Rockline Entertainments Private Limited Vs DCIT (ITAT Bangalore)
Section 270A: Merely Mentioning “Under-reporting” in the Notice Is Insufficient—Bangalore ITAT
Summary: The Bangalore Bench of the Income Tax Appellate Tribunal allowed three appeals filed by Rockline Entertainments Private Limited for assessment years 2017-18 to 2019-20. For AY 2017-18, the assessee disclosed additional income of ₹16.50 lakh in its return under Section 153A after a search. Although the Assessing Officer accepted the return, he imposed a penalty of ₹2,72,769 under Section 270A by comparing assessed income with income processed under Section 143(1). The show-cause notice referred only to under-reporting of income, while the final order invoked Section 270A(2)(a). The Tribunal held that the notice must identify the particular circumstance under clauses (a) to (g) of Section 270A(2), enabling an effective response. Subsequent identification of the clause in the penalty order could not cure the defect. The same reasoning governed AY 2018-19.
In Rockline Entertainments Pvt. Ltd. v. DCIT, ITA Nos. 1561–1563/Bang/2025, dated 28 September 2026, the Bangalore ITAT deleted penalties for AYs 2017-18 to 2019-20, addressing two distinct issues.
Specific clause under section 270A(2) must be communicated
For AY 2017-18, the company disclosed additional income of ₹16.50 lakh in its return filed under section 153A following a search. The AO accepted that return but imposed a 50% penalty of ₹2,72,769, comparing the assessed income with the income originally processed under section 143(1).
The penalty notice mentioned “under-reporting of income”, without identifying the applicable clause of section 270A(2). Only the final penalty order referred to section 270A(2)(a).
The Tribunal held that section 270A(2) contains distinct circumstances under clauses (a) to (g). Consequently, merely identifying the charge as under-reporting, rather than misreporting, was insufficient. The assessee had to be informed of the particular statutory circumstance alleged against it when called upon to explain.
Identifying the clause in the final penalty order could not cure the defective notice. The penalty was therefore deleted. The same reasoning was applied to AY 2018-19.
The Tribunal relied on Ishwar Chand Agro (P.) Ltd. v. DCIT [2026] 189 taxmann.com 222 (Delhi–Trib.) and Nateshan Sampath v. DCIT, ITA No. 1779/Bang/2024, dated 22 January 2025.
Section 271AAB: Admission during search does not alone establish undisclosed income
For AY 2019-20, the AO imposed a penalty of ₹49,62,600, being 30% of ₹1,65,42,000, relating to cash expenditure on two films.
The expenditure was recorded in kaccha books when the search occurred during the ongoing financial year. It was subsequently entered in the regular books and considered in the return, which the AO accepted.
The Tribunal held that an admission under section 132(4) does not, by itself, establish “undisclosed income” for section 271AAB. The amount must independently satisfy the statutory definition. On the facts recorded, the Tribunal found the penalty unsustainable. It also found the notice defective for failing to specify the applicable penalty clause, relying on PCIT v. R. Elangovan, TCA Nos. 770 and 771 of 2018 (Madras HC).
Practical significance
The section 270A ruling goes beyond requiring a distinction between under-reporting and misreporting: it requires identification of the specific clause within section 270A(2). The section 271AAB finding should be read in its factual setting; it should not be treated as a general rule that subsequent accounting automatically protects every search disclosure from penalty.
Cases Discussed
- Ishwar Chand Agro (P.) Ltd. v. DCIT [2026] 189 taxmann.com 222 (Delhi–Trib.)
- Nateshan Sampath v. DCIT, ITA No. 1779/Bang/2024 (22.01.2025)
- Schneider Electric South East Asia (HQ) PTE Ltd. v. CIT (International Taxation) (2022) 443 ITR 186
- PCIT v. Shri R. Elangovan, Tax Case Appeal Nos. 770 & 771 of 2018
- Sandeep Chandak (Allahabad High Court)
- Manjunatha Cotton and Ginning Factory (Karnataka High Court)
- SSA’s Emerald Meadows (Karnataka High Court)
- Babuji Jacob (Madras High Court)
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT BANGALORE
These three appeals filed by the assessee are directed against the orders passed by the Learned Commissioner of Income Tax Appeals (hereafter Ld. CIT(A)) under section 270A of the Income-tax Act, 1961 (hereafter the Act), for A.Ys. 2017-18 to 2019-20. Since the facts and issues involved in these appeals are identical, ITA No. 1561/Bang/2025 for A.Y. 2017-18 is taken as the lead case.
