By TIOL News Service

VIZAG, APRIL 20, 2018: THE ISSUE BEFORE THE TRIBUNAL IS - Whether loose sheets found during course of search which shows only projection of profit statement, is no basis to conclude undisclosed income and levy penalty u/s 271AAB, when no investigation was carried out to link cost of profit to the entries in books of account. YES IS THE ANSWER.

Facts of the case:

During the relevant year, a search was carried out in the assessee’s case, wherein it had admitted the additional income of Rs.4.80 crores as additional sales for the financial year 2012-13 onwards and the additional income admitted for the assessment year 2013-14 was Rs.1,48,84,142/-. Accordingly, the assessee filed the return and the assessment was completed making the disallowance u/s 40(a)(ia) for an amount of Rs.3,35,000/-. In addition, the AO issued show cause notice as to why penalty should not be levied u/s 271AAB. In reply, the assessee submitted that it had filed return on the basis of turnover and the books of accounts were regularly maintained. The said turnover was disclosed in the profit & loss account and included the sum of Rs.1,48,84,142/- towards additional sale price offered sold/booked for sale on the date of search. The assessee submitted before the AO that no incriminating material was found suggesting receipt of any additional sale price by the firm. The admission of additional income was only to buy peace and to avoid protracted litigation as stated by the assessee. Not being convinced with the explanation offered by assessee, the AO imposed penalty @ 30% of the undisclosed income amounted to Rs.44,65,543/-. On appeal, the FAA scaled down the penalty to 10% instead of the penalty levied by the AO at 30%.

Tribunal held that,

++ the legislature has included the provisions of section 274 and section 275 in 271AAB of the Act with clear intention to consider the imposition of penalty judicially. Section 274 deals with the procedure for levy of penalty, wherein, it directs that no order imposing penalty shall be made unless the assessee has been heard or has been given a reasonable opportunity of being heard. Once the opportunity is given to the assessee, the penalty cannot be mandatory and it is on the basis of the facts and merits placed before the AO. This opportunity of being heard is not a mere formality but it is to adhere to the principles of natural justice. In the present case, a search u/s 132 was carried out in the assessee’s premises but no evidence was found during the course of search except a loose sheet. Careful verification of the loose sheet found during the course of search shows the projections and profitability but not the actual expenditure incurred by the assessee. Penalty u/s 271AAB attracts on undisclosed income but not on admission made by the assessee u/s 132(4). The AO must establish that there is undisclosed income on the basis of incriminating material. In the instant case, a loose sheet was found according to the AO, it was incriminating material evidencing the undisclosed income. However neither the AO nor CIT(A) has verified the cost of construction with the books and projections found at the time of search. There was no money, bullion, jewellery or valuable article or thing or entry in the books of accounts or documents transactions were found during the course of search indicating the assets not recorded in the books of accounts or other documents maintained in the normal course, wholly or partly;

++ the Revenue did not find any undisclosed asset, any other undisclosed income or the inflation of expenditure during the search/ assessment proceedings. Though a loose sheet was found that does not indicate any suppression of income but it is only projection of profit statement. The amount of Rs.3571/- mentioned in the projections refers to cost and profit which is approximate sale price but not the cost as stated by the AO in the penalty order. The cost of construction in the projections projected at Rs.2177/- which is in synch with the statement given by the assessee. The AO was happy with the disclosure given by the assessee and did not verify the factual position with the books of accounts and projections and bring the evidence to unearth the undisclosed income. Neither the AO nor the investigation wing linked the cost of profit or cost of asset to the entries in the books of accounts or to the sales conducted by the assessee to the sale deeds. The facts of the assessee’s case shows that there was no undisclosed income found during the course of search and no incriminating material was found, hence there is no case for imposing penalty u/s 271AAB of the Act.

(See 2018-TIOL-580-ITAT-VIZAG)