Penalty under Section 271AAB(1A) quashed for defective notice and inconsistent penalty stance by AO

Penalty proceedings under section 271AAB(1A) were quashed due to the Assessing Officer's failure to specify the relevant clause for levy of penalty, rendering the notice defective. Consistent with precedent, the Tribunal held that omission to pinpoint the specific limb vitiates the entire penalty process. Additionally, as penalty was not levied for the preceding year on identical facts, the AO could not adopt a contrary stance for the subsequent year. The GST paid on undisclosed sales was allowed as a deduction from gross profit, resulting in no undisclosed income for penalty levy. The CIT(A) erred in granting only partial relief; the entire penalty was set aside, dismissing Revenue's appeal and allowing the assessee's grounds.

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ISSUES:

Whether penalty under section 271AAB(1A) of the Income Tax Act, 1961 is leviable on undisclosed income admitted during search proceedings but declared in the return filed before the due date.Whether the penalty notice issued under section 274 read with section 271AAB is valid if it does not specify the exact clause of section 271AAB(1A) under which penalty proceedings are initiated.Whether GST paid on undisclosed sales should be deducted from the gross profit while computing undisclosed income for penalty under section 271AAB(1A).Whether interest paid on delayed GST payment should be considered while computing undisclosed income for levy of penalty under section 271AAB(1A).Whether penalty can be levied for the assessment year when no penalty was levied for a preceding year on the same facts.

RULINGS / HOLDINGS:

The penalty under section 271AAB(1A) is leviable on "undisclosed income" which means income not recorded in the books of account before the date of search but found during search; admission of undisclosed income in statement under section 132(4) and declaration in return filed after search but before due date does not exclude levy of penalty.The penalty notice issued under section 274 read with section 271AAB is invalid if it fails to specify the exact clause (a) or (b) of section 271AAB(1A) under which penalty is proposed, as this omission denies reasonable opportunity to the assessee; such defect vitiates the penalty proceedings and renders them liable to be quashed.The undisclosed income for penalty purposes must be computed after deducting GST paid on such undisclosed sales from the gross profit declared, since the sales were inclusive of GST and GST payment is directly related to unaccounted sales; penalty should be levied on net profit after GST deduction.The interest paid on delayed GST payment is compensatory in nature and not directly related to undisclosed income; hence, it should not be deducted while computing undisclosed income for penalty levy under section 271AAB(1A).Where penalty was not levied by the Assessing Officer for a preceding assessment year on identical facts, the Assessing Officer cannot take a contrary stand and levy penalty for the subsequent assessment year; consistency in approach is required.

RATIONALE:

The Court applied the definition of "undisclosed income" as per Explanation to section 271AAB, which includes income not recorded in books before search but found during search, supported by the assessee's admission under section 132(4) and subsequent declaration in return.The Court relied on the binding decision of the Madras High Court holding that penalty notices under section 271AAB must specify the exact clause under which penalty is levied to enable effective response, extending principles from analogous decisions on section 271(1)(c); failure to do so results in defective notice and invalid penalty proceedings.The Court examined the accounting policy and seized documents showing that sales were inclusive of GST; since GST was paid and debited to Profit & Loss Account, it forms part of the gross profit figure and must be deducted to arrive at true undisclosed income for penalty computation.The Court distinguished GST interest payment as unrelated to undisclosed income and thus excluded it from deduction in penalty calculation.The Court followed precedents emphasizing that the Assessing Officer cannot adopt inconsistent positions on penalty for different assessment years on identical facts, upholding principles of fairness and consistency in tax administration.

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