2. The only effective issue arising for consideration is whether the Ld. CIT(A) was justified in confirming the levy of penalty u/s 270A of the Act on account of under-reporting of income.
3. The necessary facts are that the assessee, a private company, is engaged in the business of film production, filed its return of income u/s 139 of the Act for A.Y. 2017-18 declaring total income of Rs. 1,31,68,740/- only. The said return was processed u/s 143(1) of the Act on 19.06.2017 without any variation. Subsequently, a search u/s 132 of the Act was conducted in the case of the assessee on 03.10.2019. During the course of the search, the assessee admitted income on account of undisclosed cash introduced in movie production.
3.1 Consequent to the search, notice u/s 153A of the Act was issued to the assessee. In response thereto, the assessee filed its return of income declaring additional income of Rs. 16,50,000/-. The AO accepted the said additional income and completed the assessment u/s 143(3) r.w.s. 153A of the Act, determining the total income of the assessee at Rs. 1,48,18,740/-only.
3.2 The AO initiated penalty proceedings u/s 270A of the Act on account of under-reporting of income. Finally, the AO passed an order u/s 270A of the Act holding that the assessee had under-reported its income as defined u/s 270A(2)(a) of the Act. The AO observed that the income assessed was Rs. 16,50,000/- higher than the income accepted under the return processed u/s 143(1) of the Act. Hence, Rs. 16,50,000/- constitutes under-reported of income. Accordingly, the AO concluded penalty proceedings against the assessee for under-reporting of income by levying a penalty of Rs. 2,72,769/-, being 50% of the tax on the under-reported income.
4. The aggrieved assessee preferred an appeal before the learned CIT(A), who confirmed the penalty levied by the AO by observing as under:
6.3 The ground of appeal, submission of the appellant and material available on record have been carefully considered. The facts of the case are as under:
(i) The appellant filed its return of income u/s 139 of the Act as in 31.10.2017 declaring total income of Rs. 1,31,68,740/-.
(ii) On 03rd January 2019 a search action u/s. 132 of the Income Tax Act, 1961 was conducted in the appellant’s own case. The appellant offered additional income of Rs. 16.50 Lakhs as undisclosed income in the statement recorded u/s. 132(4) of the Act during the search proceedings.
(iii) Accordingly, the appellant has offered the same while filing of return of income on 18.03.2020 in response to the notice u/s.153A of Income tax Act, 1961 by declaring total income of Rs.1,48,18,740/-.
(iv) As the assessed income was more than the income determined by the appellant in its original return of income, the AO has initiated the penalty u/s.270A of the Act for under reporting of income and levied the penalty of Rs.2,72,769/- being 50% of Rs.5,45,539/- difference in tax as per assessed income and tax as per intimation u/s.143(1)(a) of the Act.
6.4 The appellant has alleged in its written submission that the Assessing Officer has not applied his mind while levying the penalty and did not give sufficient opportunities before passing the penalty order. However, as seen from the penalty order, the appellant was given opportunities vide notices dated 07.09.2021 and 14.01.2022. The appellant had also filed its reply on 21.01.2022. The appellant claimed that the Assessing Officer in his order mentioned the word “legal heir” instead of the “assessee company” which is a proof of non-application of his mind. This is a simple typo error made by the Assessing Officer, wherein the word “the legal heir” was erroneously mentioned while mentioning the reply filed by the appellant in response to the penalty proceedings. This in no way proves that the penalty has been levied in a mechanical manner. A perusal of the complete penalty order reveals that the Assessing Officer has applied his mind by correctly determining the quantum of “under reporting of income” and calculating tax on it as can be seen from the page 4 of the order. Also, the section 270A has been interpreted correctly and the provisions of the section are correctly applied by the Assessing Officer.
6.5 Therefore, based on the above discussions, the actions of the AO in levying the penalty u/s.270A of the Act is hereby upheld. Accordingly, the grounds of appeal filed by the appellant are dismissed.
5. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us, challenging the levy of penalty by the AO and subsequently confirmed by the learned CIT(A).
