DY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2(1), NAGPUR, NAGPUR vs. OM SHIVAM BUILDCON PRIVATE LIMITED, NAGPUR

PER PAWAN SINGH, JUDICIAL MEMBER:

oflearned CIT(A) – 3, Nagpurboth dated 13.06.2023 for Assessment Year (AY)

2017-18. In ITA No. 282/Nag/2023, the assessee has challenged the validity of

penalty levied under section 271AAB of Rs. 60,31,056/- being penalty @ 10% of

undisclosed income admitted in the statement recorded under section 132(4). In

ITA No. 280/Nag/2023, the assessee has challenged the validity of order passed

under section 154 dated 30.09.2019 in rectifying the penalty levied on

13.02.2019 whereby penalty was increased @ 60% of undisclosed income

admitted in a statement under section 132(4). Both the appeals are inter-

connected hence clubbed, heard together and are decided by common order to avoid the conflicting decisions. In ITA No. 282/Nag/2023, the Revenue has raised

following grounds of appeal:

“1. On the fact and in circumstances of the case, the Ld. CIT(A) erred in deleting the penalty proceedings u/s 271AAB of the I. T. Act, 1961, levied by the AO of Rs. 60.31.056/- 10% undisclosed income as assessee had admitted additional income in the statement recorded u/s 132(4) of the Income Tax Act.

“1. On the fact and in circumstances of the case, the Ld. CIT(A) erred in deleting the penalty proceedings u/s 271AAB of the I. T. Act, 1961, levied by the AO of Rs.3,61,86,340/- 60% of undisclosed income as assessee has admitted additional income in the statement recorded u/s 132(4) of the Income Tax Act and also not paid the tax together with interest in respect of undisclosed in income before the specified date.

Om ShivamBuildcon Private Limited (Assessee Company) on 26.07.2016. The

assessee is a builder and developer. During the search action, the assessee had

declared additional income of Rs. 6,03,10,567/- for A.Y. 2017-18. The details of

additional income declared by assessee are recorded on page 2 of penalty order.

The assessee while filing return of income declared income of Rs. 6,56,49,860/-.

The assessment was completed under section 143(3) on 07.12.2018 determining

total income at Rs. 6,56,62,420/-, with minor variation. The assessing officer

while passing the assessment order, initiated penalty proceeding under section

271AAB. Show cause notice dated 07.12.2018 was issued under section 274

r.w.s. 271AAB. Show cause notice was replied by assessee vide reply dated

07.01.2019. In reply, the assessee stated that they have duly cooperated in the

search proceeding as well as in assessment proceedings. The assessee has not

retracted from the statement. During the assessment, the assessee also pointed

out certain mistake and himself requested for disallowances for fair completion of assessment proceeding. The intention of assessee was not to make any

unwarranted claim. The assessee is not well equipped to understand the

technicalities of Income Tax Act and was dependent on tax professional. The

assessee has also admitted certain part of income during the course of search

proceeding and also explained the manner of arriving such income. The same

was duly accepted while filing return of income and in the assessment

proceeding. The assessee has paid tax with interest due. There is no attempt to

hide any income. The assessee made reliance on the decision of Hon’ble

Supreme Court in Hindustan Steel Ltd. vs State of Orissa (1972) 83 ITR 26 (SC)

wherein it was held that penalty should not be imposed merely for the reasons

that it is lawful to do so. The assessee also relied on the decision of Madras High

Court in CIT vs Sankaran (2000) ITR 825 (Mad). The reply of assessee was not

accepted by assessing officer. The AO held that had a search not been conducted

the assessee would not have declared the additional income of Rs. 6.03 crore.

