2019 (1) TMI 1797 - AT - Income Tax

Penalty u/s 271AAB - undisclosed income - Invalid notice u/s 274 - proper explanation and disclosure was given during the course of search action in the statement recorded u/s. 132(4) and the disclosure so made was offered to tax in the return of income filed - HELD THAT - Assessee with the panel provisions, it is pre-requisite that it should be evident from the notice, the intend and purpose for levying penalty as the purpose of the notice is to inform the assessee as to the specific charge for which he has been show caused so that he could furnish his reply without any confusion and to the point. In the present case, neither the assessee nor anyone else could make out as to whether the notice u/s. 274 r.w.s. 271 of the Act was issued for concealing the particulars of income or for furnishing inaccurate particulars of such income disabling it to meet with the case of the Assessing Officer. There are a catena of judgments highlighting the necessity for identifying the charge for which the assessee is being visited and in all those decisions, Hon'ble Courts have repeatedly held that where the jurisdictional notice is vague, similar to the one in the present case, the consequent levy cannot be sustained. The Hon ble jurisdictional High Court in the case of CIT v. Samson Perinchery 2017 (1) TMI 1292 - BOMBAY HIGH COURT had also occasion to consider a similar issue. In this case, though proceedings u/s. 271(1)(c) of the Act were initiated for furnishing of inaccurate particulars of income, in the notice issued u/s. 274 r.w.s. 271 of the Act in the standard form, the charge for which it was issued was also not identified, as in the present case. We hold that the notice issued u/s 274 r.w.s 271 and incorporated 271AAB (in hand) was not valid. Consequently, the penalty proceedings are also invalid. Since the very basis of levy of penalty has been held to be invalid, we are of the view that the other grounds of appeal raised by the assessee against the merits of the levy of penalty requires no adjudication at this stage - Decided in favour of assessee.

Summary

Issues Involved:
1. Enhancement of penalty under Section 271AAB.
2. Validity of notice issued under Section 274.
3. Classification of income as "undisclosed" under Section 271AAB.
4. Proper explanation and disclosure during the search.
5. Additions based on estimation/presumption.
6. Arithmetic mistakes and rounding off errors.
7. Admissibility of additional grounds.

Issue-wise Detailed Analysis:

1. Enhancement of Penalty under Section 271AAB:
The assessee contested the enhancement of penalty levied under Section 271AAB by the CIT(A) from 20% to 30% of the undisclosed income, arguing it should be restricted to 10% as per clause (a) of Section 271AAB. The assessee claimed that the excess penalty amounting to ?3,61,85,050 was unjustified and should be deleted.

2. Validity of Notice Issued under Section 274:
The assessee argued that the notice issued under Section 274 was vague as it did not specify the grounds for initiating the penalty, i.e., whether it was under Section 271 or 271AAB or for concealment of income or furnishing inaccurate particulars. This lack of specificity rendered the notice invalid and the penalty order without jurisdiction. The Tribunal agreed, citing precedents from various High Courts and the Supreme Court, emphasizing that a notice must clearly state the grounds for penalty to comply with the principles of natural justice.

3. Classification of Income as "Undisclosed" under Section 271AAB:
The case involved a search operation where the assessee disclosed ?35.13 crores initially, later enhanced to ?42.89 crores. The AO considered this as undisclosed income and levied a penalty at 20%, which was later enhanced to 30% by the CIT(A). The Tribunal noted that the assessee had admitted the income during the search and filed returns accordingly, questioning the justification of treating it as undisclosed and the subsequent penalty enhancement.

4. Proper Explanation and Disclosure During the Search:
The assessee maintained that a proper explanation and full disclosure were provided during the search, which was recorded under Section 132(4) and included in the income tax return. The argument was that this should qualify the case under clause (a) of Section 271AAB, limiting the penalty to 10%. The Tribunal considered this explanation in the context of the legal requirements for penalty imposition.

5. Additions Based on Estimation/Presumption:
The CIT(A) made additions of ?7,75,407 to the returned income based on estimation and presumption rather than concrete evidence found during the search. The assessee argued that penalties on such additions were unjustified. The Tribunal acknowledged this point, emphasizing that penalties should not be based on estimated or presumed income.

6. Arithmetic Mistakes and Rounding Off Errors:
The assessee pointed out that an addition of ?2,54,064 was due to an arithmetic mistake or rounding off error, which was inadvertently not included in the return. The Tribunal noted that penalties for such errors, especially when the entire unaccounted cash was disclosed, were unwarranted.

7. Admissibility of Additional Grounds:
The Tribunal allowed the assessee to raise additional grounds, considering them purely legal and based on facts already on record. This included the argument that the penalty order was bad in law due to the vague notice under Section 274. The Tribunal referenced the principle laid down by the Supreme Court in NTPC v. CIT, allowing legal grounds to be raised at any stage if they go to the root of the matter.

Conclusion:
The Tribunal concluded that the notice issued under Section 274 was vague and invalid, leading to the quashing of the penalty order. Consequently, the enhancement of the penalty under Section 271AAB by the CIT(A) was also invalidated. The Tribunal emphasized the necessity of clear and specific notices for penalty proceedings to comply with the principles of natural justice. The appeal was allowed, and the penalty order was set aside.