2022 (7) TMI 1576 - AT - Income Tax

ITAT dismisses section 271AAB penalty despite search findings, rules automatic imposition invalid without incriminating material

ITAT Chennai dismissed penalty proceedings under section 271AAB despite excess cash and jewellery found during search. The tribunal held that penalty ... Penalty u/s 271AAB - excess cash and jewellery was found in search - assessee has submitted that AO has not mentioned the specific clause of applicable provisions under which the alleged default was committed by the assessee - HELD THAT:- Upon perusal of statement it could be gathered that it is a general statement wherein no incriminating material has been confronted to the assessee and no question with respect to undisclosed income has been put to the assessee. Another statement has been recorded on next day. Upon perusal of question no.6, it could be seen that the assessee was required to explain the variance in the amount of cash found. The assessee, in the reply, has sought time to furnish the requisite details to reconcile the discrepancies. There is no admission in the statement of the assessee regarding any ‘undisclosed income’. No question with respect to any other incriminating material is shown to have been put to the assessee in this statement also. Subsequently, during post search proceedings, the assessee group has agreed to offer lump sum Rs.40 Crore collectively to tax which has been confirmed by another assessee i.e., Shri Sardarmal M. Kothari in statement recorded on 14.02.2013 which is placed on page nos. 63 to 65 of paper-book. However, in this statement also, no incriminating material or documents have been confronted to that assessee. Imposition of penalty is not automatic but it would apply on peculiar facts and circumstances of each case. Merely because the voluntary admission has been made by the assessee which is not represented by any incriminating material found during the course of search action, the same would not justify the imposition of penalty. The principle of natural justice would demand that the aggrieved party is given an opportunity of hearing to defend its case. It is only after the defense of the accused has been considered, the authorities could proceed with penal consequences. Had the imposition of penalty been automatic, such an opportunity would have no relevance and no opportunity would be required to be given to the assessee. It is only after the assessee has been heard and Ld. AO finds it a fit case for imposition of penalty, the penalty could be levied on the assessee. CIT(A) has clinched the issue in the right perspective. Therefore, we confirm the impugned order, however, with enhancement. It could be observed that excess cash was found for Rs.68.55 Lacs from the premises of M/s Kamachi Steel Ltd. which was owned up by the assessee and disclosure was made. Therefore, besides own cash, the assessee would be liable for penalty on this excess cash of Rs.68.55 Lacs also. We order so. Rate of penalty - we concur with the adjudication of Ld. CIT(A) since it is undisputed fact that part payment of taxes was already made by the assessee along with return of income. The assessee had filed ‘No objection letters’ and requested for adjustment of the same which was rejected. Subsequently, when the refunds were issued, the tax liability was settled by the assessee. Further, a part of the tax liability was also settled by the assessee group by way of seizure of cash of Rs.88.10 Lacs by the department. Nevertheless, the amount seized as well as paid by the assessee along with return of income would amount to more than the penalty sustained by Ld. CIT(A) in the impugned order, which we have substantially confirmed. Therefore, we confirm the stand of Ld. CIT(A), in this regard. Issues Presented and ConsideredThe core legal issues considered in this judgment revolve around the imposition of penalty under Section 271AAB of the Income Tax Act, 1961. Specifically, the issues include:Whether the penalty under Section 271AAB was correctly levied at 30% by the Assessing Officer (AO) on the undisclosed income of Rs.10,00,00,000/- admitted during the search action.Whether the notice issued under Section 271AAB was defective for failing to specify the applicable clause under which the alleged default was committed.Whether the voluntary admission of income by the assessee qualifies as 'undisclosed income' under the statutory definition provided in Section 271AAB.Whether the penalty is mandatory or discretionary under Section 271AAB and the appropriate rate of penalty to be applied.Issue-wise Detailed Analysis1. Validity of Penalty under Section 271AABThe relevant legal framework involves Section 271AAB of the Income Tax Act, which prescribes penalties for undisclosed income found during a search. The AO initially levied a penalty of 30% on the undisclosed income based on the provisions of clause (c) of Section 271AAB(1). The Tribunal examined whether the income admitted by the assessee during the post-search proceedings could be considered as 'undisclosed income' as defined in the section.The Court's interpretation emphasized that 'undisclosed income' should be linked to specific assets or documents found during the search. The Tribunal found that the penalty was based on the assessee's admission without any incriminating material being found during the search, which does not meet the statutory definition of 'undisclosed income'.Key evidence included the lack of incriminating documents or materials found during the search that could substantiate the undisclosed income. The Tribunal concluded that the voluntary admission of income by the assessee, not supported by search materials, could not be treated as 'undisclosed income' for penalty purposes.2. Defect in Show-Cause NoticeThe assessee argued that the show-cause notice was defective as it did not specify the applicable clause under Section 271AAB. The Tribunal considered whether the lack of specificity in the notice rendered it invalid. The Tribunal found that the notice, although not specifying the clause, did mention the amount subject to penalty and the section under which the penalty was proposed, thus providing sufficient clarity to the assessee. Therefore, the Tribunal dismissed the argument that the notice was defective.3. Discretionary Nature of Penalty under Section 271AABThe Tribunal analyzed whether the penalty under Section 271AAB is mandatory or discretionary. It noted that the section uses the term 'may', indicating discretion. The Tribunal referred to various judicial pronouncements establishing that the penalty is not automatic and must be based on the facts and circumstances of each case.The Tribunal emphasized that the imposition of penalty requires a clear link between the undisclosed income and the materials found during the search. Since no such link was established in this case, the Tribunal found that the penalty could not be automatically imposed based solely on the voluntary admission by the assessee.Significant HoldingsThe Tribunal's significant holdings include the following:The penalty under Section 271AAB cannot be levied solely based on voluntary admission of income without any supporting incriminating material found during the search.The show-cause notice, despite not specifying the clause, was not defective as it provided sufficient information regarding the penalty proceedings.The penalty under Section 271AAB is discretionary, not mandatory, and must be based on the specific facts and circumstances of each case.The Tribunal upheld the CIT(A)'s decision to restrict the penalty to 10% of the undisclosed income of Rs.91.64 Lacs, considering the facts that part of the tax liability was settled through seized cash and refunds due to associated entities.The Tribunal's final determination was to partly allow the revenue's appeal by enhancing the penalty to include excess cash found at M/s Kamachi Steel Ltd. premises, while confirming the CIT(A)'s adjudication on the rate of penalty.