2018 (7) TMI 2010 - AT - Income Tax

Penalty Order under Income Tax Act Section 271AAB Deleted for Lack of Grounds and Improper Discretion

Shri Ritesh Agarwal Versus The DCIT, Central Circle-2, Jaipur.

Shri Ritesh Agarwal Versus The DCIT, Central Circle-2, Jaipur. - TMI Issues Involved:1. Validity of the penalty order under section 271AAB of the Income Tax Act, 1961.2. Recording of satisfaction by the Assessing Officer before initiating penalty proceedings.3. Justification for the penalty amount of Rs. 2,16,60,000/-.4. Applicability of the penalty rate at 30% versus 10% of the undisclosed income.5. Discretionary versus mandatory nature of the penalty under section 271AAB.Detailed Analysis:1. Validity of the Penalty Order:The assessee challenged the validity of the penalty order under section 271AAB, arguing that the order was void ab initio. The Tribunal noted that the Assessing Officer (AO) did not specify under which clause of section 271AAB the penalty was being levied. The Tribunal emphasized that the penalty under section 271AAB is not automatic but discretionary, requiring the AO to issue a show cause notice and provide a proper opportunity for the assessee to be heard. The Tribunal found that the AO failed to specify the grounds for the penalty, rendering the show cause notice unlawful. This was supported by the decision in CIT vs. Manjunatha Cotton & Ginning Factory, which held that a notice must specify the grounds for penalty to be valid.2. Recording of Satisfaction:The assessee argued that the AO did not record satisfaction before initiating the penalty proceedings. The Tribunal highlighted that the AO must record satisfaction that the conditions for levying penalty under section 271AAB are met. The Tribunal found that the AO did not provide any finding that the income in question was undisclosed as per the definition in section 271AAB, thus failing to meet the statutory requirements.3. Justification for Penalty Amount:The Tribunal examined whether the penalty of Rs. 2,16,60,000/- was justified. It was noted that the AO imposed the penalty at 30% of the undisclosed income without specifying the clause under which this rate was applicable. The Tribunal reiterated that the AO must provide a clear basis for the penalty rate, considering the circumstances and the assessee's explanation.4. Applicability of Penalty Rate:The assessee contended that the penalty should be at 10% instead of 30%, as they had substantiated the manner of earning the income. The Tribunal agreed that the AO must determine the appropriate penalty rate based on the specific clause under section 271AAB(1). The Tribunal found that the AO did not provide a finding on which clause applied, thus failing to justify the 30% penalty rate.5. Discretionary vs. Mandatory Nature:The Tribunal discussed whether the penalty under section 271AAB is discretionary or mandatory. It was concluded that the penalty is discretionary, as indicated by the use of the word 'may' in the statute. The Tribunal emphasized that the AO must exercise discretion judiciously, considering the facts and circumstances of each case. The Tribunal also referred to several case laws, including ACIT vs. Marvel Associates, which supported the view that penalties under section 271AAB are not automatic but require a discretionary decision by the AO.Conclusion:The Tribunal held that the penalty order under section 271AAB was not sustainable due to the AO's failure to specify the grounds and clause for the penalty, lack of recorded satisfaction, and improper exercise of discretion. The penalty of Rs. 2,16,60,000/- was deleted, and the appeal of the assessee was allowed.