Suresh Kumar Vs ACIT (ITAT Delhi)
Summary: The Delhi Bench of the Income Tax Appellate Tribunal allowed the assessee’s appeal for Assessment Year 2019-20 against the order of the Commissioner of Income Tax (Appeals)-24, New Delhi, dated 29 May 2023, confirming penalty under Section 271AAB(1A) of the Income-tax Act, 1961. The principal question was whether penalty proceedings could survive when the Assessing Officer failed to identify the precise statutory charge both while recording satisfaction and while issuing the show-cause notice under Section 274 read with Section 271AAB.
Assessee’s arguments: Shri Pranav Yadav, appearing for the assessee, submitted that Section 271AAB(1A) prescribed different consequences depending on the applicable statutory conditions. Clause (a) provided for penalty at 30% of undisclosed income where the assessee admitted such income in a statement under Section 132(4), specified and substantiated the manner of deriving it, paid the applicable tax and interest, and declared the income in the return within the specified time. Clause (b) prescribed penalty at 60% where the conditions of clause (a) were not satisfied. Therefore, the Assessing Officer was required to identify the applicable clause and the alleged default. The assessee contended that neither the recorded satisfaction nor the notice dated 20 May 2021 disclosed the precise charge. Reliance was placed on Jaina Marketing & Associates v. DCIT, decided by ITAT Delhi on 20 March 2024.
Revenue’s arguments: Shri Sanjay Kumar, representing the Department, supported the orders of the Assessing Officer and CIT(A) and sought dismissal of the appeal. The supplied judgment does not reproduce any further detailed arguments advanced by the Revenue.
Statutory framework: The Tribunal examined the distinction between Section 271AAB(1), which contained three penalty categories applicable to searches initiated during the earlier specified period, and Section 271AAB(1A), which provided two categories for searches initiated after the relevant 2016 legislative change. Under Section 271AAB(1A), the statutory conditions determined whether penalty was leviable at 30% or 60%. The Tribunal considered this distinction material because a notice referring only to Section 271AAB did not tell the assessee which particular statutory allegation required an answer.
Tribunal’s findings: After examining the recorded satisfaction and notice, the Tribunal found that the Assessing Officer had merely mentioned Section 271AAB(1A) while initiating penalty proceedings, without clearly identifying the applicable offence or clause. The subsequent notice under Section 274 read with Section 271AAB did not even identify the relevant subsection. Consequently, the notice failed to communicate the specific charge and was vague and ambiguous.
The Tribunal relied on the Division Bench decision in Jaina Marketing & Associates v. DCIT, in which similar penalty notices for Assessment Years 2018-19 and 2019-20 had been held invalid. That decision explained that the assessee must be informed whether penalty is proposed under clause (a), (b) or (c) of Section 271AAB(1), or clause (a) or (b) of Section 271AAB(1A), as applicable. A general allegation of undisclosed income is not sufficient to identify the statutory basis for penalty.
The reproduced reasoning in Jaina Marketing also discussed Mahaveer Prasad Agarwal v. DCIT, Padam Chand Pungliya v. ACIT,Ashok Bhatia v. DCIT, Sushil Kumar Paul v. ACIT and other judicial precedents. These authorities addressed the requirement of a legally valid penalty notice, the assessee’s opportunity to meet the precise allegation, and the distinction between admitting income during a search and determining whether such income qualifies as undisclosed income under the statute.
Particular emphasis was placed on the reasoning in Ashok Bhatia that a standard-form notice merely mentioning Section 271AAB does not fulfil the requirement of communicating the charge. The decisions discussed within that precedent also invoked the principles of natural justice and the requirement of specificity in penalty proceedings.
Final ruling: The Tribunal found the notice in the present appeal identical in its material deficiency to the notices considered in Jaina Marketing. It held that the Assessing Officer had issued the notice mechanically without specifying the charge. Applying the same reasoning, the Tribunal directed deletion of the penalty under Section 271AAB and allowed the assessee’s appeal. The order was pronounced on 31 January 2025.
The ruling concerns the validity of penalty initiation and the resulting notice. The Tribunal did not independently adjudicate whether any particular income satisfied the statutory definition of undisclosed income or whether the conditions for a specific penalty rate were otherwise fulfilled.
