DCIT, C-III, Ludhiana V. M/s SEL Manufacturing Co. Ltd., Ludhiana

ITA 165/CHANDI/2021

AI Insights

The case revolves around a penalty imposed by the Assessing Officer (AO) under section 271AAB of the Income Tax Act, 1961, following a search operation at the premises of M/s SEL Manufacturing Co. Ltd. The company had disclosed additional income during the search, which was later contested in terms of its classification as 'undisclosed income'. The Ld. CIT(A) found the penalty unjustified, leading to the Revenue's appeal to the Tribunal. The Tribunal's decision affirmed the Ld. CIT(A)'s order, emphasizing that the disclosed income did not meet the criteria of 'undisclosed income' as required for the penalty under section 271AAB.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 127793 (ITAT-CHANDIGARH)
• Duration Of Justice: 1 year(s) 6 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-01-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 04-01-2023
• Assessment Year: 2013-2014
• Appeal Filed On: 22-06-2021
• Other Referred Cases: M/s SEL Textiles Limited Vs. DCIT, Bright Enterprises Pvt. Ltd Vs. CIT, Jalandhar, CIT Vs. Kapsons Associates, ACIT Vs. Janak Global Resources Pvt Ltd, Hero Cycles (P) Ltd Vs. CIT, CIT (LTU) Vs. Reliance Industries Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Document seized; Earning of tax free income; Documents seized; Set aside
• Section: 132; 143(3); 153A; 14A; 274; 43; 153

Judgement Text

आयकर अपील य अ धकरण,च डीगढ़ यायपीठ “बी” , च डीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCH “B”, CHANDIGARH ी स ु धांश ु ीवा तव, या यक सद य, एवं ी #व$म &संह यादव, लेखा सद य BEFORE: SHRI. SUDHANSHU SRIVASTAVA, JM & SHRI. VIKRAM SINGH YADAV, AM ITA NO. 165/Chd/ 2021 Assessment Year : 2013-14 The DCIT, Central Circle-III, Ludhiana M/s SEL Manufacturing Co. Ltd. 274, GT. Road, Dhandari Khurd, Ludhiana PAN NO: AAHCS9189E Appellant Respondent ! " Assessee by : Shri Ashwani Kumar, C.A and Shri Bhavesh Jindal, CA # ! " Revenue by : Shri Sarabjeet Singh, CIT, DR $ % ! & Date of Hearing : 05/01/2023 '()* ! & Date of Pronouncement : 06/01/2023 आदेश/Order PER VIKRAM SINGH YADAV, A.M. : This is an appeal filed by the Revenue against the order of the Ld. CIT(A)-5, Ludhiana dt. 13/04/2021 pertaining to A.Y. 2013-14, wherein the sole ground of appeal taken by the Revenue reads as under: “Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the penalty of Rs. 6,98,66,660/- imposed u/s 271AAB(1) of the I.T. Act, 1961 by holding that the amount of Rs. 23,28,88,868/- would not fall in the definition of ‘undisclosed income’ as per section 271AAB(3)(c)(ii) of the Income Tax Act, 1961 ignoring the facts that the assessee has itself disclosed additional income during the course of search. 2. Briefly the facts of the case are that a search operation u/s 132 was carried out at the business premises of the assessee company on 11/09/2013. During the search proceedings, the assessee through its authorized representative made a statement u/s 132(4) that in order to purchase peace of mind, to avoid litigation and multiplicity of proceedings, the assessee hereby offers a sum of Rs. 80,00,00,000/- as additional income over and above the book 2 results to cover various discrepancies such as cash, stock, assets, deductions, disallowable expenses etc. and a detailed bifurcation shall be submitted after looking into entire seized documents in due course of time. As per the detailed bifurcation subsequently submitted by the assessee, a sum of Rs. 23,28,88,868/- pertained to the impugned assessment year. Thereafter, pursuant to notice under section 153A(1) dt. 24/03/2014, the assessee filed its return of income dt. 02/03/2015 declaring loss of Rs. 29,01,51,706/- including a sum of Rs. 23,28,88,868/- which was offered by way of disallowance of expenditure under Section 14A of the Act. The assessment proceedings were thereafter completed under section 153A r.w.s 143(3) vide order dt. 30/01/2017 making an addition of Rs 241,64,40,094/- at an assessed total income of Rs. 241,64,40,094/- and penalty proceeding under clause (a) of Section 271AAB were initiated in respect of income of Rs. 23,28,88,868/- disclosed under section 132(4) of the Act and notice dated 30.01.2017 u/s 274 r/w 271AAB was issued to the assessee. 