Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2026 Supreme(Online)(ITAT) 11722

INCOME TAX APPELLATE TRIBUNAL (NAGPUR BENCH)
Pawan Singh, Judicial Member, Khettra Mohan Roy, Accountant Member
DCIT, Central Circle – 2(1), Nagpur – Appellant
Versus
Om Shivam Buildcon Private Limited – Respondent
ITA No. 280/NAG/2023 (AY : 2017-18) | ITA No. 282/NAG/2023 (AY: 2017-18)

Advocates:
For the Appellants/Petitioners: Madhav Vichare, CA
For the Respondents: Pankaj Kumar, CIT-DR

A penalty notice under section 274 r.w.s. 271AAB of the Income Tax Act is defective and void if it does not specify the particular limb (clause a, b, or c) of section 271AAB(1) under which the Assessing Officer proposes to levy the penalty.

Headnote:(A) Income Tax Act, 1961 - Sections 132(4), 154, 254(1), 271AAB, 274 - Penalty for undisclosed income in search cases - Validity of penalty notice under section 274 must specify the specific limb of section 271AAB(1) (clause (a), (b), or (c)) to be valid; a vague notice that does not specify the charge is defective and renders subsequent penalty proceedings void ab initio - Rectification under section 154 cannot be used to change the basis of penalty from one clause to another where it is a debatable issue - Approval of the Range Head is a statutory requirement for penalty orders and rectification thereof.

(B) Penalty - Principles of natural justice - Penalty proceedings are quasi-criminal in nature; imposing a penalty should not be automatic and requires judicial discretion. Penalty should not be imposed for technical or venial breaches unless the party acted deliberately in defiance of law, with contumacious or dishonest conduct, or in conscious disregard of its obligations; a bona fide belief that the party was not liable under the Act is a ground for waiver.

Facts of the case:
A search and seizure action was carried out on the assessee, a builder and developer, on 26.07.2016. During the search, the assessee declared additional income of Rs. 6,03,10,567/- for A.Y. 2017-18 in a statement recorded under section 132(4). The assessee filed a return of income and the assessment was completed under section 143(3). The Assessing Officer (AO) initiated penalty proceedings under section 271AAB and issued a show-cause notice under section 274 r.w.s. 271AAB on 07.12.2018. The AO initially levied a penalty @ 10% of the undisclosed income on 13.02.2019. Subsequently, the AO invoked section 154 on 30.09.2019 to rectify the penalty order, changing the levy to @ 60% of undisclosed income under clause (c) of section 271AAB(1), on the ground that the assessee had not filed the return or paid tax by the specified date. The assessee appealed, and the CIT(A) deleted both penalty orders. The Revenue appealed to the Tribunal.

Findings of Court:
The Tribunal held that the initial penalty notice under section 274 r.w.s. 271AAB was defective because it did not specify which specific limb of section 271AAB(1) (clauses a, b, or c) the AO intended to proceed under. Following the judgment of the Hon’ble Madras High Court in PCIT vs. R. Elangovan, the Tribunal held that a vague notice denies the assessee a reasonable opportunity to put forth an effective defence, and the consequent penalty order is unsustainable and void ab initio. The Tribunal also found that the rectification order under section 154 was not justified, as changing the basis of penalty from one sub-clause to another involves a debatable issue, which is beyond the scope of section 154. Furthermore, the rectification order lacked the statutory approval of the Range Head.

Issues: 1. Whether a penalty notice under section 274 r.w.s. 271AAB that does not specify the particular limb of section 271AAB(1) (a, b, or c) is a valid notice? 2. Whether the AO can validly rectify a penalty order under section 154 to change the penalty rate from 10% to 60% under a different sub-clause of section 271AAB(1)?

Ratio Decidendi: The court ruled that a penalty notice issued under section 274 r.w.s. 271AAB must specifically mention the clause under which the Assessing Officer proposes to levy the penalty. A notice that is vague and does not strike off irrelevant portions fails to provide the assessee with a reasonable opportunity to be heard and is therefore defective, rendering the subsequent penalty proceedings void ab initio. A rectification under section 154 cannot be used to convert a penalty levied under one sub-clause to another sub-clause as it is a debatable issue, not a mistake apparent from the record. Result : Both appeals by the Revenue are dismissed. The initial penalty order dated 13.02.2019 and the rectified order dated 30.09.2019 are invalid. (Paras 10, 11, 12, 13 and 15)

Table of Content
1. introduction to the appeals and brief facts. (Para 1 , 2 , 3)
2. penalty order and rectification under section 154. (Para 4 , 5 , 6)
3. arguments of the revenue and the assessee. (Para 7 , 8)
4. analysis of penalty under section 271aab and scope of section 154. (Para 9 , 10)
5. defective notice under section 274 r.w.s. 271aab as per pcit v. r. elangovan. (Para 11 , 12 , 13)
6. distinction from sandeep chandak and final dismissal. (Para 14 , 15)

Order under section 254(1) of Income Tax Act

PER PAWAN SINGH, JUDICIAL MEMBER:

1. These two appeals by Revenue are directed against the separate orders 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.

2. 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. If the search had not been conducted, the assessee would not have declared the additional income of Rs.6,03,10,567/- The act of declaration of income could not be considered as voluntary declaration since it was due to the search action which unearthed the undisclosed income. Therefore, this declaration was out of the purview of voluntary declaration and tax payment. Hence no immunity can be granted.

3. On the fact and in the circumstances of the case, the Ld. CIT(A) erred in allowing the appeal of the assessee ignoring the provision of section 271AAB of the Act, wherein it is mentioned that penalty-is. leviable @ 10% of undisclosed income in case of an assessee who has admitted admit additional income in the statement recorded u/s 132(4) of the Income Tax Act, in a case where search has been initiated under section 132 on or after the 1 day of July 2012.

4. Any other ground that may be raised during the course of appellate proceedings.”

2. In ITA No. 280/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.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.

2. 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. if the search had not been conducted, the assessee would not have declared the additional income of Rs.6.03,10,567/-, The act of declaration of income could not be considered as voluntary declaration since it was due to the search action which unearthed the undisclosed income. Therefore, this declaration was out of the purview of voluntary declaration and tax payment. Hence no immunity can be granted.

3. On the fact and in the circumstances of the case, the Ld. CIT(A) erred in allowing the appeal of the assessee ignoring the prov

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2026 Supreme(Online)(ITAT) 11722

INCOME TAX APPELLATE TRIBUNAL (NAGPUR BENCH)Pawan Singh, Judicial Member, Khettra Mohan Roy, Accountant MemberDCIT, Central Circle – 2(1), Nagpur – AppellantVersusOm Shivam Buildcon Private Limited – RespondentITA No. 280/NAG/2023 (AY : 2017-18) | ITA No. 282/NAG/2023 (AY: 2017-18)

A penalty notice under section 274 r.w.s. 271AAB of the Income Tax Act is defective and void if it does not specify the particular limb (clause a, b, or c) of section 271AAB(1) under which the Assessing Officer proposes to levy the penalty.

INCOME TAX APPELLATE TRIBUNAL (NAGPUR BENCH)
Pawan Singh, Judicial Member, Khettra Mohan Roy, Accountant Member
DCIT, Central Circle – 2(1), Nagpur – Appellant
Versus
Om Shivam Buildcon Private Limited – Respondent
ITA No. 280/NAG/2023 (AY : 2017-18) | ITA No. 282/NAG/2023 (AY: 2017-18)