M/S ENRICE ENTERPRISES PVT LTD,CHENNAI vs. DCIT,CENTRAL CIRCLE-3(4), CHENNAI

आदेश / O R D E R

PER MANJUNATHA. G, AM:

This appeal filed by the assessee is directed against the order of the

Commissioner of Income Tax (Appeals)-20, Chennai, dated 17.08.2023

and pertains to assessment year 2019-20.

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The learned CIT(A) ought to have seen that a bare reading of the notice under section 271 rws 271AAB suggests that the notice has been issued in a casual fashion. The officer has not applied his mind and no specific charge is mentioned for which the appellant is required to be show caused.

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For these and other grounds that may be rendered at the time of hearing it is most humbly prayed that the Hon'ble Tribunal may be pleased to allow the appellants appeal and thus render justice.

Enterprises Pvt. Ltd., is engaged in the business of manufacture and sale

of Indian Made Foreign Liquor (IMFL) and it is one of the prime suppliers

to M/s.Tamilnadu State Marketing Corporation Ltd (TASMAC). A search

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and seizure operations u/s.132 of the Income Tax Act, 1961 (in short “the

Act“), was conducted at the premise of the assessee on 06.12.2018.

During the course of search, a sum of Rs.55,27,70,000/- of unaccounted

cash was found and seized from the residential premise of Shri.

M.Kothandarami Reddy and six individuals, who had identified themselves

as associates of the assessee and claimed that they have held the cash

for and on behalf of the assessee. The amount of cash seized during the

course of search and seizure on 06.12.20128 in the residential premise of

Shri M.Kothandarami Reddy, Director of the assessee and others was

tabulated in Page No.2 of the assessment order. In the course of search,

a sworn statement u/s.132(4) of the Act, was recorded from Shri

S.D.Rami Reddy, one of the Director of the assessee company and in

response to Q.Nos.17 & 18, he has explained the modus operandi of

generation of cash seized during the course of search and also admitted a

sum of Rs.113.99 Crs. as additional income for the period from

01.04.2014 to 06.12.2018 which includes cash seizure of Rs.55.27 Crs.

The Director of the assessee company has also explained the modus

operandi of generation of unaccounted cash by way of inflated

expenditure booked under the head marketing expenditure being ‘gift articles’ purchased and admitted that on an average 1/3rd of actual

expenditure accounted in the books of accounts, has been received back

in cash from the suppliers. The relevant question and answer in the

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statement recorded u/s.132(4) of the Act, from Shri S.D.Rami Reddy, was

reproduced as under:

"Q.17. While answering to Q.6, in your sworn statement recorded under section 132(4) dated 9.12.2018, while asking the modus operandi of generating unaccounted cash, you have stated that you will raise bogus bills for which you pay them through banking channels and receive cash from them. Please go through your statement and clarify about generation of unaccounted cash.

Ans. Sir, we have not raised any bogus bills from our suppliers of gift articles to generate unaccounted cash. However, we received back one third of the invoice value on an average in the form of cash from our gift article suppliers. Since this amounts to inflation of the expenditure in our books of account, we undertake to withdraw of claim towards expenditure in the respective years.

Q:18. Please furnish the quantity of cash generated invoice-wise and party -wise with details of suppliers?

Ans. Sir I don't have the invoice-wise and party -wise details of cash generated. However, I am here by submitting year-wise details of cash generated on this account as under –

S.No. Financial Year Amount in Crores 1 2014-15 16.39 2 2015-16 23.62 3 2016-17 15.79 4 2017-18 25.73 5 2013-19 32.46 113.99

However, no corroborative evidence to the sworn statement was unearthed during search.

