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

Sandeep Chandak, Shakuntala Devi Chandak, Kamal Kishore Chandak Versus Assistant Commissioner of Income-Tax - [2017] 55 ITR (Trib) 209 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.