No penalty when Assessee surrendered undisclosed income & taxed based on seized papers

ORDER

Vikram Singh Yadav, Accountant Member – This is an appeal filed by the Revenue against the order of Ld. CIT(A), Central, Jaipur dated 14.08.2014 wherein the Revenue has taken following grounds of appeal:

2. The brief facts of the case are that a search action u/s 132 of the Income-Tax Act, 1961 was carried out on the UDB Group on 28.01.2009 and cash, jewellery, books of account and certain loose papers were found and seized from the residential and business premises of the assessee and the groups concerns. During the course of search, statements of the assessee and his family members were recorded, wherein certain undisclosed income was admitted. The return of income for the year under appeal was filed u/s 139(1) declaring total income of Rs. 1,28,55,850/- on 20.09.2010 which included a sum of Rs. 1,16,31,103/- offered by assessee as additional income as a result of search pertaining to the year under appeal. Assessment was completed u/s 143(3) of Income-Tax Act, 1961 at a total income of Rs. 2,71,20,669/- by making various additions to the tune of Rs. 1,42,64,819/-. The assessee had preferred appeal before the Ld. CIT(A), Central, and thereafter, before the Tribunal whereby all the additions were deleted excepting for an amount of Rs. 50,000/- in respect of unexplained investment in furniture and fixture.

The AO thereafter proceeded to levy penalty u/s 271AAA on the income remained assessed after allowing the necessary appeal effect and accordingly levied penalty of Rs. 11,93,110/-. Against the said penalty order of the AO, the assessee had preferred an appeal before the Ld. CIT(A), Central who vide her impugned order dated 14.08.2014 in ITA No. 91/13-14 allowed the appeal of assessee and deleted the penalty imposed by Ld. AO u/s 271AAA of the Act at Rs. 11,93,110/-. Against the said order, the Revenue has preferred this appeal before us.

2.1 The ld. AR submitted that out of the entire additions of Rs. 1,42,64,819/- made by Ld. AO, merely an amount of Rs. 3,00,000/- was sustained by the Ld. CIT(A) and further, the entire additions sustained by Ld. CIT(A) stood deleted by the Hon’ble ITAT, except a small amount of Rs. 50,000/-. Thus, except the meagre amount sustained by Hon’ble ITAT, there remained no addition on which the penalty could be levied, therefore, there remained no discretion with the Ld. CIT(A) in the impugned appellate proceedings to uphold the penalty pertaining to the addition of Rs. 2,50,000/- which though sustained by Ld. CIT(A), but deleted by Hon’ble ITAT. Thus, the appeal of Revenue in so far as it relates to penalty imposed qua the addition of Rs. 2,50,000/- so deleted deserves no consideration at all.

2.2 The ld AR further submitted that besides this, the penalty was also levied on the additional undisclosed income of Rs.1,16,31,103/- declared by assessee in his return of income on which due taxes were paid. In this regard it is submitted as under:

That, from a perusal of the statements of the assessee recorded u/s 132(4) of Income Tax Act, 1961, during the course of search, it would transpire that the assessee has duly admitted the additional income and explained the mode and manner in which the said income has been derived. Further, the manner in which the undisclosed income was derived has also been substantiated and the tax thereon alongwith interest also stands paid. Therefore, penalty u/s 271AAA could not at all have been imposed in the facts and circumstances of the case.

It is pertinent here to make a reference to clause (2) of section 271AAA for which the provisions as contained in section 271AAA are reproduced herein below for ready reference:

“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 ⁴³[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,-

Manifestly, this sub-section lays down the certain circumstances which, if fulfilled, can absolve the assessee from any liability under section 271AAA of the Income Tax Act, 1961. It is submitted that all of the three conditions have been satisfied in the facts and circumstances of the present case.