The act of declaration of income cannot be construed as voluntarily declaration

but due to the search action which unearthed the undisclosed income. Hence, no

immunity can be granted to the assessee. The penalty cannot be dropped

against the assessee. The AO by referring the provision of section 271AAB held

that he is satisfied that assessee has committed a default within the meaning of

section 271AAB(1)(a) and thereby levied a penalty of Rs. 60,31,056/-, being

10% of Rs. 6,03,10,567/-.

jurisdiction under section 154. Before rectifying the AO issued notice under

section 154 on 09.09.2019 with the direction to file reply by 23.09.2019. The AO

noted that assessee failed to file reply till the given time, so it was assumed that

assessee has nothing to say on such rectification. The AO while rectifying the

order recorded that assessee has neither filed return of income within the

specified date nor paid tax together with the interest in respect of undisclosed

income on or before the specified date. Hence, penalty under section

271AAB(1)(c) is leviable @ 60% which comes to Rs. 3,61,86,340/- (60% of Rs.

3,16,10,567/-. The AO passed rectified order on 30.09.2019.

order dated 30.09.2019, the assessee filed appeal before ld. CIT(A). The ld.

CIT(A) allowed full relief to the assessee in both the appeals. In appeal against

original penalty dated 13.02.2018, the ld. CIT(A) held that AO failed to establish

that there is melafide intention to conceal income. Therefore, the penalty

proceeding under section 271AAB(1)(a) is untenable and deleted the entire

penalty in order dated 13.06.2023. Similarly, in appeal against the rectified order

of penalty dated 30.09.2019, the ld. CIT(A) took similar view.

appeal before Tribunal.

orders of lower authorities carefully. The ld. CIT-DR for the Revenue supported the order of AO. The ld. CIT-DR for the revenue submits that ld. CIT(A) while

deleting the penalty recorded his finding in a single sentence that AO failed to

establish that there is melafide intention to conceal the income. The provision of

section 271AAB does not require the AO establish any melafide intention on the

part of assessee as a pre-condition for levy of penalty. No such word “melafide”

find place in the said section. The ld. CIT(A) may have influenced by the

jurisprudence surrounding to section 271(1)(c). The provision of section 271AAB

was introduced by Finance Act, 2012 with effect from 01.07.2012 as successor

provision to section 271AAA. The newly inserted section governs the levy of

penalty in cases where the search initiated on or after 01.07.2012. Under the

earlier provision of section 271AAA, penalty was not leviable if the assessee

during the course of search admitted the undisclosed income, specified the

manner in which it was derived and paid the taxes along with interest. The said

provision was found to be ineffective as a deterrent as it was allowed tax evading

assesses to escape penalty merely by paying tax only on surrendered income.

The legislature inserted section 271AAB which mandate penalty in cases of

undisclosed income found during search proceeding initiated on or after

01.07.2012. Section 271AAB is a self-contained penal provision of operates

independently. The Hon’ble Apex Court in Sandeep Chandak vs PCIT (2018) 93

taxmann.com 406 (SC) has affirmed the order of High Court wherein it was held

that provisions of section 271AAB automatically attract in case where assessee in

the course of search admits undisclosed income and manner in which such income has been derived. The ld. CIT-DR also relied upon the decision of Kolkata

Tribunal in DCIT vs Amit Agarwal (2017) 88 taxmann.com 288 (Kolkata), Delhi

Tribunal in DCIT vs SubhashTyagi (2024) 169 taxmann.com 623 (Delhi – Trib.)

and UOI Vs Dharmendra Textile (2008) 306 ITR 277 (SC). The ld. CIT-DR for the

Revenue submits that initially the penalty was levied @ 10% the undisclosed

income admitted as additional income by assessee. However, the assessee failed

to file return of income and to pay tax, thereby penalty order was rectified under

section 154 by AO as the case of assessee clearly falls in clause (c) of sub-

section(1) of section 271AAB. The assessee has not filed return of income nor

paid tax with interest with in specified date. Once the rectification order is

passed the earlier order dated 13.02.2018 was merged with rectified order dated

30.09.2019.

The ld. AR of the assessee submits that AO initiated penalty proceedings in the

assessment order under section 271AAB on the amount of additional income

surrender during search proceeding. The assessee included the additional income

and has shown in the return of income under income from ‘other sources’. The

assessee paid due tax on the surrender income. The surrender income does not

fall under the purview of “undisclosed income” as prescribed in section 271AAB.

