2018 (7) TMI 2010 - AT - Income Tax

Penalty u/s 271AAB - income surrendered by the assessee during the course of search and seizure and in the statement recorded under section 132(4) - assessee has declared the income as salary received from partnership firm interest from partnership firm capital gain short term and long term both and income from other sources apart from the surrendered income - HELD THAT - When the provisions for levy of penalty under section 271AAB is a specific provision to deal with the undisclosed income and it provides a strict penal action then the corresponding duty of the tax authority is also equally stringent. The AO cannot escape from following the strict mandatory requirement of law and particularly the principle of natural justice. AO has neither specified the grounds and clause of section 271AAB nor has dealt with the same in the impugned order passed under section 271AAB. The AO has also not given a finding that the case of the assessee falls in the definition of undisclosed income provided under clause (c)(i) of Explanation to section 271AAB. When the transactions of investment in real estate are recorded in the diary being other documents maintained by the assessee for the said purpose then in the absence of any requirement of maintaining regular books of accounts by the assessee the case of the assessee would not fall in the definition of undisclosed income as per clause (c) of Explanation to section 271AAB When the assessee is not required to maintain the books of account as per section 44AA then the matter is required to be examined whether the alleged undisclosed income is recorded in the other documents maintained in the normal course as per clause (c) to Explanation to section 271AAB. Undisputedly the alleged income was found recorded in the diary which is nothing but the other record maintained in the normal course thus the same would not fall in the definition of undisclosed income. Once the said income is found as recorded in the other documents maintained in the normal course then it cannot be presumed that the assessee would not have disclosed the same in the return of income to be filed after about one year from the date of search. Hence in view of the above facts and circumstances of the case as well as the various decisions on this point we hold that the penalty levied under section 271AAB is not sustainable and the same is deleted. Following SHRI AMIT AGARWAL SHRI MADAN LAL BESWAL SHRI MANOJ BESWAL 2017 (11) TMI 678 - ITAT KOLKATA and Ravi Mathur vs. DCIT 2018 (6) TMI 1128 - ITAT JAIPUR we delete the penalty levied by the AO under section 271AAB of the Act. - Appeal of the assessee is allowed.

Issues Involved:
1. Validity of the penalty order under section 271AAB of the Income Tax Act, 1961.
2. Recording of satisfaction by the Assessing Officer before initiating penalty proceedings.
3. Justification for the penalty amount of ?2,16,60,000/-.
4. Applicability of the penalty rate at 30% versus 10% of the undisclosed income.
5. Discretionary versus mandatory nature of the penalty under section 271AAB.

Detailed Analysis:

1. Validity of the Penalty Order:
The assessee challenged the validity of the penalty order under section 271AAB, arguing that the order was void ab initio. The Tribunal noted that the Assessing Officer (AO) did not specify under which clause of section 271AAB the penalty was being levied. The Tribunal emphasized that the penalty under section 271AAB is not automatic but discretionary, requiring the AO to issue a show cause notice and provide a proper opportunity for the assessee to be heard. The Tribunal found that the AO failed to specify the grounds for the penalty, rendering the show cause notice unlawful. This was supported by the decision in CIT vs. Manjunatha Cotton & Ginning Factory, which held that a notice must specify the grounds for penalty to be valid.

2. Recording of Satisfaction:
The assessee argued that the AO did not record satisfaction before initiating the penalty proceedings. The Tribunal highlighted that the AO must record satisfaction that the conditions for levying penalty under section 271AAB are met. The Tribunal found that the AO did not provide any finding that the income in question was undisclosed as per the definition in section 271AAB, thus failing to meet the statutory requirements.

3. Justification for Penalty Amount:
The Tribunal examined whether the penalty of ?2,16,60,000/- was justified. It was noted that the AO imposed the penalty at 30% of the undisclosed income without specifying the clause under which this rate was applicable. The Tribunal reiterated that the AO must provide a clear basis for the penalty rate, considering the circumstances and the assessee's explanation.

4. Applicability of Penalty Rate:
The assessee contended that the penalty should be at 10% instead of 30%, as they had substantiated the manner of earning the income. The Tribunal agreed that the AO must determine the appropriate penalty rate based on the specific clause under section 271AAB(1). The Tribunal found that the AO did not provide a finding on which clause applied, thus failing to justify the 30% penalty rate.

5. Discretionary vs. Mandatory Nature:
The Tribunal discussed whether the penalty under section 271AAB is discretionary or mandatory. It was concluded that the penalty is discretionary, as indicated by the use of the word "may" in the statute. The Tribunal emphasized that the AO must exercise discretion judiciously, considering the facts and circumstances of each case. The Tribunal also referred to several case laws, including ACIT vs. Marvel Associates, which supported the view that penalties under section 271AAB are not automatic but require a discretionary decision by the AO.

Conclusion:
The Tribunal held that the penalty order under section 271AAB was not sustainable due to the AO's failure to specify the grounds and clause for the penalty, lack of recorded satisfaction, and improper exercise of discretion. The penalty of ?2,16,60,000/- was deleted, and the appeal of the assessee was allowed.

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