However, the Ld. AO has proceeded to pass the penalty order on the basis of wrong factual considerations and misunderstanding of the provisions of law. The Ld. AO has wrongfully observed that the assessee has failed to establish the mode and manner of acquisition of undisclosed income so declared, and such observation of Ld. AO is based on following reasons as cited by Ld. AO on page no 5, in para 15 of the penalty order which are quoted as under as appearing:

“Though the assessee has admitted and surrendered undisclosed income of Rs. 1,16,31,103/- relating to the specified previous year and declared the same in the return of income but at the same time he did not specify the manner in which such income has been earned and also did not substantiate the manner in which the undisclosed income was earned. This fact is evidenced from the figures mentioned in the return filed by the assessee on 20.09.2010. The assessee has shown in that return income from business and profession at Rs. 1,16,31,103/-. However, no corresponding and corroborative figure are available in the return e.g. the assessee has shown income from business & profession at Rs. 1,16,31,103/- in the computation of profit as per P & L account but no profit and loss account has been attached with the return filed. Part A-P&L of ITR 4 is also blank. Further, in column 51 of Part A-P&L no such figure is reflected so that it can be said that any business income has been derived by the assessee which has been surrendered and stated to be earned from business. Even though, figure mentioned in Schedule BP is also not supported and have no corroborative figures from Item 43 of item 51d of Part A-P&L. As such under these facts and circumstances, it is very much clearly established that though the assessee surrendered undisclosed income of Rs. 1,16,81,103/- but failed to specify the manner of earning and to substantiate the same from any documentary corroborative evidence. Therefore, the case of assessee clearly comes under the ambit of section 271AAA of the IT Act, 1961 for the undisclosed income referred.”

From a perusal of aforementioned observations of the Ld AO in the penalty order, two things are noted which are as under:

In this regard, it is submitted that, firstly, the Ld. AO failed to appreciate the statements rendered by assessee as well as of family members of assessee. More particularly, the statements of son of assessee Sh. Ravinder Singh have specifically been relied upon by the assessee and Sh. Ravinder Singh has rendered his statement on behalf of all his family members, wherein, he has admitted and surrendered the undisclosed income for taxation and has also explained the mode and manner of acquisition of the said undisclosed income which stood admitted by assessee and declared in his return of income. In view of the statements of Sh. Ravinder Singh, it is absolutely clear that while admitting the undisclosed income, he has very well explained the mode and manner of acquisition of this income. It is pertinent to mention that such declaration of additional income by Shri Ravinder Singh was duly honored by assessee who owned entire transactions found recorded in loose papers/documents seized during the course of search and also accepted by Ld. AO while completing the assessment and no adverse inference whatsoever was taken in the case of Shri Ravinder Singh.

Secondly, the Ld. AO has not allowed assessee the protection of sub-section (2) to section 271AAA without considering the statements of assessee and his son Sh. Ravinder Singh, and merely by observing in the last lines of above quoted para that the assessee had not corroborated the figure so declared by him with the P&L account or any other documentary evidence. Merely by observing this, the Ld. AO hold the assessee liable for penalty u/s 271AAA by grossly ignoring the statements recorded u/s 132(4) during search. It must be noted that these observations of Ld. AO clearly run contrary to the provisions of sub- section (2) to section 271AAA. The said sub-section provides only this much that, if the assessee has admitted undisclosed income in his statements u/s 132(4) and specified mode and manner of acquisition alongwith substantiation thereof and has paid taxes thereon along with interest then penalty cannot be levied. This sub section nowhere requires the assessee to furnish any documentary evidence to corroborate the amount of undisclosed income, on the other hand, it merely requires the assessee to admit the income and explain mode and manner of acquisition alongwith substantiation thereof in the statements recorded u/s 132(4). And thus, the section nowhere requires the assessee to provide any corroborative documentary evidence reflecting the undisclosed income so admitted by him in statements recorded u/s 132(4). Therefore, Ld. AO had committed a gross error in imposing penalty on the basis of these wrong observations and which fact was pointed out before the Ld. CIT(A) who was well justified in deleting the penalty imposed by Ld. AO.

It is submitted that in the present case, all of the abovementioned three conditions stand fulfilled and therefore, no penalty u/s 271AAA is leviable. It may be noted that in the statements recorded u/s 132(4) of the assessee as well as of his family members, the undisclosed income has duly been admitted and also the mode and manner of acquiring the said income alongwith substantiation thereof has been explained. The Ld. AO has grossly erred in observing that the Assessee has not declared the undisclosed income in his statements. While, the actual fact is that the assessee has admitted the undisclosed income and has explained/substantiated the mode and manner of acquisition of the said income which is clearly reflected in the statements of Sh. Ravinder Singh recorded u/s 132(4) during search, on which, the assessee has relied. Thus, since the mode and manner of acquisition of undisclosed income stands explained, no penalty was leviable in view of sub-section(2) to section 271AAA of Income Tax Act, 1961.

