AO to Record Specific Finding That Undisclosed Income Was Based on Tangible Material Before Levying Penalty u/s 271AAA

Case Details: Ajay Kumar Sood Engineers and Contractors vs. Deputy Commissioner of Income-tax - [2024] 165 taxmann.com 75 (Chandigarh - Trib.)

Judiciary and Counsel Details

• Sanjay Garg, Judicial Member & Vikram Singh Yadav, Accountant Member
• Sudhir Sehgal, Adv. for the Appellant. 
• Anil Kumar Sharma, Sr. DR for the Respondent.

Facts of the Case

During the search and seizure operation under section 132(1) in case of firm, a partner on behalf of the assessee firm surrendered a sum as income in his statement. Subsequently, a return of income was filed by the assessee firm showing such surrendered income and paid due taxes and interest thereon.

The Assessing Officer (AO) contended that the assessee had failed to specify the manner in which it had derived the additional undisclosed income which was mandatory requirement as per the provisions of Section 271AAA. Consequently, penalty proceedings under section 271AAA were initiated against the assessee firm.

On appeal, the penalty under section 271AAA imposed by the AO was sustained. Aggrieved by the order, an appeal was filed to the Chandigarh Tribunal.

ITAT Held

The Tribunal held that the penalty provisions have to be strictly construed. In the instant case, the AO invoked the provisions of Section 271AAA. Thus, whether the conditions specified therein have been fulfilled before the penalty is fastened on the assessee firm needs to be seen.

Section 271AAA provides that the AO may direct that where the search has been initiated on or after June 1, 2007, the assessee shall pay by way of penalty at the rate of 10% of the undisclosed income of the specified previous year. Therefore, the essential condition that needs to be satisfied before the levy of a penalty is that there is an undisclosed income of the specified previous year as found during the course of the search.

The term “undisclosed income” is specifically defined in the explanation to section 271AAA to mean any income of the specified previous year represented either wholly or partly by any money, bullion, jewellery or other article or thing found during the course of search which has not been recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous year.

Therefore, the fact that some undisclosed income was surrendered during the search, that the surrender is voluntary and emerges out of the statements recorded during the search, or that the undisclosed income was not recorded in the books of account prior to the date of search is not sufficient to fasten the levy of penalty.

The undisclosed income so surrendered and admitted during the course of the search has to fall within the four corners of the definition of the undisclosed income, and only in situations where it satisfies the said definition the levy of penalty can be said to be justified and not otherwise. It is for the AO to record a specific finding that undisclosed income, as so defined, has been found based on tangible, verifiable material found during the course of the search, and the onus is thus on the AO to satisfy the conditions before the charge for levy of penalty is fastened on the assessee.

Accordingly, the penalty under section 271AAA was deleted.

List of Cases Referred to

• following Coordinate Benches decisions such as DCIT v. Shri Sanjee Goyal ITA No. 109/Chd/2015 (para 6.3),
• Others (Chd Trib), Shri Manoj Sahni v. DCIT ITA No. 1372/Chd/2017 (para 6.3),
• Others (Chd Trib), DCIT v. Shri Pardeep Aggarwal ITA No. 1100/Del/2015 (para 6.3),
• Asstt. CIT v. Munish Kumar Goyal [2014] 45 taxmann.com 563/[2015] 152 ITD 453 (Chandigarh – Trib.) (para 6.3),
• TTJ (Del Trib), Pramod Kr. Jain v. DCIT 77 DTR (CTK. Trib) 244 (para 6.3),
• Ashok Kr. Sharma v. DCIT 77 DTR (CTK. Trib) 241 (para 6.3),
• CIT v. Sudhir jain [2014] 41 taxmann.com 234 (Delhi) (para 6.3)
• CIT v. Mahendra C. Shah [2008] 172 Taxman 58/299 ITR 305 (Gujarat) (para 6.3).