5.1 The Ld. AR, before us, among other contentions, submitted that the penalty proceedings initiated against the assessee u/s 274 r.w.s. 270A of the Act are vitiated in law. It was submitted that the notice issued by the AO does not specify the particular limb of under-reporting of income under which the penalty was proposed to be levied. The notice merely refers to under-reporting of income without specifying the applicable clause of section 270A(2) of the Act. The assessee was thus not made aware of the precise charge for which the penalty proceedings were initiated.
5.2 The Ld. AR submitted that section 270A(2) of the Act contains different circumstances in which income is considered to have been under-reported. Therefore, the AO was required to specify the particular clause applicable to the assessee’s case. A general notice referring to under-reporting of income does not meet this requirement. The assessee must be informed of the specific charge so as to enable it to furnish an effective explanation in response to the penalty proceedings.
5.3 It was further submitted that the notice issued u/s 274 r.w.s. 270A of the Act is the foundation of the penalty proceedings. In the absence of a specific charge, the assessee was deprived of a proper opportunity to defend its case. The AO cannot leave the assessee to guess the particular limb under which the penalty is proposed to be imposed and subsequently sustain the penalty by referring to a specific provision in the penalty order.
5.4 The Ld. AR submitted that the defect in the notice is not a mere technical or clerical error. It goes to the root of the penalty proceedings and violates the principles of natural justice. The failure of the AO to specify the applicable limb of section 270A(2) of the Act has therefore rendered the penalty proceedings invalid.
5.5 In support of the above contention, the Ld. AR placed reliance on the decision of the coordinate Bench in the case of Mr. Nateshan Sampath vs. DCIT, circle-3 (1)(1), Bangalore in ITA No. 1779/Bang/2024 dated 22.01.2025, wherein the Tribunal considered the absence of a specific limb in the notice issued u/s 274 r.w.s. 270A of the Act. Accordingly, the Ld. AR submitted that the notice issued u/s 274 r.w.s. 270A of the Act, being vague and defective, cannot sustain the penalty proceedings. The penalty order passed on the basis of such defective notice is bad in law and deserves to be quashed. It was therefore prayed that the penalty levied u/s 270A of the Act be deleted and the appeal of the assessee be allowed.
6. The learned DR, on the other hand, supported the orders of the lower authorities and submitted that the notice issued u/s 274 r.w.s. 270A of the Act clearly specifies the charge as “under-reporting of income.” Therefore, the contention of the assessee that the notice does not specify the relevant limb is factually incorrect. The Ld. DR accordingly prayed that the penalty levied by the AO be upheld.
7. We have considered the rival submissions of both the parties and perused the materials available on record. The short issue before us is whether the penalty levied u/s 270A of the Act can be sustained when the notice issued u/s 274 r.w.s. 270A of the Act merely mentions “under-reporting of income” without specifying the particular clause of section 270A(2) of the Act under which the assessee’s case falls. The AO ultimately levied penalty of Rs. 2,72,769/- by treating Rs.16,50,000/- as under-reported income within the meaning of section 270A(2)(a) of the Act.
7.1 First of all, we note that the provision of section 270A(2) of the Act provides different circumstances under clauses (a) to (g) in which a person shall be considered to have under-reported the income. Thus, the expression “under-reporting of income” by itself does not disclose the particular circumstance alleged against the assessee. In the present case, the notice issued u/s 274 r.w.s. 270A of the Act only refers to “under-reporting of income”. It does not state that the assessee’s case falls u/s 270A(2)(a) of the Act. It is only in the final penalty order that the AO identified section 270A(2)(a) of the Act and held that the assessed income was greater than the income determined in the return processed u/s 143(1) of the Act.
7.2 In our view, the specific charge should be made known to the assessee at the stage of issuance of notice itself. The purpose of issuing notice is to give the assessee a reasonable opportunity to explain why penalty should not be imposed for the particular default alleged against it. When section 270A(2) of the Act itself provides several distinct circumstances of under-reporting, merely mentioning “under-reporting of income” leaves the assessee to ascertain for itself which particular clause is being invoked. The defect goes to the very initiation of the penalty proceedings.