Further, the undisclosed income as represented by the seized papers was duly admitted in the statements recorded u/s 132(4) and the assessee had agreed to pay tax on the income which will be arrived at after deriving the exact amount of income represented by seized papers. Thus, the income on the basis of seized papers was calculated vide a fund flow statement and was duly submitted before the Ld. AO during assessment proceedings, and tax thereon was paid accordingly. A copy of the said fund flow statement has been placed at paper book page no. 98.

Since all the three conditions as enumerated in sub section (2) to section 271AAA have been fully satisfied as the assessee has offered the additional income and duly substantiated the manner as to how it has been worked out, the Ld. AO has not doubted the additional income declared and mode and manner of such income and due taxes alongwith interest has been paid while filing the return of income. Therefore there was no basis at all on which penalty u/s 271AAA could have been levied by Ld. AO on the additional undisclosed income declared by the assessee in the return of income filed for the year under reference and thus, no penalty could have been levied by the Ld. AO u/s 271AAA of the Act.

Furthermore, the penalty u/s 271AAA has been imposed by the Ld. AO by merely observing (though wrongfully) that the assessee has failed to explain the manner of deriving the undisclosed income and substantiation thereof has also not be done by assessee. It is submitted that merely by observing so, the protection under clause (2) of section 271AAA cannot be denied to the assessee, given that in the circumstances of the present case, the assessee has duly made disclosure of undisclosed income and even the manner of deriving such income has been explained by assessee in his statements recorded u/s 132(4).

Reference is drawn to the decision of the Hon’ble ITAT, Mumbai Bench, Mumbai in the case of ACIT v. Kanakia Spaces (P.) Ltd. ITA No. 6763/Mum/2011, in an appeal filed by department, has made the following observations:

“3.1 Ld. CIT(A) after considering the submission deleted the penalty by stating as under:

I have carefully considered the submissions made by the appellant in respect of the penalty levied by the ld.AO. It is seen that the ld.AO has written two sentences at para-8 to conclude that the appellant has not been able to substantiate the source of acquisition of the movable assets. The fact of the matter is that the requirement on the part of an assessee to substantiate the source of income cannot be taken to mean that all evidences in the respect has to be produced. The very fact that the disclosure is made in respect of undisclosed income, all that can be required of an assessee is that the proximate nature of acquisition can be mentioned by him. It cannot be the case that very minute detail thereof would be preserve with evidence which is possible only for the regular income being disclosed by him. The requirement as per Section (2) of Section 27IAAA is only that the manner of earning income should be specified so that undue advantage of telescoping or some other income being brought within the total ambit of undisclosed income surrendered does not happen. From the order of the Ld. A.O also, it is apparent that the penalty is not levied by him on account of some conviction but has been just levied to complete the proceedings. In fact there are no material facts warranting the levy of penalty and, accordingly, the penalty of Rs. 55,00,000/- levied under section 271AAA is directed to be deleted.”

Here, the facts and circumstances of the present case are thus to be read in light of the legal position as enumerated above:

Thus, all the three conditions laid down under sub-section (2) to section 271AAA stand satisfied and therefore the immunity under the said sub-section is available to the assessee, thus, the penalty cannot be levied in the facts and circumstances of the present case.