scrutiny. In response to notice under section 153A of the Act, issued by

the AO, the assessee has filed its return of income on 25-11-2020

admitting a total income of Rs.125,92,51,312/-, which includes additional

income offered during the course of search towards inflated expenditure

amounting to Rs. 32.46 crores. During the course of assessment

proceedings, on enquiry with the suppliers of gift articles, replies were

received from the suppliers of gift articles along with account copy as

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reflected in the books of the assessee, where, all of them stated to have

supplied gift articles to the assessee, but some of them also stated that

the assessee took back some cash at times. The AO completed the

assessment u/s.143(3) r.w.s.153A of the Act on 26.07.2021, accepting

the additional income voluntarily offered by the assessee towards inflated

expenditure under the head ‘gift articles’. While completing the

assessment, the AO observed that after considering relevant submissions

of the assessee, the income offered by the assessee, including estimated

disallowance of portion of marketing expenses, is found to be in order and

accepted. The relevant submissions of the assessee and findings of the

AO are reproduced as under:

In continuation to the above, during assessment proceedings, assessee claimed that no corroborative evidence to the sworn statement w.r.t. found/seized materials was unearthed so as to suggest the culpability of tax evasion. After going through the circumstances in entirety. The income offered by the assessee, including the estimated disallowance of portion of marketing expenses, is found to be in order and accepted. 5. The AO, along with the assessment order dated 26.07.2021 initiated

penalty proceedings u/s.274 r.w.s.271AAB of the Act, dated 26.07.2021

and called upon the assessee to show cause ‘as to why’ an order imposing

penalty should not be made. In response, the assessee vide letter dated

07.08.2021 submitted that there is no undisclosed income as defined in

Explanation-C to Sec.271AAB (1)(a) of the Act, and thus, question of

levying penalty u/s.271AAB of the Act, does not arise. The AO after

considering relevant submissions of the assessee and also taken note of

relevant provisions of Sec.271AAB of the Act, observed that it is evident

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from the search proceedings and sworn statement recorded from the

assessee, there is undisclosed income of the specified previous year in the

form of additional income offered towards estimated disallowance of

marketing expenses and said additional income was gone unnoticed had

search been not conducted in the case of the assessee. The arguments of

the assessee that it has voluntarily surrendered additional income to buy

peace and avoid litigation are devoid of merits. Therefore, opined that

the additional income offered by the assessee represents any income of

the specified previous year by any entry in respect of expenses recorded

in the books of accounts of the assessee or other documents maintained

in the normal course relating to the specified previous year, which is

found to be false and would not have been found to be so had the search

has not been conducted. Therefore, rejected arguments of the assessee

and levied penalty of 30% of total undisclosed income offered by the

assessee. The relevant findings of the AO are as under:

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appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee has

challenged show cause notice issued u/s.274 r.w.s.271AAB of the Act,

dated 26-07-2021 in light of certain judicial precedents and argued that

the AO has not specified the clauses under which penalty u/s.271AAB of

the Act, has been initiated. The assessee had also challenged penalty

levied on additional income offered in the return of income filed u/s.153A

of the Act, and accepted by the AO on the ground that said additional

income does not come under the definition of undisclosed income, as per

Explanation-C to Sec.271AAB of the Act.

assessee and also taken note of relevant facts opined that the additional

income declared by the assessee towards estimated disallowance of

marketing expenses comes under definition of undisclosed income as per

Explanation-C to Sec.271AAB of the Act, because, the assessee has

quantified the undisclosed income for each year including for the

impugned assessment year based on actual inflation of expenditure in its

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books of accounts and said estimate is based on admission of suppliers of

‘gift articles’ during the course of assessment proceedings, where the

suppliers have categorically stated that at times cash has been refunded

to the assessee. This is further fortified by the statement of working

Director of the assessee company, where, he has explained modus

operandi generation of unaccounted cash and also admitted that cash

found during the course of search, is on account of inflated expenditure

under the head ‘marketing expenses’. Therefore, the Ld.CIT(A) opined

that it is a clear case of undisclosed income of specified previous year and

accordingly, there is no error in the reasons given by the AO to levy

penalty u/s.271AAB of the Act. The Ld.CIT(A) had also rejected

arguments of the assessee on show cause notice issued u/s.274

r.w.s.271AAB of the Act, and held that non-specification of sub-section in

the penalty notice issued u/s.274 r.w.s.271AAB of the Act, issued by the

AO do not vitiates the penalty proceedings. The relevant findings of the

Ld.CIT(A) are as under:

