2017 (5) TMI 675 - AT - Income Tax

Penalty proceedings under Section 271AAB invalidated for procedural flaws and natural justice violation

Sandeep Chandak, Shakuntala Devi Chandak, Kamal Kishore Chandak Versus Assistant Commissioner of Income-Tax

The Tribunal invalidated penalty proceedings under section 271AAB due to procedural flaws, lack of satisfaction recording, natural justice violation, and ... Penalty levied under section 271AAB - notice has been issued under section 271(1)(c) of the Act and no show-cause notice has been issued under section 271AAB - denial of natural justice - Held that:- It appears that the notice in this case has been issued by the Assessing Officer just for the sake of providing the opportunity but this opportunity cannot be regarded to be a proper opportunity. We also noted that opportunity of being heard has been given to the assessee only in respect of the proceedings initiated under section 271(1)(c) of the Act. No opportunity has been given to the assessee in respect of the penalty to be levied under section 271AAB of the Act. On this basis also, the order passed by the Assessing Officer is against the principles of natural justice of providing the proper opportunity to the assessee and accordingly we quash the order of the Assessing Officer. We have also gone through the provisions of section271AAB and noted that this section specifies three different situations under which the penalty can be imposed on the assessee under different clauses (a), (b) and (c), the penalty has to be imposed on different rate. AO has not specified in the notice in respect of which clause the penalty is going to be levied on the assessee. On this basis also, in our opinion, the penalty cannot be sustained. We further noted that the provisions of section 271AAB are not mandatory which means that the penalty has to be levied in each and every case wherever the assessee has made default as stated under clauses (a), (b) and (c) of the Act. Sub-section (1) of section 271AAB uses the word 'may' not 'shall'. 'May' cannot be equated with 'shall' especially in penalty proceedings. Using the word 'may', in our opinion, gives a discretion to the Assessing Officer to levy the penalty or not to levy, even if the assessee has made the default under the said provision. In view of the aforesaid discussion, we set aside the order of the Commissioner of Income-tax (Appeals) and delete the penalty levied on the assessee. - Decided in favour of assessee. Issues Involved:1. Confirmation of penalty under section 271AAB of the Income-tax Act, 1961.2. Definition and applicability of 'undisclosed income' under section 271AAB.3. Requirement of recording satisfaction by the Assessing Officer for initiating penalty.4. Principles of natural justice and adequate opportunity of being heard.5. Validity and specificity of penalty notice issued under section 271AAB.Issue-Wise Detailed Analysis:1. Confirmation of Penalty under Section 271AAB:The core issue in these appeals is the sustenance of the penalty of Rs. 40,00,000 levied under section 271AAB of the Income-tax Act, 1961. The penalty was imposed following a search and seizure operation on October 24, 2013, where undisclosed income was found and surrendered. The Assessing Officer imposed the penalty on the grounds that the surrendered income was undisclosed and that the conditions of section 271AAB were met.2. Definition and Applicability of 'Undisclosed Income':The appellants argued that the income surrendered was duly recorded in a diary and related to the assessment year 2014-15, and thus, did not fall under the definition of 'undisclosed income' as per clause (c) of the Explanation below sub-section (3) of section 271AAB. The Tribunal noted that the term 'undisclosed income' is critical in determining the applicability of the penalty under section 271AAB.3. Requirement of Recording Satisfaction by the Assessing Officer:The appellants contended that no penalty notice was issued during the course of assessment, and the penalty was not initiated during the assessment proceedings. The Tribunal observed that the penalty was initiated by a notice under section 274 read with section 271(1)(c), not under section 271AAB, which was a significant procedural lapse. The Tribunal emphasized that recording satisfaction is essential for the validity of penalty imposition under section 271AAB, drawing parallels with the Supreme Court's decision in CIT v. Jai Laxmi Rice Mills [2015] 379 ITR 521 (SC).4. Principles of Natural Justice and Adequate Opportunity of Being Heard:The appellants argued that the Assessing Officer did not provide a reasonable opportunity of being heard, violating the principles of natural justice. The Tribunal agreed, noting that the notice was issued on September 23, 2015, received on September 24, 2015, with only two working days given for response before the hearing on September 28, 2015. The Tribunal highlighted that the principles of natural justice require a fair and reasonable opportunity to be given, which was not adhered to in this case.5. Validity and Specificity of Penalty Notice Issued under Section 271AAB:The Tribunal found that the notice issued under section 271(1)(c) did not specify the charge under section 271AAB, which involves different penalties (10%, 20%, 30%) based on the nature of the undisclosed income. The lack of specificity and clarity in the notice rendered the penalty proceedings invalid. The Tribunal also noted that section 271AAB uses the word 'may,' indicating discretionary power for the Assessing Officer to levy or not levy the penalty, contrary to the mandatory interpretation suggested by the revenue.Conclusion:The Tribunal concluded that the penalty proceedings under section 271AAB were invalid due to the lack of proper initiation, failure to record satisfaction, violation of natural justice, and inadequate notice. Consequently, the penalty imposed was quashed, and the appeals were allowed.Order Pronouncement:The order was pronounced in the open court on January 30, 2017, allowing all the appeals of the assessees.