2019 (4) TMI 867 - AT - Income Tax

Invalid Penalty under Income Tax Act; Tribunal rules AO lacked grounds, income not undisclosed. Discretionary nature emphasized.

Shri Krishna Yadav Versus The DCIT, Central Circle-4, Jaipur.

Shri Krishna Yadav Versus The DCIT, Central Circle-4, Jaipur. - TMI Issues Involved:1. Validity of the penalty order under section 271AAB of the Income Tax Act, 1961.2. Confirmation of penalty imposition by the Assessing Officer.3. Procedural defects in the show cause notice issued by the Assessing Officer.4. Discretionary vs. mandatory nature of penalty under section 271AAB.5. Definition and scope of 'undisclosed income' under section 271AAB.Detailed Analysis:1. Validity of the Penalty Order Under Section 271AAB:The appellant contended that the penalty order under section 271AAB was void ab initio and should be quashed. The Tribunal noted that the Assessing Officer (AO) issued show cause notices in a routine manner without specifying under which clause of section 271AAB the penalty was being imposed. This lack of specificity indicated a lack of application of mind, rendering the show cause notice unlawful. The Tribunal referenced the Karnataka High Court decision in CIT vs. Manjunatha Cotton & Ginning Factory, which emphasized the need for clarity in show cause notices.2. Confirmation of Penalty Imposition by the Assessing Officer:The AO imposed a penalty of Rs. 1,00,10,000 under section 271AAB on the surrendered income of Rs. 10,01,00,000. The appellant argued that the penalty was imposed without a proper basis, as the AO did not provide a specific finding that the income in question was 'undisclosed income' as defined under section 271AAB. The Tribunal noted that the AO must examine the facts and circumstances and determine if the income disclosed falls within the definition of 'undisclosed income.'3. Procedural Defects in the Show Cause Notice:The appellant argued that the show cause notices issued on 29th December 2016 and 16th August 2016 were defective as they did not specify the grounds or clauses under which the penalty was to be levied. The Tribunal agreed, stating that the AO must specify the undisclosed income and the grounds for penalty in the show cause notice to allow the assessee to prepare a defense. The Tribunal relied on the decision of the Chennai Bench of the Tribunal in DCIT vs. Shri R. Elangovan, which held that a show cause notice must specify the grounds for penalty.4. Discretionary vs. Mandatory Nature of Penalty Under Section 271AAB:The appellant argued that the penalty under section 271AAB is discretionary, not mandatory. The Tribunal agreed, noting that the use of the word 'may' in section 271AAB indicates discretion. The Tribunal referenced the decision of the Visakhapatnam Bench in ACIT vs. M/s. Marvel Associates, which held that the levy of penalty under section 271AAB is not automatic but discretionary based on the facts and circumstances of each case. The Tribunal emphasized that the AO must provide an opportunity for the assessee to explain and must consider the explanation before imposing the penalty.5. Definition and Scope of 'Undisclosed Income' Under Section 271AAB:The appellant contended that the income recorded in the seized diary was not 'undisclosed income' as defined under section 271AAB. The Tribunal noted that the definition of 'undisclosed income' includes income not recorded in the books of account or other documents maintained in the normal course. The Tribunal found that the transactions recorded in the diary were not part of the regular business activity and were to be recorded in the capital account. Therefore, the income recorded in the diary did not fall within the definition of 'undisclosed income.'Conclusion:The Tribunal concluded that the penalty levied under section 271AAB was not sustainable. The AO had not specified the grounds for penalty in the show cause notice, and the income recorded in the diary did not constitute 'undisclosed income.' The Tribunal emphasized that the levy of penalty under section 271AAB is discretionary and not mandatory. The appeal of the assessee was allowed, and the penalty was deleted.