Penalty under s.271AAB cannot be imposed without a s.132 search; assessment under s.153C not s.153A

ITAT held that penalty under s.271AAB cannot be imposed where no search under s.132 was conducted on the assessee. Because the assessment was framed under s.153C and not s.153A, the statutory precondition for s.271AAB was absent. The tribunal deleted the penalty and allowed the assessee's appeal.

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ISSUES PRESENTED AND CONSIDERED

1. Whether penalty under section 271AAB can be imposed on an assessee where no search under section 132 has been conducted upon that assessee and the assessment is framed under section 153C.

2. Whether material or statements recorded during a search of a third person (searched person) can form the basis for imposing penalty under section 271AAB on a person whose assessment is made under section 153C.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Applicability of section 271AAB where no search under section 132 was conducted on the assessee and assessment is under section 153C.

Legal framework: Section 271AAB provides for levy of penalty where "search has been initiated under section 132" on or after 1 July 2012 and contemplates conditions including admission in a statement under subsection (4) of section 132, substantiation of manner of deriving undisclosed income, payment of tax and filing of return for the specified previous year.

Precedent Treatment: The Tribunal relied upon its earlier decision in ITA No. 2335/KOL/2019 which construed section 271AAB as applicable only where search under section 132 has been initiated on the assessee seeking penalty under that provision and sustained deletion of penalty where the assessment was under section 153C.

Interpretation and reasoning: The Court examined the statutory text of section 271AAB and observed that its opening phrase expressly requires a search to have been initiated under section 132 to invoke the provision. The scheme of the Income Tax Act distinguishes between assessees searched (section 153A) and other persons whose material is found during that search (section 153C). Where incriminating material belonging to a person other than the searched person is found, a satisfaction note is to be transmitted and the other person is assessed under section 153C. The Tribunal held that section 271AAB is directed to assessees upon whom search has been conducted; consequently, it does not apply to persons assessed under section 153C where no search on that person under section 132 occurred.

Ratio vs. Obiter: Ratio - Section 271AAB is inapplicable to an assessee in respect of whom no search under section 132 was initiated and whose assessment is made under section 153C. This is the central holding applied to the facts and dispositive of the penalty issue.

Conclusion: Penalty under section 271AAB cannot be imposed where the assessment is framed under section 153C and no search under section 132 was carried out on the assessee; penalty deleted.

Issue 2: Reliance on statements or disclosures of the searched person to compute penalty under section 271AAB for a section 153C assessee.

Legal framework: Section 271AAB predicates penalty on admissions and statements made "in the course of the search" under section 132(4), and on the assessee's own substantiation and compliance (payment of tax, furnishing return) for the specified previous year.

Precedent Treatment: The Tribunal in the cited prior decision treated reliance upon the searched person's statement or disclosures as impermissible to levy penalty on a non-searched person assessed under section 153C.

Interpretation and reasoning: The Tribunal observed that statements under section 132(4) are recorded during the course of a search of the person searched and pertain to that searched person. Where an assessment is made under section 153C in respect of a different person, there is no statutory basis to treat the searched person's statements as admissions by the person assessed under section 153C. The Assessing Officer's act of computing penalty by reference to disclosures of the searched person (or by reference to undisclosed income shown by the searched person) rather than to the income determined in the hands of the assessee under assessment was found contrary to law. The Tribunal noted that in the present matter the assessed/returned income of the assessee was almost equivalent to the declared income, yet the AO purported to compute a penalty by reference to much larger disclosed amounts of the searched person, which the Tribunal described as legally unsustainable.

Ratio vs. Obiter: Ratio - Statements or disclosures of the searched person cannot be used as the basis for imposing section 271AAB penalty on a different person assessed under section 153C; the penalty must be founded on the statutory predicate (search on the assessee) and the assessee's own statement/admissions as provided in section 271AAB.

Conclusion: The Assessing Officer erred in relying on the searched person's disclosures to impose penalty under section 271AAB on the section 153C assessee; such computation is contrary to the statutory scheme and the penalty must be deleted.

Cross-reference

The conclusions on both issues are interlinked: because section 271AAB requires a search under section 132 on the assessee (Issue 1), it follows that statements recorded under section 132(4) of a searched person cannot serve as the requisite admission or foundation for penalty in respect of a different person assessed under section 153C (Issue 2).

Disposition

The Tribunal allowed the appeal by deleting the penalty under section 271AAB, applying the statutory interpretation and the reasoning adopted in the Tribunal's prior decision on the identical point. The deletion of penalty is ratio decidendi and dispositive of the appeal.

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