2023 (8) TMI 1619 - AT - Income Tax

AO must issue show cause notice before levying Section 271AAB penalty, not automatic upon income surrender

Shri Prafulla Shashikant Vaidya Versus Deputy Commissioner of Income Tax, Central Circle-1, Thane.

The ITAT Mumbai held that penalty under Section 271AAB(1) is not automatic or mandatory but requires examination based on facts and circumstances. The AO ... Penalty proceedings u/s. 271AAB (1) - income surrendered by the assessee in the statement recorded u/s 132(4) - as argued non specifying under which clause of Section 271AAB(1) the penalty is being levied - HELD THAT:- From a plain reading the provisions of Section 271AAB, it can be seen that, it begins with the stipulation that the AO may direct the assessee and the assessee shall pay the penalty as per clause (a) to (c) so satisfied in sub-section (1) to Section 271AAB. As per sub-section (3) of Section 271AAB, the provisions of section 274 and section 275 as far as maybe applied in relation to penalty under this section which means that before levying the penalty, the Assessing officer has to issue a show cause granting an opportunity to the assessee. Thus, the levy of penalty is not automatic but the Assessing officer has to decide based on facts and circumstances of the case. Levy of penalty u/s 271AAB is not mandatory or automatic, same needs to be examined, whether there is any basis for levy of penalty or non-levy thereof and the same will depend upon the facts and circumstances of the case. We hold that the addition confirmed does not fall in the ambit of definition of undisclosed income as contemplated in Explanation to section 271AAB - Appeal of the assessee is allowed. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment revolve around the applicability and imposition of penalty under Section 271AAB(1) of the Income Tax Act, 1961. Specifically, the issues include:Whether the penalty under Section 271AAB(1) can be imposed without specifying under which clause of Section 271AAB(1) the penalty is being levied.Whether the income declared by the assessee during the search qualifies as 'undisclosed income' under the definition provided in Section 271AAB.Whether the penalty under Section 271AAB is mandatory or discretionary.ISSUE-WISE DETAILED ANALYSIS1. Specification of Clause under Section 271AAB(1)The legal framework under Section 271AAB(1) requires that the Assessing Officer (AO) specify the clause under which the penalty is being imposed. The Tribunal noted that the AO failed to mention the specific clause in the penalty notice, which led to a lack of effective communication and compliance with Section 274. This omission denied the assessee a reasonable opportunity to present an effective defense, as highlighted by the precedent set in the case of PCIT vs. Shri R Elangovan.2. Definition of 'Undisclosed Income'The Tribunal examined whether the income declared by the assessee during the search constituted 'undisclosed income' as defined under Section 271AAB. The relevant legal framework defines 'undisclosed income' as income not recorded in the books of accounts or disclosed to the Commissioner before the search. The Tribunal found that the jewellery and cash were duly recorded in the documents maintained in the normal course and explained to the authorities. The AO did not provide evidence that the income confirmed in the quantum proceedings fell within the category of 'undisclosed income.' The Tribunal emphasized that the mere disclosure and surrender of income do not automatically categorize it as 'undisclosed income' under the Act.3. Mandatory vs. Discretionary Nature of PenaltyThe Tribunal considered whether the penalty under Section 271AAB is mandatory or discretionary. The legal framework under Section 271AAB uses the term 'may,' suggesting that the imposition of penalty is discretionary rather than automatic. The Tribunal referenced various precedents, including the case of Raja Ram Maheshwari v. Dy. CIT, to support the view that penalties are not compulsory but should be considered based on the facts and circumstances of each case. The Tribunal concluded that the AO must exercise discretion in deciding whether to impose a penalty, taking into account the specific details of the case.SIGNIFICANT HOLDINGSThe Tribunal held that the penalty notice issued by the AO was defective due to the failure to specify the clause under Section 271AAB(1) under which the penalty was being levied. This defect denied the assessee a reasonable opportunity to defend against the penalty.The Tribunal also concluded that the income declared by the assessee did not qualify as 'undisclosed income' under the definition provided in Section 271AAB, as the jewellery and cash were recorded in the books of accounts and explained to the authorities.Furthermore, the Tribunal determined that the penalty under Section 271AAB is not mandatory but discretionary, requiring the AO to consider the facts and circumstances of the case before imposing a penalty.Consequently, the Tribunal deleted the penalty of Rs. 6,09,244/- levied by the AO and sustained by the CIT(A), allowing the appeal in favor of the assessee.