With regard to the addition sustained by Hon’ble ITAT to the tune of Rs. 50,000/- on account of unexplained investment in furniture and fixtures, it is submitted that during the course of search, a list of furniture and fixtures, electronic consumer durables and gadgets available at the residence of the assessee and his sons were prepared by the search team and on the basis of the list so prepared by the search party, the Ld. AO had made a lump sum addition of Rs. 5,00,000/- to the total income of the assessee for the year under consideration by alleging that the assessee has made unexplained investment in the acquisition of these items though no valuation whatsoever was made at the time of preparation of list during the course of search. While doing so the fact that some of the items appearing in the list were purchased before the block period and assessee’s family has made sufficient amount withdrawals to meet out such expenses was not considered by the AO and also the fact that in the list itself some items were shown as non-working however addition for those items were also made. This fact is clearly evident from the list appearing at page 5 of the assessment order wherein item No. 20 and 21 are being listed as out of pressure. In addition to this assessee has included a sum of Rs. 1.00 crore as investment in various items in the fund flow statement prepared to compute the additional income as a result of search and after including the said amount of Rs. 1.00 crore a sum of Rs. 1,16,31,103/- was computed as income for the year under consideration which fact was accepted the AO in the assessment order passed u/s 143(3) of the Income Tax Act, 1961. After considering these facts this Hon’ble Tribunal was of the opinion that the assessee has not made any undisclosed investment in the after making disclosure of Rs. 1.16 crores, the relevant observations in para 4.7 at page 7 are reproduced herein below for ready reference :

“We have carefully considered the submissions of the ld. representatives of the parties and the orders of the authorities below. We observed that the assessee has made sufficient withdrawals in the preceding assessment years, the details of which are mentioned by the Ld. CIT(A) in the impugned order. However, it is a fact that at the time of preparing inventory no valuation report was obtained by the department and only an estimated addition has been made for Rs. 5.00 lacs by the AO which has been reduced to Rs. 3.00 lacs by the Ld. CIT(A). The said addition has been made on an adhoc basis. It is also observed that the assessee has made disclosure of Rs. 1.16 crores towards undisclosed investment inter alia in furniture(s) and fixture(s). After considering the other additions made, we are of the considered view that electronics items and/or fixtures found at the premises of the assessee could be said to have been procured from the said undisclosed income declared and/or withdrawal made in the preceding assessment years. Since assessee could not furnish details as to when those items were purchased and valued thereof, we are of the considered view that it will be fair and reasonable to sustain the addition to Rs. 50,000/- as against Rs. 3.00 lacs sustained by the Ld. CIT(A). Hence, Ground No. 2 of the appeal taken by the Department is rejected and C.O. of the assessee is allowed in part.”

From the perusal of the observations of this Hon’ble Tribunal as narrated above, it is evident that the Hon’ble Bench has sustained the additions solely for the reason that the assessee could not furnish details as to when those items were purchased and value thereof and further accepted the investment made in furniture etc. from additional income offered by the assessee which cannot tantamount to the concealment of income by the assessee. It is the settled proposition of law that merely because some addition is sustained in appellate proceedings does not lead to belief that assessee has concealed income by not disclosing the mode and manner in which the same is earned and thus liable for levy of penalty for concealment of income more particularly when the Ld. AO has not initiated the penalty proceedings in respect of addition made on account of unexplained investment in furniture & fixture in his assessment order itself.

Further Reliance is placed on the following decisions:

All the above mentioned facts and circumstances of the case as well as contentions of the assessee were duly taken into consideration by the Ld. CIT(A) after which he passed the impugned appellate order and thereby deleted the penalty levied by the Ld. AO.

3. Having considered the submissions of the ld AR, we now refer to the order of the ld. CIT(A) whose findings are reproduced as under:

‘I have carefully perused the order of the AO and submissions of the appellant alongwith the assessment order, statement of the appellant and his son Shri Ravindra Singh taken u/s 132(4). On perusal of the facts on record, I consider with the submissions of the appellant on the following grounds:

Regarding the addition of Rs. 50,000/- confirmed by Hon’ble ITAT in the quantum appeal it is seen that the AO made an estimated addition of Rs. 5 lakh on account of furniture and fixtures. The matter went up for adjudication before Hon. ITAT who sustained the addition of Rs. 50,000/- with the following observations:

“However it is a fact that at the time of preparing inventory no valuation report was obtained by the Department and only an estimated addition has been made for Rs. 5 lakh by the AO which has been reduced to Rs. 3 lakh by the ld. CIT(A). The said addition has been made on an adhoc basis. It is also observed that the assessee has made disclosure of Rs. 1.16 cr. Towards undisclosed investment inter alia in furniture(s) and fixture(s). After considering the other additions made, we are of the considered view and electronics items and/or fixtures found at the premises of the assessee could be said to have been procured from the aid undisclosed income declared and/or withdrawal made in the preceding assessment years. Since assessee could not furnish details as to when those items were purchased and valued thereof , we are of the considered view that it will be fair and reasonable to sustain the addition of Rs. 50,000/- as against Rs. 3 lakhs sustained by the ld. CIT(A). Hence ground No.2 of the appeal taken by the Department is rejected and CO of the assessee is allowed in part.”

