Market value of stock no basis to derive undisclosed income. Penalty u/s 271AAB not mandatory

Market value of stock instead of cost no basis to determine undisclosed income. Penalty u/s 271AAB not mandatory

ABACUS Case Law Citation
ABCAUS 3363 (2020) (08) ITAT

Important case law relied upon by the parties:
M/s Sumangal Gems vs. DCIT

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming penalty u/s 271AAB imposed by the Assessing Officer (AO) of the Income Tax Act, 1961 (the Act).

A search and seizure action u/s 132 of the Act was carried out on a Business Group and assessee was one of the members of the said Group.

During the course of search, the statement of the partner of the assessee firm was recorded u/s 132(4) wherein he surrendered additional business income on account of stock.

Thereafter, the assessee firm filed its return of income on declaring total income including the additional income surrendered during the course of search. 

The assessment u/s 143(3) read with section 153B(1)(b) was completed accepting the returned income except for a trading addition. Separately, the penalty proceedings u/s 271AAB were initiated by way of issuance of notice u/s 274 read with section 271AAB of the Act and thereafter, the AO levied the penalty u/s 271AAB @ 10% being the undisclosed income of the specified previous year.

In the penalty order, the Assessing Officer referred to the assessment order and stated that the assessee had not filed any further appeal against the said order.

Further, the Assessing officer held that in view of the provisions of section 271AAB, it is clear that there is no  scope  of  escapement for levy of penalty rather the provisions provides for the quantum for levy of penalty depending upon facts and circumstances of the each case and the assessee contentions that he had made bona fide disclosure were not found acceptable.

On appeal, the CIT(A) noted that the assessee had made disclosure of additional income and same was also offered in the return filed u/s 153A of the Act.

The CIT(A) further stated that intention of legislature was very clear that section 271AAB provides for mandatory levy of penalty on surrender of undisclosed income though quantum thereof may vary subject to fulfillment of certain conditions and thus, unlike section 271AAA, wherein immunity from imposition  of penalty is possible subject to fulfillment of conditions, there is no immunity clause provided from penalty u/s 271AAB.

It was accordingly held that the penalty u/s 271AAB is mandatory in nature and there is no discretion with the Assessing Officer (AO) and the penalty so levied by the Assessing Officer was confirmed.

The Tribunal observed that the Assessing officer had merely gone by the surrender statement of partner of the assessee firm where the stock has been valued at market price as on the date of search and had not examined the matter from the  perspective of determining any excess stock and the cost of such stock which was not recorded in the books of accounts. 

The Tribunal noted that there was no finding that there was any excess stock which had been physically found and which had not been recorded in the books of accounts as on the date of search.

The Tribunal stated that it was clear that difference in stock of goods as per books and as found at the time of search was  on account of valuation of such stock at the market value instead of cost and the same could not be a basis to hold that it represented undisclosed income so defined in explanation to section 271AAB of the Act.

Further the Tribunal observed that the Coordinate Bench had held that it was a consistent view of this Tribunal across various Benches that levy of penalty u/s 271AAB is not automatic in nature but the AO has the discretion and has to take a decision after arriving at the conclusion that the  income disclosed by the assessee in the statement recorded  u/s 132(4) of the Act is an “undisclosed income” in terms of Section 271AAB(1) r/w. explanation defining the undisclosed income,

The Bench had held that the order levying the penalty is an appellable order and therefore, the fact that the statue has provided for an appellate remedy against the levy of penalty, the levy of penalty cannot be held as mandatory but the same will depend upon facts and circumstances of each case.

Accordingly, on the facts and circumstances of the case and following the judicial decision, the Tribunal held that the penalty levied u/s 271AAB was not sustainable as it did not satisfy the requirements as so prescribed.

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