ITAT Visakhapatnam Deletes Section 270A and 271AAD Penalties After Search

Ghanta Srinivas Vs DCIT (ITAT Visakhapatnam)

Summary: The assessee, a practising doctor in Guntur, had originally declared total income of Rs.48,97,990/- for A.Y. 2022-23. A search and seizure action under section 132 resulted in cash of Rs.5,24,18,100/- being found and seized, which the assessee explained as professional receipts attributable to A.Ys. 2022-23 and 2023-24; for A.Y. 2022-23, since the time limit for filing a revised return had expired, he filed a revised statement of total income admitting Rs.3,03,74,646/- towards the cash and paid taxes, and the Assessing Officer completed the assessment by accepting the revised computation without making any addition. The Assessing Officer nevertheless levied penalty under section 270A(9) for under-reporting in consequence of misreporting and also penalty under section 271AAD for omission of entries in the books. The Visakhapatnam ITAT held that the section 274 read with section 270A show-cause notice was vague because the Assessing Officer had not specified the particular sub-clause of section 270A(9) under which the penalty was proposed, and therefore the penalty under section 270A(9) could not be upheld. The Tribunal further held that the assessment was invalid because, for the assessment year involved, following the search the Assessing Officer had proceeded under section 143(3) without following the procedure under section 148, and that the assessee could challenge the validity of the assessment in collateral penalty proceedings; consequently, penalty proceedings founded on the invalid assessment could not be sustained. On merits, the Tribunal held that the Assessing Officer, having accepted the additional income disclosed by the assessee without making any further addition, erred in treating the disclosure as under-reporting in consequence of misreporting, and considered the decision in MAK Data (P.) Ltd. v. CIT in the context supplied by the order. In relation to section 271AAD, the Tribunal considered the provision and the Memorandum explaining the Finance Bill, 2020 and held that the penalty could not be sustained in the present facts merely because professional receipts had not been recorded in the books, having regard to the purpose for which section 271AAD was introduced. The Tribunal accordingly directed deletion of the penalties under sections 270A(9) and 271AAD and allowed the assessee’s appeals in ITA Nos.172/VIZ/2026 and 173/VIZ/2026.

Search Surrender Accepted Without Addition-Visakhapatnam ITAT Deletes ₹2.59-Crore Section 270A Penalty and Section 271AAD Penalty

The assessee, a practising doctor, originally declared income of ₹48.98 lakh for AY 2022-23. During a search under Section 132, cash of ₹5.24 crore was found and seized. The assessee explained the cash as unaccounted professional receipts attributable to AYs 2022-23 and 2023-24.

Since the time limit for revising the return for AY 2022-23 had expired, the assessee filed a revised computation, offered additional income of ₹3.04 crore and paid the applicable tax. The AO accepted the revised computation without making any further addition. Nevertheless, he imposed a penalty of ₹2.59 crore under Section 270A(9) for under-reporting of income resulting from misreporting and a separate penalty under Section 271AAD for omission of professional receipts from the books.

The Visakhapatnam ITAT held that the notice under Section 274 read with Section 270A was vague because it did not identify the specific clause of Section 270A(9) allegedly attracted. Further, when the AO had accepted the additional income disclosed in the revised computation without making any further addition, the surrender of income by itself could not automatically establish misreporting.

The Tribunal also held that the underlying assessment was jurisdictionally invalid because, following the search, the AO completed the assessment merely under Section 143(3) without following the mandatory reassessment procedure under Section 148. The assessee was entitled to challenge the validity of the assessment in the collateral penalty proceedings even though the assessment itself had not been appealed. Consequently, penalties founded on an invalid assessment were also void.

Regarding Section 271AAD, the Tribunal observed that the provision was introduced principally to address false or omitted entries involving sham documentation and fake invoices. It could not be invoked merely because unaccounted professional receipts had not been entered in the books.

Accordingly, the Tribunal directed the AO to delete the penalties under Sections 270A(9) and 271AAD.

List of Cases Discussed / Relied Upon

• Prem Brothers Infrastructure LLP,[2022] 142 taxmann.com 38 (Del) — vague notice under section 270A and failure to specify the applicable limb.
• Schneider Electric South East Asia (HQ) Pte. Ltd.,[2022] 145 taxmann.com 665 (Del) — vague notice and absence of specification of the limb of section 270A.
• Babuji Jacob v. ITO,[2021] 430 ITR 259 (Madras) — specificity of the penalty notice under section 274 read with section 271(1)(c).
• Sundaram Finance Ltd. v. ACIT,[2018] 93 taxmann.com 250 — specificity of the penalty notice and striking the inapplicable portion.
• CIT v. Manjunatha Cotton & Ginning Factory,[2013] 359 ITR 565 — vague penalty notice and specification of the charge.
• CIT v. SSA’s Emerald Meadows,[2016] 73 taxmann.com 241 — penalty proceedings based on an unspecified charge in the notice.
• CIT v. Anwar Ali,[1970] 76 ITR 696 (SC) — assessment findings do not automatically make penalty mandatory.
• CIT v. Gem Granites,[2013] 86 CCH 160 (Madras) — independent finding required in penalty proceedings.
• Gigabyte Technology (India) Private Ltd v. CIT, Tax Appeal No. 77 of 2015 dated 19.10.2020 — collateral challenge to the validity of assessment proceedings.
• Shri Valley Refractories Limited v. DCIT,ITA 1102/KOL/2023 — validity of assessment proceedings may be challenged in collateral penalty proceedings.
• Shadilal Sugar and General Mills Ltd. v. CIT,(1987) 168 ITR 705 — mere agreement to an addition does not automatically establish concealment or inaccurate particulars.
• MAK Data (P.) Ltd. v. CIT,[2013] 38 taxmann.com 448 (SC) / 358 ITR 593 (SC) — considered by the Tribunal in relation to voluntary surrender and penalty.

FULL TEXT OF THE ORDER OF ITAT VISAKHAPATNAM

These appeals are filed by the Assessee against different orders of Learned Commissioner of Income Tax (Appeals)-Visakhapatnam-3 [hereinafter in short “Ld. CIT(A)”] vide DIN: ITBA/APL/S/250/2025-26/1083494643(1) dated 09.12.2025 & DIN: ITBA/APL/S/250/2025-26/1083613962(1) dated 12.12.20252025 for the A.Y. 2022-23.

2. Since the grounds raised by the assessee for both the captioned appeals are identical in nature, these appeals are being clubbed and a consolidated order being passed. The grounds raised by the assessee in ITA No. 172/VIZ/2026 for the A.Y.2022-23 are reproduced below: –

1. The order of the Ld. CIT (Appeals) is erroneous on the facts of the case and contrary to the provisions of law.

2. On the facts and circumstances of the case and in law, the Ld. CIT (A) erred in rejecting the contention of the appellant that t he penalty order u/s 270A of the Act for under- reporting of income in consequence of misreporting is bad in law and void ab initio in the absence of identifying and specifying the applicable limb/clause of section 270A(9) in the notice issued u/s 274 r.w.s 270A for initiation of the penalty proceedings and in the assessment order.

3. On the facts and circumstances of the case and in law, the Ld. CIT(A) is not justified in rejecting the contention of the appellant that levy of penalty u/s 270A(1) is not legally permissible in view of the provisions of section 270A(11), when the addition, on the basis of which penalty u/s 270A(1) is imposed, has also formed the basis of imposition of penalty u/s 271AAD(1)(ii) for the same assessment year.

4. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in rejecting the contention of the appellant that no penalty u/s 270A(1) is leviable on merits when the returned income as substituted by the income as per the revised computation of income filed during t he assessment proceedings has been accepted and adopted by the Assessing Officer as the total income in the assessment order.

5. On the facts and circumstances of the case and in law, the Ld. CIT(A) is not justified in rejecting the contention of the appellant that the language employed in section 270A(1) lends discretion to the Assessing Officer in the matter of levy of penalty based on the specific facts of the case and the Assessing Officer failed to exercise such discretion in the case of the appellant though the facts of the case warranted the same.

6. On the facts and circumstances of the case and in law, the Ld. CIT(A) is not justified in sustaining the penalty on merits when clauses (a) and (e) of section 270A(9) have no application to the facts of the appellant’s case.

7. On the facts and circumstances of the case and in law, the initiation of penalty proceedings u/s 270A as per the direction recorded in the is legally unsustainable having been passed u/s 143(3) without resorting to the mandatory provisions of section 148 when the appellant has been subjected to search u/s 132.

8. Any other legal grounds or factual grounds that may be urged at the time of hearing of the appeal.”

3. The brief facts of the case are that, the assessee is a practicing Doctor in Guntur, filed his return of income for the A.Y.2022-23 on 29.09.2022 admitting total income of Rs.48,97,990/-. A Search and seizure action, under section 132 of Income Tax Act, 1961 [hereinafter in short “the Act”] was conducted in the case of the assessee on 12.12.2022. During the course of search operations, cash of Rs.5,24,18,100/- was found and seized. The assessee was asked to explain the sources for cash, found during the course of search, for which he has stated that the amount of cash is nothing but his professional receipts. The assessee has also agreed to offer additional income of Rs.5,24,18,100/- as his professional receipts for two assessment years i.e., A.Y.2022-23 and A.Y.2023-24.

4. Consequent to search, the case was taken up for scrutiny and accordingly notice under section 143(2) of the Act dated 15.06.2022 was issued and served on the assessee. During the course of assessment proceedings, the assessee has filed revised statement of total income, along with financial statement for the A.Y.2022-23 and admitted total income of Rs.3,03,74,646/- towards cash found during the course of search. Similarly, the assessee has filed retu rn of income for the A.Y. 2023-24 and admitted additional income of Rs.2,20,43,454/- towards cash completed under section 143(3) on 19.01.2024 and assessed the total income at Rs.3,72,41,820/- as per the revised computation of total income filed by the assessee without making any addition. The Ld.AO had also initiated penalty proceedings under section 270A of the Act, for under reporting of income in consequence of misreporting and also penalty proceedings under section 271AAD for omitting the entries in the books of accounts, so as to reduce the income of the assessee.

