2025 (11) TMI 464 - AT - Income Tax

Penalty under s.271(1)(c) deleted where s.153A return's additional income accepted and no concealment or furnishing inaccurate particulars

ITAT CHENNAI - AT allowed the appeal and upheld deletion of penalty under s.271(1)(c). The additional income disclosed in the return filed under s.153A ... Penalty u/s. 271(1)(c) - Additional income declared by the assessee in the return of income filed u/s. 153A - CIT(A) deleted penalty levy - HELD THAT:- For the purposes of determining concealment or furnishing of inaccurate particulars of income u/s. 271(1)(c) of the Act, the return filed u/s. 153A of the Act must be taken into consideration, if the additional income disclosed in the said return of income is not based on any incriminating material found during the course of search. In the present case, since the assessee has duly disclosed the additional income in the return filed u/s. 153A of the Act, and the said return has been accepted by the AO without any variation, there arises no occasion to allege concealment vis-à-vis the earlier return filed under Section 139 of the Act. The concealment, if any, has to be assessed only with reference to the return filed under Section 153A, and in the facts of the instant case, there exists no concealment in such return, since the said additional income was not on the basis of any incriminating material found for the impugned assessment year during the course of search at the premises of the assessee. Accordingly, we are of the considered view that the penalty sought to be imposed u/s. 271(1)(c) of the Act is unwarranted and unsustainable in law. Therefore, we hold that the CIT(A) has rightly deleted the penalty imposed by the AO u/s. 271(1)(c) of the Act. Our above view is supported by the judgment of Neeraj Jindal [2017 (2) TMI 1002 - DELHI HIGH COURT] as categorically held that where an assessee has furnished a revised return of income subsequent to the conduct of a search, and such revised return has been duly accepted by the AO, the mere fact that the revised return reflects a higher income than what was originally declared does not, by itself, warrant the automatic levy of penalty u/s. 271(1)(c) of the Act. Ratio laid down in MAK Data Private Limited [2013 (11) TMI 14 - SUPREME COURT] is clearly distinguishable on facts and, therefore, does not govern the present case of the assessee. Where the assessee's voluntary disclosure of additional income is not supported by any seized or incriminating document, the penalty provisions u/s. 271(1)(c) of the Act stand inapplicable. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under section 271(1)(c) can be levied where additional income is declared in a return filed under section 153A and such additional income is not attributable to incriminating material seized during search; and whether Explanation 5A to section 271(1)(c) is attracted. 2. Whether a penalty notice under section 274 read with section 271(1)(c) is valid if issued after completion of assessment (i.e., whether initiation of penalty proceedings is required to be 'in the course of the assessment proceedings'). 3. Whether penalty under section 270A (for under-reporting/misreporting) can be sustained where the return filed under section 153A is accepted in toto by the AO and the show-cause notice fails to specify the particular limb(s) of section 270A(2)/(9) relied upon (i.e., defects of vagueness, change of charge from under-reporting to misreporting). 4. Whether penalty under section 271AAB(1A) can be sustained where the show-cause notice does not specify the particular limb (clause (a) or (b)) of section 271AAB(1A) invoked, and whether the amounts offered/declared constitute 'undisclosed income' within the statutory definition. 5. Whether, as a general proposition, a return furnished under section 153A supersedes the earlier return under section 139 for purposes of assessing concealment and levy of penalties. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of Explanation 5A to section 271(1)(c) where additional income is declared in a section 153A return not based on incriminating seized material Legal framework: Section 271(1)(c) penalises concealment/furnishing inaccurate particulars; Explanation 5A (post-1.6.2007) deems certain disclosures made after search to be concealment if they are based on incriminating material or assets/entries found in search. Precedent treatment: Courts and tribunals (including decisions relied upon by the Tribunal) hold Explanation 5A applicable only where additions/disclosures are directly referable to seized/incriminating material; mere higher disclosure in a post-search return is not determinative. MAK Data (distinguished on facts where disclosure was compelled by seized documents). Interpretation and reasoning: The Court examined whether the additional income offered in the section 153A return was traceable to incriminating material found in the search. Where no incriminating material or seized assets/entries linked to the disclosed amounts were found at the assessee's premises, the deeming fiction of Explanation 5A cannot be invoked. The Tribunal emphasised that Explanation 5A requires a causal connection between the incriminating material and the disclosure/addition. Ratio vs. Obiter: Ratio - Explanation 5A not attracted unless disclosure is directly founded upon incriminating material unearthed in search; distinguished MAK Data on factual ground (compulsion by seized material). Obiter - observations stressing voluntary nature of disclosure and policy of section 153A as a 'second chance'. Conclusion: Penalty under section 271(1)(c) is not sustainable where the additional income in the section 153A return is voluntary and not based on incriminating material seized during the search; Explanation 5A does not apply. Issue 2 - Validity of penalty notice when issued after completion of assessment (procedural timing) Legal framework: Section 271(1)(c) penalties are to be initiated in the course of assessment proceedings; section 274 prescribes issuance of show-cause notice; principles of natural justice require meaningful initiation and specification of charge. Precedent treatment: Tribunal and High Court authorities recognise that initiation of penalty must comply with statutory procedure; where notice issued after assessment completion, it may be vulnerable though courts have treated this as fact-sensitive and sometimes academic if substantive grounds dispose of the matter. Interpretation and reasoning: The Tribunal noted the assessment was completed before the show-cause notice was issued in the facts of this case but concluded that since the penalty was unsustainable on substantive grounds (non-attraction of Explanation 5A and acceptance of the section 