2025 (10) TMI 1216 - AT - Income Tax

Penalty under section 271AAB set aside for failure to identify or quantify undisclosed income; matter remitted for fresh adjudication

ITAT GUWAHATI - AT set aside the CIT(A)'s confirmation of penalty under section 271AAB, finding the AO failed to identify or quantify 'undisclosed income' ... Levying penalty u/s 271AAB - addition on the basis of a disclosure “as discovered in the documents seized during the course of search and seizure action on the assessee, which has been disclosed in the ITR and taxes thereon have been paid by the assessee” - HELD THAT:- Penalty was leviable only on the ‘undisclosed income’ which has not been quantified by the CIT(A). We have also noticed that the AO has not mentioned as to what were the documents found and seized for computing the undisclosed income as the penalty can be levied only on the basis of the sum computed at the rate of 30% or 60% as the case may be of the ‘undisclosed income’ of the specified previous year. As per clause (c) of the Explanation to section 271AAB ‘undisclosed income’ is defined in an exhaustive manner. AO has not mentioned any entry in the books of account or other documents or transactions found during the course of search on the basis of which he has concluded that it is the ‘undisclosed income’ of the assessee on which the penalty is levied. CIT(A), while confirming the penalty, has not mentioned as to what was the undisclosed income and how was the same computed. In this respect, we note that Section 250(6) of the Act casts a duty on the Ld. CIT(A) to pass an order in appeal which should state the points for determination and a decision as well as the reason for arriving at such decision; however, CIT(A) upheld the view of the AO and has not passed a reasoned order for arriving at the decision, as is required u/s 250(6) of the Act. We further note that in Ajji Basha [2019 (12) TMI 320 - MADRAS HIGH COURT] it has been held that a speaking order on merits with reasons and findings is to be passed by Commissioner (Appeals) on basis of ground raised in assessee's appeal; he cannot dispose the assessee's appeal merely by holding that the Assessing Officer's order is a self-speaking order which requires no interference. Since it is not apparent from the penalty order or the assessment order as to what were the documents on the basis of which the penalty was levied nor the CIT(A) has identified the same while confirming the penalty, therefore, in the interest of justice and fair play to both the assessee as well as the Ld. AO, the order of the Ld. CIT(A) is hereby set aside and the appeal is restored to him with the direction to ascertain whether there was any undisclosed income as per the definition in clause (c) of the Explanation below section 271AAB of the Act and consider the submissions of the assessee which may be filed and thereafter give a specific finding as to whether the penalty was leviable for the specified previous year. Thus, after examining the facts of the case and the law, we deem it appropriate to set aside the order of the Ld. CIT(A) and restore the appeal back to the Ld. CIT(A), who shall examine and give a finding as to the ‘undisclosed income’ on the basis of the documents found and seized, quantify the same and dispose the grounds of appeal taken by the assessee on merit by passing a speaking order. ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under section 271AAB of the Income Tax Act is leviable where undisclosed income was declared following a search and seizure and whether the year in question constitutes the 'specified previous year' as defined in section 271AAB. 2. Whether a disclosure made 'to buy peace' or 'to avoid litigation' absolves the assessee from penalty under section 271AAB. 3. Whether the Assessing Officer (AO) and the Commissioner (Appeals) complied with statutory requirements in identifying and quantifying the 'undisclosed income' and in passing a reasoned (speaking) order as required by section 271AAB and section 250(6) of the Act. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Levy of penalty under section 271AAB and applicability of 'specified previous year' Legal framework: Section 271AAB(1A) prescribes penalty where search has been initiated, providing two rates (30% where specified conditions in clause (a) are satisfied; 60% otherwise) calculated on 'undisclosed income' of the 'specified previous year.' Explanation defines 'specified previous year' by two sub-clauses: (i) a year which ended before the date of search but for which the due date to file return had not expired before the date of search and return was not furnished before the date of search; and (ii) the year in which search was conducted. Precedent treatment: The Tribunal relied on higher court principles that penalty provisions must be strictly construed and that the AO must satisfy the conditions precedent for imposing penalty. It also noted established authorities holding that voluntary or peace-motivated disclosures do not automatically relieve from penalty where statutory conditions are met. Interpretation and reasoning: The Court examined factual matrix: previous year ended before date of search and return for that previous year had not expired before search date; return was filed after notice under section 153A. Therefore the impugned year fell squarely within the statutory definition of 'specified previous year' (Explanation clause (i)). Given that statutory conditions for invoking section 271AAB(1A) are met, the prescribed penalty rates are attracted. The AO and appellate authority's conclusion that the year was a 'specified previous year' was upheld on this point. Ratio vs. Obiter: Ratio - where facts satisfy statutory definition of 'specified previous year' in Explanation to section 271AAB, penalty provision becomes attracted as per the rates provided. Obiter - general remarks about interpretation being strict and self-contained. Conclusion: The Tribunal confirmed that the relevant assessment year met the definition