2019 (4) TMI 953 - AT - Income Tax

Penalty u/s 271AAB assessment u/s 153B - specification of default as per clause (a) to (c) of section 271AAB(1) - In the absence of any grounds specified in the show cause notice as well as any amount to be treated as undisclosed income of the assessee for the purpose of levy of penalty under section 271AAB, the initiation of penalty is not valid - HELD THAT - It is clear that both the show cause notices issued by the AO for initiation of penalty proceedings u/s 271AAB are very vague and silent about the default of the assessee and further the amount of undisclosed income on which the penalty was proposed to be levied. Even the Hon ble Jurisdictional High Court in case of Shevata Construction Co. Pvt. Ltd 2016 (12) TMI 1603 - RAJASTHAN HIGH COURT has concurred with the view taken by Hon ble Karnataka High Court in case of CIT vs. Manjunatha Cotton Ginning Factory, 2013 (7) TMI 620 - KARNATAKA HIGH COURT which was subsequently upheld by the Hon ble Supreme Court by dismissing the SLP filed by the revenue in the case of CIT vs. SSA s Emerald Meadows, 2016 (8) TMI 1145 - SUPREME COURT . Accordingly, following the decision of the Coordinate Bench as well as Hon ble Jurisdictional High Court, this issue is decided in favour of the assessee by holding that the initiation of penalty is not valid and consequently the order passed u/s 271AAB is not sustainable Absence of a finding that the income disclosed by the assessee is an undisclosed income as explanation to section 271AAB(1) - penalty is not mandatory but to be imposed on merits of each case - HELD THAT - We hold that the entries in the seized documents representing the payment on account of land, in the absence of the other essential facts regarding the particulars of the land as well as the persons do not constitute undisclosed income of the assessee as defined in the explanation to section 271AAB. Accordingly, the penalty levied under section 271AAB by the AO and confirmed by the ld. CIT (A) is not sustainable As regards the alternative plea regarding the requirement of maintaining the regular books of account by the assessee, we find that the assessee is not engaged in any business activity or any other professional activity requiring the regular books of account. The income derived by the assessee is only from Income from house property and income from other sources as well as the profit from partnership firm for which regular books of account are not required to be maintained. See - Ravi Mathur vs. DCIT 2018 (6) TMI 1128 - ITAT JAIPUR

Issues Involved:
1. Validity of initiation of penalty proceedings under section 271AAB of the IT Act.
2. Whether the penalty under section 271AAB is mandatory or discretionary.
3. Whether the income disclosed by the assessee qualifies as "undisclosed income" under section 271AAB.
4. Validity of the show cause notice issued under section 274 read with section 271AAB.
5. Requirement of maintaining regular books of account by the assessee.

Issue-Wise Detailed Analysis:

1. Validity of Initiation of Penalty Proceedings:
The assessee contended that the notice issued under section 271AAB was defective as it did not specify the default under clauses (a) to (c) of section 271AAB(1). The Tribunal noted that the AO must specify the grounds for penalty in the show cause notice to allow the assessee to properly defend themselves. The absence of specific charges violates the principles of natural justice, making the initiation of penalty proceedings invalid.

2. Mandatory or Discretionary Nature of Penalty Under Section 271AAB:
The Tribunal analyzed section 271AAB and concluded that the penalty is not mandatory but discretionary. The AO must issue a show cause notice, provide an opportunity for hearing, and consider the assessee’s explanation before deciding to levy the penalty. This interpretation is supported by the Tribunal's earlier decisions and the Visakhapatnam Bench's ruling in ACIT vs. Marvel Associates, which emphasized the discretionary nature of the penalty.

3. Qualification of Disclosed Income as "Undisclosed Income":
The Tribunal examined whether the income disclosed by the assessee during the search qualifies as "undisclosed income" under section 271AAB. It was noted that the mere disclosure of income during a search does not automatically make it "undisclosed income." The AO must establish that the disclosed income meets the definition of "undisclosed income" as provided in the explanation to section 271AAB. In this case, the Tribunal found that the entries in the seized documents did not constitute undisclosed income as they lacked details and evidence of actual transactions.

4. Validity of Show Cause Notice:
The Tribunal found that the show cause notices issued by the AO were vague and did not specify the default or the amount of undisclosed income. This vagueness rendered the notices invalid, as per the principles established in the Karnataka High Court's decision in CIT vs. Manjunatha Cotton & Ginning Factory and upheld by the Supreme Court in CIT vs. SSA’s Emerald Meadows. Consequently, the penalty order based on such defective notices was quashed.

5. Requirement of Maintaining Regular Books of Account:
The Tribunal noted that the assessee, being an individual with income from house property and other sources, was not required to maintain regular books of account under section 44AA. The seized diary was considered as "other documents maintained in the normal course." Since the income was recorded in these documents, it did not qualify as "undisclosed income" under section 271AAB. The Tribunal referenced its earlier decision in Ravi Mathur vs. DCIT, which held that entries in other documents maintained in the normal course do not constitute undisclosed income.

Conclusion:
The Tribunal allowed the appeal, holding that the penalty under section 271AAB was not mandatory, the initiation of penalty proceedings was invalid due to defective notices, and the disclosed income did not qualify as undisclosed income. The penalty order was quashed, and the penalty was deleted.

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