2025 (2) TMI 438 - AT - Income Tax

Penalty under Section 271AAB deleted as voluntary disclosure without incriminating material doesn't constitute undisclosed income

ITAT Chennai ruled in favor of the assessee regarding penalty under Section 271AAB(1A)(b) at 60%. The tribunal held that penalty could only be levied on ... Penalty invoking the provisions of 271AAB(1A)(b) @ 60% - additional income offered/accepted by the Appellant during the course of search/ search assessment proceedings forming part of the computation of the taxable total income in the search assessment order - HELD THAT:- No incriminating material has been unearthed during search which substantiate the fact that the assessee do not have undisclosed income which is represented by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other document or transaction found in the course of search which either have not been recorded before the date of search in the books of account or not disclosed to the Principal Chief Commissioner of Income Tax before the date of search. We concur with the submissions that penalty u/s 271AAB was discretionary and would depend on the merits of each case. Finding or unearthing of undisclosed income in the course or as a result of search conducted u/s 132 and consequent assessment of undisclosed income is a condition precedent for levy of penalty u/s 271AAB. Every offer of the assessee to pay tax on his income in the course of recording of statement u/s 132 does not amount to finding of 'undisclosed income'. A mere offer or disclosure by an assessee to pay tax on some additional amount with a view to avoid litigation cannot amount to discovery of undisclosed income for the purposes of levy of penalty under section 271AAB of the Act. The stated penalty could be levied only in respect of the ‘undisclosed income' as defined in Explanation (c) to the said Section 271AAB. In the present case, we arrive at a conclusion that there aforesaid notings were nothing but ‘market adjustments’ as pleaded by the assessee and the same would not fall within the expression ‘undisclosed income’ as defined in Explanation (c) to the said Section 271AAB since the same is not represented by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other document or transaction found in the course of search which either have not been recorded before the date of search. In such a case, the levy of penalty could not be upheld. We reach a conclusion that the impugned penalty is not sustainable in law. Accordingly, we direct Ld. AO to delete the same. Decided in favour of assessee. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment revolve around the applicability of penalty under Section 271AAB of the Income Tax Act. The specific issues include:Whether the penalty under Section 271AAB is automatic upon the discovery of undisclosed income during a search.Whether the amounts found during the search, claimed as 'market adjustments,' qualify as undisclosed income under Section 271AAB.Whether the penalty was imposed without jurisdiction or outside the prescribed time limits.Whether the explanation provided by the assessee regarding the nature of the transactions was sufficiently credible to negate the penalty.Whether the lack of precise charges in the show-cause notice invalidates the penalty proceedings.Whether the penalty provisions should be applied in a discretionary manner, considering the facts and circumstances of each case.ISSUE-WISE DETAILED ANALYSIS1. Applicability of Penalty under Section 271AABThe relevant legal framework involves Section 271AAB, which mandates penalties for undisclosed income found during searches. The Court examined whether the income in question was indeed 'undisclosed' as defined by the statute. The definition includes income not recorded in books or not disclosed to tax authorities before the search.The Court reasoned that the penalty under Section 271AAB is not automatic and depends on the merits of each case. The penalty can only be levied if the income qualifies as 'undisclosed' under the statutory definition, which was not the case here as the income was explained as 'market adjustments' and not as undisclosed income.2. Nature of 'Market Adjustments'The assessee claimed that the amounts found during the search were not income but 'market adjustments' necessary for liquidity management among stockists. The Tribunal considered evidence, including explanations and supporting documents, to determine the nature of these transactions.The Court found the explanation plausible, supported by the practice in the assessee's business line and similar cases where such adjustments were not considered income. The Tribunal noted that no incriminating material was found to substantiate the claim of undisclosed income.3. Jurisdiction and Timeliness of Penalty ProceedingsThe assessee argued that the penalty order was passed out of time and without proper jurisdiction. The Tribunal evaluated the procedural aspects and found no jurisdictional error or procedural lapse that would invalidate the penalty proceedings.4. Discretionary Nature of PenaltyThe Tribunal emphasized that the imposition of penalty under Section 271AAB is discretionary and not mandatory. The Court highlighted that the statutory language uses 'may' instead of 'shall,' indicating discretion. The Tribunal considered the lack of incriminating evidence and the nature of the transactions to conclude that the penalty was not warranted.5. Lack of Precise Charges in Show-Cause NoticeThe assessee contended that the penalty proceedings were vitiated due to imprecise charges in the show-cause notice. The Tribunal considered this argument but found that the notice provided sufficient information for the assessee to respond, and thus, the proceedings were not invalidated on this ground.SIGNIFICANT HOLDINGSThe Tribunal held that:The amounts in question did not constitute 'undisclosed income' as defined under Section 271AAB, as they were adequately explained as 'market adjustments.'The penalty under Section 271AAB is not automatic and requires a clear finding of undisclosed income, which was absent in this case.The imposition of penalty is discretionary, and the facts did not justify such imposition in this scenario.The procedural aspects of the penalty proceedings were upheld, but the substantive basis for the penalty was found lacking.In conclusion, the Tribunal directed the deletion of the penalty, allowing the appeal in favor of the assessee. The decision underscores the importance of a clear nexus between discovered assets and undisclosed income for the imposition of penalties under Section 271AAB.