The AO issued show cause notice under section 274 r.w.s. 271AAB wherein

appropriate clauses (a) or (b) or (c) of section 271AAB has not been specifically

mentioned as the condition for imposing penalty under each sub-clause are separate. The notice issued under section 274 needs to be specific. As no specific

clause of sub-section(1) of section 271AAB has been specified in the notice, the

penalty order based on such notice is bad in law. The penalty order passed on

the basis of penalty notice dated 07.12.2018, which is bad in law. As the notice is

for failure to comply with sub-section (2) of section 271AAB. Initially notice was

issued for failure to comply with the condition stipulated in sub-section (2) of

section 271AAB and penalty was levied under section 271AAB(1)(a) which later

on rectified vide order dated 30.09.2019 by holding that penalty to be levied

under section 271AAB(1)(c). The penalty order framed is void ab initio passed on

invalid incomplete approval under section 274(2)(b) by JCIT-2, Nagpur as the

same is without application of mind and, therefore, penalty framed accrued by

JCIT is to be quashed. The rectification under section 154 is not valid. The AO

could rectify the mistake apparent that he has changed the gravity of order.

There is no separate satisfaction under sub-clause (c) of section 271AAB(1).

There is debatable issue if the penalty is to be levied under clause (a) or clause

(c) of section 271AAB(1). Thus, the debatable issue cannot be rectified by

invoking provision of section 154. There is no approval of rectified penalty order.

The approval of range head is statutory requirement and in absence of valid

approval, the order is invalid and void ab initio. The rectified penalty order is

otherwise barred by limitation. There was reasonable cause for filing late return

of income as it was last year of block period and accounts could not be finalised

till earlier years. The return filed in response to notice of AO was only late by 10 days. The return in response to notice of AO was not treated as invalid return.

No penalty for late filing of return was initiated. The taxes were paid. Further,

interest was paid as adhoc of Rs. 10 lacs. The difference is on account of levy of

interest under section 234A, 234B and 234C only. There was no melafide

intention for failure to file return of income in time or payment of full taxes with

interest. The ld. AR of the assessee reiterated that rectified penalty order is

patently illegal and passed without seeking approval of range head otherwise not

found within the scope of section 154. Further, the original penalty order dated

13.02.2019 is not sustainable. The ld AR of the assessee submits that besides

supporting the order of ld CIT(A), his submission may be considered under Rule-

11 of Income Tax (Appellate Tribunal) Rules-1963.

through the orders of lower authorities carefully. We find that Hon’ble Supreme

Court in Hindustan Steel Ltd. vs State of Orissa (1972) 83 ITR 26 (SC) in a

celebrated decision laid down certain principals that penalty should not be

imposed merely because it is lawful to do so. The Hon’ble Court held that penalty

proceedings are in nature, and authorities must follow these specific criteria.

Even if a person has technical or venial (minor) breaches of the law, the

authority is not bound to impose a penalty. They must exercise judicial

discretion. A penalty should not ordinarily be imposed unless the party acted

deliberately in defiance of law, or was guilty of contumacious (stubbornly

disobedient) or dishonest conduct, or acted in conscious disregard of its obligation and that if the breach is a result of a bona fide (honest) belief that the

party was not liable under the Act, the penalty should be waived.

both the penalty under section 271AAB by AO and deleting thereof has recorded

by us in preceding paras of this order. We have independently examined the facts

of both the appeals and find that while passing the assessing order, though the

AO has initiated penalty, but no specific clause of sub-section (1) of section

271AAB was specified. As recorded above, initially the AO levied penalty vide

order dated 13.02.2019, @ 10% of the undisclosed income admitted by

assessee in statement recorded under section 132(4). Though, the AO has not

specified specific clause of sub-section (1) of Section 271AAB, which we shall

take up in later part of this order. We find that penalty order dated 13.02.2019

was rectified by AO by invoking his jurisdiction under section 154 and converted

the levy of penalty from clause(a) to clause (c) of subsection (1) of section

271AAB. Thereby, the AO levied penalty @ 60% of undisclosed income during

search action. In our considered view the AO can rectified the mistake which is

apparent in the order, however, the AO cannot pass such order on the debatable

issue. Thus, the order passed on 30.09.2019 is not justified being beyond

jurisdiction. Moreover, no approval by range head was obtained by AO either

before initiating action under section 154 or after passing rectified order of

penalty. Thus, the assessee succeeded against the penalty levied vide order

dated 30.09.2019.

