2024 (3) TMI 1399 - AT - Income Tax

Penalty u/s 271AAB - additional income surrendered by assessee - as argued AO does not refer any incriminating material and the AO has merely assessed the surrendered income already offered by assessee in the return of income - HELD THAT - Mere surrender by assessee during search does not constitute an incriminating material. It is further held that penalty u/s 271AAB is imposable only if there is undisclosed income in the form of (i) any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search, or (ii) entry of an expense recorded in the books of account or documents maintained in the normal course which is found to be false. AO has himself acknowledged that there was nothing incriminating in seized-material. When it is so, there is nothing of the nature (i) or (ii) as mentioned in the definition of Undisclosed Income prescribed in clause (c) of the Explanation to Section 271AAB. Faced with this situation, we have no hesitation in accepting assessee s claim that the penalty u/s 271AAB(1A) was not imposable in the light of judicial decisions. We therefore allow the grounds raised by assessees and delete the penalties imposed by AO in all cases. The assessees succeed in these appeals.

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

Whether the penalty imposed under Section 271AAB(1A) of the Income-tax Act, 1961, is valid when no incriminating material was found during the search.
Whether the definition of "undisclosed income" as per the Explanation to Section 271AAB is exhaustive and applicable to the facts of the case.
Whether the penalty under Section 271AAB is mandatory or discretionary.
Whether the assessee's voluntary disclosure during the search without incriminating material can be considered "undisclosed income" for the purpose of penalty.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Penalty under Section 271AAB(1A)

Relevant Legal Framework and Precedents: Section 271AAB of the Income-tax Act, 1961, provides for penalties related to undisclosed income found during a search. The explanation defines "undisclosed income" and sets conditions for imposing penalties.
Court's Interpretation and Reasoning: The court emphasized that the penalty under Section 271AAB is not automatic. It requires the presence of "undisclosed income" as defined in the statute.
Key Evidence and Findings: The AO's assessment order noted that no incriminating material was found during the search, and the bank accounts examined showed no adverse findings.
Application of Law to Facts: The court found that since no incriminating material was found, the income disclosed by the assessee could not be termed as "undisclosed income" under Section 271AAB.
Treatment of Competing Arguments: The Revenue argued that the penalty was justified due to the assessee's voluntary disclosure. However, the court held that without incriminating evidence, the penalty could not be sustained.
Conclusions: The penalty imposed under Section 271AAB(1A) was not valid as the conditions for "undisclosed income" were not met.

Issue 2: Definition of "Undisclosed Income"

Relevant Legal Framework and Precedents: The Explanation to Section 271AAB defines "undisclosed income" and is crucial for determining the applicability of penalties.
Court's Interpretation and Reasoning: The court interpreted the definition as exhaustive, meaning that only income fitting the criteria in the Explanation could be penalized.
Key Evidence and Findings: The court noted the AO's acknowledgment that no incriminating material was found during the search.
Application of Law to Facts: The court applied the definition of "undisclosed income" and concluded that the assessee's disclosed income did not meet the criteria.
Treatment of Competing Arguments: The Revenue's argument that the definition was not exhaustive was rejected based on statutory interpretation principles.
Conclusions: The definition of "undisclosed income" was deemed exhaustive, and the penalty was not applicable.

Issue 3: Nature of Penalty under Section 271AAB

Relevant Legal Framework and Precedents: Section 271AAB provides for penalties but uses the word "may," indicating discretion.
Court's Interpretation and Reasoning: The court held that the penalty is discretionary, not mandatory, and must be based on a judicious decision by the AO.
Key Evidence and Findings: The court referred to precedents where penalties were held to be discretionary.
Application of Law to Facts: The court found that the AO failed to exercise discretion judiciously, as no incriminating material was found.
Treatment of Competing Arguments: The Revenue's assertion of mandatory penalties was rejected in favor of a discretionary interpretation.
Conclusions: The penalty under Section 271AAB is discretionary, and the AO failed to justify its imposition.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "The penalty under Section 271AAB is not automatic but requires the presence of 'undisclosed income' as defined in the statute."
Core Principles Established: The definition of "undisclosed income" in Section 271AAB is exhaustive, and penalties are discretionary, requiring judicious application.
Final Determinations on Each Issue: The penalties imposed were deleted as the conditions for "undisclosed income" were not met, and the AO did not exercise discretion appropriately.

The judgment underscores the importance of adhering to statutory definitions and exercising discretion in penalty proceedings under the Income-tax Act. The court's decision to delete the penalties reflects a strict interpretation of "undisclosed income" and emphasizes the discretionary nature of penalties under Section 271AAB.

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