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submitted that the Ld.CIT(A) erred in conforming the penalty levied by

the AO u/s.271AAB of the Act, without appreciating the fact that the

penalty u/s.271AAB of the Act, is not mandatory and further, such

penalty cannot be imposed without providing reasonable opportunity of

hearing to the assessee. The Ld.Counsel for the assessee referring to

provisions of Sec.274 & 275 of the Act, submitted that the provisions of

Sec.271AAB(3) of the Act, specifically says sec.274 & 275 of the Act, shall

as far as may be applied in relation to the penalty referred to in this

section, which means before initiating penalty proceedings, the AO should

show cause to the assessee and also called for explanation and such show

cause notice should be specific to the sub-clauses, under which, the AO

proposed to initiate penalty proceedings. Since, the AO has issued a

notice in a routine manner without specifying sub-clause under which

penalty is initiated, the entire proceedings becomes vitiates and invalid.

additions made by the AO towards income voluntarily surrender by the

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assessee in the return of income filed u/s.153A of the Act, does not come

under the definition of undisclosed income as defined in Explanation-C to

Sec.271AAB of the Act. Further, there is no reference in the assessment

order with regard to undisclosed income, which is evident from the

assessment order passed by the AO, where the AO clearly observed that

after considering relevant circumstances in its entirety, income offered by

the assessee, including the estimated disallowance of marketing expenses

is found to be in order and accepted. From the findings of the AO, it is

very clear that the AO has not made out a case of undisclosed income of

specified previous year, which warrants levy of penalty u/s.271AAB of the

Act, and thus, the order passed by the CIT(A) confirming penalty levied

by the AO, should be quashed.

arguments of the assessee on the issue of show cause notice has been

negated by the Ld.CIT(A) with a specific finding in light of provisions of

Sec.271AAB of the Act. Further, non-specification of sub-clause in the

notice does not vitiate entire penalty proceedings as contended by the

Ld.Counsel for the assessee. Further, the AO has made out a case of

undisclosed income of a specified previous year in respect of undisclosed

income offered by the assessee towards estimated disallowance of

marketing expenses and such addition is purely based on material found

during the course of search. During the course of search, the Department

has gathered incriminating materials, including unaccounted cash which is

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generated out of inflated expenditure under the head ‘marketing

expenses’. The Director of the assessee company admitted to have

generated cash by inflating expenditure, which is further strengthened by

the confirmation submitted by suppliers of gift articles. Therefore, the

arguments of the assessee that estimated disallowance of marketing

expenses, does not come under undisclosed income of specified years is

incorrect, and thus, the AO and the Ld.CIT(A) has rightly levied penalty

and their orders should be upheld.

record and gone through orders of the authorities below. Levy of penalty

u/s.271AAB of the Act, is not mandatory, which is evident from the fact

that order passed by the AO imposing penalty u/s 271AAB is appealable

order u/s.246A of the Act, before the First Appellate Authority. If penalty

u/s.271AAB of the Act, mandatory in nature, then, there would not have

been any appeal jurisdiction against penalty order before the First

Appellate Authority. Therefore, in our considered view, there is a merit in

the arguments of the Counsel that levy of penalty u/s.271AAB of the Act,

is not mandatory and which depends upon facts of each case is

acceptable and in accordance with law. Further, once penalty u/s.271AAB

of the Act, is not mandatory in nature, then, the next question that arises

for our consideration is whether the assessee should get opportunity of

hearing or not. Sub-section (3) of sec.271AAB of the Act, stated that

provisions of Sec.274 & 275 of the Act, shall as far as may be applied in

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relation to the penalty referred in this section. This means, before levy of

penalty u/s.271AAB of the Act, the AO must issue show cause notice as

required u/s.274 of the Act, and called explanation from the assessee.