3. Here it is relevant to note that during the course of assessment proceedings, the assessee filed a letter dt. 30/01/2017 with the AO submitting that the disallowance offered / made in the return of income under Section 14A need not be disallowed as the same was not called for and that appropriate adjustment be made in this regard. However the AO did not take cognizance of the said submission and framed the assessment as per disallowance offered under Section 14A in the return of income so filed by the assessee. 4. Thereafter, in the appellate proceedings before the Ld. CIT(A), the assessee contended that the AO has failed to take cognizance of the said letter/submissions and further submissions were also made on the merits of the matter. The Ld. CIT(A) rejected the said contention and the submission so filed by the assessee holding that the issue of disallowance agitated by the assessee does not arise out of the order passed by the AO. Further, it was held that no discussion pertaining to this fact is emerging from the assessment order. 3 5. The assessee thereafter went in further appeal before the Tribunal and contended that the Ld. CIT(A) has wrongly and illegally rejected the additional claim put by the assessee. It was submitted that there was no bar on the assessee to claim refund or to put additional claim before the appellate authorities where the assessee under wrong notion or mistaken belief had offered the income for taxation to which it otherwise was not liable to pay and further submissions were also made on the merits of the matter. The Coordinate Chandigarh Benches (vide its order dt. 28/02/2019 in ITA No 157 to 161 & 302- 303/CHD 2018) allowed the assessee to raise this additional legal ground and on merit of the case, it was held by the Coordinate Benches that it would be proper to restrict the disallowance under Section 14A up to the total exempted income earned by the assessee irrespective of the amount of disallowance offered under Section 14A of the Act in the return of income and the relevant findings are contained at para 53 r/w para 40 to 43 of its order dated 28/02/2019. 6. The AO thereafter passed an order dt. 29/03/2019 to give the appeal effect to the aforesaid order dated 28/02/2019 so passed by the Coordinate Benches and the contents thereof read as under: “Effect of Hon’ble Income Tax Appellate Tribunal, Division Bench, ‘B’ Chandigarh order passed in ITA No. 160/Chd/2018 dated 28.02.2019 Income assessed u/s 153A r.w.s 143(3) dt. 30.01.2007 : Rs. 241,64,40,094/- Less relief allowed by Hon’ble ITAT dated 28.02.2019 . On account of proceed of GDR receipt : Rs. 241,64,40,094/- . On account of self disallowance u/s 14A : Rs. 23,28,88,868/- Total relief allowed Rs. 264,93,28,962/- 7. During the course of penalty proceedings, it is brought to our notice that the assessee brought the said facts in terms of passing of the order by the Tribunal dt. 28/02/2019 and the appeal effect order dated 29/03/2019 to the 4 notice of the AO, however, the AO proceeded ahead and passed the penalty order u/s 271AAB vide order dt. 31/03/2019 holding that the disclosure so made by the assessee during the course of search in its statement recorded u/s 132(4) falls within the meaning of “undisclosed income” as per provisions of section 271AAB(3)(c)(ii) and penalty @ 30% of undisclosed income i.e, 30% of Rs 23,28,88,868/- was levied on the assessee under section 271AAB(1)(C) of the Act. 8. Against the said levy of penalty, the assessee went in appeal before the Ld. CIT(A) who, taking into consideration the decision of the Coordinate Benches and the appeal effect order passed by the AO, found the levy of penalty as unsustainable and has deleted the penalty vide the impugned order dt. 13/04/2021. Against the said findings and the order of the Ld. CIT(A), the Revenue is in appeal before us. 9. During the course of hearing, the Ld. CIT DR relied on the findings of the AO and referring to the surrender letter dt. 04/10/2013, which also found mention in the penalty order, submitted that the assessee itself has admitted and surrendered a sum of Rs. 80,00,00,000/- as additional income out of which Rs. 23,28,88,868/- was surrendered for A.Y 2013-14 to cover any discrepancy found in the seized documents during the course of search and also to cover any kind of discrepancy in the regular books of accounts and therefore the said sum of Rs. 23,28,88,868/- clearly falls within the meaning of “undisclosed income” as