issuing notice under section 274 r.w.s. 271AAB, the AO has not specified specific

charges of various sub-clauses of section 271AAB(1) in the notice and therefore

the initiation in itself in invalid. We find that initially notice under section 274

r.w.s. 271AAB was issued for failure to comply with the condition stipulated in

sub-section (2) of section 271AAB and penalty was levied under section

271AAB(1)(a) which later on rectified vide order dated 30.09.2019 by holding

that penalty to be levied under section 271AAB(1)(c). Thus, the AO himself was

not sure about the initiation under which sub-clause it is to be issued.

recent decision in ACIT Vs Sri Maheswary Grantites (P) Limited in ITA No.

3054/Chny/2025 dated 20.02.2026, while following decision of Hon’ble Madras

High Court in PCIT Vs R Elangovan in TCA No 770 & 771 of 2018 and nine other

decisions of various benches of Tribunal, held as under;

11.The Hon'ble Jurisdictional High Court in the case of PCIT v. R. Elangovan (TCA. Nos. 770 & 771 of 2018) had followed the above proposition of law, wherein the Court while dealing with a Penalty Notice issued u/s. 271AAB of the Act held that Penalty Notice which does not specifically mention the provision of law under which the Assessing Officer proposes to levy penalty is nothing but a defective Penalty Notice and upheld the order of Tribunal which deleted the penalty imposed. The relevant finding of the Hon'ble Jurisdictional High Court is extracted hereunder for ready reference: - "15. As rightly pointed out by the learned counsel appearing for the assessee, Section 271AAB of the Act, which deals with penalty consists of three contingencies. Therefore, 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 has been denied reasonable opportunity to put forth their submissions. The Tribunal, in paragraph 5 of the impugned order, has verbatim reproduced the penalty notice and we find that the notice is absolutely vague and none of the irrelevant portions had been struck off nor the relevant portions had been marked or indicated. Hence, the Tribunal is right in observing that the penalty could not have been levied based on such defective notice and more particularly, when the assessee has been strenuously canvassing the jurisdictional issue from the inception." 12. The judgement rendered by the Hon'ble High Court in the PCIT v. R. Elangovan (supra) squarely applies to the facts of the present case. Furthermore, said proposition of law laid by the Hon'ble High Court has been followed in number of cases throughout the country by various Co- ordinate Benches of the Income Tax Appellate Tribunal, including this Tribunal. The following are list of judicial pronouncements by various Tribunals across country following the judgment of Hon’ble Madras High Court in the case of PCIT v. R. Elangovan. i. Rahul Jain v. Dy. CIT [ITA No.1219/CHANDI/2024, dated 18.08.2025) ii. Pr. CIT v. Industrial Safety Products (P.) Ltd. [2023] 154 taxmann.com 433 (Calcutta))/2023 (7) TMI 241 iii. Giriraj Enterprises v. Dy. CIT [2025] 176 taxmann.com 870 (Pune - Trib.) iv. St. Joseph's Educational Trust v. Dy. CIT [2025] 175 taxmann.com 284 (Chennai-Trib.) v. Krishnappa Gowder Kalyanasundaram v. Dy. CIT [IT Appeal No. 1678 (CHNY) of 2024, dated 21-5-2025] vi. Prakash Asphalting & Toll Highways (India) Ltd. v. ACIT [IT Appeal No. 720/Ind/2024, dated 24.02.2025]

