Penalty u/s 271AAB quashed for non-mentioning specific limb in show cause notice

ITAT quashed penalty u/s 271AAB for non-mentioning of specific limb in the show cause notice

In a recent judgment, Delhi ITAT quashed penalty u/s 271AAB for non-mentioning of specific limb in the show cause notice and following decision of Hon’ble Supreme Court that the construction which is favourable to the assessee is to be adopted. 

ABCAUS Case Law Citation:
4372 (2025) (01) abcaus.in ITAT

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming the levy of penalty u/s. 271AAB of the Income Tax Act, 1961 (the Act).

The return of income was originally filed u/s. 139(1) of the Act. Pursuant to the search and seizure operation conducted. The assessee declared additional income on account of investment in construction / renovation of his house and additional income for cash found and seized during the search. 

The assessment was completed u/s 143(3) r.w.s. 153B of the Act. The AO initiated penalty proceedings u/s. 271AAB of the Act on additional income offered pursuant to the search by treating the same to fall within the ambit of “undisclosed income” as defined in section 271AAB of the Act.  In the penalty show cause notices, the AO had not specified under which limb he is initiating the penalty proceedings i.e. whether the penalty proceedings are initiated in accordance with section 271AAB (a) or (b) or (c) of the Act.

The moot question that arose for consideration by ITAT was as to whether non-mentioning of specific limb in the penalty show cause notice for which penalty proceeding u/s 271AAB of the Act was initiated on the assessee would become fatal to the penalty proceeding per se?

The Tribunal observed that assessee had to pay different amount of penalty depending upon the specific limb where his case falls. 

The Tribunal further observed that this issue is no longer res-integra in view of the decision of Hon’ble Madras High Court. The Hon’ble High Court observed that the Assessing Officer should point out to the assessee as to under which of the three clauses, he chooses to proceed against the assessee so as to enable the assessee to give an effective reply. Since the same has not been mentioned, the assessee had been denied reasonable opportunity to put forth their submissions. Accordingly, the Madras High Court following the judgment of the Karnataka High Court in the cases of Manjunatha Cotton and Ginning Factory and SSA’s Emerald Meadows dismissed the appeal of the Revenue.

In the instant case, the Tribunal noted that from the notices it was very clear that the AO had not mentioned the specific limb on which the penalty proceedings u/s. 271AAB is sought to be initiated by him. The ratio laid down in the aforesaid decision of the Hon’ble Madras High Court squarely applied to the case.

The Revenue had vehemently relied on the order of Hon’ble Allahabad High Court which decision was rendered in favour of the revenue. 

The Tribunal stated that the decision of Allahabad High Court had been duly considered and distinguished on facts by the Hon’ble High Court of Allahabad in the decision relied upon.  Further both the decisions of Hon’ble Madras High Court and Hon’ble Allahabad High Court, being non jurisdictional High Courts, qua the assessee, as per the decision of Hon’ble Supreme Court, the construction which is favourable to the assessee is to be adopted. 

Therefore, the Tribunal held that the decision of Hon’ble Madras High Court needed to be followed in the instant case and respectfully following the same, the levy of penalty was cancelled for issuance of defective penalty show cause notice thereby vitiating the entire penalty proceedings. 

Accordingly the appeal was allowed.

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