per the provision of Section 271AAB(3)(c)(ii) of the Act. 10. It was further submitted that the assessee had not specified in the surrender letter that the surrender was made under Section 14A for A.Y 2013-14 and the head under which this amount was offered was disclosed later by the assessee and even if the disclosure for the year under consideration relates to Section 14A, still it would fall under the provisions of section 271AAB(3)(c)(ii) as it would be disclosure of the expenditure in relation to income not includible in the 5 total income by the assessee and the assessee would not have surrendered the amount related to expenses under Section 14A if the search would not have been conducted. 11. It was further submitted that the assessee admitted the undisclosed income in the statement recorded under section 132(4) but has not paid the taxes and neither specified the manner in which such income had been derived nor substantiated the manner in which the undisclosed income was derived and therefore the provision of Section 271AAB(1)(a) and 271AAB(1)(b) are not applicable and the disclosure of Rs. 23,28,88,868/- falls within the meaning of “undisclosed income” as per the provision of Section 271AAB(1)(c) and accordingly the penalty has been rightly levied @ 30% of the undisclosed income. 12. The Ld. CIT DR accordingly supported the order and the findings of the AO and submitted that the Ld. CIT(A) has failed to appreciate the fact that the assessee has surrendered the income during the course of search and therefore the same falls within the definition of “undisclosed income” on which the penalty has been rightly levied by the AO. He accordingly submitted that the order of the Ld. CIT(A) be set aside and that of the AO be sustained. 13. Per contra, the Ld. AR taken us through the order of the Ld. CIT(A) and it was submitted that the Ld. CIT(A) has rightly taken into consideration the decision rendered by the Coordinate Benches as well as appeal effect order passed by the AO wherein necessary relief has been allowed to the assessee in terms of deletion of disallowance of expenditure under Section 14A of the Act. Referring to the findings of the Coordinate Benches, it was submitted that as rightly held by the Coordinate Benches, the disallowance under Section 14A is not made on account of any additional income found either in cash or in kind or otherwise in respect of any documents or entries in the account book and in fact, it was a notional disallowance made by the assessee on the footing that 6 out of the total expenditure, some of the expenditure might have been attributable to the activity of making investment from which the assessee has earned tax exempt income. 14. It was further submitted that the Coordinate Benches have rightly held that it is not the case of the AO that the aforesaid disallowance is attributable and relatable to any incriminating documents found during the search action or that the aforesaid surrender can be related to part of any other income of the assessee. It was accordingly submitted that the disallowance under Section 14A is not covered within the definition of “undisclosed income” for the purpose of levy of penalty under section 271AAB of the Act. 15. It was further submitted that where there is no disallowance of any expenditure under Section 14A as held by the Coordinate Benches and even the AO has given necessary appeal effect to the order so passed by the Coordinate Bench, the question of any undisclosed income surrendered by the assessee doesn’t exist anymore and in absence of any undisclosed income, the question of levy of penalty under section 271AAB does not arise for consideration. Further reliance was placed on the Coordinate Benches decision in case of M/s SEL Textiles Limited Vs. DCIT (in ITA No. 695/Chd/2018 vide order dt. 18/04/2019) wherein penalty u/s 271AAB has been deleted under similar circumstances. It was accordingly submitted that there is no infirmity in the order and the findings of the Ld. CIT(A) who has taken into consideration the order of the Coordinate Bench and the appeal effect given by the AO and has deleted the penalty and the appeal so filed by the Revenue be dismissed and the order of the ld CIT(A) be affirmed. 