2018 (7) TMI 220 - AT - Income Tax

Penalty u/s 271AAB - need to maintain the books of account - determination of turnover - unexplained advances - 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, the penalty levied under section 271AAB is not sustainable and the same is deleted. See Ravi Mathur vs. DCIT 2018 (6) TMI 1128 - ITAT JAIPUR The amount of advance itself is not in the nature of income though the source of the advances can be added to the income of the assessee. The assessee has explained the source of the said advances from his activities. Accordingly, by following the earlier order of this Tribunal, we delete the penalty levied by the AO under section 271AAB of the Act. - Decided in favour of assessee

Issues Involved:
1. Validity of the penalty order under section 271AAB of the Income Tax Act, 1961.
2. Legality of the show cause notice issued under section 271AAB.
3. Nature and definition of "undisclosed income" under section 271AAB.
4. Discretionary vs. mandatory nature of penalty under section 271AAB.
5. Procedural requirements and principles of natural justice in imposing penalty under section 271AAB.

Detailed Analysis:

1. Validity of the Penalty Order under Section 271AAB:
The assessee challenged the penalty order passed under section 271AAB, asserting that it was void ab initio and should be quashed. The assessee contended that the penalty proceedings were not initiated lawfully, as the show cause notice issued under section 274 read with section 271AAB did not specify the grounds for the levy of penalty. The Tribunal noted that the AO did not record his satisfaction as to how the provisions of section 271AAB were attracted in the case. The Tribunal emphasized that the AO must specify the grounds and clauses for the levy of penalty and that the assessment order should reflect the AO's satisfaction regarding the default committed by the assessee.

2. Legality of the Show Cause Notice Issued under Section 271AAB:
The Tribunal observed that the show cause notice issued by the AO did not specify the default and charge against the assessee, which necessitated the levy of penalty under section 271AAB. The Tribunal referred to the decision of the Chennai Bench in the case of DCIT vs. Shri R. Elangovan, which held that a notice under section 274 read with section 271AAB must specify the grounds for the levy of penalty. The Tribunal concluded that the show cause notice issued by the AO was not valid, as it did not specify the grounds and clauses for the levy of penalty, thus violating the principles of natural justice.

3. Nature and Definition of "Undisclosed Income" under Section 271AAB:
The Tribunal examined whether the income disclosed by the assessee in the statement recorded under section 132(4) fell within the definition of "undisclosed income" as per section 271AAB. The Tribunal noted that the definition of "undisclosed income" under section 271AAB includes income not recorded in the books of accounts or other documents maintained in the normal course relating to the specified previous year. The Tribunal found that the transactions of investment were recorded in the diary, which was considered as other documents maintained in the normal course. Therefore, the income disclosed by the assessee did not fall within the definition of "undisclosed income" under section 271AAB.

4. Discretionary vs. Mandatory Nature of Penalty under Section 271AAB:
The Tribunal held that the levy of penalty under section 271AAB is not mandatory but discretionary. The Tribunal referred to the decision of the Visakhapatnam Bench in the case of ACIT vs. M/s. Marvel Associates, which held that the use of the word "may" in section 271AAB indicates that the AO has the discretion to levy the penalty. The Tribunal emphasized that the AO must take a decision to impose the penalty after giving a proper opportunity of hearing to the assessee and considering the explanation furnished by the assessee.

5. Procedural Requirements and Principles of Natural Justice in Imposing Penalty under Section 271AAB:
The Tribunal stressed the importance of following the procedural requirements and principles of natural justice in imposing penalty under section 271AAB. The Tribunal noted that the AO must issue a show cause notice specifying the grounds for the levy of penalty and provide the assessee with a reasonable opportunity of being heard. The Tribunal observed that the AO did not specify the grounds and clauses for the levy of penalty in the show cause notice and did not give a finding that the case of the assessee fell within the definition of "undisclosed income" under section 271AAB. Therefore, the Tribunal concluded that the penalty order passed by the AO was contrary to the provisions of the Act and not sustainable in law.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the penalty levied under section 271AAB was not sustainable. The Tribunal emphasized that the AO must specify the grounds and clauses for the levy of penalty in the show cause notice, provide a reasonable opportunity of being heard to the assessee, and give a finding that the case of the assessee falls within the definition of "undisclosed income" under section 271AAB. The Tribunal concluded that the penalty order passed by the AO was contrary to the provisions of the Act and violated the principles of natural justice.

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