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The Asst. CIT,, Visakhapatnam v. M/s. Marvel Associates,, Visakhapatnam

Income Tax Appellate Tribunal

Mar 16, 2018

Judgment

Subsequent
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CaseIQ

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Tribunal Summary — M/s Marvel Associates, Visakhapatnam (ITA No.147/Vizag/2017)

Factual and Procedural Background

This appeal by the Revenue challenges the order of the Commissioner of Income Tax (Appeals)-3, Visakhapatnam (CIT(A)) dated 6.1.2017 for assessment year 2013-14. A search under section 132 was conducted on 20.12.2012. During the search the assessee admitted additional income of Rs.4.80 crores for financial year 2012-13 onwards, and admitted additional income of Rs.1,48,84,142 for assessment year 2013-14. The assessee filed return declaring the admitted amount; the assessment recorded a disallowance under section 40(a)(ia) of Rs.3,35,000 and separate penalty proceedings under section 271AAB were initiated.

The Assessing Officer (AO) issued a show cause notice and, being not satisfied with the assessee's explanation, imposed penalty at 30% of the undisclosed income (Rs.44,65,543). The assessee appealed to the CIT(A), who reduced the penalty to 10% (finding concealment but treating it as falling in the 10% category). The Revenue appealed to the Income Tax Appellate Tribunal (the Tribunal). The assessee filed a cross-objection seeking cancellation of the entire penalty. The Tribunal heard the appeal and cross-objection and pronounced its order on 16.03.2018.

Legal Issues Presented

Whether penalty under section 271AAB of the Income Tax Act is mandatory/automatic on admission under section 132(4) or is discretionary and to be imposed on merits.
Whether an admission made during search under section 132(4), without corroborative incriminating material or undisclosed assets/entries found in the search, gives rise to "undisclosed income" attracting penalty under section 271AAB.
Whether a loose sheet (page No.107 of Annexure A/GS/MA/1), which contains projected profitability/cost figures, constitutes incriminating material establishing undisclosed income or concealment sufficient to levy penalty under section 271AAB.

Arguments of the Parties

Appellant (Revenue / Assessing Officer)

The AO imposed penalty at 30% because the assessee's admission at the time of search indicated undisclosed income; the AO was not convinced by the assessee's explanation that the admission was merely to avoid prolonged litigation.
The AO and the CIT(A) treated the loose sheet (page No.107) discovered during search as incriminating material showing a difference in cost/sale price per sq. ft. (AO recorded Rs.3,571 per sq.ft. on the loose sheet versus Rs.2,200–2,300 per sq.ft. stated by the assessee), and relied upon that to conclude concealment of income.
The Revenue appealed to the Tribunal against the CIT(A)'s order insofar as it reduced the penalty, seeking affirmation of penalty (i.e., the AO's view that penalty was properly levied).

Respondent (Assessee / Authorized Representative)

The assessee contended that penalty under section 271AAB is not mandatory but discretionary — parimateria with section 158BFA(2) — and that the AO should exercise discretion; when there is reasonable cause penalty is not exigible.
The assessee argued that the admission was made to "buy peace" and avoid protracted litigation and that there was no incriminating material found during the search besides a loose sheet which represented projections, not actuals or documentary proof of undisclosed receipts or assets.
The assessee maintained that no money, bullion, jewellery, undisclosed asset or entry in books of account was found to establish undisclosed income; therefore penalty should not be imposed or should be cancelled entirely.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Radhakrishna Vihar (Hon'ble A.P. High Court), ITTA No.740/2011	Distinction between mandatory and directory language in penalty provisions — where statute uses "may direct" it is directory (discretionary) whereas other words may be mandatory.	The Tribunal relied on this authority to support its conclusion that the word "may" in s.271AAB (and identical wording in s.158BFA(2)) indicates discretion to the AO and that imposition of penalty is not automatic/mandatory but must be exercised reasonably on merits.
Ajay Sharma Vs. DCIT (2012) 32 CCH 334 (ITAT Delhi Bench)	Holding that additions or penalties cannot be sustained on the basis of loose/seized documents alone when there is no direct material establishing undisclosed income.	The Tribunal cited this decision to support the view that an addition or penalty based solely on a loose document (seized paper/projection) does not closely prove concealment; applying that principle, the Tribunal found the loose sheet insufficient to establish undisclosed income and cancelled the penalty.

Court's Reasoning and Analysis

The Tribunal's analysis proceeded in two main strands: statutory interpretation of section 271AAB and fact-based evaluation of materials seized during search.