16. We have heard the rival contentions and purused the material available on record. The issue that has arisen for our consideration is whether in the facts and circumstances of the present case, the disallowance of expenditure under Section 14A is covered within the definition of “undisclosed income” for the 7 purpose of levy of penalty under section 271AAB of the Act and where the answer to the same is in affirmative, whether the AO has righty levied the penalty at the rate of 30% of the undisclosed income invoking the provisions of section 271AAB(1)(c) of the Act and which has wrongly been set-aside by the ld CIT(A). 17. In this regard, we refer to the definition of “undisclosed income” as per clause (C)(ii) of explanation to section 271AAB which has been invoked by the AO and the same reads as under: “(c) “Undisclosed” income means- (i) ......... (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.” 18. It thus talks about any entry in respect of an expenditure which is recorded in the books of accounts or other documents maintained in the normal course of assessee’s business, such an entry should relates to the specified previous year and such an entry has to be found to be false basis the search action conducted at the assessee’s premises. In the entire penalty order, we find that there is no whisper by the Assessing officer, forget recording of his satisfaction, as to how the aforesaid conditions are satisfied in the instant case and how the charge of “undisclosed income found during the course of search” has been fastened on the assessee making it liable for levy of penalty u/s 271AAB. 19. All the Assessing officer has stated in the penalty order is that the assessee has itself admitted in its statement u/s 132(4) and surrendered the same as 8 additional business income to cover any discrepancies found in the seized documents during the course of search and also to cover any discrepancies in the regular books of accounts. In our view, where the admittance u/s 132(4) was the sole criteria for levy of penalty, what was the necessity for the legislature to provide a discretion to the AO in the matter of levy of penalty, provide for a specific definition as to what constitute “undisclosed income” and for the purposes of levy of penalty, provide for the satisfaction of charge of “undisclosed income found during the course of search”. The penalty provisions have to be strictly construed and the AO has to exercise his discretion judiciously and while doing so, the AO has to justify the charge of “undisclosed income found during the course of search” by leading demonstrable evidence found during the course of search, and in cases where such evidence is confronted to the assessee during the course of search and his statement is recorded, the AO is well within his rights to draw support from the same. 20. At the same time, we find that the admittance is relevant for determining the quantum of penalty as can be seen from the provisions of section 271AAB(1)(a) which provides that where there is an admittance in the statement recorded u/s 132(4), the penalty is leviable at the rate of 10% of undisclosed income subject to the fulfillment of other conditions. At the same time, under Section 271AAB(1)(b), where there is no admittance in statement recorded u/s 132(4) but the assessee subsequently goes ahead and declare the undisclosed income in the return of income, the penalty is still leviable at the rate of 20% of undisclosed income. Interestingly, in the instant case, the penalty has been levied u/s 271AAB(1)(c) at the rate of 30% of undisclosed income where it doesn’t fall under clause (a) or clause (b). The provisions of 271AAB(1)(c) are thus residuary and thus includes cases which doesn’t fall either under clause (a) or clause (b). In other words, there could be cases where there is an admittance u/s 132(4) but other conditions are not fulfilled as specified under clause (a) or a case where there is no admittance but at the same time, 9 other conditions so specified in clause (b) are also not satisfied. Thus, we find that though an admittance is a relevant criteria so far as determining the quantum of levy of penalty is concerned but for fastening the charge, basis which the penalty can be levied, the threshold of income qualifying as undisclosed income as found during the course of search as so defined has to be met and satisfied and in the facts of the present case, whether the disallowance of expenditure under Section 14A is covered within the definition of “undisclosed income” for the purpose of levy of penalty under section 271AAB of the Act need to be examined. 