2025 (2) TMI 1221 - AT - Income Tax

Penalty proceedings u/s 271AAB - non specification of clear charge - HELD THAT - As in the notice AO has mentioned you have disclosed/ undisclosed income u/s 132(4) of the Act during specified previous year and in subsequent notice AO has mentioned a search was conducted in your case and you were found to have undisclosed income. AR is very correct in submitting that the notices issued by AO do not specify the exact charge of default committed by assessee or the clause/limb of section 271ABB under which the assessee s case would fall. From these notices it is discernible that the AO was not even clear in his mind as to the default committed by assessee. Therefore the case of assessee is certainly covered by decisions of SSA S Emerald Meadows 2016 (8) TMI 1145 - SC ORDER Kulwant Singh Bhatia 2018 (5) TMI 960 - MADHYA PRADESH HIGH COURT Shri Ashok Bhatia 2020 (2) TMI 261 - ITAT INDORE and Mukesh Kumar Ranka. Assessee appeal allowed.

Summary

ISSUES:

Whether the penalty proceedings under section 271AAB of the Income-tax Act, 1961 can be sustained when the penalty notice issued under section 274 does not specify the exact charge or the specific clause of section 271AAB(1) under which penalty is proposed.Whether the penalty under section 271AAB is mandatory or discretionary upon the Assessing Officer.Whether a vague or cryptic penalty notice under section 274 read with section 271AAB(1) is valid and not a nullity.Whether the penalty order passed beyond the prescribed time limit under section 275(1)(c) is valid.Whether a revised claim of deduction under section 80-IA can amount to "undisclosed income" within the meaning of section 271AAB and attract penalty.Whether the penalty rate of 60% under section 271AAB(1)(b) is applicable to search initiated before 15.12.2016 or the earlier rate of maximum 30% applies.

RULINGS / HOLDINGS:

On the issue of specificity of penalty notice: The Court held that the penalty notice issued under section 274 read with section 271AAB must be clear and specify the exact charge or clause of section 271AAB(1) under which penalty is proposed. The notices in question merely stated that the assessee "have disclosed/undisclosed income u/s 132(4)" or that "a search was conducted and undisclosed income was found," without specifying the precise limb (a), (b), or (c) of section 271AAB(1). This vagueness rendered the penalty notice defective and invalid, making the penalty proceedings a nullity.Regarding the mandatory or discretionary nature of penalty under section 271AAB: The Court noted that penalty under section 271AAB is not mandatory but discretionary, and the Assessing Officer must exercise discretion reasonably and not arbitrarily.On the validity of vague or cryptic penalty notices: The Court emphasized that a penalty notice must convey to the assessee the exact charge to enable effective response. Vague notices that fail to specify the clause of section 271AAB or the nature of default violate principles of natural justice and are invalid.Concerning time limits under section 275(1)(c): The Court did not adjudicate this ground as the penalty proceedings were quashed on the ground of defective notice.On whether revised claims under section 80-IA amount to undisclosed income: The Court did not decide this issue as the penalty proceedings were quashed at the threshold.Regarding applicability of penalty rates pre- and post-amendment dated 15.12.2016: The Court did not rule on this issue due to quashing of penalty proceedings.

RATIONALE:

The Court applied the statutory framework of section 271AAB of the Income-tax Act, 1961, which prescribes penalties for concealment of income in cases where search has been initiated under section 132. Section 271AAB(1) contains three mutually exclusive clauses (a), (b), and (c), each prescribing different penalty rates based on the nature of disclosure and compliance by the assessee.Section 274 mandates that no penalty order shall be passed without issuing a show-cause notice and giving the assessee a reasonable opportunity of being heard. The notice must be sufficiently clear and specific to enable the assessee to understand the charge and respond effectively.The Court relied on a consistent line of judicial precedents, including decisions of the Hon'ble Supreme Court, jurisdictional High Courts, and various ITAT Benches, which held that a penalty notice that fails to specify the exact charge or clause under which penalty is levied is defective and invalid. Notably, the Court referred to decisions such as CIT vs. SSA's Emerald Meadows, Pr.CIT vs. Kulwant Singh Bhatia, Shri Ashok Bhatia vs. DCIT, and Mukesh Kumar Ranka vs. ACIT, which emphasize the requirement of specificity in penalty notices under section 271AAB.The Court observed that the notices issued in the present case were vague, did not specify the clause of section 271AAB(1), and thus failed to inform the assessee of the precise nature of the alleged default. This failure denied the assessee a reasonable opportunity of hearing, violating principles of natural justice.The Court distinguished decisions relied upon by the Revenue which pertained to section 271(1)(c) or where the facts were materially different, underscoring that the present issue relates specifically to section 271AAB.Due to the fundamental defect in the penalty notice, the Court quashed the penalty proceedings at the threshold on legality grounds without adjudicating other grounds raised by the assessee.