Under section 271AAB undisclosed income also means additional income due to bogus expense recorded in the books of accounts – ITAT
ABCAUS Case Law Citation:
ABCAUS 3820 (2023) (11) ITAT
Important Case Laws relied upon by parties:
ACIT vs. Sri Mahender Kumar Agarwal
CIT vs. Harjeev Aggarwal, 70 taxmann.com 95
Radhey Shyam Agarwal vs. DCIT [2017] 88 taxmann.com 336
CIT vs. Miss Lata Mangeshkar [1974] 97 ITR 696
Chand Pungliya vs. ACIT, 181 ITD 261
Khadar Khan & Sons 300 ITR 157
In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming penalty under section 271AAB of the Income Tax Act, 1961 (the Act).
The appellant assessee was a private limited company, engaged in civil contract works.
The Assessee filed the return of income for the relevant assessment year. Subsequently a search and seizure operations under section 132 of the Act were conducted. In pursuance of notice under section 153A of the Act the assessee again filed the return of income by declaring income increased by Rs. one crore.
During the assessment, the Assessing Officer (AO) observed that during the course of search and seizure operations conducted in the premises of the assessee, it was observed that there were various employees present in the attendance roll of the assessee company, who also appeared in the list of sub-contractors.
When such employee’s were questioned about the execution of sub-contracts, they stated that they did not execute any sub-contracts from the company and that the amounts credited to their accounts were withdrawn and given back in cash to the Managing Directors of the company.
The material found during the search and also the statements of the employees were confronted to the Managing Directors of the company. They admitted the same to be true and correct, and declared the said additional income.
While concluding the assessment the Assessing Officer initiated penalty proceedings under section 271AAB(1A) of the Act, and levied penalty being 30% of the additional income declared.
Aggrieved by such levy of penalty, assessee preferred an appeal before the CIT(A) and contended that though the employees of the assessee denied to have executed this contract works, the fact remained that the sub-contract works stood executed and, therefore, the natural inference must be that the assessee must have incurred such expenditure represented under the head ‘sub-contract’ to the so-called employee.
It was further contended by the assessee before the CIT(A) that in the line of business conducted by the assessee there will be certain incidental expenditure and to meet the same, this expenditure was booked. In this process, there arose some confusion which is bound to occur, but as a matter of fact, the amount represented by the sub-contract was actually spent to complete the works undertaken from the Government.
It was also contended that mere admission of income in a statement recorded under section 132(4) of the Act, ipso facto does not constitute undisclosed income unless the same was tested on the parameters laid down by law. The assessee further pleaded that penalty cannot be levied on the basis on mere admission in a statement in the absence of incriminating evidence.
Assessee placed reliance on certain decision in support of his arguments.
However, the CIT(A) returned a finding that the modus operandi that has been followed by the assessee for over years was to inflate the expenditure and reduce the taxable income by taking accommodation bill from their own employees under the head ‘sub-contracts’ and it had been a conscious act of tax evasion, by resorting to undue influence on the subordinates.
According to the CIT(A), it was only the seized material that lead to the admission of income by the assessee, and such disclosure was not at all voluntary. Recording so, learned CIT(A) dismissed the appeal.
Before the Tribunal, the assessee contended that the provisions of section 271AAB of the Act were not applicable to the facts of the case as the entire disclosures during the search proceedings was not based on any seized material, but was a disclosure made voluntarily under section 132(4) statement.
The assessee also placed reliance on CBDT circulars and decision of Hon’ble Supreme Court and contended that the levy of penalty was unsustainable.
Further, it was submitted by the assessee that the levy of penalty is not mandatory, but discretionary, and it was noted and held by the Co-ordinate Bench of the Tribunal
that any disclosure of additional income in the statement recorded under section 132(4) of the Act itself is not sufficient to levy penalty under section 271AAB of the Act, until and unless income so disclosed by assessee falls in definition of ‘un-disclosed income’ defined in Explanation to section 271BBA(1) of the Act.
The assessee placed reliance on the decision of the Hon’ble High Court for the principle that a statement recorded under section 132(4) of the Act can form basis for a block assessment only, if such statement relates to any incriminating evidence of undisclosed income unearthed during search.
The Tribunal noted that when the Managing Directors of the company were confronted with the seized material and the statements of the so called sub-contractors, who were actually the employees of the assessee, they categorically admitted the statements made by the Accountants of the assessee to be true and correct; whereas all such four persons in one voice stated that they never undertook any sub-contract from the assessee, the amount credited to their bank account towards sub-contract was returned to the Managing Directors. It was only in this context the Managing Directors surrendered the amount which was subject of penalty under dispute.
The Tribunal opined that in the circumstances it cannot be stated that the additional income that was assessed was solely based on the statements recorded under section 132(4) of the Act but the material seized during the search and seizure operation under section 132 of the Act ultimately lead to the admission of income by the assessee and it was but for the search.
Further the ITAT dismissed the plea of the assessee that the elements and degree of proof required to hold the assessee liable for penalty under section 271AAB of the Act are different from those under section 271(1)(c) and opined that under section 271AAB of the Act, the undisclosed income also means any income by any entry in respect of an expense recorded in the books of accounts and in this case, the additional income was the result of falsification of the sub-contract expense, recorded in the books of the assessee.
As a result, appeal of the assessee was dismissed.
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