Cases Discussed
- Jaina Marketing & Associates v. DCIT, ITA Nos. 224, 225 and 226/Del/2023, decided on 20 March 2024, 224(3) TMI 1007 (ITAT Delhi) — Directly relied upon and extensively reproduced. The Division Bench held that a Section 271AAB penalty notice must identify the applicable statutory clause and charge.
- Sushil Kumar Paul v. ACIT, ITA No. 2274/Kol/2019, decided on 15 December 2022 (ITAT Kolkata) — Discussed in the reproduced Jaina Marketing decision for holding that a general-form penalty notice failing to identify the applicable charge is defective.
- Mahaveer Prasad Agarwal v. DCIT, ITA No. 1218/JP/2019 (ITAT Jaipur) — Discussed in the reproduced precedent. The source refers to differing decision dates, 2 June 2022 and 2 August 2022; the date requires editorial verification. The decision was cited on the invalidity of a notice failing to identify the relevant penalty clause.
- ACIT v. Shri Arnit Tiwari, ITA No. 249/Ind/2021, decided on 28 June 2022 (ITAT Indore) — Listed in the reproduced Jaina Marketing decision among Tribunal orders taking a similar view on defective penalty notices.
- ACIT v. Smt. Pallem Reddy Sreelakshmi, ITA No. 756/Hyd/2020, decided on 4 January 2022 (ITAT Hyderabad) — Listed among decisions adopting the requirement of a specific penalty charge.
- Ashok Bhatia v. DCIT, ITA No. 869/Ind/2018, decided on 5 February 2020 (ITAT Indore) — Extensively reproduced within Jaina Marketing. The Tribunal held that a notice under Section 274 must identify the charge and relevant conditions under Section 271AAB.
- Padam Chand Pungliya v. ACIT (ITAT Jaipur) — Discussed in the reproduced Mahaveer Prasad Agarwal reasoning. The decision addressed the need to determine whether income admitted during search falls within the statutory definition of undisclosed income before imposing penalty.
- DCIT v. R. Elangovan (ITAT Chennai) — Cited in the reproduced Ashok Bhatia reasoning as supporting the invalidity of defective Section 271AAB penalty notices.
- Ravi Mathur v. DCIT (ITAT Jaipur) — Cited within Ashok Bhatia for the requirement that the Assessing Officer communicate the applicable penalty charge.
- CIT v. Manjunatha Cotton and Ginning Factory (Karnataka High Court) — Cited in the reproduced reasoning on the requirement that penalty notices specify the alleged default.
- CIT v. SSA’s Emerald Meadows (Karnataka High Court) — Cited alongside Manjunatha Cotton in support of the specificity requirement.
- Dilip N. Shroff, 161 Taxmann 218 (Supreme Court) — Referred to in the reproduced reasoning concerning natural justice in penalty proceedings.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-24, New Delhi (hereinafter referred to as ‘the CIT(A)’) dated 29.05.2023, for assessment year 2019-20 confirming levy of penalty u/s. 271AAB(1A) of the Income Tax Act, 1961(hereinafter referred to as ‘the Act’).
2. Shri Pranav Yadav, appearing on behalf of the assessee submits that the Assessing Officer (AO) while recording satisfaction for levy of penalty u/s. 271AAB(1A) of the Act has failed to clearly record the charge on which penalty is being levied. He pointed that as per provisions of section 271AAB(1A) of the Act the penalty can be levied:
आदशे
(a) at the rate of 30% of undisclosed income, if the assessee
(i) in the course of the search, in a statement under sub-section (4) of section-132, admits the undisclosed income and specifies the manner in which such income has been derived;
(ii) substantiates the manner in which the undisclosed income was derived; and
(iii) on or before the specified date—
(A) pays the tax, together with interest, if any, in respect of the undisclosed income; and
(B) furnishes the return of income for the specified previous year declaring such undisclosed income therein;
(b) at the rate of 60% of the undisclosed income not covered under provision of clause a above.
3. Even, in the notice issued u/s. 274 r.w.s 271AAB of the Act, charge for levy of penalty has not been specified. Thus, making notice vague and ambiguous, hence, penalty levied on the basis of vague notice is unsustainable. In support of his contentions, he placed reliance on the decision rendered in the case of Jaina Marketing & Associates vs. DCIT in ITA No. 224, 225 & 226/Del/2023 decided on 20.03.2024 reported as 224(3) TMI 1007-ITAT Delhi.