7.3 In this regard, we find support from the decision of the Coordinate Bench of the Delhi Tribunal in the case of Ishwar Chand Agro (P.) Ltd. v. DCIT [2026] 189 taxmann.com 222 (Delhi – Trib.). The Tribunal held that while initiating penalty for under-reporting of income, the AO is required to identify and communicate the particular circumstance falling under clauses (a) to (g) of section 270A(2) of the Act. Failure to communicate the specific charge makes the proceedings unsustainable as the assessee is not properly informed of the case which it is required to meet. The relevant finding of the Hon’ble Delhi Bench of the Tribunal is extracted as under:
9. From the above, it is clear that for “under reporting of income”, the AO should satisfy the conditions defined in sub clause (a) to (g) of sub section (2) of section 270A of the Act. For “under reporting of income in consequence to misreporting of income” the conditions specify in clause (a) to (f) of sub section (9) of section 270A should be satisfied. In the instant case, it is observed that, the Ld. AO after having clearly analysed facts and circumstances of the case has dejectedly failed to identify or determined and then communicate either through assessment order or through notice, the specific circumstance or incidence i.e. specific clause (a) to clause (g) of s/s (2) of section 270 within which the case of the appellant falls so has to hold income as “under-reported” to trigger said penal provision. The failure continued further in identifying or determining and showcasing the specific action of the appellant in terms of clause (a) to clause (f) to sub-section (9) of section 270A within which such action of the assessee falls so as to jacket or categorise such “under-reported income in consequence of mis-reporting”.
7.4 We further found that the identical view has also been taken into account by the coordinate bench of this tribunal in the case of Mr. Nateshan Sampath vs. DCIT in ITA No. 1779/Bang/2024 wherein it was held as under:
5.1 For the purpose of evaluating the correctness of rival submissions addressed, we deem it apposite to extract section 270A of the Act herein below:
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5.2 On plain reading of the same, we are of the opinion that when a notice u/s 270A of the Act is issued, the following step ladder should be followed by the AO while levying penalty u/s 270A of the Act.
1. Underreporting – First the onus is on the AO to establish whether any of the contingency spoken of in clauses (a) to (g) of Section 270A(2) in the case of the assessee are attracted or not. If Yes, under which clause (limb) the assessee has underreported the income?
2. Now the onus shifted on the assessee to refute by establishing that the assessee falls within any of the clauses (a) to (e) of section 270A(6) of the Act & hence there is no underreporting of income & the proceedings end there. Section 270A(6) is a window given by the legislature to give a leave to the Assessee.
3. If the assessee is not able to controvert the charge of under reporting, the under reporting gets confirmed.
4. Once the charge of underreporting is confirmed, then the AO has to establish whether the underreporting is in consequence of any of the clauses (a) to (f) of Section 270A(9) of misreporting. If Yes, under which clause (limb) the assessee has misreported the income?
5.3 Therefore, we are of the considered opinion that without the charge of under reporting of income, the AO cannot straightaway jump with the charge of misreporting of income. In the present case the AO without even a whisper as to how the ingredient of sub-section (2) of section 270A is satisfied, has also not specifically mentioned the exact limb of misreporting as per section 270A(9) of the Act. Further, the AO stated under reported income amounting to Rs.91,47,331/- in his penalty order but levied 200% penalty.
5.4 By respectfully following the judgment of Hon’ble High court of Delhi in the case of Schneider Electric South East Asia (HQ) PTE Ltd. V. Commissioner of Income Tax (International Taxation) & Ors. (2022) 443 ITR 186, we are of the considered view that failure on the part of the AO to show cause which of the specific action of the assessee company from clause (a) to (f) of Section 270A(9) was determinant before imposing penalty u/s 270A of the Act has rendered the proceedings invalid and thus untenable in the eyes of law.
7.5 The contention of the Ld. DR that the notice specifically mentions “under-reporting of income” and therefore sufficiently communicates the charge does not persuade us. There is no dispute that the AO had selected under-reporting as against misreporting of income. However, that does not answer the issue before us. The question is whether, within the category of under-reporting, the particular circumstance contemplated under clause (a) to (g) of section 270A(2) of the Act was communicated to the assessee. Admittedly, the notice does not mention section 270A(2)(a) of the Act. The specific clause appears only in the penalty order.
7.6 The subsequent reference to section 270A(2)(a) of the Act in the penalty order cannot cure the defect in the notice. The assessee must know the precise charge when it is called upon to show cause and not for the first time when the penalty is finally imposed. The material placed before us also supports the proposition that subsequent clarification in the penalty order cannot cure the lack of specificity at the initiation stage.