Since the entire addition was made on estimate basis and the Hon’ble ITAT has given a finding that part addition was being confirmed because of the assessee’s failure to furnish details as to when these items was purchased the penalty u/s 271AAA cannot be imposed on this addition. The observation of the Hon. ITAT implies that the investment in the household furniture and fixture could have been made in the previous A.Ys in which case the addition would not come within the purview of sec. 271AAA. Moreover, the addition has been made on adhoc estimated basis., the Hon. Jurisdictional high Court has recently deleted, penalty u/s 271(1)(c) on additions made on estimated basis, in the case of CIT v. Krish Tyre Retrading & Rubber Industries (ITA No. 542/2008). Therefore no penalty u/s 271AAA is merited on the adhoc addition of Rs. 50,000/-.Given the above facts of the case it is held that the appellant is entitled for claiming immunity u/s 271AAAand therefore the penalty of Rs. 11,93,110/- lakh is deleted.’

4. We have heard the rival contentions and perused the material available on record. The limited issue under consideration relates to whether the appellant is eligible for immunity from penalty in terms of section 271AAA(2) of the Act. In particular, having satisfied rest all conditions, whether the appellant has specified the manner in which such undislosed income has been derived and substantiates the manner in which such income was derived. In this regard, the ld AR has submitted that it satisfies the said condition as the undisclosed income as represented by the seized papers was duly admitted in the statements recorded u/s 132(4) and the assessee had agreed to pay tax on the income which will be arrived at after deriving the exact amount of income represented by seized papers. Thus, the income on the basis of seized papers was calculated vide a fund flow statement and was duly submitted before the Ld. AO during assessment proceedings, and tax thereon was paid accordingly and a copy of the said fund flow statement has been placed at APB 98.

Further, we refer to following findings of fact by ld CIT(A) which remain uncontroverted before us:

“On perusal of the statement it is seen that specific documents were found and annexurised as A-11 during the course of search and seizure. The son of the assessee was confronted with these documents who have gave specific answer regarding the details of accounted and non accounted transactions with reference to the projects Southern Heights, Unique Harmony, Unique Builders (Reality) and Unique Builders and Developers (Ajit) and RNB Investment. Given the above fact, I am not inclined to agree with the observations of the AO that the appellant did not substantiate or describe the manner in which the unaccounted income was earned.”

“From the above statement it is clear that the main source of his undisclosed income was admitted as being from the real estate business in which there were unaccounted receipts on sale of property. This was admitted and explained by in detail by Shri Ravindra Singh during the course of search and post search enquiries when confronted with the incriminating documents. During the course of these statements of the manner of earning of this income was also explained and specific names were also mentioned. Thus it is seen that during the course of statements u/s 132(4) and subsequently in statement u/s 131, the appellant was confronted with specific documents with reference to income from his profession, share transactions and investments in the land and other expenditure. The transactions as per these documents which could not be verified from the regular books of accounts were surrendered by him. Thus it cannot be held that the manner of deriving the income was not substantiated by the appellant because the substantiating evidence by way of seized documents was with the Department and was confronted with the appellant, during the course of statements on the basis of which he made the surrender.”

In light of above, in respect of undisclosed income of Rs. 1,16,30,103/- admitted by the appellant and offered to tax in the return of income, the appellant is eligible for immunity from penalty in terms of section 271AAA(2) of the Act as he has fulfilled all the conditions stated therein. In respect of penalty imposed qua the addition of Rs. 3,00,000/-, the said addition has been deleted except for an amount of Rs 50,000 on an estimated basis by the Coordinate Bench in the quantum proceedings. The penalty which thus survives relates to estimated addition of Rs 50,000 which has rightly been deleted by the ld CIT(A). We do not see any reason to interfere with the order of ld. CIT(A), which is hereby upheld.

In the result the appeal filed by the Revenue is dismissed.