4. Per contra, Shri Sanjay Kumar representing the department supported findings of the AO and the CIT(A) and prayed for dismissing appeal of the assessee.
5. Both sides heard, orders of the authorities below examined. The short issue in appeal is with regard to validity of notice dated 20.05.2021 issued u/s. 274 r.w.s 271AAB of the Act for levy of penalty under the aforesaid section. Before proceeding further it would be relevant to refer to provisions of section 271AAB of the Act, same are reproduced herein below:
“271AAB. (1) The Assessing Officer may, notwithstanding anything contained in any other provisions of this Act, direct that, in a case where search has been initiated under section-132 on or after the 1st day of July, 2012 but before the date on which the Taxation Laws (Second Amendment) Bill, 2016 receives the assent of the President, the assessee shall pay by way of penalty, in addition to tax, if any, payable by him,—
(a) a sum computed at the rate of ten per cent of the undisclosed income of the specified previous year, if such assessee—
(i) in the course of the search, in a statement under sub-section (4) of section-132, admits the undisclosed income and specifies the manner in which such income has been derived;
(ii) substantiates the manner in which the undisclosed income was derived; and
(iii) on or before the specified date—
(A) pays the tax, together with interest, if any, in respect of the undisclosed income; and
(B) furnishes the return of income for the specified previous year declaring such undisclosed income therein;
(b) a sum computed at the rate of twenty per cent of the undisclosed income of the specified previous year, if such assessee—
(i) in the course of the search, in a statement under sub-section (4) of section-132, does not admit the undisclosed income; and
(ii) on or before the specified date—
(A) declares such income in the return of income furnished for the specified previous year; and
(B) pays the tax, together with interest, if any, in respect of the undisclosed income;
(c) a sum computed at the rate of sixty per cent of the undisclosed income of the specified previous year, if it is not covered by the provisions of clauses (a) and (b).
(1A) The Assessing Officer may, notwithstanding anything contained in any other provisions of this Act, direct that, in a case where search has been initiated under section-132 on or after the date on which the Taxation Laws (Second Amendment) Bill, 2016 receives the assent of the President, the assessee shall pay by way of penalty, in addition to tax, if any, payable by him,—
(a) a sum computed at the rate of thirty per cent of the undisclosed income of the specified previous year, if the assessee—
(i) in the course of the search, in a statement under sub-section (4) of section-132, admits the undisclosed income and specifies the manner in which such income has been derived;
(ii) substantiates the manner in which the undisclosed income was derived; and
(iii) on or before the specified date—
(A) pays the tax, together with interest, if any, in respect of the undisclosed income; and
(B) furnishes the return of income for the specified previous year declaring such undisclosed income therein;
(b) a sum computed at the rate of sixty per cent of the undisclosed income of the specified previous year, if it is not covered under the provisions of clause (a).”
6. A bare perusal of provision of section 271AAB of the Act would show that the penalty under aforesaid section can be levied under different circumstances for different violations. Although, while recording satisfaction, the AO mentioned that penalty is being initiated u/s. 271AAB(1A) of the Act, however, no specific offence as mentioned under sub-section (1A) has been ambiguously specified by the AO.
The vagueness and ambiguity in mind of the AO is writ large even while issuing notice u/s. 274 r.w.s 271AAB of the Act. While issuing notice the AO has not even bothered to mention sub section under which penalty has been levied. Hence, specific charge for levy of penalty in the notice is missing in the notice. This makes the notice vague. The Division Bench of the Tribunal in the case of Jaina Marketing & Associates vs. DCIT (supra) while dealing with similar issue deleted penatly levied u/s. 271AAB of the Act. For the sake of completeness the relevant extract of findings of the Division Bench are reproduced herein under:
“17. Now, we take up the appeals are pertaining for A.Y 2018-19 & 2019-20. The impugned orders of penalty have been passed u/s 271AAB of the Act. The Ld. Counsel for the assessee submitted that the penalty notice issued u/s 271AAB of the Act in both the Assessment Years are not in manner depicting the charge against the assessee as to whether under which clause (a), (b) or (c) of Section 271AAB (1) or Clause (a) or (b) of 271AAB(1A) of the Act, penalty is leviable on the assessee. Thus, submitted that the notice initiating the penalty u/s 271AAB of the Act is a vague notice and therefore, illegal consequently, the order of penalty and the order of the Ld. CIT(A) thereon deserves to be set aside. The Ld Counsel for the assessee relied on various judicial precedents in support of the said submission.