5. During the penalty proceedings, the Ld.AO issued show- cause notice dated 19.01.2024 and called upon the assessee to file his objections, if any, for proposed imposition of penalty under section 270A of the Act, for under reporting of income in consequence of misreporting. The assessee vide letter dated 21.02.2024 submitted that the penalty is not justified as per section 270A(11) of the Act. The assessee further submitted that, he has surrendered additional income towards cash found during the course of search as his professional receipts and also included additional income in the return of income filed for the A.Y.2023-24. For the A.Y. 2022-23, since the time limit for filing revised return of income was expired, he has filed revised statement of total income and offered the additional income of Rs.3,03,74,646/- and also paid taxes. Therefore, submitted that surrendering of income voluntarily cannot be considered as under reporting of income in consequence of misreporting thereof.

6. Ld.AO, after considering the submissions of the assessee and also taking note of the facts gathered during the course of search which resulted in seizure of huge unaccounted cash, observed that, the assessee initially stated that the cash found during the search process pertaining to the sale proceeds o f agricultural lands, sale proceeds of flat and house and maturity of chit proceeds. Further, while recording statement on 13.01.2023, he retracted from the earlier statement and stated that his mental condition was not good due to circumstances prevailing on the date of search. He further changed his statement and claimed that the entire amount of cash found during the search was purely out of the professional receipt. From a cursory glance, at the above events, it is clearly understood that the assessee has intention to avoid payment of tax. Further, the penalty under The Income Tax Act, 1961, in the opinion of the Ld.AO are deterrent measures. If a person is caught with unaccounted income and the s aid person is not saddled with extra burden, a wrong signal will be sent to the society that the tax can be paid whenever it is caught by Income Tax authorities. As mentioned earlier, the assessee is a practicing Doctor and being a responsible person should have disclosed true and correct professional receipts in his return and paid taxes. Therefore, Ld.AO observed that, if the search was not taken place, the assessee would not have disclosed the suppressed receipts. Therefore, opined that, it is a fit case of under reporting of income in consequence of misreporting which squarely falls under the provisions of section 270A(9) of the Act, and, thus, lev penalty of Rs.2,59,142,74/- which is equivalent to the 200% of the tax on suppressed income. The relevant findings of the Ld.AO are as under:

“9. From a cursory glance at the above events, it is clearly understood that the assessee has under reported his income intentionally to evade payment of income tax. Further, the penalties under Incom e tax, in the opinion of the undersigned, are deterrent measures. If a person is caught with unaccounted income and the said person is not saddled with extra burden, a wrong signal will be sent to the society that the tax can be paid whenever it is caught by income tax authorities. Viewing from this angle also, penalties are must against a person who is found with unaccounted income. As mentioned earlier the assessee is a practicing doctor in Guntur. During the course of search proceedings, it was unearthed that the assessee’s receipts were systematically suppressed and were not disclosed in the books of accounts completely. Therefore, the assessee was forced to come forward and accordingly the assessee filed revised computations including the receipts unearthed during the course of search proceedings. But for the action u/s. 132 of the IT Act 1961 was conducted, the assessee would not have disclosed the suppressed receipts. Thus, the assessee deserved capital punishment. If, this is not a fit case, then no other case will be a fit case for levy of penalties under the provisions of Income Tax Act 1961. The assessee was forced to file revised computations only because of the extreme action conducted by the department and therefore it is felt that the case of th e assessee is a fit case for levy of penalty u/s. 270A(9) of the IT Act 1961. The case of the assessee clearly falls under clause (a) and (e) of Section 270A(9) of the IT Act. Accordingly, I proceed to levy 200% of the tax payable by the assessee as penalty u/s. 270A(9) of the IT Act 1961. The quantum of the penalty is worked out as under: –

7. Being aggrieved by the Assessment Order, the assessee preferred an appeal before Ld.CIT(A). Before Ld. CIT(A), the assessee has filed detailed written submissions on the issue which has been reproduced at Page No. 5 and extended up to Page Nos. 24 of the Ld. CIT(A) order. T argument of the assessee before Ld. CIT(A) was that, surrender of income during the course of search to cover up various discrepancies including the unaccounted professional receipts cannot be considered as under reporting of income in consequence of misreporting thereof. The assessee further submitted that, the Ld.AO initiated the penalty proceedings under section 270A for under reporting of income and further initiated penalty proceedings under section 271AAD for omission to record receipts in the books of accounts, on the very same receipts considered for levy of penalty under section 270A of the Act, and, therefore as per provisions of section 270A(11), if any receipt is conceded for the purposes of penalty then very same receipts cannot be considered for the purposes of other provisions of Act. He further submitted that, the assessee has filed revised statement of total income and also paid taxes on the additional income to come clean and disclose true and correct professional receipts, and therefore mere surrendering of income cannot be treated as under reporting of income, is in consequence of misreporting thereof.

8. The Ld. CIT(A), a fter considering the submissions of the assessee and also taking note of relevant facts and by following certain judicial precedents including the decision of the Hon’ble Supreme Court in the case Mak Data (P.) Ltd. v. CIT [2013] 38 taxmann.com 448 (SC) / 358 ITR 593 (SC), rejected the explanation of the assessee both on legal ground and on merits. Ld. CIT(A) rejected the legal ground, taken by the assessee, without specifying the exact clause of section 270A(9) of the Act, on the ground that under reporting of income in consequence of misreporting sufficiently conveying the nature of the default. Unlike earlier regime under section 271(1)(c) of the Act, section 270A does not require selection between mutually exclusive limbs and further misreporting is itself is a complete st atutory category. Further, the assessee has also not demonstrated any prejudice caused by the absence of clause numbers in the notice, especially when the penalty order explicitly refers to clauses (a) to (e). Therefore, he observed that, there is no merit in the arguments of the assessee on the legal issue and thus rejected.

9. Ld. CIT(A) had also rejected the contentions of the assessee, in light of provisions of section 270A(11) of the Act, by holding that section 270A(11) applies only where the same addition or disallowance has already formed the basis of another penalty. The statutory test is not the “commonality of facts” but the identity of the addition forming the basis of two penalties. In the present case, the penalty under section 271AAD proceeds on the footing of “omitted or false entries”, whereas the penalty under section 270A proceeds on “under reporting of income in consequence of misreporting”. This provision addresses distinct field of misconduct and therefore the argument of the assessee that once the addition is considered for penalty under other pro visions of the Act, the same cannot be basis of levying penalty under section 271AAD is incorrect.

10. Ld. CIT(A) has also rejected the argument of the assessee, on merits, in light of the decision of the Hon’ble Supreme Court in the case of MAK Data (P). Ltd., v. ACIT [358 ITR 593 (SC)] and held that so- called voluntary surrender made after detection of undisclosed income does not grant immunity from penalty, and that “voluntary disclosure” cannot substitute a credible explanation. Therefore, held that, on an overall consideration of the seized cash, the seized documents evidencing suppression of receipts, the contradictory explanations provided during the search, the failure to file a revised return within statutory period, and the fact that additional income was admitted only after detection, it is evident that the case falls squarely within the definition of misreporting under section 270A(9) of the Act, and thus, there is no error in the reasons recorded by the Ld.AO in levying penalty for under reporting of income in consequence of misreporting thereof. Thus, rejected the explanation of the assessee and sustained the penalty levied by the Ld.AO.

11. Aggrieved by the order of Ld. CIT(A), the assessee is now in appeal before the Tribunal

12. Learned Counsel for the assessee, Shri M.V. Prasad, CA, submitted that, the order passed by the Ld.AO imposing the penalty under section 270A(9) of the Act, is invalid and liable to be quashed, because, the Ld.AO issued a vague show – cause notice under section 274 r.w.s 270A of the Act without specifying the limb under which the assessee is liable to pay penalty, and thus, it non-application of mind thereby levying of penalty automatically on the basis of assessment of income. The Learned Counsel for the assessee, further submitted that, the Ld.AO initiated the penalty proceedings for under reporting of income in consequence of misreporting. The misreporting of income, referred to in sub-section (9) has six limbs from (a) to (f) which deals with penalties under different situations, and, therefore unless the Ld.AO specifies the exact clause under which the proposed penalty has been initiated, it is difficult for the assessee to justify its case with relevant submissions. Since Ld.AO has levied penalty on the basis of vague notice, the order passed by the Ld.AO cannot be upheld. In this regard, he relied on the decision of the ITAT Hyderabad Bench in the case of M/s. MSN Laboratories Private Limited v. ACIT in ITA No. 2304 & 2305/HYD/2025 dated 25.02.2026.

13. Learned Counsel for the assessee, further submitted that, even on merits, the penalty levied by the Ld.AO is unsustainable in law, because the Assessment Order passed by the Ld.AO under section 143(3) of the Act dated 19.01.2024 is invalid. The Learned Counsel for the assessee, further referring to provisions of section 148 and 149 of the Act submitted that assessment in the present case was subjected to search proceedings conducted on 12.12.2022. The assessment year involved in the present case is one year prior to the year of search. As per the provisions of section 148 and 149 of the Act, in cases of search, the Ld.AO shall re-assess the income of a person by following section 148 of the Act and explanation provided there to. However, in the present case, the Ld.AO has assessed the income by issuing notice under section 143(2) of the Act without complying the provisions of section 148 and 149 of the Act, and, thus the Assessment Order passed by the Ld.AO is invalid and consequently the penalty levied by the Ld.AO under section 270A and 271AAD is also invalid. Although the assessee has not challenged the validity of assessment proceedings by filing the appeal, the fact remains that in collateral proceedings, assessee can very well challenge the validity of assessment proceedings, in case, the said proceedings are void ab initio as held by the various judicial precedents including the decision of Hon’ble Bombay High Court in the case of Gigabyte Technology (India) Private Ltd v. CIT in Tax Appeal No. 77 of 2015 dated 19.10.2020. Since the assessee has got opportunity for the first time to challenge the validity of assessment proceedings in a collateral proceedings of penalty under section 270A / 271 AAD of the Act, the assessee has challenged the proceedings on the basis of facts available on record, and going by the facts of the present case, the Assessment Order passed by the Ld.AO itself is invalid because of incorrect application of provisions of section 143(2) of the Act, even though, the Ld.AO is required to assess the income as per provisions of section 148 of the Act. Therefore, he submitted that, once the assessment proceedings itself is invalid, subsequent penalty proceedings is also invalid and liable to be quashed.

