2019 (3) TMI 2076 - AT - Income Tax

ITAT deletes section 271AAB penalty on surrendered LTCG during search as income didn't qualify as undisclosed income

Smt. Indira Agrawal Versus The Deputy Commissioner of Income-tax, Central Circle, Kota. And (Vice-Versa)

The ITAT Jaipur allowed the assessee's appeal against penalty under section 271AAB imposed on income surrendered during search proceedings. The assessee ... Penalty order passed u/s 271AAB - income surrendered by the assessee on account of LTCG from purchase and sale of equity shares - addition @ 30% of the undisclosed income which was admitted during the search - whether the surrender made by the assessee in the statement recorded u/s 132(4) will be regarded as undisclosed income without testing the same with the definition as provided under clause (c) of Explanation to section 271AAB ? - HELD THAT:- The penalty under section 271AAB is not automatic but the AO has to take a decision as per the provisions of section 271AAB and particularly in the light of the definition of the undisclosed income as prescribed in the Explanation to section 271AAB of the Act. We hold that the income surrendered by the assessee in the statement recorded u/s 132(4) does not fall in the ambit of definition of undisclosed income as contemplated in Explanation to section 271AAB. Accordingly, the penalty levied by the AO and sustained by the ld. CIT (A) is not sustainable and the same is deleted. Assessee appeal allowed. Issues Involved:1. Validity of the penalty order under section 271AAB of the Income Tax Act.2. Application of section 271AAB(1)(a) versus section 271AAB(1)(c) for penalty imposition.3. Existence of undisclosed income under section 271AAB.4. Mandatory nature of penalty under section 271AAB.5. Consideration of mens rea in penalty imposition.Detailed Analysis:1. Validity of the Penalty Order:The primary contention was that the penalty order was invalid because the Assessing Officer (AO) did not specify the clause under section 271AAB in the penalty notice. The tribunal emphasized that the AO must clearly specify the grounds for penalty, as the conditions for imposing penalties under different clauses of section 271AAB are distinct. It was found that the AO failed to provide this specification, rendering the penalty order void.2. Application of Section 271AAB(1)(a) versus Section 271AAB(1)(c):The assessee argued that the AO incorrectly applied section 271AAB(1)(a) instead of section 271AAB(1)(c) without issuing a requisite notice. The tribunal noted that the AO must issue a show cause notice and provide an opportunity for the assessee to be heard before deciding under which clause the penalty is to be imposed. The tribunal found that this procedural requirement was not met, thus affecting the validity of the penalty imposition.3. Existence of Undisclosed Income:The tribunal examined whether the income surrendered by the assessee during the search constituted 'undisclosed income' as defined under section 271AAB. It was concluded that since the transactions were duly recorded in the books of account and supported by documentary evidence, they did not qualify as undisclosed income. The tribunal highlighted that mere surrender of income does not automatically categorize it as undisclosed unless it meets the specific criteria outlined in the statute.4. Mandatory Nature of Penalty:The tribunal addressed the argument that the penalty under section 271AAB is mandatory. It was clarified that the use of the word 'may' in the statute indicates discretion, not compulsion, in imposing penalties. The tribunal cited precedents to support the view that penalties are not automatic and must be judiciously considered based on the facts of each case.5. Consideration of Mens Rea:The assessee contended that the penalty should not be imposed without establishing mens rea or intent of wrongdoing. The tribunal noted that the AO did not provide any findings on the presence of mens rea. It reiterated that penalties should not be imposed unless the case clearly falls within the statutory provisions, which include the requirement of intent or negligence.In conclusion, the tribunal allowed the appeals of the assessee, holding that the penalty orders were not sustainable due to procedural lapses and lack of evidence of undisclosed income. The tribunal also dismissed the appeals of the revenue, upholding the reduction of penalty by the Commissioner of Income Tax (Appeals).