21. In the instant case, we find that the Coordinate Benches in its order dated 28/02/2019 referred supra had an occasion to examine the same in assessee’s own case and the relevant findings read as under: “40. Now coming to the merits of the case. First of all, it is pertinent to mention here that disallowance u/s 14A of the Act is not made on account of any additional income found either in cash or in kind or otherwise in respect of any documents or entries in the account book. It is, in fact, a notional disallowance out of the total expenditure claimed by the assessee on the footing that out of the total expenditure, some of the expenditure might have been attributable to the activity of making investment from which the assessee has earned tax exempt income. This is not the case of the Assessing officer that the aforesaid disallowance made by the Assessing officer u/s 14A of the Act is otherwise attributable / relating to the incriminating documents found during the search action or that the aforesaid surrender can be related to part of any other income of the assessee. Even otherwise it has been held time and again by various Courts of law that a retracted surrender of income without any corroborative or any relatable evidence of any undisclosed income of the assessee cannot be made sole basis for addition to the income of the assessee. Moreover, the amount offered as disallowance relating to this issue is on 10 account of notional disallowance of expenditure which may be attributable to earning of tax exempt income of the assessee. Under the circumstances, even if an assessee surrenders some amount as disallowance u/s 14A of the Act or otherwise has offered certain amount under the provisions of section 14A of the Act, however later on, the assessee demonstrates that as per the settled law the said disallowance of expenditure has wrongly been offered / agreed to and that as per the settled law his disallowance actually should be of a lower amount, in our view, that aspect can be looked into even at the appellate stage. This Tribunal is not of a penal jurisdiction to punish the litigants for their mistakes. Even the Income Tax Authorities are supposed to charge legitimate tax from the assessee and if an assessee offers a higher or more amount of tax, of which he otherwise is not supposed to pay, he can certainly put a claim that as per law he is required to pay a lower amount of tax on any issue. There is no denial or rebuttal to the pleadings of the assessee that the assessee was having own sufficient funds to make the investments which may yield tax exempt income. The issue is now squarely covered by the various decisions of the High Courts including that of the decision of the Hon'ble Jurisdictional High Court in the case of ‘Bright Enterprises Pvt. Ltd Vs. CIT, Jalandhar’ (supra), ‘CIT Vs. Kapsons Associates’ (2016) 381 ITR 204 (P&H) and the latest decision of the Coordinate Bench of the Tribunal in the case of ‘ACIT Vs. Janak Global Resources Pvt Ltd’ ITA No. 470/Chd/2018 order dated 16.10.2018, holding that that if the assessee is possessed of sufficient own interest free funds to meet the investments / interest free advances, then, under the circumstances, presumption will be that interest free advances / investments have been made by the assessee out of own funds / interest free funds. Reliance in this respect can also be placed on the decision of the Hon'ble Supreme Court in the case of ‘Hero Cycles (P) Ltd Vs. CIT’ 379 ITR 347 (SC) and also on the latest decision of the Hon'ble Supreme Court in the case of ‘CIT (LTU) Vs. Reliance Industries Ltd.’ [2019] 410 ITR 466 (SC). 11 41. Moreover, the assessee has taken a specific stand that no expenditure has been incurred by the assessee for making investments etc. and that no disallowance u/s 14A of the Act is attracted. Neither the Assessing officer nor the CIT(A) has recorded any satisfaction from the accounts of the assessee that the assessee’s above contention is not correct. 