18. The Ld. Departmental Representative has also produced various Judgments relying on the orders of the Lower Authorities submitted that the order of the Lower Authorities, are well reasoned, the assessee has been heard before passing the order of penalty and the assessee is not prejudiced in any manner in issuing the penalty notice in the manner which it has been issued, therefore, sought for dismissal of the Appeals filed by the assessee.
19. We have heard both the parties and perused the material available on record. In both the Assessment Years i.e. A.Y 2018-19 and 2019-20, the identical penalty notice u/s 271AAB has been issued. For the sake of convenience, the penalty notice for Assessment Year 2018-19 reproduced reads as under:
“Whereas in the course of proceedings before me for the Assessment Year 2018-19. it appears to me that a search was conducted in your case and you were found to have undisclosed income, you are hereby requested to appear before me either personally or through a duly authorized representative at 11:30 AM on 02/07/2021 and show cause why an order imposing a penally on you should not be made under section 271AAB of the Income Tax Act, 1961. If you do not wish to avail yourself of this opportunity of being heard in person or through authorized representative, you may show cause in writing on or before the said date which will be considered before any such order is made under section 271AAB of the Income Tax Act, 1961.”
20. A show cause notice was also issued on 09/09/2021 for imposing penalty u/s 271AAB for A.Y 2018-19 and identical show cause notice was also issued for A.Y 2019-20. The show cause notice dated 09/09/2021 reads as under:-
“During the course of proceedings before me for the assessment year 2019-20, it was found that consequent upon search proceeding you were found to have undisclosed income. You were show caused vide letter ITBA/PNL/S/271AAB/2021- 22/1033245356(1) dated 02.06.2021 as to why an order imposing a penalty on you should not be made u/s 271AAB of Income Tax Act, 1961. You were requested to submit your reply by 02.07.2021 but no reply has been submitted by you till date. You are, hereby, given further opportunity to explain as to why an order imposing a penalty u/s 271AAB of the IT Act, on you should not be made. You are requested to submit your explanation in writing on or before 14.09.2021 which will be considered before any such order is made under section 271AAB of the Income Tax Act, 1961. Please note that in case of non- compliance, it will be assumed that you have nothing to explain in your support and penalty shall be imposed on the basis of material available on record.”
21. As could be seen from the above the notice issued u/s 271AAB of the Act, it does not depict the charge against the assessee as to under which Clause (a), (b) or (c) or Section 271AAB (1) or Clause (a) or (b) of 271 AAB (1A) of the Act penalty is leviable on the assessee. Therefore, we are of the opinion that the notice initiating penalty u/s 271AAB of the Act is vague and the assessee was not made aware of the actual charge on which the penalty proceedings will be initiated on the assessee. The various judicial precedents have held that the penalty notice should be clear enough to convey the assessee about the charge which is to be levied against him/her/it for levying penalty for the contravention of the related provisions of the Act.
22. An Identical question came for consideration before the Jaipur bench of the Tribunal in the case of Sri. Mahaveer Prasad Agarwal Vs. The DCIT in ITA No.1218/JP/2019 vide order dated 02-06-2022, wherein the similar notice has been issued to the Assessee therein and the Tribunal held as under:
“5.1 In case of Shri Padam Chand Pungliya vs. ACIT (supra), the Coordinate Bench has held at para 5 page 7 of its order as under:-
“It is pertinent to note that the disclosure of additional income in the statement recorded under section 132(4) Itself is not sufficient to levy the penalty under section 271AAB of the Act until and unless the income so disclosed by the assessee falls in the definition of undisclosed income defined in the explanation to section 271AAB(1) of the Act. Therefore, the question whether the income disclosed by the assessee is undisclosed income in terms of the definition under section 271AAB of the Act has to be considered and decided in the penalty Since the assessee has offered the said income in the return of income filed under section 139(1) of the Act, therefore, the question of taking any decision by the AO in the assessment proceedings about the true nature of surrender made by the assessee does not arise and only when the AO has proposed to levy the penalty then it is a pre-condition for invoking the provisions of section 271AAB that the said income disclosed by the assessee in the statement under section 132(4) is an undisclosed income as per the definition provided under section 271AAB.