Statutory interpretation:

The Tribunal compared the wording of section 271AAB with section 158BFA(2). It emphasized that the phrase "AO may direct" in s.271AAB (and identical language in s.158BFA(2)) confers discretion on the Assessing Officer rather than mandating automatic penalty. The Tribunal observed that subsection (3) of s.271AAB incorporates sections 274 and 275 (procedure and appellate provisions), which indicates a legislative intent to permit judicial consideration and procedural safeguards before imposing penalty.
The Tribunal highlighted that section 274 requires that the assessee be heard before a penalty order is made; this procedural requirement enforces the principle that imposition of penalty must be based on reasons and evidence, not mechanically imposed upon an admission under s.132(4).
Relying on the cited High Court authority (Radhakrishna Vihar), the Tribunal held that "may direct" is directory and that penalty under s.271AAB must be imposed on merits and in a reasonable and rational manner.

Application to the facts:

On the factual matrix, the Tribunal noted that the only item found during the search that the Revenue relied upon was a loose sheet marked page No.107 of Annexure A/GS/MA/1. The sheet contained projected profitability figures and references to cost and approximate sale price, described in the order as a "summary of the projected profitability statement".
The Tribunal observed that neither the AO nor the CIT(A) had undertaken verification of the projections against the books of account, actual sales deeds, or other documentary evidence. The AO treated the figure Rs.3,571 per sq.ft. on the loose sheet as incriminating, in contrast to the assessee's stated cost per sq.ft. (Rs.2,200–2,300), but the Tribunal found no corroboration that the projections represented actual undisclosed income or assets.
Section 271AAB(c)'s definition of "undisclosed income" requires that income be represented by money, bullion, jewellery, other valuable articles, or entries/documents found in course of search that were not recorded in books or otherwise disclosed. The Tribunal found that the loose sheet was only a projection and did not amount to discovery of undisclosed assets, entries, or receipts in the sense required by the section.
The Tribunal relied on Ajay Sharma (ITAT Delhi Bench) to reinforce the proposition that loose documents/seized papers which do not directly and firmly establish undeclared receipts are insufficient to sustain additions or penalties. Applying that principle to the present facts, the Tribunal concluded that there was no incriminating material proving undisclosed income.
Given the absence of corroborative incriminating material, coupled with the discretionary character of s.271AAB, the Tribunal concluded there was no basis to sustain the penalty and set aside the penalty orders by the AO and the CIT(A).

Holding and Implications

Holding:

The appeal filed by the Revenue is dismissed; the penalty under section 271AAB of the Income Tax Act (amounting to Rs.44,65,543) is cancelled.

Additional procedural outcome: The assessee's cross-objection seeking cancellation of the penalty was allowed; the Tribunal set aside the penalty levied by the lower authorities with respect to bank deposits and gold and jewellery and dismissed the Revenue's appeal.

Implications:

Direct effect: The assessed penalty against M/s Marvel Associates is vacated and the Revenue's appeal to restore or increase the penalty fails.
Scope: The Tribunal expressly applied existing precedent and statutory interpretation to hold that imposition of penalty under s.271AAB is discretionary and must be grounded on incriminating material or corroborative evidence of undisclosed income. The Tribunal did not purport to lay down a new, general rule beyond applying these principles to the facts of this case.
Limitations: The order emphasizes that mere admission under s.132(4) or reliance on a seized loose sheet containing projections, without corroborative evidence linking projections to actual undisclosed receipts/entries/assets in books or sale deeds, is insufficient to sustain a penalty under s.271AAB.

Order pronounced in open court on 16.03.2018. Bench: V. Durga Rao (Judicial Member) and D.S. Sunder Singh (Accountant Member).

Show all summary ...

PER D.S. SUNDER SINGH, Accountant Member: This appeal filed by the revenue is directed against order of the Commissioner of Income Tax (Appeals)-3 {CIT(A)}, Visakhapatnam vide ITA No.70/2015-16/CIT(A)/VSP/2016-17 dated 6.1.2017 for the assessment year 2013-14.