7.7 In view of the above, we hold that the notice issued u/s 274 r.w.s. 270A of the Act, without specifying the particular clause of section 270A(2) of the Act, is vague and does not communicate the precise charge to the assessee. Consequently, the penalty proceedings initiated on the basis of such notice cannot be sustained. We therefore set aside the order of the Ld. CIT(A) and direct the AO to delete the penalty levied u/s 270A of the Act. Accordingly, the ground of appeal raised by the assessee is hereby allowed.
8. In the result, the appeal of the assessee for A.Y. 2017-18 is allowed.
Coming to ITA No. 1562/Bang/2025 for A.Y. 2018-19.
9. At the outset, we note that the issues raised by the assessee in its grounds of appeal for the AY 2018-19 are identical to the issues raised by the assessee in ITA No. 1561/Bang/2025 for the assessment year 2017-18. Therefore, the findings in ITA No. 1561/Bang/2022 shall also apply to the assessment year 2018-19. We have decided the assessee’s appeal for A.Y. 2017-18 vide paragraph No.7 of this order, in favour of the assessee. The learned AR and the DR also agreed that whatever the findings are for the assessment year 2017-18 shall also apply to the assessment year 2018-19. Hence, the ground of appeal filed by the assessee is hereby allowed.
10. In the result, the appeal of the assessee is allowed.
Coming to ITA No. 1562/Bang/2025 for A.Y. 2019-20.
11. The interconnected issue raised by the assessee is that the learned CIT(A) erred in confirming the levy of penalty under section 271AAB of the Act for Rs. 49,62,600/- only.
11.1 The necessary facts are that the assessee was subject to search proceedings under section 132 of the Act dated 03rd January 2019. During the search, it was found that cash expenditure of Rs. 1,65,42,000/- for the movies was not recorded in the regular books of account maintained for the F.Y. 2018-19.
11.2 As the financial year under consideration was not yet completed on the date of search, the assessee recorded the cash expenditure in the final books of account. Accordingly, the assessee filed the ROI for the year under consideration as on 1st October 2019, and further revised it as on 18th March 2020, declaring total income of Rs. 68,42,880/-only. The returned income was accepted in the assessment order under section 143(3) of the Act dated 07-09-2021. However, the AO treated the unaccounted expenditure of Rs. 1,65,42,000/- found on the date of search as undisclosed income and levied the penalty under section 271AAB of the Act of Rs. 49,62,600/-.
12. The aggrieved assessee preferred an appeal before the learned CIT(A) and filed detailed submissions. The assessee effectively contended that the cash expenditure for the 2 movies was recorded in the Kachcha book. On the date of search, the financial year was not yet closed, and there was time at least till 31st March 2019 to complete its regular books of account. The cash expenditure noted in the Kacha book was duly recorded in the regular audited books of account, and the return of income was filed considering the same. Therefore, in the given facts, the kacha book found during the search containing cash expenditure cannot be considered as undisclosed income. However, the learned CIT(A) confirmed the levy of penalty under section 271AAB of the Act by observing as under:
5.4 The AO in the penalty order has very clearly stated that during the course of search proceedings the appellant admitted additional income of Rs.1,65,42,000/-. In the return of income filed after search the appellant has included this income in its return of income (ROI). The conditions for imposing penalty u/s.271AAB of the Act has been satisfied in the following manner;
Search Initiated on or After 15th December 2016;
1. The search proceedings have been initiated, against the assessee, under section 132 of the Income Tax Act.
2. Such a search has been undertaken on or after 15th December 2016.
3. The assessee during the course of the search, in a sworn statement recorded u/s 132(4) of the Act dated 05.01.2019 admitted the undisclosed income and specified and substantiated the manner in which such income was derived as below: ————–
4. The appellant satisfies the clause (iii) also of the section by furnishing the return of income declaring the above-mentioned undisclosed income.
5. The penalty amount payable is hence correctly determined at 30% of the undisclosed income by the Assessing Officer, since the assessee admitted the undisclosed income during the search, specified and substantiated the manner of derivation, pays tax and interest, and declares it in the return. 5.4.1 Therefore, all the conditions for levy of penalty u/s.271AAB is found to be fulfilled.
5.5 Therefore, based on the above discussions, the actions of the AO in levying the penalty u/s.271AAB of the Act is hereby upheld. Accordingly, the grounds of appeal filed by the appellant are dismissed.