14. Learned Counsel for the assessee, further submitted that the penalty levied by the Ld.AO under section 270A and 271AAD of the Act, on an admitted income is unsustainable in law, because the assessee has admitted additional income of Rs.3,03,74,646/- in consequent to search proceedings where the Department found cash in the residential premise of the assessee and the assessee has explained the cash found during the course of search out of professional income and also filed revised statement of total income and paid taxes before the assessment. Since the assessee has admitted the income and paid taxes, mere admission of income cannot be considered as under reporting of income in consequence of misreporting, for the purposes of section 270A of the Act. Similarly, for the purposes of section 271AAD of the Act, non-entry in the books of accounts cannot be considered as false entry as per section 271AAD, and, for this purpose, he referred to the Memorandum Explaining the Provisions in the Finance Bill, 2020, and claimed that, the above section has been inserted to curb the practice of taking bogus invoices under Goods and Services Tax for claiming Input Tax Credit and the said provision cannot be applied to the cases of assessees where the assessee has not reported income. Therefore, he submitted that even on merit, penalty levied by the Ld.AO cannot be sustained and needs to be deleted.

15. The Learned CIT(DR) for the Revenue, Shri Nilanjan Dey, CIT(DR), on the other hand supporting the order of the Ld. CIT(A), and submitted that, clear case of under reporting of income in consequence of misreporting and the Ld.AO has rightly levied penalty under section 270A(9) of the Act. Once the provisions have been invoked for under reporting of income in consequence of misreporting, then there is no necessity of referring to sub- clause for which the penalty has been proposed, and, therefore the arguments of the assessee on the issue of vague show cause notices is unsustainable in law. The Learned CIT(DR) for the Revenue, further supporting the order of the Ld. CIT(A) submitted that, it is a clear case of under reporting of income which is evident from relevant findings given by the Ld.AO in the Assessment Order, as well as, penalty order, where the assessee has not reported the professional income in the return of income file d for the year under consideration. Further, although there is time limit for fling the revised return of income the assessee did not file revised return of income disclosing true and correct income. The assessee has filed the revised statement of total income and admitted additional income in consequent to search, and, therefore the arguments of the assessee that mere admission of income does not warrant penalty, is contrary to the facts available on record and cannot be accepted.

16. Learned CIT(DR) for the Revenue, further submitted that, the penalty order passed by the Ld.AO under section 271AAD is also as per law, going by the provisions of section 271 AAD and its purpose, because the above provision has been inserted to curb the menace of false entry in the entry has been explained which includes forged or falsified documents such as a false invoice and invoice in respect of supply or receipt of goods or without actual supply, and the, assessee case comes under second clause of an omission of any entry which is relevant for computation of total income to evade tax liability. Ld.AO and Ld. CIT(A), after considering the facts of the case, including the cash found during the course of search and the explanation of the asses see with regard to the above cash clearly observed that t he assessee has omitted to record professional receipt in the books of accounts which comes under provisions of section 271AAD of the Act. The Ld. CIT(A), a fter considering the relevant facts has rightly confirmed the penalty levied by the Ld.AO on the ground that it is a case of under reporting of income is in consonance of misreporting and also it is a case of omission of entry which is relevant for computation of total income of such person who evaded tax liability. Therefore, he submitted that the orders of the Ld. CIT(A) should be upheld.

17. We have heard both the sides, perused the material available on record and had gone through the orders of the authorities below. We have carefully considered the relevant case laws relied upon by Learned Counsel for the assessee in support of his contention. The Ld.AO levied penalty under section 270A(9) of the Act in respect of additional income offered by the assessee towards cash found and seized during the course of search of Rs.5,24,18,100/- spread over to two assessment years where the assessee has admitted sum of Rs.3,03,74,646/-

A.Y. 2022-2023 as undisclosed professional income. The Ld.AO completed the assessment by accepting the revised statement of total income filed by the assessee during the course of assessment proceedings which included additional income offered by the assessee towards cash found during the course of search and also paid taxes. Therefore, it is necessary for us, to ex amine the reasons given by the Ld.AO and upheld by the Ld. CIT(A) to levy penalty under section 270A(9) of the Act, for under reporting of income is in consequence of misreporting thereof.

18. The assessee has raised preliminary objection and questioned the validity of penalty proceedings, in light of show- cause notice issued under section 274 r.w.s 270A and claimed that the Ld.AO issued a vague show- cause notice without specifying the particular charge under which penalty is initiated and thereby the entire penalty proceedings become vitiate and consequently the order passed by the Ld.AO under section 270A of the Act is bad in law and liable to be quashed. The provisions of section 270A of the Act deals for under reporting of income and under reporting of income in consequence of misreporting thereof. The sub-section (1) to (6) of section 270A deals with under reporting of income and under reporting of income in consequence of misreporting. Sub-section (9) deals with misreporting of income which has six sub clauses applicable under different circumstances which includes misrepresentation or suppression of facts, failure to record investments in the books of account, books of account having a bearing on total income, claim of expenditure not substantiated by any evidence or recording of any false entry in the books of account etc. The different situations warrant different explanation f rom the assessee with regard to misreporting of income. Therefore, while issuing show -cause notice under section 274 r.w.s 270A of the Act, it is necessary for the Ld.AO to specify the sub-clause of section270A(9) of the Act to give a proper opportunity to the assessee to explain its case. Unless, the Ld.AO gives a specific show-cause notice to the assessee, it is difficult for the assessee to explain its case to justify non-levy of penalty under section 270A of the Act. In the present case, since the Ld.AO has issued vague show-cause notice without specifying sub -clause under which the proposed penalty proceedings has been initiated, in our considered view, the penalty levied by the Ld.AO under section 270A(9) of the Act is clear case of non-application of mind, without any application to the relevant facts of the case before arriving at a conclusion that the assessee has under reported the income which is in consequence of misreporting thereof. Therefore, in our considered view, the order passed by the Ld.AO imposing penalty under section 270(9) of the Act on the basis of vague show- cause notice cannot be upheld.

19. The assessee has relied upon the decision of the ITAT, Hyderabad Bench in the case of M/s. MSN Laboratories Private Limited v. ACIT (supra), wherein the Coordinate Bench of the ITAT, Hyderabad Bench on identic levy of penalty under section 270A(9) of the Act deleted the penalty levied by the Ld.AO on the ground that, show cause notice issued by the Ld.AO does not specify the limb under which the penalty under section 270A(9) of the Act was levied, and thus, the entire penalty proceedings becomes null-avoid. The relevant findings of the Tribunal are as under:

“17. The assessee has raised a preliminary objection and questioned validity of penalty proceedings in light of notice issued under section 274 r.w.s. 270A of t he I.T. Act and claimed that the show cause notice issued by the A.O without specifying a particular charge under which penalty is initiated, vitiate the entire penalty proceedings and consequently, the order passed by the A.O under section 270A of the Act is bad in law and liable to be quashed. In light of above factual back ground, if we examine the order passed by the AO, imposing penalty u/s.270A(9) of the Act, it is necessary to refer to provisions of Sec.270A of the Act, and the reasons given by the AO to impose penalty u/s.270A(9) of the Act. The provisions of Sec.270A of the Act, deals with penalty for ‘under reporting of income and under reporting as a consequence of misreporting of income’. Sub- section (1) to (6) of Sec.270A of the Act deals with ‘under reporting of income and under reporting as a consequence of misreporting of income’, has been specified in sub- section (7) to Sec.270A of the Act. Subsection (8) & (9) deals with ‘under reporting of income and under reporting as a consequence of misreporting of income’ thereof by any person and such case of ‘misreporting of income’ referred to in sub- sec.(8) has been specified in Sec.(9) of Sec.270A of the Act. From the above, it is manifestly clear that a provision of Sec.270A of the Act has two limbs or two charges for which penalty can be levied. The first limb or first charge is ‘under reporting of income and such under reporting of income’ has been specifically referred to in sub- sections (2) of Sec.270A of the Act. In the present case, these provisions are not relevant, because the AO has not invoked under reporting of income. The second limb or charge is ‘under reporting of income as consequence of misreporting of income’ thereof and in the present case, the AO invoked the second limb of provisions of Sec.270A of the Act. Admittedly, these provisions have been substituted by the Finance Act, 2016 w.e.f.01.04.2017 and applicable for AY 2017- 18 onwards. Prior to insertion of Sec.270A of the Act, a similar provision was existed in the statue by way of sec.271(1)(c) of the Act, for concealment of particulars of income or furnishing of inaccurate particulars of income. Provisions of Sec.271(1)(c) of the Act, was also having two limbs or two charges i.e. i) for concealment of particular of income and ii) furnishing of inaccurate particulars of income. If you go by provisions of Sec. 271(1)(c) of the Act & Sec.270A of the Act, and wordings therein, both provisions are similar and parametria to each other. Although, the term ‘tax evasion’ has been redefined by way of ‘under reporting of income and under reporting as a consequence of misreporting o f income’ but it is synonymous with concealment of particular of income or furnishing of inaccurate particulars of income. Therefore, it is necessary to examine, whether penalty proceedings u/s.270A of the Act, is mandatory in nature and further, such penalty can be invoked without providing an opportunity to the assessee as required u/s.274 of the Act.