Thus, it is evident that penalty u/s.271AAB of the Act, cannot be imposed,

unless the assessee has been given a reasonable opportunity and

assessee is being heard. Once, the AO is bound by the Act to hear the

assessee and give reasonable opportunity to explain his case, in our

considered view, show cause notice issued by the AO u/s.274

r.w.s.271AAB of the Act, should specify the exact charge on which the

assessee is directed to pay penalty u/s.271AAB of the Act. Sec.271AAB

of the Act, has two clauses. Sub-section (a) to Sec.271AAB(1) of the Act,

specifies 30% penalty of the undisclosed income of the specified previous

year, if assessee in the course of search in statement u/s.132(4) of the

Act, admits undisclosed income and specify the manner in which such

income has been derived and also substantiated the manner in which

undisclosed income was derived and pays tax on or before due date of

furnishing return of income. Sub-clause (b) specifies penalty at 60% of

the undisclosed income of the specified previous year, if it is not covered

under the provisions of Clause-(a). From the above, it is manifestly clear

that there are two scenarios for levy of penalty depend upon facts of each

case and accordingly, in the show cause notice, the AO should specify

under which clause, the assessee is directed to pay penalty u/s.271AAB of

the Act. In the present case, on perusal of notice issued u/s.274

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r.w.s.271AAB of the Act, it is undisputedly clear that the AO has issued

notice in a routine manner without mentioning under which clause of

section 271AAB of the Act, the assessee is liable for penalty. Though, the

AO while passing the impugned order, has imposed the penalty as per

clause-(a) of sec.271AAB(1) of the Act, but, no such ground was specified

in the show cause notice issued on 26.07.2021. Therefore, we are of the

considered view that there is no application of mind at the time of issuing

show cause notice and also no satisfaction from the AO regarding

undisclosed income of specified previous year and further, under which

clause such undisclosed income falls. Further, issuing a notice without

specifying clause under which, the assessee is directed to pay penalty is

definitely vague, incorrect in nature, and consequent order passed by the

AO imposing penalty u/s.271AAB of the Act, becomes illegal, void ab

initio. This legal position is fortified by the decision the Hon’ble Madras

High Court in the case of PCIT v. R. Elangovan in TCA Nos.770 & 771 of

2018, wherein, the Hon’ble Madras High Court held that sec.271AAB of

the Act, which deals with penalty consist of three contingencies.

Therefore, the AO who pointed out 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. Hence, the Tribunal is right in observing penalty

could not have been levied based on such defective notice and, more

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particularly, when the assessee has been strenuously canvassing

jurisdictional issue from the beginning. The relevant findings of the

Hon’ble Madras High Court are as under:

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of Hon’ble jurisdictional high court in the case of PCIT v. R. Elangovan

(supra), we are of the considered view that order passed by the AO

imposing penalty u/s.271AAB of the Act, in consequent to vague notice

issued u/s 274 r.w.s. 271AAB dated 26-07-2021 cannot be sustained.

provisions of Sec. 271AAB(1)(a) of the Act, the AO may direct that in

case, search has been initiated u/s.132 of the Act, the assessee shall pay

by way of penalty in addition to taxes, if any, payable by him on sum

computed @30%/60% of the undisclosed income of the specified previous

year depend upon facts of each case. The term ‘undisclosed income’ has

been defined in Explanation-c to Section 271AAB of the Act, which reads

as under:

(i) any income of the specified previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search under section 132, which has— (A) not been recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous year; or (B) otherwise not been disclosed to the 5a[Principal Chief Commissioner or] Chief Commissioner or [Principal Commissioner or] Commissioner before the date of search; or (ii) any income of the specified previous year represented, either wholly or partly, by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the specified previous year which is found to be false and would not have been found to be so had the search not been conducted.

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u/s.271AAB of the Act, is not applicable. In fact, the AO and the Ld.CIT(A)

invoked Clause-(ii) of Explanation-C to Section u/s.271AAB of the Act. As

per Clause-(ii), undisclosed income of a specified previous year means

any income of the specified previous year represented either wholly or

partly by any entry in respect of expenses recorded in the books of

accounts or other documents maintained in the normal course relating to

the specified previous year which is found to be false and would not have

been found to be so, had the search has not been included. From the

reading of Explanation-(c) and definition of undisclosed income, it is very

clear that it should represent wholly or partly any entry in respect of

expenses recorded in the books in the normal course relating to the

specified previous year, which is found to be false and also has not been

found to be so had the search has not been concluded. First of all, there

should be falsification of entry in the books of accounts in respect of any

expenditure. Secondly, such falsification should come to know as a

consequence of search conducted. In the present case, the AO has

arrived at a satisfaction to the effect that there is undisclosed income of

previous year, which warrants penalty u/s.271AAB of the Act, on

additional income offered by the assessee in the return of income filed u/s.153A of the Act, towards estimated disallowance of 1/3rd of marketing

expenses. No doubt, the assessee has admitted additional income of Rs.113.99 Crs. towards estimated disallowance of 1/3rd of marketing

