2025 (7) TMI 1751 - AT - Income Tax

Penalty u/s 271AAB(1A) - assessee during the course of search had admitted the undisclosed sales - effect of non specification of clear charge - assessee in the present case has admitted the gross profit at the time of search which was not recorded in the books and GST on such sales was also not recorded in the books of accounts Whether in absence of mentioning the specific limb for levy of penalty u/s 271AAB(1A) such penalty notice is invalid and the subsequent proceedings are also invalid? - HELD THAT - We find an identical issue had come up in the case of PCIT vs. Shri R. Elangovan 2021 (4) TMI 1131 - MADRAS HIGH COURT once the provisions get attracted it is incumbent on the part of the AO to specify as to under which clause in Section 271AAB(1) of the Act he intends to proceed against the assessee. In the instant case in the absence of such material in the penalty notice it has to be held that the notice is defective. We find in the case of Shri Naveen Goswami 2025 (3) TMI 800 - ITAT DELHI has also quashed the penalty proceedings initiated u/s 271AAB of the Act on the ground that the failure on the part of the Assessing Officer in not pinpointing the relevant limb of section 271AAB(a) to (c) vitiates the entire proceedings. Therefore in absence of non-mentioning of the relevant limb u/s 271AAB(a) to (c) the penalty proceedings initiated by the Assessing Officer are not in accordance with law and therefore the same are liable to be quashed. As under the same set of facts the AO for assessment year 2020-21 has not levied any penalty u/s 271AAB of the Act. Although the principles of res judicata do not apply to the tax proceedings however the Courts are consistently holding that when the AO has dropped the penalty proceedings for one assessment year on same set of facts for some lapse the AO could not take a different stand for another year. We find the Mumbai Bench of the Tribunal in the case of Orient Press Ltd. 2005 (6) TMI 215 - ITAT BOMBAY-F has held that the Assessing Officer cannot take different stand for 2 different years under same set of facts. It is the settled proposition of law that the assessment proceedings and penalty proceedings are distinct and separate. An assessee can always make fresh argument during the penalty proceedings which was not taken during the assessment proceedings. It is also the settled proposition of law that the addition made during assessment proceedings do not automatically attract the levy of penalty. Since the sale price as per the seized documents which is inclusive of GST almost tallies with the invoices as per the accounted sales and the gross profit rate declared by the assessee on account of such accounted sales also matches with the unaccounted sales therefore the GST paid during the year in our opinion has to be allowed as deduction from the gross profit while computing the penalty. When the search took place the accounts of the assessee were not closed and the return was also not due. The assessee filed the return of income and the same was accepted without any further addition / disallowance. Under these circumstances if the GST for the impugned assessment year as well as the GST for the preceding assessment year which was not claimed from the undisclosed profit of assessment year 2020-21 but paid during the assessment year 2021-22 is excluded then no undisclosed income remains with the assessee for levy of penalty. CIT(A) should have deleted the entire penalty levied by the Assessing Officer instead of giving part relief. In this view of the matter the grounds raised by the Revenue are dismissed and the grounds raised by the assessee are allowed.

Summary

ISSUES:

Whether penalty under section 271AAB(1A) of the Income Tax Act, 1961 is leviable on undisclosed income admitted during search proceedings but declared in the return filed before the due date.Whether the penalty notice issued under section 274 read with section 271AAB is valid if it does not specify the exact clause of section 271AAB(1A) under which penalty proceedings are initiated.Whether GST paid on undisclosed sales should be deducted from the gross profit while computing undisclosed income for penalty under section 271AAB(1A).Whether interest paid on delayed GST payment should be considered while computing undisclosed income for levy of penalty under section 271AAB(1A).Whether penalty can be levied for the assessment year when no penalty was levied for a preceding year on the same facts.

RULINGS / HOLDINGS:

The penalty under section 271AAB(1A) is leviable on "undisclosed income" which means income not recorded in the books of account before the date of search but found during search; admission of undisclosed income in statement under section 132(4) and declaration in return filed after search but before due date does not exclude levy of penalty.The penalty notice issued under section 274 read with section 271AAB is invalid if it fails to specify the exact clause (a) or (b) of section 271AAB(1A) under which penalty is proposed, as this omission denies reasonable opportunity to the assessee; such defect vitiates the penalty proceedings and renders them liable to be quashed.The undisclosed income for penalty purposes must be computed after deducting GST paid on such undisclosed sales from the gross profit declared, since the sales were inclusive of GST and GST payment is directly related to unaccounted sales; penalty should be levied on net profit after GST deduction.The interest paid on delayed GST payment is compensatory in nature and not directly related to undisclosed income; hence, it should not be deducted while computing undisclosed income for penalty levy under section 271AAB(1A).Where penalty was not levied by the Assessing Officer for a preceding assessment year on identical facts, the Assessing Officer cannot take a contrary stand and levy penalty for the subsequent assessment year; consistency in approach is required.

RATIONALE:

The Court applied the definition of "undisclosed income" as per Explanation to section 271AAB, which includes income not recorded in books before search but found during search, supported by the assessee's admission under section 132(4) and subsequent declaration in return.The Court relied on the binding decision of the Madras High Court holding that penalty notices under section 271AAB must specify the exact clause under which penalty is levied to enable effective response, extending principles from analogous decisions on section 271(1)(c); failure to do so results in defective notice and invalid penalty proceedings.The Court examined the accounting policy and seized documents showing that sales were inclusive of GST; since GST was paid and debited to Profit & Loss Account, it forms part of the gross profit figure and must be deducted to arrive at true undisclosed income for penalty computation.The Court distinguished GST interest payment as unrelated to undisclosed income and thus excluded it from deduction in penalty calculation.The Court followed precedents emphasizing that the Assessing Officer cannot adopt inconsistent positions on penalty for different assessment years on identical facts, upholding principles of fairness and consistency in tax administration.