Without finding to year of purchase, jewellery found in locker not undisclosed income u/s 271AAB

In the absence of finding as to the year of purchase, jewellery found in locker would not represent the undisclosed income as defined in the explanation to section 271AAB of the Act  

ABCAUS Case Law Citation:
ABCAUS 2887 (2019) (04) ITAT

Important Case Laws Cited/relied upon by the parties
CIT vs. Manjunatha Cotton & Ginning Factory 359 ITR 565
Muninaga Reddy vs. ACIT 396 ITR 398
CIT vs. SSA’s Emerald Meadows 73 taxmann.com 248 (SC)
Ravi Mathur vs. DCIT
Raja Ram Maheshwari vs. DCIT
M/s. Rambhajo’s vs. ACIT
Rajendra Kumar Gupta vs. DCIT

During the course of search and seizure action u/s 132 of the Income Tax Act, 1961 (the Act), the assessee disclosed undisclosed income inter alia on account unexplained expenditure on jewellery.  Later, the assessee filed his return of income under section 139(1) including the said additional income.

The assessment was completed under section 143(3) read with section 153B(1)(b) of the Act accepting the returned income.

Subsequently, the AO initiated the penalty proceedings under section 271AAB of the Act by issuing show cause notices. The assessee raised objection against the levy of penalty by filing the reply and written submissions and mainly contended that the additional income was disclosed and offered to tax to buy peace and avoid litigation and, therefore, the penalty cannot be levied under section 271AAB of the Act.

The AO did not accept the contention of the assessee and levied the penalty @ 10% of the undisclosed income while passing the order which was confirmed by CIT(A).

Before the Tribunal, the assessee claimed that initiation of penalty proceedings was illegal due to show cause notice being defective. That the notices were issued in routine manner without mentioning under which clause of section 271AAB(1) of the Act the assessee was liable for penalty.

It was also contended that the AO while passing the penalty order under section 271AAB had not given a finding that the income disclosed by the assessee is an undisclosed income as per definition provided in the explanation to section 271AAB(1) of the Act.

The assessee submitted that no incriminating material was found during the course of search and the disclosure was taken only on the basis of the valuation of jewellery at current rate instead of the actual cost of acquisition of the jewellery.

Therefore, he submitted that considering the status of the assessee’s family and the number of family members, the jwellery found during the course of search was not abnormal and acquired in the long back.

It was contended that part of the jewellery was even not purchased but inherited from the forefathers. Hence the disclosure obtained on account of the jewellery would not constitute undisclosed income of the assessee for the purpose of levy of penalty.

The Tribunal observed that there was no dispute that the jewellery found during the course of search and seizure action belonged to the assessee’s family. Therefore, once the jewellery was not found to be purchased during the year under consideration, then the same could not be treated as an undisclosed income for the year under consideration.

The Tribunal noted that the department had not found that the jewellery was purchased or acquired by the assessee and other family members only during the year under consideration. The jewellery belonged to the family members of the assessee and found in the locker was old jewellery and, therefore, the valuation of the jewellery for the purpose of computing the undisclosed income by applying the current rates on the gross weight was not permissible.

The Tribunal opined that hence when the department had not made any efforts to ascertain the year of acquisition of the jewellery and then to apply the rates as prevailing in the year of acquisition and some of the jewellery even not acquired by the assessee or the family members but was inherited, then the manner in which the disclosure was obtained on account of the jewellery would not represent the undisclosed income as defined in the explanation to section 271AAB of the Act.

The Tribunal observed that the order passed by the AO under section 271AAB as well as the order of the CIT (A) were silent on the issue of incorrect valuation as well as the timing of acquiring of the personal jewellery of the assessee and the family members. Therefore, in the facts and circumstances of the case, the personal jewellery of the assessee and family members acquired in the past and some part of which was also inherited will not fall in the ambit of undisclosed income. Hence the penalty levied by the AO against such disclosure was not sustainable.

The Tribunal pointed out that the statement recorded under section 132(4) itself would not either constitute an incriminating material or undisclosed income in the absence of any corresponding asset or entry in the seized document representing the undisclosed income.

Accordingly, the penalty levied by the AO under section 271AAB of the Act was deleted.

On the issue of the validity of the notice also, following the decision of the Coordinate Bench as well as Hon’ble Jurisdictional High Court, it was held that the order passed under section 271AAB was not sustainable and quashed.

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