DAGGUBATI VENKATESH,CHENNAI vs. DCIT., CENTRAL CIRCLE -1(2), HYDERABAD

Brief facts of the case are that the income of the assessee for the assessment year 2015-16 was determined under section 143(3) of the Income Tax Act, 1961 (for short “the Act”) by order dated 3/12/2017. A search and seizure operation was carried out on 20/11/2019 in the case of the assessee. Consequent to the search, notice under section 153A of the Act was issued and the assessee furnished the information stating that “gross rental income of Rs.3,50,000/-has been additionally offered to income in the return of income filed u/s. 153A”. Learned Assessing Officer accepted the returned income and by order dated 25/9/2021 passed under section 143(3) read with section 153A of the Act he completed the assessment.

Learned Assessing Officer, however, initiated penalty proceedings under section 271(1)( c ) of the Act read with explanation 5A and concluded the same by order dated 27/3/2022 with the levy of penalty of Rs.1,20,000/- in respect of the income of Rs.3.5 Lacs that was additionally offered in the returns of income filed in response to the notice under section 153A of the Act.

Aggrieved by such an action of the learned Assessing Officer, assessee preferred appeal before the learned CIT(A). Learned CIT(A) by way of the impugned order upheld the penalty and dismissed the appeal. Hence this appeal by the assessee stating that the levy in confirmation of penalty under section 271(1)( c ) of the Act is bad under law. 5. At the outset, learned AR submitted that in as much as the search in this case took place on 20/11/2019, the provisions under section 271(1)( c ) of the Act are not applicable inasmuch as the legislature introduced section 271AAB (1) of the Act in respect of the searches that took place between 1/7/2012 and 14/12/2016, and 271AAB (1A) of the Act in respect of the searches that took place on or after the Taxation Laws (Second Amendment) Bill, 2016 receiving the ascent of the President, namely, 15/12/2016. He further submitted that the nature and degree of proof required under section 271AAB (1A) of the Act is altogether different from the nature and degree of proof required under section 271(1)( c ) of the Act. Since the assessee was not given an opportunity to meet the requirements under section 271AAB (1A) of the Act, and the notice and proceedings under section 271(1)( c ) of the Act culminated in the levy of penalty, the penalty cannot be sustained for want of compliance with the principles of natural justice.

Per contra, learned DR referred to the requirements of 271(1)( c ) of the Act read with explanation 5A thereof and submitted that since the search initiated under section 132 of the Act in this case after 1/6/2007, provisions under section 271(1)( c ) of the Act read with explanation 5A are applicable and inasmuch as the penalty is based on the income found in the books of account or other documents or transactions found during the search, there is no escape from penalty for the assessee. Based on this learned DR justified the levy of penalty and confirmation thereof by the authorities.

We have gone through the record in the light of the submissions made on either side. No doubt explanation 5A of section 271(1)( c ) of the Act is applicable in respect of the search that was initiated in section 132 on or after the 1st day of June, 2007, legislature subsequently enacted 271AAB (1) of the Act in respect of the search that was initiated under section 132 on or after the 1st day of July, 2012 but before the date on which the Taxation Laws (Second Amendment) Bill, 2016 receives the ascent of the President. Legislature also enacted section 271AAB (1A) of the Act to be applicable to the search that was initiated under section 132 of the Act on or after the date on which the Taxation Laws (Second Amendment) Bill, 2016 received the assent of the President. Taxation Laws (Second Amendment) Bill, 2016 received the assent of the President and it came into force w.e.f. 15/12/2016.

Search in this case took place on 20/11/2019, and, therefore, the provisions under section 271AAB (1A) of the Act are applicable to the case of the assessee. The nature and degree of proof required under these two provisions, namely, section 271(1)( c ) of the Act read with explanation 5A and section 271AAB (1A) of the Act are quite different. Admittedly all through the course of penalty proceedings learned Assessing Officer proceeded on the footing of section 271(1)( c ) of the Act, but never adverted to the provisions under section 271AAB (1A) of the Act. Attention of the assessee was never drawn to the ingredients of section 271AAB (1A) of the Act. Since the provisions under section 271(1)( c ) of the Act are not applicable to the case of the assessee, and the learned Assessing Officer never adverted to the provisions in section 271AAB (1A) of the Act, levy of penalty in this matter is in violation of the principles of natural justice and the assessee cannot be fastened with any penal liability.

With this view of the matter, we find it difficult to sustain the penalty levied under section 271(1)( c ) of the Act read with explanation 5A, and therefore, we quash the penalty. Since our discussion in the preceding paragraphs is applicable to the appeal for the assessment year 2016-17 with equal force, we follow the same and quash the penalty levied for the assessment year 2016-17 also. Grounds are answered accordingly.

In the result, both the appeals of the assessee are allowed. Order pronounced in the open court on this the 19th March, 2025.