2018 (12) TMI 1201 - AT - Income Tax

Penalty u/s 271AAB (1)(c) - assessee admitted undisclosed income which was recorded under statement u/s 132(4) - Held that - On reading of provisions u/s 271AAB of the Act, it is justified to hold that the assessee shall pay penalty u/s 271AAB @ 10% under clause (a) of subsection (1) of section 271AAB of the Act for the reasons set out hereunder under - 1 . Search action u/s 132 of the Income Tax Act, 1961 should be initiated u/s 132 on or after 01.06.2012; 2 . The assessee has made disclosure of undisclosed income during the course of search action, has paid the tax together with interest and has filed return of income; and 3 . The assessee substantiates the manner in which he has earned the undisclosed income and in view of the above, the order of CIT(A) is set aside. Ground No-1 raised by the Revenue is partly allowed. Thus, the order of AO is restored to the extent s indicated above. Defective Show-cause notice issued u/s 274 r.w.s 271 - Held that - On perusal of the said notice, it is observed in the last paragraph that the AO directed the assessee to appear before him on specific date seeking explanation why an order u/s 271AAB of the Act be made? Therefore, in our opinion, the said notice does not appear to be defective and ambiguous as contended by Ld.AR. In the last paragraph of the said notice, the AO clearly mentioned the provision u/s 271AAB of the Act so therefore, it is clear that the AO conveyed on which provision the proceedings are being initiated and the assessee filed reply to the said notice. Therefore, Ground No.2 raised in C.O filed by the assessee fails and it is dismissed. Imposition of penalty @ 30% instead of 10% or 20% - In order to fall under clause (a) of sub-section (1) of section 271AAB of the Act to compute the penalty @ 10%, the assessee has to fulfill the conditions therein. On perusal of the clause (a), the assessee fulfilled all the conditions therein and therefore, penalty shall be @ 10% in terms of clause (a) of sub-section (1) of section 271AAB of the Act. Therefore, the AO is not justified in impose penalty @ 30% vide clause (c). Therefore, the AO is directed in imposing penalty @ 10% under clause (a) of subsection (1) of section 271AAB

Issues Involved:
1. Validity of penalty imposed under Section 271AAB(1)(c) of the Income Tax Act, 1961.
2. Applicability of Section 271AAB(1)(a) penalty rate.
3. Defectiveness of the show-cause notice issued under Section 274 read with Section 271.
4. Substantiation of the manner of earning undisclosed income.

Issue-wise Detailed Analysis:

1. Validity of Penalty Imposed under Section 271AAB(1)(c):
The Revenue appealed against the CIT(A)'s order canceling the penalty imposed by the AO under Section 271AAB(1)(c). The AO had imposed a penalty of ?36,90,000 at the rate of 30% on the undisclosed income of ?1,23,00,000 admitted by the assessee during a search operation. The CIT(A) canceled the penalty, relying on the Supreme Court's decision in Sudharsan Silk & Sarees, which held that no penalty is leviable on the amount offered by the assessee suo motto to buy peace of mind. The Tribunal found that the assessee had admitted the undisclosed income, specified the manner of earning, and paid taxes along with interest, but the AO held that the assessee failed to substantiate the manner in which the undisclosed income was derived. The Tribunal concluded that the penalty should be imposed at 10% under Section 271AAB(1)(a) instead of 30% under Section 271AAB(1)(c).

2. Applicability of Section 271AAB(1)(a) Penalty Rate:
The Tribunal analyzed Section 271AAB and found that the assessee fulfilled the conditions under Section 271AAB(1)(a), which entails a penalty of 10% of the undisclosed income. The conditions include the initiation of a search under Section 132, the admission of undisclosed income, the payment of tax along with interest, and the filing of a return of income. The Tribunal held that the assessee substantiated the manner of earning the undisclosed income through family business activities and directed the AO to impose a penalty at 10% under Section 271AAB(1)(a).

3. Defectiveness of the Show-Cause Notice Issued under Section 274 read with Section 271:
The assessee argued that the show-cause notice issued under Section 274 read with Section 271 was defective as it did not specify the charge of penalty. The Tribunal observed that the notice directed the assessee to appear before the AO and explain why an order under Section 271AAB should not be made. The Tribunal concluded that the notice was not defective or ambiguous as it clearly mentioned the provision under Section 271AAB and the assessee had filed a reply to the notice. Therefore, the Tribunal dismissed the assessee's ground regarding the defectiveness of the notice.

4. Substantiation of the Manner of Earning Undisclosed Income:
The AO contended that the assessee failed to substantiate the manner of earning the undisclosed income with documentary evidence. However, the Tribunal found that the assessee had explained the manner of earning the undisclosed income through trading in sarees, ghagra sets, suits, dress materials, furnishings, and related activities, which were part of the family business. The Tribunal held that the assessee had substantiated the manner of earning the undisclosed income and was liable to pay a penalty at 10% under Section 271AAB(1)(a).

Conclusion:
The Tribunal partly allowed the Revenue's appeals and the assessee's cross-objections. The Tribunal directed the AO to impose a penalty at 10% under Section 271AAB(1)(a) instead of 30% under Section 271AAB(1)(c). The Tribunal dismissed the assessee's ground regarding the defectiveness of the show-cause notice and upheld the CIT(A)'s order canceling the penalty imposed by the AO under Section 271AAB(1)(c). The Tribunal concluded that the assessee had substantiated the manner of earning the undisclosed income and fulfilled the conditions under Section 271AAB(1)(a).

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