessment order nor it was found on inspection in the assessment folder. Thus, the assessment order itself is illegal and consequently the impugned penalty. It clearly shows that the assessing officer was very much aware that this is a necessity and that is why this was duly mentioned in the assessment order on page 4. Thus, the impugned assessment order itself is bad in law. The learned AR relied upon the decision in case of Valuelines Securities India Ltd., (2007) 108 ITD 639 (Hyd-Trib) : 2007 TaxPub(DT) 1728 (Hyd-Trib) where the Hon’ble ITAT, Hyderabad Bench of the Tribunal held “Thus, whatever may be the internal records with the Revenue given to the assessee have to be the basis of conclusion. The panchnamas and the assessment orders are in the public domain and can be held as carrying more weight as compared to the secret internal files off the income-tax department.” Therefore, any penalty imposed in consequence to the said illegal order itself is bad in law.

10. On merit, the learned AR submitted that the assessee was not conducting any business or profession and as such, was not required and was factually not maintaining any books of account. Therefore, this case does not fall under non-entering of income or expenses in the books of account maintained in the normal course. The assessment order does not at all spell as to what undisclosed assets were found by way of money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents. It also does not specify what transactions found were not recorded in the books of account or other documents in the normal course. It is pertinent to note that the assessee had no business/professional income and he was just receiving salary, rent, interest on FDR and other saving bank accounts. (Kindly refer the question No. 4 of the statement dated 31-7-2008 in this regard) and therefore, there could not be any undisclosed income which was required to be entered in the normal books of account as those were not required to be maintained under section 44AA of the Act. The learned AR further submitted that the assessee sent a letter dated 12-9-2008 i.e. during the relevant financial year itself, to the DDIT (Inv.) and offered to surrender Rs. 51.641 lakhs as his income and asserted that this offer was for buying peace of mind and to avoid the litigation and to cooperate ‘on the specific condition that no penalty proceedings and prosecution proceedings’ would be initiated. The assessee indicated that Rs. 45 lakhs was paid for purchasing the shares and further, lump sum Rs. 6.641 Lakhs on account of cash in hand, jewellery and any other items without any specific break up/details. The learned AR further submitted that the blank share transfer forms were not valuable article or thing. Transfer of shares is complete only when the share certificates along with the transfer form are delivered. Therefore, the blank forms are not covered by ‘undisclosed income’ as defined in section 271AAA of the Act.

11. Further, the learned AR submitted that though the assessee mentioned ‘sum of Rs. 6.641 lakhs on account of cash in hand, jewellery and any other items, but in fact nothing pertains to cash or jewellery. The total jewellery found was valued at Rs. 26,74,710 and nothing was seized. The notice under section 142(1) of the Act dated 28-9-2010 was issued by the assessing officer and the query number No. 31 was in respect of jewellery found. In reply, the assessee submitted that the Jewellery worth 23,90,082/belonged to the assessee and was disclosed in his Wealth-tax returns. The balance belonged to his wife and was disclosed in her Wealth-tax returns. As regard the cash, only cash of Rs. 3,61,200 was found from the assessee and the remaining cash of Rs. 17,80,000 was found in the bedroom of Mr. Sanjay Agrawal. The Panchnama was joint in the name of assessee and his brother Mr Sanjay Agarwal. Out of the total cash found at the time search, a sum of Rs. 5,41,200 was released and a sum of Rs. 16,00,000 was seized. In the statement recorded under section 132(4) of the Act, the assessee was confronted only to the cash found with him where he stated that the cash of Rs. 3.61 lakhs was out of his family drawings and cash in hand shown in the books of account (of his companies). These facts clearly show that this sum of Rs. 6.641 lakhs has no relation with the cash/jewellery but part of the ‘settlement’ with the investigation wing so as to ease departmental pressure, to buy peace and end litigation etc. Otherwise, there was no occasion for filing any letter with the investigation wing as the authorised officer/investigation wing becomes function officio after completion of the searches which had concluded on a much earlier date.