6.0 In the result, the appeal is dismissed.
13. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us challenging the levy of penalty under section 271AAB of the Act.
13.1 The Ld. AR before us reiterated that the search was conducted on 03.01.2019, when the relevant previous year had not yet ended and the time for filing the return of income was still available. The cash expenses relating to the two movies were recorded in the kaccha books. Therefore, the assessee still had time to record the same in its regular books of account before closing the books on 31.03.2019. The assessee subsequently recorded the said amounts in its regular books and declared them in the return of income. Therefore, according to the Ld. AR, such amount could not be treated as “undisclosed income” for the purpose of section 271AAB of the Act.
13.2 The Ld. AR further submitted that merely because the assessee admitted the amount in the statement recorded u/s 132(4) of the Act, the same would not automatically become undisclosed income. The amount must first satisfy the definition of “undisclosed income” provided in Explanation to section 271AAB of the Act. It was submitted that the impugned expenditure was already recorded in the kaccha books and was subsequently accounted for in the regular books. The assessee also declared the same in its return of income and paid the applicable tax and interest. Therefore, the conditions for levy of penalty u/s 271AAB of the Act were not satisfied.
13.3 The Ld. AR also challenged the validity of the notices issued u/s 274 r.w.s. 271AAB of the Act. It was submitted that section 271AAB of the Act provides different conditions and rates of penalty under clauses (a), (b) and (c). However, the notices issued by the AO did not specify the particular clause under which penalty was proposed to be levied. Thus, the notices did not disclose the specific charge against the assessee. It was therefore submitted that the notices were vague and defective and the penalty proceedings initiated on the basis of such notices were liable to be quashed.
13.4 The Ld. AR further submitted that the AO had levied the penalty merely on the basis of the addition made in the assessment proceedings without independently considering the facts relevant for penalty. It was contended that penalty proceedings are separate and independent from assessment proceedings and mere addition in the assessment does not automatically result in levy of penalty.
13.5 In support of the above contentions, the Ld. AR relied upon the decision of the Hon’ble Madras High Court in the case of PCIT v. Shri R. Elangovan, Tax Case Appeal Nos. 770 & 771 of 2018, and the decision of the Coordinate Bench of the Tribunal in ITA Nos. 1590 to 1596/Bang/2019 dated 19.10.2020. Accordingly, the Ld. AR prayed that the penalty levied u/s 271AAB of the Act and confirmed by the Ld. CIT(A) be deleted.
14. On the contrary, the Ld. DR supported the orders of the lower authorities and submitted that the assessee had admitted the undisclosed income during the course of search in the statement recorded u/s 132(4) of the Act. The assessee had also declared the same in the return of income and paid the applicable tax and interest. Therefore, the conditions prescribed u/s 271AAB of the Act were satisfied and the AO was justified in levying the penalty. The Ld. DR accordingly prayed that the order of the Ld. CIT(A) be upheld.
15. We have considered the rival submissions of both the parties and perused the materials available on record. The issue before us is whether the cash expenditure of Rs. 1,65,42,000/-found during the course of search can be treated as “undisclosed income” for levy of penalty u/s 271AAB of the Act.
15.1 The undisputed facts are that the search u/s 132 of the Act was conducted on 03.01.2019. Thus, on the date of search, the relevant financial year 2018-19 had not yet ended. During the search, cash expenditure of Rs. 1,65,42,000/- relating to two movies was found recorded in the kaccha books but was not yet recorded in the regular books of account. Subsequently, before the close of the financial year, the assessee recorded the said expenditure in its regular books. The assessee then filed the return of income accordingly. The AO also accepted the returned income of Rs. 68,42,880/- in the assessment completed u/s 143(3) of the Act.
15.2 We note that for levy of penalty u/s 271AAB of the Act, the amount in question must first fall within the meaning of “undisclosed income” as defined in the Explanation to the said section. Therefore, in our considered opinion, merely because an amount was admitted by the assessee in the statement recorded u/s 132(4) of the Act would not, by itself, be sufficient for levy of penalty. The nature of the amount and the manner in which it was recorded also require examination.
15.3 In the present case, the expenditure was found recorded in the kaccha books during the course of the search. Further, the search itself took place on 03.01.2019, much before the close of the financial year on 31.03.2019. The assessee thereafter recorded the expenditure in its regular books of account and considered the same while filing its return of income. These facts have not been disputed.