2. All the grounds of appeal are related to the imposition of penalty u/s 271AAB of the Act. In this case, a search u/s 132 of the Act was carried out in the assessees case on 20.12.2012. During the course of search, the assessee had admitted the additional income of Rs.4.80 crores as additional sales for the financial year 2012-13 onwards and the additional income admitted for the assessment year 2013-14 was Rs.1,48,84,142/-. Accordingly, the assessee filed the return of income and the assessment was completed making the disallowance u/s 40(a)(ia) of the Act for an amount of Rs.3,35,000/- and penalty u/s 271AAB of the Act were initiated separately. During the penalty proceedings, the A.O. issued show cause notice as to why the penalty should not be levied u/s 271AAB of the Act. In reply, the assessee submitted that the assessee filed return of income on the basis of turnover and the books of accounts were regularly maintained. The said turnover was disclosed in the profit & loss account ITA No.147/Vizag/2017 M/s. Marvel Associates, Visakhapatnam and included the sum of Rs.1,48,84,142/- towards additional sale price offered sold/booked for sale on the date of search. The additional income was part of Rs.4.80 crores admitted by the assessee at the time of search. The above additional admission was given on the basis of additional sale price worked out at Rs.500/- per sq.ft. for 96000 Sq.ft. sold/booked up to the date of search. The assessee submitted before the A.O. that no incriminating material was found suggesting receipt of any additional sale price by the firm. The admission of additional income was only to buy peace and to avoid protracted litigation as stated by the assessee. The assessee had filed the return of income and paid the taxes. Since there was no incriminating material and there was no evidence found during the course of search relating to the undisclosed income or undisclosed expenditure, the assessee requested to drop the penalty proceedings initiated u/s 271AAB of the Act. Not being convinced with the explanation offered by the assessee, the A.O. imposed penalty @ 30% of the undisclosed income amounted to Rs.44,65,543/-.

3. Aggrieved by the order of the A.O., the assessee went on appeal before the CIT(A) and the Ld. CIT(A) scaled down the penalty to 10% instead of the penalty levied by the A.O. at 30%. The Ld.CIT(A) did not accept the contention of the assessee that there was no incriminating ITA No.147/Vizag/2017 M/s. Marvel Associates, Visakhapatnam material and observed that page No.107 of Annexure A/GS/MA/1 showed that the cost per sq.ft. at Rs.3571/- as against Rs.2200/- to Rs.2300/- per sq.ft. stated to have been incurred by the assessee. Only when the A.O. has pointed out the difference in cost per sq.ft., the assessee firm had admitted the additional income. CIT(A) further opined that had the AO did not raise this issue, the assessee would not have offered the additional income. The Ld CIT(A) observed that the department has found loose sheet bearing page No.107 of Annexure A/GS/MA/1, which is an incriminating material, hence, held that this is a clear case of concealment of income. Since the assessee has explained the modus operandi, CIT(A) held that the penalty falls under 10% category, accordingly confirmed the penalty at 10% instead of 30%.

4. Aggrieved by the order of the CIT(A), the assessee is in appeal before this Tribunal.

5. 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 the A.O. has levied the penalty under the impression that the levy of penalty in the case of admission of income u/s 132(4) is mandatory. The Ld. A.R. further stated that penalty u/s 271AAB of the Act is not mandatory but discretionary. The provisions of section 271AAB of the Act is parimateria ITA No.147/Vizag/2017 M/s. Marvel Associates, Visakhapatnam with that of section 158BFA of the Act relating to block assessment and accordingly argued that the levy of penalty under section 271AAB is not mandatory but discretionary. When there is reasonable cause, the penalty is not exigible. The Ld. A.R. 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 are identical. Hence, argued that the penalty section 271AAB of the Act penalty is not automatic and it is on the merits of each case. For ready reference, we reproduce 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 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 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 ITA No.147/Vizag/2017 M/s. Marvel Associates, Visakhapatnam

(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.

6. 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 are 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 view. ITA No.147/Vizag/2017 M/s. Marvel Associates, Visakhapatnam 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.

7. The legislature has included the provisions of section 274 and section 275 of the Act in 271AAB of the Act with clear 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 plain reading of section 271AAB of the Act, it is evident 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 merits 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. Honble A.P. High Court in the case of Radhakrishna Vihar in ITTA No.740/2011 while dealing with the penalty u/s 158BFA held that we are of the opinion that while the words shall be liable ITA No.147/Vizag/2017 M/s. Marvel Associates, Visakhapatnam 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.