Therefore, the AO in the proceedings uno section 271AAB has to examine all the facts of the case as well as the basis of the surrender and then arrive to the conclusion tharth income disclosed by the assessee falls in the definition of undiscloses income as stipulated in the explanation to the said section. Therefore we do not agree with the contention of the Id. D/R that the levy of penalty under section 271AAB is mandatory simply because the AO has to first issue a show cause notice to the assessee and then has to make a decision for levy of penalty after considering the fact that all the conditions provided under section 271AAB are satisfied.”
It is evident from the show cause notice issued under section 274 read with section 271AAB (APB Page 1) that the AO was not clear as to on what precise charge the appellant was asked to show cause, whether the assessee shall pay by way of penalty under clause (a), (b) or (c) of section 271AAB. The AO has just mentioned “deliberately concealed the true income”. Thus the AO without mentioning specific default of the assessee in terms of clause (a), (b) or (c) of section 271AAB of the Act, the, show cause notice issued in routine manner cannot be considered a valid notice in the eyes of law and accordingly the levy of penalty against the assessee is held to be void ab initio.
Further, the assessee has substantiated the undisclosed cash available, as to the extent of surrendered income of Rs. 8,73,000/-.
6. In view of the above, considering the peculiar facts, the grievance of the assessee is accepted as genuine and as such the order of the Id. CIT (A) sustaining the penalty is hereby quashed.
7. In the result, appeal of the assessee is allowed.”
22. The Indore Bench of the Tribunal in ITA No. 869/1nd/2018 in the case of Shri Ashok Bhatia vs. DCIT vide order dated 05.02.2020 held as under:-
“8. From perusal of the above provision we observe that sub section 3 of Section 271AAB of the Act talks about issuing the notice u/s 274 of the Act. So for initiating the penalty proceedings u/s 271AAB of the Act the first step to be taken by 1.d. A.O is to issue a valid notice u/s 274 of the Act. Sub- section (1) to Section 274 of the Act provides a procedure that “No order imposing a penalty under this Chapter shall he made unless the assessee has been heard, or has been given a reasonable opportunity of being heard”. To comply with this requirement the notice u/s 274 should be clear enough to convey the assessee about the charge which is to be leveled against him/her/it for levying the penalty for the contravention of the related provisions of the Act which in the instant case relates to not surrendering of undisclosed amount during the course of search which is subsequently admitted during the course of assessment and not challenged before the Ld. CIT(A). So it was incumbent for Ld. A.O that in the notice issued u/s 274 of the Act he should have mentioned that penalty u/s 271AAB of the Act may be levied na 10/20/30% since the assessee falls in Clauses (a)/(b)/(c) of section 271AAB of the Act. He should have further mentioned that as the assessees case falls under clause-c of section 271AAB of the Act, why she should not be visited by penalty (30% of the undisclosed income. Against this charge the assessee should have been given a reasonable opportunity of being heard. From going through the above three notices issued to the assessee on 22.03.2016, 03.06.2016 and 16.09.2016, we find that there is no mention about various conditions provided u/s 271 AAB of the Act. The Ld. A.O has very casually used the proforma used for issuing notice before levying penalty u/s 271(1)(c) of the Act for the concealment of income or furnishing of inaccurate particulars of income. Except mentioning the Section 271AAB of the Act in the notice it does not talk anything about the provision of section 271AAB. Certainly such notice has a fatal error and technically is not a correct notice in the eyes of law because it intends to penalize an assessee without spelling about the charge against the assessee. Hon’ble Jurisdictional High Court in the case of PCIT V/s Kulwant Singh Bhatia (supra) dealt the issue of defective notice issued u/s 274 r.w.s. 271(1)(c) of the Act and Hon’ble court after relying judgment of Hon’ble Supreme Court in the case of CIT V/s Manjunatha Cotton Ginning Factory and CIT v/s SSA’S Emerald Meadows (supra) held that such show cause notices would not satisfy the requirement of law as notice was not specific. Merely issuing notice in general proforma will negate the very purpose of natural justice. Hon’ble Apex Court in the case of Dilip N Shraf 161 Taxmann 218 held that “the quasi criminal proceedings u/s 271(1)(c) of the Act ought to comply with the principles of natural justice”.