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expenses when the Department has found and seized unaccounted cash

Rs.55.27 Crs. in the residential premise of the assessee Company Director

and their associates. But, fact remains that said unaccounted cash was

not identified to any particular assessment year or person. Although, the

AO has telescoped unaccounted cash to additional income offered by the

assessee towards estimated disallowance of marketing expenses, but, in

our considered view, said cash was not identified for the impugned

assessment year either by the assessee or by the AO. Further, additional

income offered by the assessee and accepted by the AO towards

estimated disallowance of marketing expenses is also an ad hoc

disallowance without there being any observation/adverse comments with

regard to expenses accounted by the assessee in the books of accounts of

the specified previous year and also explanation offered by the assessee.

The sole basis for the AO to levy penalty u/s.271AAB of the Act, is

voluntary surrender of income by the assessee in the return of income

filed u/s.153A of the Act, and such income has been quantified in the

statement recorded u/s.133(4) of the Act. Although, the AO took support

from confirmation from one of the suppliers, where he has stated that at

times cash has been returned to the assessee, but there is no specific

admission in the confirmation letter of suppliers regarding supplies made to the assessee and refund of 1/3rd of cash for the impugned assessment

year. We have gone through the reply received from supplier which has

been extracted in the penalty order and we find that said reply is general

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in nature without any specific reference for the impugned assessment

year and also amount of cash returned to the assessee. Therefore, in our

considered view, on the basis of admission of the assessee without there

being any reference to incriminating material surrender of additional

income in the return of income filed u/s.153A of the Act, cannot be

considered as undisclosed income as defined in Explanation-(c) to Sec.

271AAB(1)(a) of the Act and such undisclosed income is for specified

previous year. Thus, we are of the considered view that Clause-(ii) of

Explanation-(c) to Sec. 271AAB(1)(a) of the Act, is not attracted in the

given facts and circumstances of the case in respect of additional income

offered by the assessee amounting to Rs.32.46 Crs. and thus, in our

considered view, said additional income surrendered by the assessee does

not come under the definition of undisclosed income and consequently,

the AO cannot levy penalty u/s.271AAB of the Act.

of its arguments. The assessee has relied upon the decision of ITAT

Mumbai Benches, in the case of Shri. Prafulla Shashikant Vaidya v. DCIT

in ITA No.469/Mum/2023 order dated 30.08.2023. The Tribunal under

identical set of facts has considered the issue of penalty levied

u/s.271AAB of the Act, in respect of income surrendered by the assessee

and held that surrender of income would not if so facto lead to the

conclusion that the amount surrendered by the assessee is undisclosed

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income in terms of Sec.271AAB of the Act. The relevant findings of the

Tribunal are as under:

"undisclosed income" means—

(i) any income of the specified previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search under section 132, which has— (A) not been recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous year; or

(B) otherwise not been disclosed to the Chief Commissioner or Commissioner before the date of search; or

(ii) any income of the specified previous year represented, either wholly or partly, by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the specified previous year which is found to be false and would not have been found to be so had the search not been conducted.'.

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having any control or influence of the assessee except the books of account of the assessee which were not disputed by the AO. Further, the revenue has not disputed the correctness of the documentary evidence filed by the assessee, albeit the AO has proceeded on the assumption that the income disclosed by the assessee under section 132(4) is undisclosed income for the purpose of section 271AAB of the Act. Once the assessee has explained the fact that all the assets found during the course of search have been duly recorded in the documents in the normal course relating to such previous year, then the mere disclosure and surrender of income would not ipso facto lead to the conclusion that the amount surrendered by the assessee is ‘undisclosed income’ in terms of section 271AAB of the Act.