of 'specified previous year' and that section 271AAB is attracted in principle; hence the question of leviability of penalty was not negated merely by timing of return. Issue 2 - Effect of disclosure motivated by 'peace of mind' or avoidance of litigation Legal framework: Section 271AAB is a penal provision; statutory language prescribes levy where conditions are met. Analogous penal jurisprudence establishes that voluntary surrender or motive to 'buy peace' does not per se negate penal liability where statutory presumption/requirements indicate concealment. Precedent treatment: The Tribunal applied authoritative principles that mere plea of voluntary disclosure to avoid litigation is not a recognized defense to avoid penalty; onus shifts upon assessee to discharge inference and thereafter upon revenue to prove otherwise where applicable. Interpretation and reasoning: The assessee's stated reason for disclosure - to have 'peace of mind' and to avoid litigation - did not explain the manner of derivation of income or rebut statutory classification as 'undisclosed income.' Section 271AAB requires compliance with specified conditions (including substantiation of manner of deriving such income) to merit a lower rate; motives alone do not satisfy or negate those statutory conditions. Hence the motive-based defence was rejected as not tenable to avoid penalty. Ratio vs. Obiter: Ratio - motive of disclosure (buying peace) does not absolve statutory penal consequences under section 271AAB where definition/conditions are met. Obiter - analogy with general penal jurisprudence emphasizing burden shifting. Conclusion: Disclosure made to avoid litigation or to buy peace is not a valid ground to negate levy of penalty under section 271AAB absent satisfaction of statutory conditions and substantiation requirements. Issue 3 - Identification, quantification of 'undisclosed income' and requirement of a speaking order by appellate authority Legal framework: Section 271AAB defines 'undisclosed income' exhaustively (entries, documents, transactions found in course of search not recorded or disclosed before search). Section 250(6) requires the Commissioner (Appeals) to state points for determination, decisions thereon and reasons for decisions; appellate authority must pass a speaking order and may direct further inquiry under section 250(4). Precedent treatment: Tribunal relied on precedents holding that the appellate authority is a fact-finding body obliged to apply mind, give reasons and not merely reproduce AO's order; direction to re-examine where reasoning/identification is absent is supported by case law requiring speaking orders and opportunity to be heard. Interpretation and reasoning: On facts, AO imposed penalty referencing documents seized and quantified an addition of a specific sum, but neither assessment order nor penalty order identified the specific seized documents or specified entries in books from which the 'undisclosed income' was computed. The appellate order merely reproduced AO's findings and confirmed penalty without independent reasoning, contrary to section 250(6). Because section 271AAB permits computation of penalty only on the basis of 'undisclosed income' as defined, absence of identification/quantification of what constituted undisclosed income rendered the penalty order devoid of necessary foundation. The Tribunal held that in the interest of justice, the appellate order must be set aside and matter remitted for fresh consideration with directions: ascertain whether any undisclosed income exists as per the statutory definition, identify the seized documents/entries on which such income is based, quantify the undisclosed income, consider assessee's submissions and provide opportunity of hearing (including AO if necessary), and pass a reasoned speaking order applying section 271AAB and Rule 46A of the Income Tax Rules as applicable. Ratio vs. Obiter: Ratio - penalty under section 271AAB must be founded on identified and quantified 'undisclosed income' based on seized documents/entries; appellate authority must pass a speaking order specifying points for determination, reasoning and findings as required by section 250(6). Obiter - procedural suggestions regarding conduct of fresh appellate proceedings (reasonable opportunity, no unnecessary adjournments). Conclusion: Although penalty appears attracted in principle, both AO and Commissioner (Appeals) failed to identify and quantify the 'undisclosed income' on an evidentiary basis and the appellate order lacked requisite reasoning; therefore the appellate order is set aside and remitted to the Commissioner (Appeals) for fresh, reasoned adjudication in accordance with statutory provisions and applicable rules. Cross-references and consequential directions 1. Findings on 'specified previous year' and on validity of motive-based disclosure apply mutatis mutandis to the subsequent assessment year where facts are identical; hence identical deficiency in identifying 'undisclosed income' and absence of speaking reasoning require remand for that year as well. 2. On remand Commissioner (Appeals) shall consider statutory definition of 'undisclosed income' (Explanation (c) to section 271AAB), clause (a)/(b) of sub-section (1A) for rate application, and rule-making provisions (Rule 46A as applicable), provide opportunities of hearing to assessee and AO, and pass a speaking order stating points for determination, findings and reasons as required by section 250(6). Overall conclusion Penal provision under section 271AAB is attracted where statutory conditions (including 'specified previous year') are satisfied and motive to 'buy peace' does not negate liability; however, on facts the penalty orders lacked identification/quantification of 'undisclosed income' and the appellate authority failed to pass a speaking order, warranting remand for fresh, reasoned adjudication. Appeals are partly allowed for statistical purposes and remitted to the Commissioner (Appeals) for de novo determination in accordance with law.