2019 (4) TMI 952 - AT - Income Tax

Invalid Penalty Proceedings: Lack of Specificity in Notice

Shri Shyam Sundar Khandelwal Versus The Deputy Commissioner of Income Tax, Central Circle-2, Jaipur.

Shri Shyam Sundar Khandelwal Versus The Deputy Commissioner of Income Tax, Central Circle-2, Jaipur. - TMI Issues Involved:1. Validity of initiation of penalty proceedings under section 271AAB of the IT Act.2. Levy of penalty under section 271AAB based on the alleged undisclosed income.3. Specificity and adequacy of the show cause notice issued under section 274 read with section 271AAB.4. Nature and sufficiency of the evidence supporting the alleged undisclosed income.5. Treatment of various items such as advances for land, renovation expenses, household expenses, excess cash, and jewellery under the definition of undisclosed income.Issue-wise Detailed Analysis:1. Validity of initiation of penalty proceedings under section 271AAB of the IT Act:The primary issue raised by the assessee was the validity of the initiation of penalty proceedings under section 271AAB due to the lack of specificity in the show cause notice. The Tribunal noted that the show cause notice did not specify the default under clauses (a) to (c) of section 271AAB(1), which is necessary for the assessee to understand the grounds they need to meet. The Tribunal emphasized that the penalty under section 271AAB is not automatic but discretionary, requiring the Assessing Officer (AO) to make a judicious decision after considering the facts of the case and the explanation provided by the assessee.2. Levy of penalty under section 271AAB based on the alleged undisclosed income:The assessee argued that the penalty under section 271AAB is not mandatory but discretionary, and the AO must determine whether the disclosed income qualifies as undisclosed income as per the definition provided in the explanation to section 271AAB. The Tribunal agreed with this view, citing various decisions, including those of the Visakhapatnam Bench and the Karnataka High Court, which held that the AO must exercise discretion and provide a proper opportunity for the assessee to explain their case before imposing a penalty.3. Specificity and adequacy of the show cause notice issued under section 274 read with section 271AAB:The Tribunal found that the show cause notices issued by the AO were vague and did not specify the default or the amount of undisclosed income on which the penalty was proposed. This lack of specificity violated the principles of natural justice, as the assessee was not given a proper opportunity to defend themselves. The Tribunal cited the decisions of the Karnataka High Court and the Chennai Bench of the Tribunal, which held that a vague notice is not valid and cannot form the basis for imposing a penalty.4. Nature and sufficiency of the evidence supporting the alleged undisclosed income:The Tribunal examined the various items of alleged undisclosed income, including advances for land, renovation expenses, household expenses, excess cash, and jewellery. It found that the entries in the seized documents did not, by themselves, constitute undisclosed income. The Tribunal emphasized that the AO must conduct a thorough investigation to establish the nature and source of the income before concluding that it is undisclosed. The Tribunal noted that the AO had not made any effort to verify the details of the transactions or the persons involved, which is essential to determine whether the income is indeed undisclosed.5. Treatment of various items such as advances for land, renovation expenses, household expenses, excess cash, and jewellery under the definition of undisclosed income:- Advances for Land: The Tribunal found that the entries in the seized documents were vague and did not provide sufficient details about the land or the persons involved. Without verifying these details, the entries could not be considered undisclosed income.- Renovation Expenses: The seized document was an estimate for renovation work, not evidence of actual expenditure. The Tribunal held that an estimate does not constitute undisclosed income unless it is proven that the expenditure was incurred.- Household Expenses: The Tribunal noted that the household expenses recorded in the seized document could not be treated as undisclosed income without considering the drawings of the assessee and other family members. The AO failed to conduct any inquiry to verify the source of these expenses.- Excess Cash: The Tribunal found that the cash found during the search was explained as past savings of family members. The AO did not provide any evidence to refute this explanation, and the Tribunal held that the cash could not be treated as undisclosed income without such evidence.- Jewellery: The Tribunal noted that the jewellery found during the search belonged to the family members and was received on various occasions. The AO did not make any effort to ascertain the year of acquisition or the source of the jewellery. The Tribunal held that the jewellery could not be treated as undisclosed income without such verification.Conclusion:The Tribunal concluded that the initiation of penalty proceedings under section 271AAB was not valid due to the lack of specificity in the show cause notice. It also held that the penalty under section 271AAB is discretionary and not mandatory, requiring the AO to make a judicious decision based on the facts of the case. The Tribunal found that the AO had not conducted a thorough investigation to establish the nature and source of the alleged undisclosed income, and therefore, the penalty imposed was not sustainable. The Tribunal allowed the appeal of the assessee and quashed the penalty order.