2024 (3) TMI 1417 - AT - Income Tax

Penalty under section 271AAB cannot be sustained where voluntary disclosure under section 153A used as ad hoc estimate

M/s. Enrica Enterprises Pvt. Ltd. Versus The Dy. Commissioner of Income Tax, Central Circle-3 (4), Chennai.

ITAT held that penalty under section 271AAB cannot be sustained where additional income was voluntarily disclosed in a return filed under section 153A as ... Penalty u/s 271AAB - additional income offered in the return of income filed u/s. 153A towards estimated disallowance of 1/3rd of marketing expense - HELD THAT:- No doubt, the assessee has admitted additional income towards estimated disallowance of 1/3rd of marketing expenses when the Department has found and seized unaccounted cash in the residential premise of the assessee Company Director and their associates. But, fact remains that said unaccounted cash was not identified to any particular assessment year or person. Although, the AO has telescoped unaccounted cash to additional income offered by the assessee towards estimated disallowance of marketing expenses, but, in our considered view, said cash was not identified for the impugned assessment year either by the assessee or by the AO. Further, additional income offered by the assessee and accepted by the AO towards estimated disallowance of marketing expenses is also an ad hoc disallowance without there being any observation/adverse comments with regard to expenses accounted by the assessee in the books of accounts of the specified previous year and also explanation offered by the assessee. The sole basis for the AO to levy penalty u/s. 271AAB of the Act, is voluntary surrender of income by the assessee in the return of income filed u/s. 153A of the Act, and such income has been quantified in the statement recorded u/s. 133(4) of the Act. Although, the AO took support from confirmation from one of the suppliers, where he has stated that at times cash has been returned to the assessee, but there is no specific admission in the confirmation letter of suppliers regarding supplies made to the assessee and refund of 1/3rd of cash for the impugned assessment year. We have gone through the reply received from supplier which has been extracted in the penalty order and we find that said reply is general in nature without any specific reference for the impugned assessment year and also amount of cash returned to the assessee. Thus, on the basis of admission of the assessee without there being any reference to incriminating material surrender of additional income in the return of income filed u/s. 153A of the Act, cannot be considered as undisclosed income as defined in Explanation-(c) to Sec. 271AAB(1)(a) of the Act and such undisclosed income is for specified previous year. As decided in Shri. Prafulla Shashikant Vaidya [2023 (8) TMI 1619 - ITAT MUMBAI] issue of penalty levied u/s. 271AAB of the Act, in respect of income surrendered by the assessee and held that surrender of income would not if so facto lead to the conclusion that the amount surrendered by the assessee is undisclosed income in terms of Sec. 271AAB. Thus additional income offered by the assessee in the return of income filed in response to notice issued u/s 153A of the Act, towards surrender of estimated disallowance of 1/3rd marketing expenses does not come under the definition of undisclosed income as defined in Explanation-c to Sec. 271AAB - Decided in favour of assessee. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment include:Whether the penalty under Section 271AAB of the Income Tax Act, 1961, is mandatory or discretionary.Whether the penalty proceedings initiated under Section 271AAB were valid given the alleged defects in the show cause notice.Whether the additional income declared by the assessee qualifies as 'undisclosed income' as per Explanation-C to Section 271AAB.Whether the Assessing Officer (AO) properly applied the provisions of Section 271AAB in levying the penalty.ISSUE-WISE DETAILED ANALYSIS1. Mandatory vs. Discretionary Nature of Penalty under Section 271AABThe Tribunal examined whether the penalty under Section 271AAB is mandatory. It noted that the provision uses the word 'may,' indicating discretion rather than compulsion. The Tribunal emphasized that penalties are not automatic but depend on the facts and circumstances of each case. The Tribunal referred to various precedents to support its interpretation that the penalty is discretionary and not mandatory.2. Validity of Penalty Proceedings and Show Cause NoticeThe Tribunal scrutinized the validity of the penalty proceedings initiated under Section 271AAB, focusing on the show cause notice issued by the AO. It was argued that the notice was defective as it did not specify under which sub-clause of Section 271AAB the penalty was being levied. The Tribunal agreed with this contention, citing the requirement for the AO to clearly specify the charge under which the penalty is being imposed to enable the assessee to effectively respond. The Tribunal found the notice to be vague and lacking specificity, rendering the penalty proceedings invalid.3. Definition of 'Undisclosed Income' under Section 271AABThe Tribunal assessed whether the additional income declared by the assessee could be classified as 'undisclosed income' under Explanation-C to Section 271AAB. The Tribunal noted that for income to be considered 'undisclosed,' it must be unrecorded in the books of accounts or falsely recorded as an expense. In this case, the Tribunal found that the additional income declared by the assessee was based on an estimated disallowance of marketing expenses and was not linked to any specific incriminating material found during the search. Therefore, the Tribunal concluded that the declared income did not meet the criteria for 'undisclosed income.'4. Application of Section 271AAB by the AOThe Tribunal evaluated the AO's application of Section 271AAB in levying the penalty. It found that the AO's decision was primarily based on the voluntary surrender of income by the assessee rather than on concrete evidence of undisclosed income. The Tribunal emphasized that the mere surrender of income does not automatically qualify it as 'undisclosed income' under Section 271AAB. The Tribunal highlighted the lack of specific evidence linking the surrendered income to any falsified entries or unrecorded transactions for the specified previous year.SIGNIFICANT HOLDINGSThe Tribunal established several core principles and final determinations:The penalty under Section 271AAB is discretionary, not mandatory, and depends on the specific facts and circumstances of each case.The show cause notice issued under Section 271AAB must clearly specify the sub-clause under which the penalty is being levied to provide the assessee with a fair opportunity to respond.The additional income declared by the assessee does not qualify as 'undisclosed income' under Explanation-C to Section 271AAB, as it was not linked to any specific falsified entries or unrecorded transactions.The AO's levy of penalty based on the voluntary surrender of income without concrete evidence of undisclosed income was deemed inappropriate.The Tribunal set aside the order of the CIT(A) and directed the AO to delete the penalty levied under Section 271AAB.The Tribunal's decision underscores the importance of adhering to procedural requirements and ensuring that penalties are imposed based on substantive evidence rather than mere admissions or estimates. The judgment emphasizes the necessity for clear and specific communication in penalty proceedings to uphold the principles of natural justice.