153A return), the timing issue was of academic relevance. The Tribunal further observed Revenue did not specifically challenge the CIT(A)'s finding on invalidity of the notice, rendering that limb uncontested. Ratio vs. Obiter: Obiter - timing defect alone may invalidate a notice but where substantive reasons dispose of the penalty, the Court refrained from deciding the timing issue finally. Ratio (procedural): the point was treated as significant when relied upon by the assessee and accepted by lower authority but not necessary to decide for the outcome. Conclusion: The Tribunal affirmed deletion of penalty without deciding the timing issue on merits, noting the issue was otherwise academic given substantive findings and lack of challenge by Revenue. Issue 3 - Sustainment of penalty under section 270A where section 153A return accepted and show-cause notice defective/vague Legal framework: Section 270A penalises under-reporting/misreporting; sub-sections identify specific limbs (clauses) of under-reporting and misreporting; show-cause notice under section 274 must specify the precise charge so the assessee can defend. Precedent treatment: Authorities (High Courts and Tribunals) require AO to identify which limb of section 270A(2)/(9) is invoked; vague or omnibus notices and sudden shifts in charge (from under-reporting to misreporting) have been held to vitiate proceedings. Judicial line cited emphasises strict construction of penal notices and requirement of specificity. Interpretation and reasoning: The Tribunal examined factual matrix: returns under section 153A accepted by AO without variation; AO issued preliminary notices alleging under-reporting but later shifted to misreporting (and did not specify which clause of section 270A(9) was relied upon). The Tribunal emphasised step-ladder approach: AO must first establish under-reporting under a clause of section 270A(2), then, if contested, identify misreporting limb under section 270A(9). Failure to identify or to show how ingredients are satisfied renders the notice vague and the penalty invalid. The Tribunal found no finding in assessment showing misrepresentation, and acceptance of the section 153A return negated under-reporting as charged. Ratio vs. Obiter: Ratio - penalty under section 270A cannot be sustained where the show-cause notice is vague as to the specific limb(s) relied upon and where the AO accepted the section 153A return in toto; Tribunal confirmed that the AO cannot change charge mid-stream without proper re-initiation and specification. Obiter - discussion of jurisprudential insistence on strictness in penal notices. Conclusion: Penalty under section 270A deleted where notice was vague, AO failed to specify limb(s) and shifted charge, and where the section 153A return was accepted by the AO without variation. Issue 4 - Validity of show-cause notice and characterization of 'undisclosed income' under section 271AAB(1A) Legal framework: Section 271AAB(1A) prescribes penalty at 30% (clause (a)) or 60% (clause (b)) of 'undisclosed income' found/attributed in search; statutory text requires AO to identify the applicable clause and basis; 'undisclosed income' defined by reference to assets/entries found in search or false entries/expenses discovered on search. Precedent treatment: Madras High Court and various Tribunals require AO to specify the precise limb (clause (a) or (b)) in the notice; failure to do so renders notice defective and penalty vitiated. Also, courts distinguish between voluntary offers/admissions and income that qualifies as 'undisclosed income' by reason of being represented by assets/entries found in search. Interpretation and reasoning: The Tribunal held that the notice failed to specify whether clause (a) or (b) applied and so did not put the assessee on notice of the specific statutory consequences and conditions. On merits, the Tribunal examined whether the amounts declared met the statutory definition of 'undisclosed income': where portions were voluntary offers and where no books/entries or seized assets directly established concealment, the statutory threshold for 'undisclosed income' under the Explanation was not demonstrated. The AO's blanket assertion that amounts would not have been offered but for the search was insufficient; evidence of assets/entries or false books/entries was necessary to sustain section 271AAB(1A). Reliance on PCIT v. Elangovan and other precedents supported this interpretation. Ratio vs. Obiter: Ratio - show-cause notices under section 271AAB(1A) must specify the clause relied upon; absent such specificity the notice/panelly is void. Ratio - amounts not shown to qualify as 'undisclosed income' (per statutory definition tied to search-found assets/entries) cannot attract the penalty. Obiter - broader commentary on voluntary disclosures to avoid litigation not equating to 'undisclosed income' absent supporting search-found evidence. Conclusion: Penalty under section 271AAB(1A) was unsustainable where the notice did not specify the applicable clause and where the amounts declared did not meet the statutory definition of 'undisclosed income' as established by material seized in search. Issue 5 - Status of return filed under section 153A vis-à-vis earlier return under section 139 for penalty purposes Legal framework: Section 153A contains a non-obstante clause treating the return filed in compliance with a section 153A notice as a return for purposes of the Act, overriding section 139; legislative scheme treats the section 153A return as the operative return. Precedent treatment: High Courts and Tribunals (e.g., Neeraj Jindal, Madras High Court decisions) hold that a return under section 153A supplants the earlier return for all purposes, including determination of concealment and penalties. Interpretation and reasoning: The Tribunal reiterated that once a section 153A return is filed and accepted by the AO, the prior section 139 return becomes non est; concealment must be judged with reference to the section 153A return unless additional incriminating material from the search directly links to undisclosed amounts. This construction is central to rejecting penalties premised solely on comparison with the original return. Ratio vs. Obiter: Ratio - return filed under section 153A, once accepted, is the return relevant for assessing concealment and levy of penalties; comparisons against the original section 139 return are ordinarily irrelevant absent incriminating material. Obiter - policy observation that section 153A is a legislative 'second chance'. Conclusion: The court confirmed that the section 153A return is to be treated as the operative return for penalty inquiries where additional income is not attributable to search-found incriminating material.