18. The order passed u/s.270A of the Act, is an appealable order u/s.246A of the Act before the First Appellate Authority. If the penalty u/s.270A of the Act had been mandatory, Sec.270A of the Act, is an appealable order, it cannot be said that penalty u/s.270A of the Act, is mandatory in nature. Since, penalty u/s.270 A of the Act, is not mandatory in nature, the AO is required to give an opportunity to the assessee to show cause ‘as to why’ penalty should be levied in terms of sec.274 of the Act, therefore, it is important to see the reasons given by the in the order i n light of show cause notice u/s 274 r.w.s 270A of the Act. Admittedly, the AO issued notice u/s.274 r.w.s.270A of the Act. Sec.274 of the Act deals with the procedure for levy of penalty, wherein, it directs that no order imposing penalty shall be made unless the assessee has been heard or has been given a reasonable opportunity of hearing. Thus, it is evident that the penalty u/s.270A of the Act, cannot be imposed unless the assessee has given a reasonable opportunity and the assessee is being heard. Once, the AO is bound to act to hear the assessee and give reasonable opportunity to explain its case, then, there is no mandatory requirement of imposing penalty, because the opportunity of hearing is not a mere formality, and it is in order to the principle of natural justice. Therefore, in our considered view, the penalty u/s.270A of the Act, is not mandatory and it is based on the facts and explanation placed before the AO.

19. Having said so, let us come back to notice issued u/s.274 r.w.s.270A of the A ct. We have gone through relevant show cause notice issued by the AO, wherein, the AO has stated that ‘under reporting of income and under reporting as a consequence of misreporting of income’. From the above, it is not discernable, whether penalty has been initiated for ‘under reporting of income’ as per section 270A (1) to (6) or ‘misreporting of income’ as per section (8) & (9) of Sec.270A of the Act. The AO issued a notice in a routine manner without specifying under which clause of Sec.270A of the Ac t, the assessee is liable for penalty. Though, the AO while passing the impugned order has imposed penalty u/s.270A(9) of the Act, but no such ground was specified in the show cause notice. In our considered view, notice u/s.274 r.w.s.270A of the Act, is not valid for the reason that the AO did not specify the satisfaction as to whether assessee had either ‘under reporting of income’ or ‘misreporting of income’. In absence of proper notice, which is mandatory, the AO cannot impose penalty, because, it is a clear violation of principles of natural justice. Further, issuing a vague notice without specifying the charge under which limb the proposed penalty proceedings is initiated, would vitiate the entire proceedings, because the assessee was not given an opportunity to explain its case on specific charge. Therefore, in our considered view, penalty levied on the basis of invalid or vague notice is invalid and void ab initio. The concept of ‘under reporting of income’ and ‘misreporting of income’ are two different charges with very clear boundaries. As we have already discussed in earlier part of this order, subsection (2) to (6) of sec Sec.270A of the Act, deals with concept of ‘under reporting of income’, for which separate rate of penalty is provided. Sub- sec.(9) deals with a concept of ‘misreporting of income’ and for this cases separate rate of penalty is provided. Therefore, ‘under reporting of income’ and ‘misreporting of income’ shall not be used interchangeably, nor are they synonymous, but each operates under strict definition and do not overlap each other. Since, ‘under reporting of income’ and ‘misreporting of income’ are two concepts and separate charges, the AO before initiating penalty proceedings should specifically arrive at a satisfaction t o the effect that, for which charge, he has initiated penalty Sec.270A of the Act. In the present case, if you go by the assessment order passed by the AO, there is no satisfaction in respect of initiation of penalty proceedings u/s.270A of the Act, whether it is for ‘under reporting of income and under reporting as a consequence of misreporting of income’ thereof which is clearly evident from the assessment order passed by the AO, where, the AO simply referred to initiation of penalty proceedings u/s.270A of the Act for misreporting of income. Then, said lapse is even continued while issuing show cause notice u/s.274 r.w.s.270A of the Act, where the AO specified ‘under reporting of income and under reporting as a consequence of misreporting of income’, without specifying for which charge the assessee is directed to pay penalty u/s.270A of the Act. There is no whisper as to which limb of Sec.270A of the Act, is attracted and how the ingredients of clause (a) to (f) of sub-sec.(9) of Sec.270A of the Act specified. In absence of such particulars, the mere reference to the word ‘misreporting of income’ in the assessment order or in the show cause notice makes the impugned order manifestly arbitrarily.

20. In the present case, the A.O initiated penalty proceedings under section 270A of the Act for misreporting of income, which is evident from the assessment order passed by the A.O. The misreporting of income referred to in sub- section (8) has Six limbs from (a) to (f). The A.O initiated the penalty proceedings and issued show cause notice under section 274 r.w.s. 270A of the Act, without specifying particular clause under which penalty proceedings has been initiated, whether it is for misrepresentation or suppression of facts or claim of expenditure not substantiated by evidence or failed to record any expenses in the books of account having a bearing on total income etc. Since the additions considered by the A.O for the purpose of levy of penalty under section 270A(9) of the Act, falls under different categories of misreporting, it is the duty of the of the A.O to specifically refer to sub clause and issue a show cause notice to the assessee for its explanation. Since the A.O has not specified in the notice under which clause the assessee company is liable for under reporting of income in consequent to misreporting thereon, the notice issued by the A.O is bad in law and consequent penalty proceedings are abinitio. It is a settled law that under provisions of section 271(1)(c) of the Act, the notice issued for initiating penalty should specifically set out grounds for such initiation as to whether for furnishing any inaccurate particulars of income or concealment of particulars of income. Provisions of section 270A of the Act is para materia to section 271(1)(c) of the Act, because it has two limbs of penalty i.e. one for underreporting of income and another for misreporting of income. Therefore, the A.O is bound to issue show cause notice and specify the charge under which he propose to initiate the penalty proceedings, whether it is for under reporting of income or misreporting of income and in case, it is for misreporting, then he must specify the sub clause provided thereon. Since the show cause notice issued by the A.O is vague and without application of mind, th e entire proceedings become vitiate and consequently, the penalty levied by the A.O cannot be upheld. This legal principle is supported by the decision of the Hon’ble Supreme Court in the case of CIT vs. SSA’s Emerald Meadows (2016) 73 Taxman.com 248 (SC) wherein the SLP filed against the judgement of the Hon’ble Karnataka High Court in the said case was dismissed. The said judgement of the Hon’ble Karnataka High Court was rendered by following the earlier judgment of the same Court in the case of CIT vs. M anjunatha Cotton & Ginning Factory (2013) 35 taxmann.com 250 (Kar.). Therefore, we are of the considered view that, show cause notice issued by the AO u/s.274 r.w.s.270A of the Act, without specifying the charge under which penalty is proposed u/s.270A of the Act, is a clear case of non- application of mind at the time of issuing show cause notice and thus, in absence of specific charge against the assessee, the assessee is not in a position to counter the show cause notice issued by the AO as well as cogent reply to the show cause notice and thus, entire proceedings becomes invalid and ab-initio.

21. The ld. Counsel for the assessee relied upon the decision of Hon’ble Delhi High Court in the case of Prem Brothers Infrastructure LLP (supra), where the Hon’ble Delhi High Court by following the earlier decision in the case of Schneider Electric South East Asia (HQ) Pte Ltd. v. ACIT, International Taxation in WP (C) No.5111 of 2022 dated 28.03.2022, held that in view of vague notice without any whisper as to which limb of section 270A of the Act is attracted and how ingredients of sub- section (9) is satisfied, initiation of penalty u/s.270A of the Act for ‘misreporting of income’ is not only erroneous, but also arbitrary and bereft of any reason and consequently , penalty order passed by the AO, cannot be sustained. The relevant findings of the Hon’ble Delhi High Court are as under:

6. This court in the case of Schneider Electric South East Asia (HQ) PTE Ltd. Vs. ACIT, International Taxation Circle 3(1)(2), New D elhi and Ors. W.P.(C) No. 5111/2022 vide judgment dated 28.03.2022 observed as under:-

“6. Having perused the impugned order dated 9th March, 2022, this Court is of the view that the Respondents’ action of denying the benefit of immunity on the ground that the penalty was initiated under Section 270A of the Act for misreporting of income is not only erroneous but also arbitrary and bereft of any W.P.(C) 7092/2022 Page 4 of 6 reason as in the penalty notice the Respondents have failed to specify the limb – “underreporting” or “misreporting” of income, under which the penalty proceedings had been initiated.

7. This Court also finds that there is not even a whisper as to which limb of Section 270A of the Act is attracted and how the ingredient of sub -section (9) of Section 270A is satisfied. In the absence of such particulars, the mere reference to the word “misreporting” by the Respondents in the assessment order to deny immunity from imposition of penalty and prosecution makes the impugned order manifestly arbitrary.

8. This Court is of the opinion that the entire edifice of the assessment order framed by Respondent No.1 was actually voluntary computation of income filed by the Petitioner to buy peace and avoid litigation, which fact has been duly noted a nd accepted in the assessment order as well and consequently, there is no question of any misreporting.

9. This Court is further of the view that the impugned action of Respondent No.1 is contrary to the avowed Legislative intent of Section 270AA of the Act to encourage/incentivize a taxpayer to (i) fast- track settlement of issue, (ii) recover tax demand; and (iii) reduce protracted litigation.

10. Consequently, the impugned order dated 09th W.P.(C) 7092/2022 Page 5 of 6 March 2022 passed by Respondent No.1 under Section 270AA (4) of the Act is set aside and Respondent No.1 is directed to grant immunity under Section 270AA of the Act to the Petitioner.”

7. This Court is of the opinion that the only addition in the assessment order framed by Respondent No.1 is in respect of disallowance under section 14A of the Act. The Petitioner has made a disallowance of Rs.3,20,14,010/- which was recomputed by the Assessing Officer at Rs.6,82,45,759/- . Thus, this is a case where the amount of underreporting of income is consequent to increase in the disallowance voluntarily estimated by the assessee. This court is conscious of the fact that there can be cases where underreporting of income may result in misreporting of income, however, in peculiar facts of the present case, the underreporting allegedly done by the assessee cannot amount to misreporting as the assessee had furnished all the details of the transactions relating to disallowance made under Section 14A of the Act and the AO as well as assessee has used the same details to arrive at different conclusions i.e. differing quantum of disallowances under Section 14A of the Act. This by no stretch of imagination can be held to be ‘misreporting’.