“12. Now, coming to another contention of the ld AR where he has challenged the findings of the ld. CIT(A) that penalty u/s 271AAB is mandatory in nature and there is no discretion with the Income tax authorities. It was submitted by the ld AR that in section 271AAB, the word 'may' is used instead of 'shall' so it is not mandatory but same is discretionary. It was submitted that it is settled position of law that penalties are not compulsory, not mandatory but are also discretionary considering the overall facts and circumstances of the case. In support, reliance was placed on provisions of section 158BFA(2) wherein similar phraseology has been used by the legislature and decision of Hon'ble A.P High Court in case of Radha Krishna Vihar (ITA No. 740/2011).”

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"5. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. During the appeal hearing, the ld. A.R. vehemently argued that the A.O. has levied the penalty under the impression that the levy of penalty in the case of admission of income u/s 132(4) is mandatory. The ld. A.R. further stated that penalty u/s 271AAB of the Act is not mandatory but discretionary. The provisions of section 271AAB of the Act is pari materia with that of section 158BFA of the Act relating to block assessment and accordingly argued that the levy of penalty under section 271AAB is not mandatory but discretionary. When there is reasonable cause, the penalty is not exigible. The ld. A.R. has taken us to the section 271AAB of the Act and also section 158BFA (2) of the Act and argued that the words used in section 271AAB of the Act and the words used in section 158BFA(2) of the Act are identical. Hence, argued that the penalty section 271AAB of the Act penalty is not automatic and it is on the merits of each case. For ready reference, we reproduce hereunder section 158BFA (2) of the Act and section 271AAB of the Act which reads as under:

271AAB [Penalty where search has been initiated]: (1) The Assessing Officer may, notwithstanding anything contained in any other provisions of this Act, direct that, in a case where search has been initiated under section 132 on or after the 1st day of July, 2012, the assessee shall pay by way of penalty, in addition to tax, if any, payable by him—

(a) a sum computed at the rate of ten per cent of the undisclosed income of the specified previous year, if such assessee—

(i) in the course of search, in a statement under subsection (4) of section 132, admits the undisclosed income and specifies the manner in which such income has been derived.

(ii) Substantiates the manner in which the undisclosed income was derived; and

(iii) On or before the specified date—

(A) pays the tax, together with interest, if any, in respect of the undisclosed income; and

(B) furnishes the return of income for the specified previous year declaring such undisclosed income therein;

(b) a sum computed at the rate of twenty per cent of the undisclosed income of the specified previous year, if such assessee—

(i) in the course of the search, in a statement under subsection (4) of section 132, does not admit the undisclosed income; and

(ii) on or before the specified date—

(A) declares such income in the return of income furnished for the specified previous year; and

(B) pays the tax, together with interest, if any, in respect of the undisclosed income;

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(C) a sum which shall not be less than thirty per cent but which shall not exceed ninety per cent of the undisclosed income of the specified previous year, if it is not covered by the provisions of clauses (a) and (b).

No penalty under the provisions of clause (c) of sub-section (1) of section 271 shall be imposed upon the assessee in respect of the undisclosed income referred to in sub-section (1). Section 158BFA(2):

The Assessing Officer or the Commissioner (Appeals) in the course of any proceedings under this Chapter, may direct that a person shall pay by way of penalty a sum which shall not be less than the amount of tax leviable but which shall not exceed three times the amount of tax so leviable in respect of the undisclosed income determined by the Assessing Officer under clause (c) of section 158BC:

Provided that no order imposing penalty shall be made in respect of a person if—

(i) such person has furnished a return under clause (a) of section 158BC;

(ii) the tax payable on the basis of such return has been paid or, if the assets seized consist of money, the assessee offers the money so seized to be adjusted against the tax payable.

(iii) Evidence of tax paid is furnished along with the return; and

(iv) An appeal is not filed against the assessment of that part of income which is shown in the return:

Provided further that the provisions of the preceding proviso shall not apply where the undisclosed income determined by the Assessing Officer is in excess of the income shown in the return and in such cases the penalty shall be imposed on that portion of undisclosed income determined which is in excess of the amount of undisclosed income shown in the return.