8. In this case, a search u/s 132 of the Act was carried out in the assessees premises but no evidence was found during the course of search except a loose sheet which was marked as Page No.107 of Annexure A/GS/MA/1. Careful verification of the loose sheet found during the course of search shows the projections and profitability but not the actual expenditure incurred by the assessee. As submitted by the assessee before the A.O. as well as Ld. CIT(A), no other material was found during the search proceedings. Section 271AAB sub clause (c) of the Act defines undisclosed income as under: (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 ITA No.147/Vizag/2017 M/s. Marvel Associates, Visakhapatnam 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]

9. Penalty u/s 271AAB attracts on undisclosed income but not on admission made by the assessee u/s 132(4). The AO must establish that there is undisclosed income on the basis of incriminating material. In the instant case a loose sheet was found according to the A.O., it was incriminating material evidencing the undisclosed income. In the penalty order the AO observed that loose sheet shows the cost per square feet is Rs.3571/- per sft and assessee stated to have submitted in sworn statement cost per sq.feet at Rs.2200/- to Rs.2300/- per sq.feet. However neither the AO nor the Ld.CIT(A) has verified the cost of construction with the books and projections found at the time of search. The counsel argued that it was mere projection but not the actuals. The write up heading also mentioned that summary of the projected profitability statement. There is no evidence to establish that projections reflected in the loose sheet is real. No other material was ITA No.147/Vizag/2017 M/s. Marvel Associates, Visakhapatnam found during the course of search indicating the undisclosed income. There was no money, bullion, jewellery or valuable article or thing or entry in the books of accounts or documents transactions were found during the course of search indicating the assets not recorded in the books of accounts or other documents maintained in the normal course, wholly or partly. The revenue did not find any undisclosed asset, any other undisclosed income or the inflation of expenditure during the search/ assessment proceedings. Though a loose sheet of page No.107 of Annexure A/GS/MA/1 was found that does not indicate any suppression of income but it is only projection of profit statement. The amount of Rs.3571/- mentioned in the projections refers to cost and profit which is approximate sale price but not the cost as stated by the AO in the penalty order. The cost of construction in the projections projected at Rs.2177/- which is in synch with the statement given by the assessee. The AO was happy with the disclosure given by the assessee and did not verify the factual position with the books of accounts and projections and bring the evidence to unearth the undisclosed income. Neither the A.O. nor the investigation wing linked the cost of profit or cost of asset to the entries in the books of accounts or to the sales conducted by the assessee to the sale deeds. Therefore, we are unable to accept the contention of the revenue that the loose sheet found ITA No.147/Vizag/2017 M/s. Marvel Associates, Visakhapatnam during the course of search indicates any undisclosed income or asset or inflation of expenditure. The Honble ITAT Delhi Bench in the case of Ajay Sharma Vs. DCIT (2012) 32 CCH 334 held that with respect to the addition on account of alleged receivables as per seized paper, there is no direct material which leads and establishes that any income received by the assessee has not been declared by the assessee. An addition has been made on the basis of loose document, which did not closely prove any concealment or furnishing of inaccurate particulars by the assessee. Hence penalty u/s 158BFA (2) of the Act is not leviable. The facts of the assessees case shows that there was no undisclosed income found during the course of search and no incriminating material was found, hence we hold that there is no case for imposing penalty u/s 271AAB of the Act, accordingly, we set aside the order of the lower authorities and cancel the penalty u/s 271AAB of the Act.

10. In the result, the appeal filed by the revenue is dismissed. Cross Objection No.44/Vizag/2017:

11. The assessee filed C.O. against the order passed by the Ld. CIT(A) by partly sustaining the penalty levied by the A.O. u/s 271AAB of the Act and requested to cancel the entire penalty of ` 44,65,543/- levied u/s 271AAB of the Act. ITA No.147/Vizag/2017 M/s. Marvel Associates, Visakhapatnam

12. In view of our findings in the preceding paragraphs, the penalty levied by the lower authorities u/s 271AAB of the Act on bank deposit as well as the gold and jewellery was set aside and dismissed the appeal of the revenue, hence, the cross objection filed by the assessee is allowed.

13. In the result, appeal filed by the revenue is dismissed and the C.O. filed by the assessee is allowed. The above order was pronounced in the open court on 16th Mar18. Sd/- Sd/- (. ) ( .. ") (V. DURGA RAO) (D.S. SUNDER SINGH) /JUDICIAL MEMBER /ACCOUNTANT MEMBER # /Visakhapatnam: ' /Dated : 16.03.2018 VG/SPS )# *#/Copy of the order forwarded to:-

1. / The Appellant The ACIT, Central Circle-2, Visakhapatnam

2. / The Respondent M/s. Marvel Associates, Flat No.201, Sarada Towers, FACOR Layout, Ramnagar, Visakhapatnam

3. + / The Pr. CIT (Central), Visakhapatnam

4. + () / The CIT (A)-3, Visakhapatnam

5. # ., ., # / DR, ITAT, Visakhapatnam

6. / Guard file / BY ORDER // True Copy // Sr. Private Secretary ITAT, VISAKHAPATNAM