8. This Court also finds that there is not even a whisper as to which limb of Section 270A of the Act is attracted and how the ingredient of sub-Section 270A is satisfied. In the absence of such particulars, the mere reference to the word “misreporting” by the Respondents in the penalty order to deny immunity from imposition of penalty and prosecution makes the impugned order manifestly arbitrary. W.P.(C)

9. Consequently, the impugned penalty order dated 28th March 2022 passed by Respondent No.1 under Section 270A of the Act is quashed and Respondent No.1 is directed to grant immunity under Section 270AA of the Act to the Petitioner.

22. The appellant had also relied upon the decision of the ITAT, Chennai Benches in the case of Enrica Enterprises Pvt Ltd Vs DCIT (Supra). The Chennai Benches of the Tribunal has considered an identical issue of penalty levied under section 270A of the Act for under reporting of income, in consequence of misreporting thereof and after considering the relevant facts, including the show cause notice issued under section 274 r.w.s . 270A of the Act held as under:

“12. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The AO levied penalty u/s.270A of the Act, for both the assessment years on the ground that the assessee has ‘under reporting of income and under reporting as a consequence of misreporting of income’. The AO invoked provisions of clauses (c) & (d) of Sec.270A(9) of the Act, which deals with claim of expenditure not substantiated by any evidence and recording of any false entry in the books of accounts. The AO has arrived at the above conclusion on the basis of findings in the assessment order, where income admitted by the assessee in the return of income filed in response to notice u/s.153A of t he Act, has been accepted. In the revised return u/s.153A of the Act, the assessee has admitted taxable income of Rs.2,55,35,485/- which is higher than the last return filed u/s.139 of the Act. According to the AO, the assessee has ‘under reporting of inc ome and under reporting as a consequence of misreporting of income’ in respect of marketing expenses, which is clearly evident from information gathered during the course of search coupled with statement recorded from the Director of the assessee company a nd also enquiries conducted with suppliers of ‘gift articles during the course of assessment proceedings. The AO further observed that search was not taken place u/s.132 of the Act and hence, the ‘under reporting of income and under reporting as a consequence of misreporting of income’ would not have come to light. Therefore, the AO opined that it is a clear case of ‘under reporting of income and under reporting as a consequence of misreporting of income’ which attracts provisions of Sec.270A(9) of the Ac t, and thus, levied penalty for both the assessment years for ‘under reporting of income and under reporting as a consequence of misreporting of income’.

13. The facts with regard to seizure of huge unaccounted cash during the course of search on __ was not disputed. It is also an admitted fact that the assessee company has offered additional income of Rs.16.39 Crs. & Rs.23.62 Crs. towards disallowance of estimated marketing expenses @ 1/3rd of total expenses incurred under the head ‘marketing expenses ’ for both the assessment years. The cash seized during the course of search was telescoped against additional income offered by the assessee towards estimated disallowance of marketing expenses. The assessee has filed return in response to notice u/s.15 3A of the Act, for both the assessment years and offered additional income admitted during the course of search in respect of disallowance of marketing expenses and paid taxes. The AO has also accepted retuned income filed by the assessee in response to n otice u/s.153A of the Act, without any further addition and also recorded a clear finding in the assessment order that after going through the circumstances in its entirety, the income offered by the assessee, including estimated disallowance of portion of marketing expenses, is found to be in order and accepted. In other words, there is no separate addition towards marketing expenses, but the assessment has been completed by accepting additional income offered by the assessee towards estimated disallowance of marketing expenses for both the assessment years.

14. In light of above factual back ground, if we examine the order passed by the AO imposing penalty u/s.270A(9) of the Act, it is necessary to refer to provisions of Sec.270A of the Act, and the rea sons given by the AO to impose penalty u/s.270A(9) of the Act. Provisions of Sec.270A of the Act, deals with penalty for ‘under reporting of income and under reporting as a consequence of misreporting of income’. Subsection 1 to 6 of Sec.270A of the Act deals with ‘under reporting of income and under reporting as a consequence of misreporting of income’, has been specified in sub-section 7 to Sec.270A of the Act. Sub- section 8 & 9 deals with ‘under reporting of income and under reporting as a consequence of misreporting of income’ thereof by any person and such case of ‘misreporting of income’ referred to sub- sec.8 has been specified in Sec.9 of Sec.270A of the Act. From the above, it is manifestly clear that provisions of Sec.270A of the Act has two limbs or two charges for which penalty can be levied. The first limb or first charge is ‘under reporting of income and such under reporting of income’ has been specifically referred to in two sub- sections of Sec.270A of the Act. In the present case, these provisions are not relevant because the AO has not invoked under reporting of income. The second limb or charge is ‘under reporting of income as consequence of misreporting of income’ thereof and in the present case, the AO invoked the second limb of provisions of Sec.270A of the Act. Admittedly, these provisions have been substituted by the Finance Act, 2016 w.e.f.01.04.2017 and applicable for AY 2017- 18 onwards. Prior to insertion of Sec.270A of the Act, a similar provision was existed in the statue b y way of sec.271(1)(c) of the Act, for concealment of particulars of income or furnishing of inaccurate particulars of income. Provisions of Sec.271(1)(c) of the Act, was also having two limbs or two charges i.e. i) for concealment of particular of income and ii) furnishing of inaccurate particulars of income. If you go by provisions of Sec. 271(1)(c) of the Act & Sec.270A of the Act, and wordings therein both provisions are similar and paramateria to each other. Although, the term ‘tax evasion’ has been redefined by way of ‘under reporting of income and under reporting as a consequence of misreporting of income’ but it is synonymous concealment of particular of income or furnishing of inaccurate particulars of income. Therefore, it is necessary to examine whether penalty proceedings u/s.270A of the Act, is mandatory in nature and further, such penalty can be invoked without providing an opportunity to the assessee as required u/s.274 of the Act.

15. The order imposing penalty u/s.270A of the Act, is an appealable order u/s.246A of the Act before the First Appellate Authority. If the penalty u/s.270A of the Act, had been mandatory, there have not been any provision of appeal u/s.246A of the Act. Since, the order imposing penalty Sec.270A of the Act, is an appealable order, then, it cannot be said that penalty u/s.270A of the Act, is not mandatory in nature. Since, penalty u/s.270A of the Act, is not mandatory in nature, the AO is required to give an opportunity to the assessee to show cause ‘as to why’ penalty should be levied in terms of sec.274 of the Act. Admittedly, the AO issued notice u/s.274 r.w.s.270A of the Act. Sec.274 of the Act deals with the procedure for levy of penalty, wherein, it directs that no order imposing penalty shall be made un less the assessee has been heard or has been given a reasonable opportunity of hearing. Thus, it is evident that the penalty u/s.270A of the Act, cannot be imposed unless the assessee has given a reasonable opportunity and the assessee is being heard. Once, the AO is bound to act to hear the assessee and give reasonable opportunity to explain its case, then, there is no mandatory requirement of imposing penalty, because the opportunity of hearing is not a mere formality, it is to order to the principle of natural justice. Therefore, in our considered view, the penalty u/s.270A of the Act, is not mandatory and it is based on the facts and merits placed before the AO.

16. Having said so, let us come back to notice issued u/s.274 r.w.s.270A of the Act. We have gone through notice dated 26.07.2021, wherein, the AO has stated that ‘under reporting of income and under reporting as a consequence of misreporting of income’. From the above, it is not discernable whether penalty has been initiated for ‘under reporting of income’ as per section 270A (1) to (6) or ‘misreporting of income’ as per section 8 & 9 of Sec.270A of the Act. The AO issued a notice in a routine manner without specifying under which clause of Sec.270A of the Act, the assessee is liable for penalty. Though, the AO while passing the impugned order has imposed penalty u/s.270A(9) of the Act, but no such ground was specified in the show cause notice dated 26.07.2021. In our considered view, notice u/s.274 r.w.s.270A of the Act, is not a valid f or the reason that the AO did not specify the satisfaction as to whether assessee had either ‘under reporting of income’ or ‘misreporting of income’. In absence of proper notice, which is mandatory, the AO cannot impose penalty, because, it is a clear violation of principles of natural justice, because, issuing a vague notice without specifying the charge under which limb the proposed penalty proceedings is initiated, would vitiate the entire proceedings, because, the assessee was not given an opportunity to explain its case on specific charge. Therefore, in our considered view, penalty levied on the basis of invalid or vague notice is invalid void ab initio. The concept of ‘under reporting of income’ and ‘misreporting of income’ are two different charges with very clear boundaries. As we have already discussed in earlier part of this order, sub- section 2 to 6 of sec Sec.270A of the Act, deals with concept of ‘under reporting of income’, then, separate rate of penalty is provided. Sub-sec.9 deals with a concept of ‘misreporting of income’ and for those a separate rate of penalty is provided. Therefore, ‘under reporting of income’ and ‘misreporting of income’ shall not be used interchangeably nor are they synonymous, but each operates under strict definit ion and do not overlap each other. Since, ‘under reporting of income’ and ‘misreporting of income’ are two concepts and separate charges, the AO before initiating penalty proceedings should specifically arrived at a satisfaction to the effect that, for wh ich charge, he has initiated penalty Sec.270A of the Act. In the present case, if you go by the assessment order passed by the AO, there is no satisfaction in respect of initiation of penalty proceedings u/s.270A of the Act, whether it is for ‘under repor ting of income and under reporting as a consequence of misreporting of income’ thereof which is clearly evident from the assessment order passed by the AO, where, the AO simply referred to initiation of penalty proceedings u/s.270A of the Act. Then, said lapse is even continued while issuing show cause notice u/s.274 r.w.s.270A of the Act, where, the AO specified ‘under reporting of income and under reporting as a consequence of misreporting of income’, without specifying for which charge the assessee is directed to pay penalty u/s.270A of the Act. There is no whisper as to which limb of Sec.270A of the Act, is attracted and how the ingredients of the sub- sec.9 of Sec.270A of the Act specified. In absence of such particulars, the mere reference to the word ‘misreporting of income’ in the assessment order or in the show cause notice makes the impugned order manifestly arbitrarily. Therefore, we are of the considered view that show cause notice issued by the AO u/s.274 r.w.s.270A of the Act, without specifying the charge under which penalty is proposed u/s.270A of the Act, is a clear case of nonapplication of mind at the time of issuing show cause notice and thus, in absence of specific charge against the assessee. The assessee is not in a position to counter the show cause notice issued by the AO as well as cogent reply to the show cause notice. This legal position is strengthened by the decision of the Hon’ble Delhi High Court in the case of Prem Brothers Infrastructure LLP (supra), where the Hon’ble Delhi High Court by following the earlier decision in the case of Schneider Electric South East Asia (HQ) Pte Ltd. v. ACIT, International Taxation in WP (C) No.5111 of 2022 dated 28.03.2022, held that in view of vague notice without any whisper as to which limb of section 270A of the Act is attracted and how ingredients of sub – section 9 is specified, initiation of penalty u/s.270A of the Act for ‘misreporting of income’ is not erroneous but also arbitrary and bereft of any reason and consequently, penalty order passed by the AO, cannot be sustained. The relevant findings of the Hon’ble Delhi High Court are as under:

“6. This court in the case of Schneider Electric South East Asia (HQ) PTE Ltd. Vs. ACIT, International Taxation Circle 3(1)(2), New Delhi and Ors. W.P.(C) No. 5111/2022 vide judgment dated 28.03.2022 observed as under:-

“6. Having perused the impugned order dated 9th March, 2022, this Court is of the view that the Respondents’ action of denying the benefit of immunity on the ground that the penalty was initiated under Section 270A of the Act for misreporting of income is not only erroneous but also arbitrary and bereft of any W.P.(C) 7092/2022 Page 4 of 6 reason as in the penalty notice the Respondents have failed to specify the limb – “underreporting” or “misreporting” of income, under which the penalty proceedings had been initiated.

7. This Court also fin ds that there is not even a whisper as to which limb of Section 270A of the Act is attracted and how the ingredient of sub- section (9) of Section 270A is satisfied. In the absence of such particulars, the mere reference to the word “misreporting” by the Respondents in the assessment order to deny immunity from imposition of penalty and prosecution makes the impugned order manifestly arbitrary.

8. This Court is of the opinion that the entire edifice of the assessment order framed by Respondent No.1 was actually voluntary computation of income filed by the Petitioner to buy peace and avoid litigation, which fact has been duly noted and accepted in the assessment order as well and consequently, there is no question of any misreporting.

9. This Court is further of the view that the impugned action of Respondent No.1 is contrary to the avowed Legislative intent of Section 270AA of the Act to encourage/ incentivize a taxpayer to (i) fast- track settlement of issue, (ii) recover tax demand; and (iii) reduce protracted litigation.

10. Consequently, the impugned order dated 09th W.P.(C) 7092/2022 Page 5 of 6 March 2022 passed by Respondent No.1 under Section 270AA (4) of the Act is set aside and Respondent No.1 is directed to grant immunity under Section 270AA of the Act to the Petitioner.”

7. This Court is of the opinion that the only addition in the assessment order framed by Respondent No.1 is in respect of disallowance under section 14A of the Act. The Petitioner has made a disallowance of Rs.3,20,14,010/- which was recomputed by the Assessing Officer at Rs.6,82,45,759/- . Thus, this is a case where the amount of underreporting of income is consequent to increase in the disallowance voluntarily estimated by the assessee. This court is conscious of the fact that there can be cases where underreporting of income may result in misreporting of income, however, in peculiar facts of the present case, the underr eporting allegedly done by the assessee cannot amount to misreporting as the assessee had furnished all the details of the transactions relating to disallowance made under Section 14A of the Act and the AO as well as assessee has used the same details to arrive at different conclusions i.e. differing quantum of disallowances under Section 14A of the Act. This by no stretch of imagination can be held to be ‘misreporting’.

8. This Court also finds that there is not even a whisper as to which limb of Section 270A of the Act is attracted and how the ingredient of sub – section (9) of Section 270A is satisfied. In the absence of such particulars, the mere reference to the word “misreporting” by the Respondents in the penalty order to deny immunity from imposition of penalty and prosecution makes the impugned order manifestly arbitrary. W.P.(C)

9. Consequently, the impugned penalty order dated 28th March 2022 passed by Respondent No.1 under Section 270A of the Act is quashed and Respondent No.1 is directed to gra nt immunity under Section 270AA of the Act to the Petitioner.

17. At this stage, it is relevant to consider the decision of jurisdictional the Hon’ble Madras High Court in the case of Babuji reported in 430 237 where, the Hon’ble jurisdictional Madras H igh Court in the case of Babuji Jacob v. ITO reported in [2021] 430 ITR 259 (Madras) has dealt with the issue of show cause notice u/s.274 r.w.s.271(1)(c) of the Act, after considering its earlier decision in the case of Sundaram Finance Ltd. v. ACIT reported in [2018] 93 taxmann.com 250, held that issuing a printed form of notice without striking inapplicable portion in the notice and not charging the assessee for particular evasion vitiates the entire penalty proceedings, including the order passed by the AO imposing penalty u/s.271(1)(c) of the Act. A similar view has been taken by the Hon’ble Karnataka High Court in the case of CIT v. Manjunatha Cotton & Ginning Factory reported in [2013] 359 ITR 565, where the issue of show cause notice and consequent penalty proceedings has been dealt in the issue by the Hon’ble Madras High Court and held that penalty proceedings consequent to vague and invalid notice becomes invalid and liable to be quashed. The Hon’ble Supreme Court has upheld the decision of the Hon’ble Supreme Court of Karnataka in the case of CIT v. SSA’s Emerald Meadows reported in [2016] 73 taxmann.com 241. From the ratio of above case laws, it is undisputedly clear that the satisfaction of the AO should be discernable from the show cause notice issued by the AO u/s.274 r.w.s.270A of the Act. In absence of any particular charge for which, the assessee is directed to pay penalty to the entire proceedings becomes invalid and liable to be quashed.

18. In this view of the matter and by following the ratio laid down by the Hon’ble Supreme Court and various High Courts referred to hereinabove, we are of the considered view that show cause notice issued by the AO u/s.274 r.w.s.270A of  the Act, is illegal and liable to be quashed an thus, we quashed t he order of the AO u/s.270A(9) of the Act. The assessment proceedings and penalty proceedings are two separate proceedings. The findings in the assessment proceedings cannot be considered as conclusive and final for the purpose of imposing penalty. The Hon’ble Supreme Court in the case of CIT v. Anwar Ali, reported in [1970] 76 ITR 696 (SC) observed that the findings in assessment proceedings may constitute co- evidence in the penalty proceedings, but it does not follow that penalty is mandatory whenever addition or disallowance is made. Further, the jurisdictional High Court in the case of CIT v. Gem Granites reported in [2013] 86 CCH 160 (Madras), observed that merely because, the assessment proceedings namely the quantum assessment having been confirmed, cannot automatically lead to the conclusion that the penalty proceedings are justified. In other words, there should be an independent finding from the AO regarding under reporting of income or misreporting of income in the penalty proceedings which a lone can lead to conclusion that it is a fit case for levy of penalty.”

23. In the present case, there is no dispute with regard to the fact that the show cause notice issued by the A.O under section 274 r.w.s. 270A of the Act dated 27/03/2023 and 12/06/2 025 is issued without any specific charge as to which clause, whether it is clause (a) or clause (c) or clause (e) of sub section (9) of section 270A of the Act is applicable. Further, in the assessment order also, the A.O simply stated that the penalty proceedings under section 270A is initiated for misreporting of income without any satisfaction as to for which default the assessee is liable to pay penalty under section 270A of the Act. Since the notice issued by the A.O is vague in nature, without satisfying specific charge under which the proposed penalty proceedings are initiated, in our considered view the order passed by the A.O under section 270A of the Act on the basis of vague show cause notice vitiate the entire penalty proceedings. Therefore, in our considered view, penalty levied by the A.O under section 270A(9) of the Act cannot be upheld on this ground itself.