12. The learned AR further submitted that the assessee disclosed Rs. 45,00,000 in his return of income on account of purchase of shares but the search did not yield any evidence for payment of any such amount for the said purchases as only application for shares by the named corporate-applicants, blank transfer forms by shareholders, POA by them which were not completely filled in, blank receipt for the sale of shares, blank but signed sale bill which is undated and signed but undated delivery note for shares were found. The shares of Rs. 10 each were issued by the company to various shareholders for a total amount of Rs. 95,00,000 at a premium of Rs. 90 to Rs. 190 per share. In the Question No. 19 of the statement recorded of the assessee in the midnight at 1:00 am on 1-8-2008 which was concluded early morning of the said date, the assessee was asked as to how the shares of Kiwi Food India (P) Ltd. had been transferred by a number of allottees at a meager rate of Rs. 2/50 to Rs. 5 per share to the family members of the assessee and his associates which shows that the shares issued were acquired for a very low amount. Thus, the disclosure of Rs. 45,00,000 for purchases of 87,045 equity shares of the face value of Rs. 88,87,450 is without any basis. It is neither for the full amount of Rs. 95 lakhs nor at the rate of Rs. 2.50 or Rs. 5 per equity share as per some information found as mentioned above which in that case could only be at the most Rs. 4,35,225 for 87,045 equity shares. The Revenue accepted the said offer just because the Revenue pressurized the assessee for a surrender of Rs. 55,00,000 which is clear from the offer letter dated 12-9-2008 where besides 45,00,000 for the shares, a sum of Rs. 3,35,837.39 (rounded off to Rs. 3,35,900) for stocks of his company and Rs. 6,64,100 miscellaneous income covering cash, jewellery, etc. was mentioned whereas no such undisclosed asset was found. Thus, no specific undisclosed income in terms of the definition under section 271AAA of the Act was found during the course of search. The learned AR relied upon the decisions of SPS Steel & Power Ltd. v. ACIT, [ITA Nos. 1391/KOL/2011, dt. 30-6-2015] : 2015 TaxPub(DT) 2667 (Kol-Trib) and Abu Mansur Ali v. DCIT 2017-TIOL-587-ITAT-KOL. The learned AR submitted that the surrender was made juts to buy peace and avoid penalties/litigations. Thus, the penalty imposed under section 271AAA of the Act void ab initio, illegal and must be cancelled.

13. The learned DR submitted that the assessee has not challenged the quantum assessment order and there was no surrender under section 132(4). Thus, the learned DR submitted that if there is no surrender then 271AAA is applicable in the assessee’s case. The learned DR further submitted that both the notices under section 274 read with section 271AAA and 271(1)(c) are valid and there is no defect in the said notices. The learned DR relied upon the decision of the Hon’ble High Court in case of Ritu Singhal 2018-TIOL-438.

14. We have heard both the parties and perused the material available on record. It is pertinent to note that the assessing officer completed the assessment by accepting the return of income filed by the assessee which included surrendered amount of Rs. 51,64,100. In fact in the Assessment Order, the assessing officer added another sum of Rs. 14,00,000 as unexplained cash found at the time of search which in the second round after the Tribunal’s order was deleted by the assessing officer whereby accepting this cash belonged to the other entities. This aspect is not denied by the revenue. The initiation of penalty under section 271AAA in the Assessment order is based on the surrendered amount which cannot be termed as undisclosed income. In fact, by surrendering the said amount, the assessee has disclosed it before the Revenue authorities. The quantum assessment order has nowhere stated that the surrendered amount of Rs. 51,64,100 is an undisclosed income. The surrendered amount was declared in the return of income under section 153A as misc. income. The assessing officer accepted this surrendered amount as misc. income as declared by the assessee in the return of income and levied the income tax on it accordingly. In the present case, even the penalty order is silent on subject of undisclosed income. Therefore, provisions under section 271AAA will not come under the purview as it is specifically a penalty relating to undisclosed income. Therefore, appeal of the assessee is allowed.

15. In result, the appeal of the assessee is allowed.