2018 (6) TMI 1128 - AT - Income Tax

Penalty u/s 271AAB - assessment u/s 143(3) r.w.s. 153B - as per assessee show cause notice did not contain any particulars of undisclosed income with reference to which the penalty was leviable - Held that - 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. - Decided in favour of assessee

Issues Involved:
1. Validity of the penalty order under section 271AAB of the Income Tax Act, 1961.
2. Specification of the grounds and clauses for the levy of penalty.
3. Requirement of maintaining books of accounts by the assessee.
4. Definition and nature of "undisclosed income" under section 271AAB.
5. Discretionary vs. mandatory nature of the penalty under section 271AAB.

Issue-wise Detailed Analysis:

1. Validity of the Penalty Order under Section 271AAB:
The assessee contested the penalty order under section 271AAB on the grounds that the show cause notice did not specify the particulars of undisclosed income. The Tribunal noted that the penalty under section 271AAB is not automatic but requires the Assessing Officer (AO) to issue a show cause notice and provide a proper opportunity of hearing to the assessee. The Tribunal emphasized that the AO must consider the explanation of the assessee and decide whether the conditions for imposing the penalty are met. The Tribunal concluded that the penalty order was not sustainable due to the lack of specific grounds and particulars in the show cause notice.

2. Specification of the Grounds and Clauses for the Levy of Penalty:
The Tribunal observed that the AO issued show cause notices in a routine manner without specifying under which clause of section 271AAB the penalty was being imposed. The Tribunal held that the AO must specify the default and the clause under which the penalty is being levied to provide the assessee an opportunity to explain and defend against the specific charge. The failure to specify the grounds and clauses rendered the show cause notice invalid, as supported by the decision of the Hon'ble Karnataka High Court in CIT vs. Manjunatha Cotton & Ginning Factory.

3. Requirement of Maintaining Books of Accounts by the Assessee:
The Tribunal noted that the assessee, being an individual with income from salary, house property, and other sources, was not required to maintain regular books of accounts. The transactions recorded in the pocket diary found during the search were considered as documents maintained in the normal course. The Tribunal held that the entries in the diary did not constitute undisclosed income as the assessee was not mandated to maintain regular books of accounts.

4. Definition and Nature of "Undisclosed Income" under Section 271AAB:
The Tribunal analyzed the definition of "undisclosed income" as provided in the explanation to section 271AAB. It concluded that the transactions recorded in the diary did not fall under the definition of undisclosed income since the diary was considered as a document maintained in the normal course. The Tribunal emphasized that the AO must establish that the income disclosed falls within the definition of undisclosed income and provide a finding to that effect, which was not done in this case.

5. Discretionary vs. Mandatory Nature of the Penalty under Section 271AAB:
The Tribunal held that the penalty under section 271AAB is discretionary and not mandatory. The AO must exercise discretion judiciously and provide an opportunity of hearing to the assessee. The Tribunal referred to the decision of the Visakhapatnam Bench in ACIT vs. Marvel Associates, which held that the use of the word "may" in section 271AAB indicates discretion. The Tribunal concluded that the AO must take a decision based on the facts and circumstances of each case and cannot impose the penalty automatically.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the penalty order under section 271AAB was not sustainable due to the lack of specific grounds and particulars in the show cause notice, the discretionary nature of the penalty, and the failure to establish that the income disclosed fell within the definition of undisclosed income. The Tribunal emphasized the importance of providing a proper opportunity of hearing and considering the explanation of the assessee before imposing the penalty.

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