24. Having said so, let us come back whether penalty levied under section 270A of the Act is sustainable in law. Admittedly, the A.O in itiated penalty proceedings under section 270A(9) of the Act, for under reporting of income is in consequence of misreporting thereof. The A.O had considered five additions for the purpose of levy of penalty under section 270A(9) of the Act. The first addi tion considered by the A.O is additional income offered by the assessee towards unaccounted receipts from sale of spent solvent and scraps. There is no dispute that the assessee had admitted additional income of Rs.6,77,03,448/- in the return of income filed under section 153A of the Act. However, finally the additional income offered by the assessee on this account has finally reduced to Rs.2,71,81,379/- and such additional income has been determined on estimation basis. The additional income considered by the A.O towards unaccounted receipts from sale of spent solvent and scraps has been finally determined on the basis of estimation of income, where the Tribunal has sustained unaccounted income from sale of spent solvent and scraps of Rs.2,70,81,379/- by e stimating 40% profit from receipts from sale of spent solvent and scraps. Further, the A.O had considered various expenses incurred in cash and booked under the head travelling and conveyance, foreign travel expenses, purchase of raw material and other expenses for the purpose of levy of penalty under section 270A(9) of the Act. Admittedly, except the additional income from unaccounted receipts from sale of spent solvent and scraps, remaining additions like expenses incurred in cash and booked under the head travelling and conveyance, foreign travel expenses, purchase of raw material and other expenses are recorded in the regular books of account maintained by the assessee for the A.Y under consideration. The disallowed above expenditures either for not substantiating said expenditure with supporting evidence or for violation of section 40A(3) and for personal nature of expenses. The assessee explained that mere admission of additional income towards sale of spent solvent and scraps and also disallowance of unsubstantiated expenses cannot per se lead to a conclusion that the assessee had under reported income is in consequence of misreporting thereof. Admittedly, there is no finding from the A.O in the assessment order about the incorrectness in additional income admitted by the assessee towards unaccounted receipts and spent solvent and scraps and also unsubstantiated expenses incurred in cash. The A.O has accepted the additional income declared by the assessee without any modification and also not made any observation with regard to expenditure claimed by the assessee and its correctness. Therefore, it is necessary to examine the argument of the learned Counsel for the assessee in light of sub- section (6) of section 270A which deals with a case, where the under reported income for the purpose of this section shall not include the amount of income in respect of which the assessee offers an explanation and the A.O is satisfied that the explanation is bonafide and the assessee has disclosed all the material facts to substantiate the explanation offered. 25. Sub- section (6) of section 270A deals with the cases of income determined on the basis of estimation. In the present case, admittedly, the addition considered by the A.O for the purpose of levy of penalty unde r section 270A of the Act in respect of unaccounted receipts from sale of spent solvent and scraps is determined on the basis of estimation only. Further, the addition considered by the AO towards unsubstantiated expenditure incurred in cash and accounted in the books are also on the basis of books of account maintained by the assessee. The A.O neither made out a case of incorrectness in the books of account nor find fault with the explanation of the assessee. Since the explanation offered by the assessee i s bonafide and the assessee has disclosed all the material facts to substantiate the explanation, in our considered view, mere disclosure of additional income in the return of income filed under section 153A of the Act does not warrants levy of penalty under section 270A of the Act. Further, other additions considered by the AO for levy of penalty u/s 270A are various expenditure incurred in cash and accounted under the heads travelling and conveyance, foreign travel expenses and other expenses. Admittedly, these expenditures have been identified from regular books of accounts of the assessee. Further, the above expenditures are supported by necessary bills and vouchers. The only observation of the AO is above expenditures had been incurred in cash. In our considered view, expenditure incurred in cash, per se does not lead to a cases of unsubstantiating nature of expenses. Since, the assessee explained the expenditure in cash and further, the explanation of the assessee is bonafied, in our considered view, the case of the assessee clearly falls under sub section (6) of section 270A of the Act, and therefore, the A.O ought not to have levied the penalty under section 270A of the I.T. Act, 1961. Therefore, on this ground itself, penalty levied by the AO cannot be sustained.

26. Coming to ground Nos. 5 & 6 of assessee’s appeal, which relates to challenging the levy of penalty under section 270A(9) of the Act, in light of return of income filed in response to notice under section 153A of the Act and income returned thereon and the assessment order passed by the A.O under section 143(3) r.w.s. 153A of the Act dated 31/03/2023 and income assessed thereon. The learned Counsel for the assessee argued that the admission of income during the course of search proceedings and filed by return of income under section 153A of the Act does not lead to under reporting is in consequence of misreporting of income for the purpose of section 270A(9) of the Act. The learned Counsel for the assessee had also supported his argument in light of certain judicial precedents including the decision of the Hon’ble Gujarat High Court in the case of Kirit Dahyabhai Patel vs. Assistant Commissioner of Income Tax (Supra) and the decision of the Hon’ble Delhi High Court in the case of PCIT vs. Pr. CIT vs. Neeraj Jindal (Supra). The Hon’ble Delhi High Court had considered an identical issue of levy of penalty under section 271(1)(c) of the Act income filed under section 153A of the Act, and after considering relevant facts had held as under:

“21. Thus, it is clear that when the A.O. has accepted the revised return filed by the assessee under Section 153A, no occasion arises to refer to the previous return filed under Section 139 of the Act. For all purposes, including for the purpose of levying penalty under Section 271(1)(c) of the Act, the return that has to be looked at is the one filed under Section 153A. In fact, the second proviso to Section 153A(1) provides  that “assessment or reassessment, if any, relating to any assessment year falling within the period of six assessment years referred to in this sub- section pending on the date of initiation of the search under Section 132 or making of requisition under Section 132A, as the case may be, shall abate.” What is clear from this is that Section 153A is in the nature of a second chance given to the assessee, which incidentally gives him an opportunity to make good omission, if any, in the original return. Once the A.O. accepts the revised return filed under Section 153A, the original return under Section 139 abates and becomes non- est. Now, it is trite to say that the “concealment” has to be seen with reference to the return that it is filed by the assessee. Thus, for the purpose of levying penalty under Section 271(1)(c), what has to be seen is whether there is any concealment in the return filed by the assessee under Section 153A, and not vis-a vis the original return under Section 139.”

27. A similar view has been taken by the Hon’ble Gujrat High Court in the case of Kirit Dahyabhai Patel vs. Assistant Commissioner of Income Tax (Supra), where under identical set of facts and in light of penalty levied under section 271(1)(c) of the Act, on the basis of difference between assessed income and income returned as per return of income filed under section 153A of the Act had held as under:

“13. Considering the facts and circumstances of the case and also considering the decisions relied upon by learned senior advocat e for the appellant, we are of the considered opinion that the view taken by the Tribunal is erroneous. The CIT (A) rightly held that it is not relevant whether any return of income was filed by the assessee prior to the date of search and whether any inco me was undisclosed in that return of income. In view of specific provision of Section 153A of the I.T. Act, the return of income filed in response to notice under Section 153(a) of the I.T. Act is to be considered as return filed under Section 139 of the A ct, as the Assessing Officer has made assessment on the said return and therefore, the return is to be considered for the purpose of penalty under Section 271(1)(c) of the I.T. Act and the penalty is to be levied on the income assessed over and above the income returned under Section 153A, if any.

14. Further, in the present case, it appears from the record that the assessees had satisfied all the conditions which are required for claiming immunity from payment of penalty under Section 271(1) of the Act. The provision does not specify any time limit during which the aforesaid amount i.e., the amount of penalty with interest has to be paid. Admittedly when the assessees herein have paid the entire amount with interest, the Assessing Officer ought to have gr anted them immunity available under Section 271(1)(C) of the Income Tax Act.”

28. The sum and substance of ratios laid down by the Hon’ble Delhi High Court in the case of Pr. CIT vs. Neeraj Jindal (Supra) and The Hon’ble Gujrat High Court in the case of Kirit Dahyabhai Patel vs. Assistant Commissioner of Income Tax (Supra) is that, once there is no difference between the assessed income and returned income as per the return of income filed under section 153A of the Act, then for the purpose of levy of penalty under section 271(1)(c) of the Act, what is to be seen whether any concealment in the return filed by the assessee under section 153A of the Act and not vis-à- vis the original return filed under section 139 of the Act. The Hon’ble Courts further held that once the A.O accepted the revised return filed by the assessee under section 153A of the Act, no occasion arises to refer to the previous return filed under section 139 of the Act. For all the purpose including for the purpose of levy of penalty, the return that has to be looked at is one filed under section 153A (1) of the Act, and any return filed in response to notice under section 153A of the Act shall so far as be treated as such returns where a return is required to be furnished under section 139 of the Act. Once the A.O accepted the revised return filed under section 153A of the Act, then under reporting of income if any should be considered in light of assessed income and returned income as per section 153A of the Act, and if there is no difference between the assessed income and returned income, the question of under reporting of income does not arise for the purpose of section 270A of the Act.

29. In the present case, going by the facts available on record, we find that the assessee had admit ted additional income in the course of search and also filed return of income in response to notice under section 153A of the Act and disclosed additional income offered during the course of search and the same has been accepted by the A.O without any further addition. In other words, there is no difference between the income returned as per the return of income filed in response to notice under section 153A of the Act on 2/11/2021 which was at Rs.67,30,91,940/- and assessed income as per assessment order under section 143(3) r.w.s. 153A of the act dated 31/03/2023, it was at Rs.67,30,91,940/- . Therefore, as per the provisions of section 270A of the Act, the amount of under reported income shall be in a case where income has been assessed for the first time, if return has been furnished, the difference between the amount of income assessed and the amount of income determined u/s 143(1) of the Act. Since there is no provision under the Act to assess or to process the return of income filed in response to notic e under section 153A as per the provisions of section 143(1) of the Act and further once the return of income filed under section 153A of the Act, has been treated as return filed u/s 139(1), in our considered view when when there is no difference between the assessed income and the returned income, the concept of under reporting of income cannot be applied for the purpose of levy of penalty under section 270A of the Act. Therefore, in our considered view, on this ground also, the penalty levied under section 270A of the Act cannot be sustained.

30. In this view of the matter and considering the facts and circumstances of the case and also by considering the ratios of various case laws discussed herein above, we are of the considered view that penalty levied by the A.O under section 270A(9) of the Act is unsustainable in law. Thus, we direct the A.O to delete the penalty under section 270A(9) of the Act for the A.Y. 2018-19”

20. In this view of the matter and considering facts and circumstances of the case and also by following the decision of coordinate bench of ITAT, in the case of M/s. MSN Laboratories Private Limited v. ACIT (supra), we are of the considered vie w that the order passed by the Ld.AO levying the penalty under section 270A(9) of the Act is invalid because of vague show- cause notice issued under section 274 r.w.s 270A of the Act.

21. Coming back to another aspect of the issue, the assessee has challenged levy of penalty under section 270A of the Act, on the ground of invalid assessment order passed by the Ld.AO. The Learned Counsel for the assessee referring to Assessment Order passed by the Ld.AO under section 143(3) of the Act, submitted that, the Assessment Order passed by the Ld.AO is void ab initio, because, the Ld.AO passed the Assessment Order under section 143(3) of the Act instead of section 143(3) r.w.s. 148 of the Act and consequently the very foundation for levy of penalty on the basis of Assessment Order which is invalid and therefore th e penalty order passed by the Ld.AO under section 270A of the Act is also invalid and liable to quashed. We find that, in the present case, assessment has been made under section 143(3) of the Act on the basis of search conducted on 12.12.2022. Admittedly, the present assessment year is one year before the year of search and in the ordinary course, the Ld.AO ought to have proceed to assess and pass the Assessment Order under section 143(3) r.w. s 148 of the Act by following due procedure. Further, once the re is a search, immediately preceding assessment years up to three assessment years, and beyond three assessment years and upto 10 assessment years, the Ld.AO should frame Assessment on the basis of relevant reasons recorded on the basis of incriminating material found, if any, during the search. In the present case, the Ld.AO passed the Assessment Order under section 143(3) of the Act by issuing notice under section 143(2) of the Act. Since, the Ld.AO has not followed the due procedure and passed the Assessment Order under section 143(3) r.w.s.148 of the Act, in our considered view, the Assessment Order passed by the Ld.AO becomes invalid. Although, the assessee has not challenged the Assessment Order, but the validity of assessment can b e challenged in collateral proceedings like penalty proceedings as held by the ITAT, Kolkata Bench, Third Member decision in the case of Shri Valley Refractories Limited v. DCIT in ITA 1102/KOL/2023, wherein, it has been clearly held that even in the penalty proceedings, the assessee can challenge the validity of the assessment proceedings, though the assessee has not challenged the validity of assessment proceedings before the Appellate Authorities.