vii. Suresh Kumar v. ACIT [IT Appeal No. 1880/Del/2023, dated 31.01.2025] viii. Smt. Sonia Singla v. ACIT [IT Appeal No. 1202/Del/2024, dated 30.12.2024] ix. DCIT vs. Ethirajulu Vajravel Kumaran [ITA Nos.1650 to 1655/CHNY/2025, dated 21.10.2025] 13. The Ld. DR had strongly relied on the judgment of the Hon’ble Jurisdictional High Court in the case of Gangotri Textiles Ltd., (supra). The facts of the case of Gangotri Textiles Ltd vs DCIT (supra) is distinguishable. The Assessee in the said case had raised the issue of defective notice at a belated stage. The contention of the defective notice was raised for the first time before the Hon'ble High Court which lead to dismissal of the said case. Relevant portion of the Judgment is reproduced below for ready reference:- “8. After elaborately hearing the learned counsels on either side and carefully perusing the materials placed before this Court including the decisions relied on by the learned counsels on either side, the first issue to be considered is whether the notice dated 12.03.2015 issued under Section 274 r/w. 271(1)(c) of the Act is defective. The argument of M/s.S.Yogalakshmi, learned counsel for the appellant is that the notice stated that it appears to the Assessing Officer that the assessee concealed the particulars of income or furnished inaccurate particulars of income. It is the argument that the word 'or' has been used and not 'and'. The Assessing Officer did not apply his mind while issuing the notice to state as to whether he was of the prima facie view that the assessee concealed the particulars of income or furnished inaccurate particulars of income. Therefore it is the submission that this defect is inherent, which goes to the root of the matter and all consequential proceedings would have to be rendered as nonest. Among the decisions, which were relied on by M/s. S. Yogalakshmi, learned counsel for the appellant, emphasis was laid on the decision in Manjunatha Cotton and Ginning Factory. This decision is pressed into service to substantiate her contention that if the notice does not specify as to which limb of Section 271(1)(c) is attracted, the penalty proceedings are vitiated. Unfortunately, no such contention was advanced by the assessee at any earlier point of time and for the first time before this Court such a contention is advanced. The submission of the learned counsel is that this, being the question of law, can be raised. We do not agree with the submission for more than one reason. Firstly a defect in the notice, if according to the assessee would result in a jurisdictional error, is not merely a pure question of law, but a mixed question of fact and law. If such is the position, the vigilant assessee, more particularly, a listed Company like the assessee before us should point out the factual issue at the very first instance. If that was not done by the assessee, then it goes to show that the assessee was not prejudiced by the use of the expression 'or." 14. In the instant case, the assessee had raised the contention of the defective notice before the CIT(A) and the same was adjudicated in favour of assessee. Therefore, the case of Gangotri Textiles Ltd vs DCIT (supra) is distinguishable from the present case. 15. In the light of the aforesaid reasoning and relying on the judgment of Hon’ble Jurisdictional High Court in the case of PCIT v. R. Elangovan (supra), we hold that penalty notice dated 31.12.2016 u/s. 274 r.w.s. 271AAB of the Act issued without mentioning specific limb under which the AO would proceed against the assessee is a defective notice. Therefore, the consequent penalty order imposing penalty u/s.271AAB of the Act amounting to Rs.69,71,783/- is unsustainable. Hence, we see no reason to interfere with the order of CIT(A) and we, reject the grounds raised by the Department. It is ordered accordingly. 16. In the result, the appeal filed by the Revenue is dismissed.” 13. Thus, in view of aforesaid factual and legal discussion and respectfully following

the decision of Hon’ble Madras High Court and other coordinate benches of

Tribunal, when the AO has not specified the specific charge, the notice under

section 274 r.w.s. 271AAB is not valid and subsequent action initiated thereon is also void ab-initio. Thus, the assessee also succeeded on this ground. Hence, the

initial penalty order dated 13.02.2019 is held invalid.

Chandak (supra) is not applicable as the facts of the said case are at variance. In

the said case the AO has specific notice for levying penalty under section 271AAB

and there was no such ambiguity in the said notice. However, in the case in

hand, the AO himself rectified his own finding based on his own notice.

findings.

Order pronounced on 11/05/2026 as per Rule 34 of Income Tax (Appellate

Tribunal) Rules, 1963.

Sd/- Sd/-

KHETTRA MOHAN ROY PAWAN SINGH ACCOUNTANT MEMBER JUDICIAL MEMBER

Nagpur: Dated: 11/05/2026 Biswajit

Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); (4) The DR, ITAT, Nagpur; and (5) Guard file.

By order

Assistant Registrar ITAT, Nagpur