Trifecta Projects Pvt. Ltd. Vs DCIT (ITAT Bangalore)
The Bangalore Bench of the ITAT held that penalty under Section 271AAB is leviable only in respect of “undisclosed income” unearthed during the course of search and not for routine or technical disallowances made during assessment. In the present case, additions arose from disallowance of cash payments under Section 40A(3) and reclassification of revenue expenditure as capital under Section 37(1), both of which were fully recorded in the regular books of account. No incriminating material was found during the search to justify treating such disallowances as undisclosed income. The Tribunal further held that acceptance of additions by the assessee “to buy peace” does not automatically attract penalty u/s 271AAB. Additionally, the show cause notice issued u/s 274 r.w.s. 271AAB was held to be defective for failure to specify the applicable limb of the section, rendering the penalty proceedings void ab initio. On both legal and merits grounds, the penalty of ₹36.47 lakhs was deleted and the appeal of the assessee was allowed.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This is an appeal filed by the assessee challenging the order of the Ld.CIT(A)-15, Bengaluru dated 28/02/2025 in respect of the A.Y. 2020-21 and raised the following grounds:
“1. The orders of the authorities below in so far as levying penalty u/s 271AAB of the Act against the appellant are opposed to law, equity. weight of evidence, probabilities, facts and circumstances of the case.
2. The learned CIT[A] Is not justified in upholding the penalty of Rs. 36,47,455/- imposed u/s. 271AAB of the Act without appreciating that the disallowance of Rs. 35,91,818/- made u/s. 40A[3] of the Act and the disallowance of Rs. 24,87,275/- made u/s. 37[1] of the Act in the assessment proceedings cannot be considered as undisclosed income found at the time of search in order to impose penalty u/s. 271AAB of the Act under the facts and in the circumstances of the appellant’s case.
3. Without prejudice to the above, the penalty sustained by the learned CIT[A] is highly excessive and liable to be reduced substantially.
4. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered.”
2. The brief facts of the case are that the assessee is a private limited company, in the business of construction of residential apartments, villas and commercial complexes and selling / leasing / renting the same to the customers. The assessee filed their return of income on 09/11/2020. The said return was processed u/s. 143(1) of the Act. subsequently, a search action u/s. 132 of the Act was conducted on 05/02/2020. Thereafter notice u/s. 153A was issued and the year of search i.e. the A.Y. 2020-21 is selected for compulsory scrutiny. Notices u/s. 143(2) and 142(1) were issued for which the assessee appeared and submitted the details as sought for by the AO. The AO disallowed the cash expenses u/s. 40A(3) of the Act since the payments were made in excess of Rs. 20,000/-. Similarly, the AO had added the revenue expenditure claimed by the assessee as capital expenditure. For the said additions, the assessee had accepted the said claims and paid the tax dues to the department to buy peace. The AO had treated the said disallowances as undisclosed income warranting penalty u/s. 271AAB of the Act. Subsequently, the penalty notice u/s. 274 r.w.s. 271AAB was issued in which the AO had alleged that based on the search it was found that you have undisclosed income. The assessee filed their detailed objections by citing that the disallowance of the cash expenses and the disallowance of the revenue expenditure could not be treated as undisclosed income since the said expenses were reflected in the financial statements of the assessee and therefore it could not be termed as undisclosed income warranting penalty u/s. 271AAB of the Act. Similarly, the assessee had submitted that the notice issued u/s. 274 r.w.s. 271AAB also does not specify under which limb the assessee had committed the offence warranting the penalty u/s. 271AAB of the Act. The assessee also submitted that based on the mere search, the said additions could not be termed as undisclosed income. The AO not satisfied with the reply, confirmed the penalty at 60% of the undisclosed income. As against the said order, the assessee filed an appeal before the Ld.CIT(A) and the Ld.CIT(A) had confirmed the penalty order passed by the AO.