22. In the present case, the assessee has admitted additional income towards cash found during the course of search and also paid taxes and therefore he was not having any opportunity to question validity of assessment order passed by the Ld.AO. Since the Ld.AO has levied penalty under section 270A(9) of the Act on additional income offered by the assessee, the assessee got an opportunity for the first time to question the validity of the assessment proceedings, and, therefore in our considered view, there is no bar in questioning the validity of the assessment proceedings in a collateral proceedings like penalty proceedings. Since the foundation for levy of penalty under section 270A is the assessment passed by the Ld.AO and further if the assessment order passed by the Ld.AO is invalid, for any reasons, including the incorrect assumption of jurisdiction or incorrect application of mind, then, the said assessment proceedings become invalid consequently any penalty proceedings initiated on the basis of invalid assessment proceedings also becomes void ab initio and liable to be quashed. Therefore, on this count also the penalty imposed by the Ld.AO under section 270A(9) of the Act cannot be upheld. Thus, we direct the Ld.AO to delete the penalty levied under section 270A(9) of the Act.

23. Coming back to merits of the issue, the Ld.AO levied penalty under section 270A(9) of the Act, on additional income offered by the assessee during the course of search towards undisclosed cash found and seized which has been explained out of unaccounted professional receipts. According to the Ld.AO, had the search not been taken place, the assessee would not have disclosed true and correct income for the relevant assessment year, and, therefore, observed that, arguments of the assessee that voluntary surrender of income does not automatically leads to imposition of penalty under section 270A of the Act for under reporting of income is in consequence of misreporting thereof, cannot be accepted. Ld. CIT(A), strengthened the order of the Ld.AO by taking support from the decision of the Hon’ble Supreme Court in the case of MAK Data (P.) Ltd. v. CIT (supra), and, in Para No.6.6 observed that, voluntary surrender made after detection of undisclosed income does not grant immunity from penalty and that “voluntary disclosure” cannot substitute a credible explanation. In our considered view, the Ld. C IT(A) misread the ratio laid down by the Hon’ble Supreme Court in the case of MAK Data (P.) Ltd. v. CIT (supra), because the above case deals with the issue of Mensrea and in the context of the Mensrea, the Hon’ble Supreme Court held that Mens rea is not a relevant criteria where penalty under section 271(1)(c) of the Act can be levied, and, what is important is furnishing of inaccurate particular or concealment of particulars of income. We further note that, the Hon’ble Supreme Court in the said case vi de Para No. 9 of the order held that, it had been the intention of the assessee to make full and true disclosure of income, it would have filed the return declaring the income including of the amount which was surrendered during the course of assessment proceedings. In the present case, the appellant has admitted additional income towards undisclosed professional receipts and also disclosed the additional income in the statement of additional income and paid taxes, before the Ld.AO completed the assessment. Further, the Ld.AO while finalizing the assessment, for the assessment year under consideration, accepted such surrendered income without making any observations. Therefore, in our considered view, the Ld.AO having accepted the additional income disclosed by the assessee, erred, in holding that the assessee has under reported income is in consequence of misreporting, which attracts penalty under section 270A(9) of the Act. We further note that, the Hon’ble Supreme Court in the case of Shadilal Sugar an d General Mills Ltd., v. CIT (1987) 168 ITR 705, where it has been held that, merely aggreging to an addition does not automatically imply concealment or furnishing of inaccurate particulars; an assessee may accept an addition for several reasons such as a requires the Revenue to prove deliberate concealment, and a voluntary or agreed addition cannot by itself, constitute the basis for penalty. Therefore, in our considered view, when the assessee has admitted additional income disclosed during the course of search towards cash found and seized and also paid taxes, the Ld.AO ought not to have invoked the provisions of section 270A of the Act and levy penalty for misreporting of income. Therefore, on this count also the penalty levied by the Ld.AO under section 270A(9) of the Act cannot be upheld.

24. Coming back to penalty imposed under section 271AAD of the Act. T he provisions of section 271AAD deals with penalty for false entry, etc., in books of accounts, and, as per the above provisions of section 271AAD of the Act, if during any proceedings under this Act, it is found that in the books of account maintained by any person there is a false entry, or an omission of any entry which is relevant for computation of total income of such person, to evade tax liability, then the Ld.AO shall levy penalty a sum equal to the a aggregate amount of such false or omitted entry. For the purpose of this section, false entry includes forged or falsified documents such as a false invoice or, in general, a false piece of documentary evidence; or invoice in respect of supply or receipt of goods or services or both issued by the person or any other person without actual supply or receipt of such goods or services etc. The purpose of inserting of section 271AAD has been explained by the Memorandum Explaining the provisions in the Finance Bill 2020 and as per Clause 98, been clearly laid down, that in the recent pas t after the launch of Goods & Services Tax, several cases of fraudulent input tax credit claim have been caught by the GST authorities. In these cases, fake invoices are obtained by suppliers registered under GST to fraudulently claim input tax credit and GST liability. They only issue invoices without actually supplying any goods or services. Therefore, it is proposed to introduce a new provision in the Act to provide for a levy of penalty on a person, if it is found during any proceedings unde r the Act that in the books of accounts maintained by him there is a (i) false entry or (ii) any entry relevant for computation of total income of such person has been omitted to evade tax liability. From the Memorandum Explaining the provisions in the Finance Bill, 2020, it is very clear the provisions of section 271AAD has been brought into statute to curb the menace of fraudulent claim of input tax credit on the basis of tax invoice without actual supply of goods. Therefore, the above provision cannot be invoked to the cases like the assessee, where the assessee has found to be owner of cash during the course of search and the same has been claimed to have been earned out of his professional income. Therefore, in our considered view, the penalty order passed by the Ld.AO under section 271AAD, equal to the amount of income admitted by the assessee towards cash found during the course of search in the category of omission to record entry in the books of accounts which is relevant for computation of total income is contrary to the purpose of insertion of section 271AAD of the Act and cannot be upheld. The Ld. CIT(A) without appreciating the re sustained the penalty order passed by the Ld.AO. Therefore, we direct the Ld.AO to delete the penalty levied under section 271AAD of the Act.

25. Coming back to another aspect of the issue, the assessee has challenged levy of penalty under section 271AAD of the Act, on the ground of invalid assessment order passed by the Ld.AO. The Learned Counsel for the assessee referring to Assessment Order passed by the Ld.AO under section 143(3) of the Act, submitted that, the Assessment Order passed by the Ld.AO is void ab initio, because, the Ld.AO passed the Assessment Order under section 143(3) of the Act instead of section 143(3) r.w.s. 148 of the Act and consequently the very foundation for levy of penalty on the basis of Assessment Order which is invalid and therefore the penalty order passed by the Ld.AO under section 271AAD of the Act is also invalid and liable to quashed. We find that, in the present case, assessment has been made under section 143(3) of the Act on the basis of search conducted on 12.12.2022. Admittedly, the present assessment year is one year before the year of search and in the ordinary course, the Ld.AO ought to have proceed to assess and pass the Assessment Order under section 143(3) r.w. s 148 of the Act by following due procedure. Further, once there is a search, immediately preceding assessment years up to three assessment years, and beyond three assessment years and upto 10 assessment years, the Ld.AO should frame assessment on the basis of relevant reason s recorded on the basis of incriminating material found, if any, during the search. In the present case, the  Ld.AO passed the Assessment Order under section 143(3) of the Act by issuing notice under section 143(2) of the Act. Since, the Ld.AO has not followed the due procedure and passed the Assessment Order under section 143(3) r.w. s.148 of the Act, in our considered view, the Assessment Order passed by the Ld.AO becomes invalid. Although, the assessee has not challenged the Assessment Order, but the validity of assessment can be challenged in collateral proceedings like penalty proceedings as held by the ITAT, Kolkata Bench, Third Member decision in the case of Shri Valley Refractories Limited v. DCIT in ITA 1102/KOL/2023, wherein, it has been clearly held that even in the penalty proceedings, the assessee can challenge the validity of the assessment proceedings though the assessee has not challenged the validity of assessment proceedings before the Appellate Authorities.

26. In the present case, the assessee has admitted additional income towards cash found during the course of search and also paid taxes and therefore he was not having any opportunity to question validity of assessment order passed by the Ld.AO. Since the Ld.AO has levied penalty under section 271AAD of the Act on additional income offered by the assessee, the assessee got an opportunity for the first time to question the validity of the assessment proceedings, and, therefore in our considered view, there is no bar in questioning the validity of the assessment proceedings in a collateral proceedings like penalty proceedings. Since the foundation for levy of penalty under section 271AAD passed by the Ld.AO and further, if the assessment order passed by the Ld.AO is invalid, for any reasons, including the incorrect assumption of jurisdiction or incorrect application of mind, then, the said assessment proceedings become invalid and consequently any penalty proceedings initiated on the basis of invalid assessment proceedings also becomes void ab initio and liable to be quashed. Therefore, on this count also the penalty imposed by the Ld.AO under section 271AAD of the Act cannot be upheld. Thus, we direct the Ld.AO to delete the penalty levied under section 271AAD of the Act.

27. In the result, appeals filed by the assessee in ITA Nos.172/VIZ /2026 and ITA No.173/VIZ/2026 are allowed.

Order pronounced in the open court on 21st August, 2026.