Careful reading of section 271AAB of the Act, the words used are, 'AO may direct' and 'the assessee shall pay by way of penalty'. Similar words are used under section 158BFA(2) of the Act. The word may direct indicates the discretion to the AO. Further, sub-section (3) of section 271AAB of the Act, fortifies this view.

Sub-section (3) of section 271AAB:

The provisions of sections 274 and 275 shall, as far as maybe, apply in relation to the penalty referred to in this section.

The legislature has included the provisions of section 274 and section 275 of the Act in 271AAB of the Act with clear intention to consider the imposition of penalty judicially. Section 274 deals with the procedure for levy of penalty, wherein, it directs that no order imposing penalty shall be made unless the assessee has been heard or has been given a reasonable opportunity of being heard. Therefore, from plain reading of section 271AAB of the Act, it is evident that the penalty cannot be imposed unless the assessee is given a reasonable opportunity and assessee is being heard. Once the opportunity is given to the assessee, the penalty

ITA No.1168/Chny/2023 :: 37 ::

cannot be mandatory and it is on the basis of the facts and merits placed before the A.O. Once the A.O. is bound by the Act to hear the assessee and to give reasonable opportunity to explain his case, there is no mandatory requirement of imposing penalty, because the opportunity of being heard and reasonable opportunity is not a mere formality but it is to adhere to the principles of natural justice. Hon'ble A.P. High Court in the case of Radha krishna Vihar in ITA No.740/2011 while dealing with the penalty u/s 158BFA held that 'we are of the opinion that while the words shall be liable under sub-section (1) of section 158BFA of the Act that are entitled to be mandatory, the words may direct in subsection 2 thereof intended to directory'. In other words, while payment of interest is mandatory levy of penalty is discretionary. It is trite position of law that discretion is vested and authority has to be exercised in a reasonable and rational manner depending upon the facts and circumstances of each case. Plain reading of section 271AAB and 274 of the Act indicates that the imposition of penalty u/s 271AAB of the Act is not mandatory but directory. Accordingly, we hold that the penalty u/s 271AAB is not mandatory but to be imposed on merits of each case."

coordinate Benches of ITAT Mumbai in the case of Prafulla Shashikant

Vaidya v. DCIT in ITA No.469/Mum/2023 order dated 30.08.2023, we are

of the considered view that additional income offered by the assessee in

the return of income filed in response to notice issued u/s 153A of the

Act, towards surrender of estimated disallowance of i/3rd marketing

expenses does not come under the definition of undisclosed income as

defined in Explanation-c to Sec.271AAB of the Act. The sum of Rs.32.46

Crs. does not qualify as undisclosed income of the specified previous year

not recorded in the books of accounts before the date of search as

ITA No.1168/Chny/2023 :: 38 ::

required by Clause-(ii) of Explanation-(C) to Sec.271AAB of the Act. The

same does not represent any entry in respect of expenses recorded in the

books of accounts or other documents maintained in the normal course

relating to the specified previous year, which is found to be false as

required by Clause-(ii) of Explanation-(C) to sec.271AAB of the Act.

Therefore, we are of the considered view that the AO is erred in levying

penalty u/s.271AAB of the Act, on additional income offered by the

assessee in the return filed u/s.153A of the Act. The Ld.CIT(A) without

appreciating relevant facts simply sustained penalty levied by the AO and

thus, we set aside the order of the Ld.CIT(A) and direct the AO to delete

penalty levied u/s.271AAB of the Act.

Order pronounced on the 06th day of March, 2024, in Chennai.

Sd/- Sd/- (मनोमोहन दास) (मंजूनाथा. जी) (MANJUNATHA.G) (MANOMOHAN DAS) लेखा सद�/ACCOUNTANT MEMBER �ाियक सद�/JUDICIAL MEMBER चे�ई/Chennai, �दनांक/Dated: 06th March, 2024. TLN आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 3. आयकरआयु�/CIT 5. गाड�फाईल/GF 2. ��यथ�/Respondent 4.िवभागीय�ितिनिध/DR