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2024 (3) TMI 1417 - AT - Income TaxPenalty u/s 271AAB - additional income offered in the return of income filed u/s. 153A towards estimated disallowance of 1/3rd of marketing expense - HELD THAT - No doubt the assessee has admitted additional income towards estimated disallowance of 1/3rd of marketing expenses when the Department has found and seized unaccounted cash in the residential premise of the assessee Company Director and their associates. But fact remains that said unaccounted cash was not identified to any particular assessment year or person. Although the AO has telescoped unaccounted cash to additional income offered by the assessee towards estimated disallowance of marketing expenses but in our considered view said cash was not identified for the impugned assessment year either by the assessee or by the AO. Further additional income offered by the assessee and accepted by the AO towards estimated disallowance of marketing expenses is also an ad hoc disallowance without there being any observation/adverse comments with regard to expenses accounted by the assessee in the books of accounts of the specified previous year and also explanation offered by the assessee. The sole basis for the AO to levy penalty u/s. 271AAB of the Act is voluntary surrender of income by the assessee in the return of income filed u/s. 153A of the Act and such income has been quantified in the statement recorded u/s. 133(4) of the Act. Although the AO took support from confirmation from one of the suppliers where he has stated that at times cash has been returned to the assessee but there is no specific admission in the confirmation letter of suppliers regarding supplies made to the assessee and refund of 1/3rd of cash for the impugned assessment year. We have gone through the reply received from supplier which has been extracted in the penalty order and we find that said reply is general in nature without any specific reference for the impugned assessment year and also amount of cash returned to the assessee. Thus on the basis of admission of the assessee without there being any reference to incriminating material surrender of additional income in the return of income filed u/s. 153A of the Act cannot be considered as undisclosed income as defined in Explanation-(c) to Sec. 271AAB(1)(a) of the Act and such undisclosed income is for specified previous year. As decided in Shri. Prafulla Shashikant Vaidya 2023 (8) TMI 1619 - ITAT MUMBAI issue of penalty levied u/s. 271AAB of the Act in respect of income surrendered by the assessee and held that surrender of income would not if so facto lead to the conclusion that the amount surrendered by the assessee is undisclosed income in terms of Sec. 271AAB. Thus additional income offered by the assessee in the return of income filed in response to notice issued u/s 153A of the Act towards surrender of estimated disallowance of 1/3rd marketing expenses does not come under the definition of undisclosed income as defined in Explanation-c to Sec. 271AAB - Decided in favour of assessee.
ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this judgment include:
ISSUE-WISE DETAILED ANALYSIS 1. Mandatory vs. Discretionary Nature of Penalty under Section 271AAB The Tribunal examined whether the penalty under Section 271AAB is mandatory. It noted that the provision uses the word "may," indicating discretion rather than compulsion. The Tribunal emphasized that penalties are not automatic but depend on the facts and circumstances of each case. The Tribunal referred to various precedents to support its interpretation that the penalty is discretionary and not mandatory. 2. Validity of Penalty Proceedings and Show Cause Notice The Tribunal scrutinized the validity of the penalty proceedings initiated under Section 271AAB, focusing on the show cause notice issued by the AO. It was argued that the notice was defective as it did not specify under which sub-clause of Section 271AAB the penalty was being levied. The Tribunal agreed with this contention, citing the requirement for the AO to clearly specify the charge under which the penalty is being imposed to enable the assessee to effectively respond. The Tribunal found the notice to be vague and lacking specificity, rendering the penalty proceedings invalid. 3. Definition of "Undisclosed Income" under Section 271AAB The Tribunal assessed whether the additional income declared by the assessee could be classified as "undisclosed income" under Explanation-C to Section 271AAB. The Tribunal noted that for income to be considered "undisclosed," it must be unrecorded in the books of accounts or falsely recorded as an expense. In this case, the Tribunal found that the additional income declared by the assessee was based on an estimated disallowance of marketing expenses and was not linked to any specific incriminating material found during the search. Therefore, the Tribunal concluded that the declared income did not meet the criteria for "undisclosed income." 4. Application of Section 271AAB by the AO The Tribunal evaluated the AO's application of Section 271AAB in levying the penalty. It found that the AO's decision was primarily based on the voluntary surrender of income by the assessee rather than on concrete evidence of undisclosed income. The Tribunal emphasized that the mere surrender of income does not automatically qualify it as "undisclosed income" under Section 271AAB. The Tribunal highlighted the lack of specific evidence linking the surrendered income to any falsified entries or unrecorded transactions for the specified previous year. SIGNIFICANT HOLDINGS The Tribunal established several core principles and final determinations:
The Tribunal's decision underscores the importance of adhering to procedural requirements and ensuring that penalties are imposed based on substantive evidence rather than mere admissions or estimates. The judgment emphasizes the necessity for clear and specific communication in penalty proceedings to uphold the principles of natural justice.
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