Penalty under Section 271AAB cancelled where no undisclosed income or incriminating material found during search operations.

ITAT Visakhapatnam held that penalty u/s 271AAB was not leviable where no undisclosed income or incriminating material was found during search operations. The assessee's construction cost projections aligned with disclosed statements, and the AO accepted the disclosure without verifying against books of accounts. The revenue failed to link seized loose sheets to actual undisclosed income, assets, or inflated expenditure. Following precedent from ITAT Delhi in Ajay Sharma case, the tribunal ruled that additions based solely on loose documents without direct material establishing concealment or inaccurate particulars cannot sustain penalty provisions. Since no undisclosed income was established and no incriminating evidence was discovered during search, penalty u/s 271AAB was cancelled and the order was decided in favor of the assessee.

---

---

Issues Involved:
1. Imposition of penalty under section 271AAB of the Income Tax Act.
2. Validity of incriminating material found during the search.
3. Discretionary vs. mandatory nature of penalty under section 271AAB.
4. Evaluation of evidence and material found during the search.

Detailed Analysis:

1. Imposition of Penalty under Section 271AAB of the Income Tax Act:
The core issue revolves around the imposition of penalty under section 271AAB following a search under section 132. The assessee admitted additional income of Rs. 1,48,84,142/- for the assessment year 2013-14, part of a total additional income of Rs. 4.80 crores. The Assessing Officer (A.O.) imposed a penalty of 30% on the undisclosed income, amounting to Rs. 44,65,543/-, which was later scaled down to 10% by the Commissioner of Income Tax (Appeals) [CIT(A)].

2. Validity of Incriminating Material Found During the Search:
The CIT(A) referred to a loose sheet (page No.107 of Annexure A/GS/MA/1) found during the search, indicating a higher cost per sq.ft. than what was disclosed by the assessee. The CIT(A) deemed this as incriminating material and a clear case of concealment of income. However, the assessee argued that the loose sheet only showed projections and profitability, not actual expenditure, and no other incriminating material was found during the search.

3. Discretionary vs. Mandatory Nature of Penalty under Section 271AAB:
The assessee contended that the penalty under section 271AAB is discretionary, not mandatory, drawing parallels with section 158BFA of the Act. The Tribunal agreed, noting that the words "may direct" in section 271AAB indicate discretion. The Tribunal emphasized that the imposition of penalty must consider the facts and merits of each case, and the assessee must be given a reasonable opportunity to explain their case, adhering to the principles of natural justice.

4. Evaluation of Evidence and Material Found During the Search:
The Tribunal found that the loose sheet did not conclusively prove any suppression of income or undisclosed income. The sheet was deemed a projection of profit rather than actual expenditure. No other material indicating undisclosed income, assets, or inflated expenditure was found during the search. The Tribunal referenced the case of Ajay Sharma Vs. DCIT, where it was held that a loose document without direct material evidence does not justify penalty for concealment or furnishing inaccurate particulars.

Conclusion:
The Tribunal concluded that there was no undisclosed income found during the search, and no incriminating material was presented. Consequently, the penalty under section 271AAB was not justified. The Tribunal set aside the orders of the lower authorities and cancelled the penalty. The appeal filed by the revenue was dismissed, and the cross-objection filed by the assessee was allowed.

Result:
- The appeal filed by the revenue is dismissed.
- The cross-objection filed by the assessee is allowed.

Pronouncement:
The order was pronounced in the open court on 16th March 2018.

---