15. We, therefore respectfully following the judgment of jurisdictional High Court in the case of PCIT V/s Kulwant Singh Bhatia (supra), decision of Coordinate Bench of Chennai in the case of DCIT V/s R. Elangovan (supra) and Jaipur Bench in the case of Ravi Mathur Vs DCIT (supra) and in the given facts and circumstances of the case wherein the matter written in the body of the notice issued u/s 274 of the Act does not refer to the charges of provision of Section 271AAB of the Act makes the alleged notice defective and invalid and thus deserves to be quashed. Since the penalty proceedings itself has been quashed the impugned penalty of Rs.64,22,348/- stands deleted. Thus assessee succeeds on legal ground challenging the validity of notice issued u/s 274 r.w.s. 271AAB of the Act.”
23. The Kolkata Bench of the ITAT in the case of Sushil Kumar Paul vs. ACIT in ITA No. 2274/Ko1/2019 vide order dated 15.12.2022, held as under:-
“From the perusal of the above proposition, we observe that sub section 3 of section 271AAB of the Act talks about issuing the notice u/s 274 of the Act. So for initiating the penalty proceedings u/s 271 AAB of the Act, the first step to be taken by Id. Assessing Officer issue a valid notice u/s 274 of the Act provides a procedure that “No order imposing a penalty under this Chapter shall be made unless the assessee has been heard. or has been given a reasonable opportunity of being heard.” To comply with this requirement the notice u/s 274 should be clear enough to convey the assessee about charge which is to be leveled against him/her it for levying penalty for contravention of the related provisions of the Act. So it was incumbent for Id. AO that in the notice issued u/s 274 of the Act should have mentioned that penalty u/s 271AAB of the Act may be levied @ 10/20/30% since the assessee falls in Clauses (a)/(b)/(c) of section 271AAB of the Act. He should have further mentioned that as the assesseee’s case falls under Clause-c of section 271AAB of the Act, why he should not be visited by the penalty (ee. 30% of the undisclosed income. Against this charge. the assessee should have been given reasonable opportunity of being heard.
10. From going through the above notice issued to the assessee on 28.12.2017. we find that there is no mention about various conditions provided u/s 27IAAB of the Act. The Id. AO has very casually used the proforma used for issuing notice before levying penalty u/s 271(1)(c) of the Act for the concealment of income or furnishing of inaccurate particulars of income. Except mentioning the section 271AAB of the Act in the notice, it does not talk anything about the provisions of section 271AAB. Therefore, certainly such notice has a fatal error and technically’ is not a correct notice in the eyes of law because it intends to penalize an assessee without spelling about the charge against the assessee”.
24. The similar views have been taken in the following orders of the Tribunal:-
i) Hyderabad Bench of the Tribunal in ITA No. 756/Hyd/20 ACIT dated 04.01.2022 vs Smt. Pallem Reddy Sreelakshmi, Tirupati.
ii) Indore Bench of the Tribunal in ITA No. 249/Ind/2021 dated 28.06.2022 ACIT vs. Shri. Arnit Tiwari
iii) Jabalpur Bench of the Tribunal in ITA No. 1218/JP/2019 dated 02.08.2022 Shri Mahaveer Prasad Agarwal vs. DCIT.
25. For the detailed reasoning and discussion made above and considering the fact that no specific charge has been mentioned in the penalty notice issued u/s 271AAB of the Act and also following the principles laid down in the above judicial pronouncements, we delete the penalty imposed by the A.O. On this technical grounds for the Assessment Years 2018- 19 & 2019-20.”
7. The contents of notice for levy of penalty in the instant case are identical. The notice has been issued by the AO in mechanical manner. For parity of reasons, penalty levied u/s. 271AAB is directed to be deleted.
8. In the result, appeal of the assessee is allowed.st
Order pronounced in the open court on Friday the 31 day of January, 2025.
