ITAT Pune on Section 271AAB(1A): Penalty Cancelled for Vague Notice and Incorrect Undisclosed Income Computation

1. Background and Appeal Structure

This decision of the ITAT Pune in Giriraj Enterprises Vs DCIT (ITA No.427/PUN/2025 & ITA No.553/PUN/2025) concerns cross-appeals filed by the assessee and the Revenue against the order of the CIT(A), Pune-11 dated 27.12.2024 for Assessment Year 2021-22.

  • The assessee is a partnership firm engaged in:

    • Dealership in FMCG products, primarily tobacco and lime
    • Power generation through windmill
    • Bajaj two wheeler dealership and related service station operations

  • A search under Section 132 was conducted on 17.02.2021 in the Malpani group, covering the assessee’s premises as well.

  • During search, the assessee admitted undisclosed cash sales of Gai Chhap tobacco and other products amounting to Rs.1,26,59,41,430 and subsequently offered gross profit of Rs.81,51,03,640 on such sales.

The assessment under Section 153A r.w.s. 143(3) accepted this income and made no addition on account of unaccounted sales; the only addition was a disallowance of Rs.18,01,430 under Section 80IA(4).

Later, the Assessing Officer initiated penalty under Section 271AAB(1A) and levied a penalty of Rs.24,45,31,092.

The CIT(A):

  • Rejected the legal challenge to the penalty notice,
  • But granted partial relief by allowing reduction of GST directly relatable to such unaccounted sales, and restricted the “undisclosed income” for penalty purposes to Rs.21,99,84,531.

The assessee appealed against sustenance of penalty on this reduced figure; the Revenue appealed against reduction of the penalty base from Rs.81,51,03,640 to Rs.21,99,84,531.

The Tribunal decided both appeals through a common order.

2. Key Facts Surrounding the Search and Disclosure

2.1 Search and Statement Under Section 132(4)

During the Section 132 search in the Malpani group, loose papers relating to cash sales of Gai Chhap tobacco and other products were found. These were confronted to Shri Rajesh Malpani, a partner of the assessee firm.

In his Section 132(4) statement dated 16.04.2021, he:

  • Accepted that the seized documents represented unaccounted sales of Gai Chhap tobacco and other products.

  • Stated that the practice of unaccounted sales began in July 2019 and continued till February 2021.

  • Quantified the total unaccounted sales for FY 2019-20 and FY 2020-21 as follows:

    • For FY 2019-20:

      • Gai Chaap: Rs.1,24,90,67,499
      • Other products: Rs.1,77,58,950

    • For FY 2020-21:

      • Gai Chaap: Rs.1,20,95,17,640
      • Other products: Rs.5,64,23,790

    • Grand Total:

      • FY 2019-20: Rs.1,26,68,26,449
      • FY 2020-21: Rs.1,26,59,41,430
      • Aggregate: Rs.2,53,27,67,879

  • Confirmed that income from these sales would be computed after allowing related cash expenditure (raw tobacco, packing material, labour, transport, loading/unloading and incidental expenses) and would be offered in the relevant years (FY 2019-20 and 2020-21).

2.2 Return of Income and Assessment

For AY 2021-22, in response to notice under Section 153A:

  • The assessee filed return on 08.03.2022 declaring total income of Rs.81,73,67,960, which included gross profit of Rs.81,51,03,640 on unaccounted sales of Rs.1,26,59,41,430.
  • The AO, while framing assessment under Section 153A r.w.s. 143(3), accepted:
    • The disclosure of gross profit of Rs.81,51,03,640 on cash sales, and
    • Made only a separate disallowance under Section 80IA(4) of Rs.18,01,430.

No further addition was made on undisclosed sales.

3. Penalty Proceedings Under Section 271AAB(1A)

3.1 AO’s Penalty Order

The AO initiated penalty under Section 271AAB(1A) by issuing notice under Section 274 r.w.s. 271AAB.

In substance, the AO held:

  • The undisclosed sales of Rs.1,26,59,41,430 were clearly outside the regular books on the date of search and therefore constituted “undisclosed income” as per explanation to Section 271AAB.
  • The argument that the due date for filing return under Section 139(1) had not expired as on date of search, and therefore income offered in return cannot be “undisclosed income”, was rejected.
  • The AO treated the entire gross profit of Rs.81,51,03,640 as “undisclosed income” for AY 2021-22 and levied penalty at 20%, computing penalty at Rs.24,45,31,092.

The assessee objected to:

  • The very applicability of Section 271AAB(1A) on the facts,
  • The quantum base of Rs.81,51,03,640, and
  • The rate and nature of penalty.

It also submitted that:

  • The sales disclosed at the time of search were inclusive of GST.
  • On such sales, GST and interest aggregating to Rs.65,24,14,109 (relating to AY 2021-22) had been paid and debited to Profit & Loss Account.
  • Hence, the real “undisclosed income” was only Rs.16,26,89,531 (Rs.81,51,03,640 minus Rs.65,24,14,109), and penalty, if at all leviable, should be confined to this.

The AO did not accept the GST reduction contention and levied penalty with reference to the entire gross profit.

4. CIT(A)’s Findings: Notice Validity and Quantum of Undisclosed Income

4.1 On Validity of Notice Under Section 274 r.w.s. 271AAB

Before the CIT(A), the assessee argued that:

  • The notice under Section 274 r.w.s. 271AAB did not mention the specific clause of Section 271AAB(1A) (clause (a) or clause (b)) under which penalty was proposed.
  • Therefore, the notice was vague, invalid, and the entire penalty proceedings were void.

The CIT(A) rejected this challenge, reasoning that:

  • The assessment order dated 22.04.2022 explicitly stated that penalty proceedings were initiated under Section 271AAB(1A) on undisclosed income from cash sales.
  • The assessee appeared to rely on “Mohd. Farhan A. Sheikh Vs DCIT, 434 ITR 1 (Bombay)”, which dealt with Section 271(1)(c).
  • According to the CIT(A):
    • Section 271(1)(c) contained two distinct “limbs” (concealment vs. furnishing inaccurate particulars) with different connotations.
    • By contrast, Section 271AAB(1A) was viewed by him as not having such separate “limbs”; it merely prescribed different situations in clause (a) and (b) with different outcomes.
  • Thus, he held that the ratio of Mohd. Farhan A. Sheikh Vs DCIT was not applicable and no binding decision had been cited to invalidate a Section 271AAB notice for similar defect.