15.4 In our view, these facts are important. On the date of search, the financial year was still continuing and the regular books for the year had not been finally closed. The expenditure was already found recorded in the kaccha books. The assessee subsequently brought the same into its regular books before filing the return of income. Therefore, merely because such expenditure had not been entered in the regular books as on the date of search would not be sufficient to treat the same as “undisclosed income” for the purpose of section 271AAB of the Act.
15.5 We also do not agree with the reasoning that the admission made by the assessee u/s 132(4) of the Act by itself attracts penalty. In our considered view, before applying the rate of penalty prescribed u/s 271AAB of the Act, it has first to be established that the amount admitted by the assessee falls under the definition of “undisclosed income” provided under the said section. The Ld. CIT(A), however, proceeded mainly on the basis that the assessee had admitted the amount during search, specified the manner of earning such income, paid the tax and interest and declared the same in the return of income. In our view, these facts alone do not dispense with the basic requirement of establishing that the amount represents “undisclosed income” within the meaning of section 271AAB of the Act.
15.6 There is another aspect of the matter. The assessee has challenged the validity of the notices issued u/s 274 r.w.s. 271AAB of the Act. Section 271AAB of the Act provides different clauses for levy of penalty depending upon the facts and conditions specified therein. However, as pointed out by the Ld. AR, the notices issued by the AO did not specify the particular clause under which the assessee was liable for penalty. Thus, the notices did not make the assessee aware of the specific charge which it was required to meet. In this regard, we find support and guidance from the judgment of the Hon’ble Madras High Court in the case of PCIT v. Shri R. Elangovan in Tax Case Appeal Nos. 770 & 771 of 2018, where it was held as under:
15. As rightly pointed out by the learned counsel appearing for the assessee, Section 271AAB of the Act, which deals with penalty consists of three contingencies. Therefore, Assessing Officer should point out to the assessee as to under which of the three clauses, he chooses to proceed against the assessee so as to enable the assessee to give an effective reply. Since the same has not been mentioned, the assessee has been denied reasonable opportunity to put forth submissions. The Tribunal, in paragraph 5 of the impugned order, has verbatim reproduced the penalty notice and we find that the notice is absolutely vague and none of the irrelevant portions had been struck off nor the relevant portions had been marked or indicated. Hence, the Tribunal is right in observing that the penalty could not have been levied based on such defective notice and more particularly, when the assessee has been strenuously canvassing the jurisdictional issue from inception.
16. In so far as the decision of the Allahabad High Court in the case of Sandeep Chandak is concerned, the factual position is slightly different. This decision is for the principle that where the assessee, in the course of search, makes a statement, in which, he admits the undisclosed income and specifies the manner, in which, such Income has been derived, then the provisions of Section 271AAB of the Act would automatically get attracted. There can be no quarrel over this proposition. But, once the provisions get attracted, it is incumbent on the part of the Assessing officer to specify as to under which clause in Section 271AAB (1) of the Act, he intends to proceed against the assessee. In the instant case, in the absence of such material in the penalty notice, it has to be held that the notice is defective.
17. The decisions of the Karnataka High Court in the cases of Manjunatha Cotton and Ginning Factory and SSA’s Emerald Meadows and the decision of this Court in the case of Babuji Jacob clearly support our above conclusion. For all the above reasons, we find no grounds to interfere with the common order passed by the Tribunal.”
15.7 Considering the facts as a whole, we find that the levy of penalty u/s 271AAB of the Act cannot be sustained. The impugned expenditure was found recorded in the kaccha books during an ongoing financial year. It was subsequently recorded in the regular books and considered while filing the return of income. Further, the notices issued by the AO did not specify the particular clause of section 271AAB of the Act under which penalty was proposed to be levied. Therefore, the penalty of Rs. 49,62,600/- levied by the AO and confirmed by the Ld. CIT(A) deserves to be deleted. Accordingly, we set aside the order of the Ld. CIT(A) and direct the AO to delete the penalty of Rs. 49,62,600/- levied u/s 271AAB of the Act. Thus, the grounds of appeal raised by the assessee are allowed.
16. In the result, the appeal of the assessee is allowed.
17. In the combined result, all three appeals of the assessee for A.Ys. 2017-18 to 2019-20 are hereby allowed.
Order pronounced in the open court on 28th Sept. 2026