41. Even the different Hon'ble High Courts of the country have been unanimous to hold that no disallowance is attracted u/s 14A in case the assessee has not earned any income not forming part of the total income and that the disallowance u/s 14A can not exceed the total tax exempt income earned by the assesse during the year. Reliance in this respect can be placed on various decisions of the Hon'ble High Courts including that of the Hon'ble Jurisdictional High Court of Punjab and Haryana in the case of ‘CIT Vs. Winsome Textiles’ (2009) 319 ITR 204 (P&H) and in the case of CIT Faridabad v. Lakhani Marketing INC 226 Taxmann 45 (P&H); Hon'ble Delhi High Court in the case of ‘Cheminvest Ltd Vs. ITO’ (2015) 378 ITR 33 (Delhi) and of the Hon'ble Gujarat High Court in the case of ‘Corrtech Energy P. Ltd. (2014) 45 Taxman.com 116’ and further of the Hon'ble Allahabad High Court in the case of ‘CIT Vs. M/s Shivam Motors (P) Ltd’ (2014) 272 CTR (All) 277. 42. In view of the proposition of law laid down in the above referred to decisions and also considering the overall facts and circumstances of the case, in our view, it will be proper to restrict the disallowance u/s 14A of the Act, , for the respective assessment years upto the total tax exempt income earned by the assesse irrespective of the amount of disallowance offered/s 14A in the return of income. 43. However, since we have already, while adjudicating ground No.1 of the appeal for assessment year 2010-11 have held that the additions made in the absence of any incriminating material in an assessment made u/s 153A of the Act, as per settled position of law, are not sustainable and thus the assessment framed u/s 153 A has been set aside, 12 hence under the circumstances, the income assessed as per the original assessment framed/finalized for AY 2010-11 will remain sustained as such including the disallowance, if any made u/s 14A of the Act, subject to modification by any decision of any appellate authority on any issue in an appeal / rectification application in respect of originally framed assessment order dated 17.09.2017.” 22. The Coordinate Benches have held that the disallowance under Section 14A is not made on account of any additional income found either in cash or in kind or otherwise in respect of any documents or entries in the account book. It has been held that it was a notional disallowance made by the assessee on the footing that out of the total expenditure, some of the expenditure might have been attributable to the activity of making investment from which the assessee has earned tax exempt income. It has been held that it is not the case of the AO that the aforesaid disallowance made by the AO u/s 14A is attributable/relating to the incriminating documents found during the search action or that the aforesaid surrender can be related to part of any other income of the assessee. It has been held that the AO has not recorded any satisfaction from the accounts of the assessee that the contention of the assessee that it has not incurred any expenditure for making investment is not correct. In light of these findings of the Coordinate Benches, we find that the disallowance of expenditure u/s 14A doesn’t represent any income of the specified previous year 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 which would not have been found to be so had the search not been conducted. Nothing has been brought on record or to our notice during the course of hearing that the aforesaid findings of the Coordinate Benches have been disturbed by an order of a Higher Court and therefore, taking the same into consideration, we are of the considered view that there is no legal basis for sustaining the charge of 13 undisclosed income found during the course of search and accordingly, there is no justifiable and legal basis for levy of penalty u/s 271AAB of the Act. 23. In light of the aforesaid discussions and considering the entirety of facts and circumstances of the case, we affirm the order of the ld CIT(A) who has rightly deleted the levy of penalty u/s 271AAB of the Act and the ground of appeal taken by the Revenue is dismissed. In the result, the appeal of the Revenue is dismissed. Order pronounced on 06/01/2023. Sd/- Sd/- स ु धांश ु ीवा तव #व$म &संह यादव (SUDHANSHU SRIVASTAVA) ( VIKRAM SINGH YADAV) या यक सद य / JUDICIAL MEMBER लेखा सद य/ ACCOUNTANT MEMBER AG Date: 06/01/2023 ( + ! , - . - Copy of the order forwarded to : 1. The Appellant 2. The Respondent 3. $ / CIT 4. $ / 0 1 The CIT(A) 5. - 2 ग 4 5 & 4 5 678 ग9 DR, ITAT, CHANDIGARH 6. ग 8 : % Guard File ( + $ By order, ; # Assistant Registrar