Section 271AAB Penalty Quashed for Defective Section 274 Notice: ITAT Visakhapatnam Ruling
Penalty under Section 271AAB(1) cannot be sustained when the show-cause notice under Section 274 fails to specify whether penalty is proposed under clause (a), (b), or (c). The ITAT Visakhapatnam held that these clauses prescribe different factual conditions and penalty rates. Therefore, the assessee must be informed of the precise statutory basis of the proposed penalty.
The decision was delivered in Manchukonda Yethiraja Subrahmanyam v. ACIT, Central Circle-1, Andhra Pradesh, ITA No. 724/VIZ/2025, Assessment Year 2016–17, order dated 9 September 2026.
Case Background
A search under Section 132 of the Income-tax Act, 1961 was conducted at the assessee’s residential premises on 24 November 2015. During the search, silver jewellery weighing 17,220.90 grams and valued at Rs. 46,84,044 was found.
In his statement recorded under Section 132(4), the assessee initially admitted the value of the silver articles as undisclosed income. Later, he explained that Rs. 23,49,000 represented his share of additional income disclosed by a partnership firm, M/s Navratna Estates.
According to the assessee, this additional income had been utilised for purchasing the silver articles. He subsequently filed a revised return declaring the balance amount of Rs. 23,35,044 as additional income.
The Assessing Officer did not accept the explanation regarding Rs. 23,49,000 and made the addition. Penalty proceedings were thereafter initiated under Section 271AAB.
Taxpayers dealing with search-related assessments may also review the available ITR-B and block assessment filing services.
Penalty Imposed by the Assessing Officer
The Assessing Officer imposed penalty under Section 271AAB(1) at the rate of 60% of Rs. 23,35,044.
The penalty amount worked out to:
Rs. 23,35,044 × 60% = Rs. 14,01,026
The Commissioner of Income Tax (Appeals) confirmed the penalty. The assessee then challenged the penalty before the ITAT, primarily on the ground that the show-cause notice issued under Section 274 did not specify the particular clause of Section 271AAB(1) being invoked.
For professional assistance in responding to income-tax proceedings, taxpayers may refer to tax litigation and representation services.
Defect in the Section 274 Notice
The notice dated 28 December 2017, issued under Section 274 read with Section 271AAB, merely stated that the assessee should show cause why an order imposing penalty under Section 271AAB should not be made.
However, the notice did not state:
- Whether penalty proceedings were initiated under clause (a), (b), or (c) of Section 271AAB(1).
- The specific factual conditions allegedly satisfied by the assessee.
- The precise default for which the assessee was required to defend himself.
- The applicable rate or category of penalty.
The subsequent notices dated 21 January 2021 and 22 February 2021 also did not cure the original defect.
Different Clauses Have Different Consequences
Section 271AAB(1) contains separate clauses dealing with different factual circumstances. The applicable penalty consequences are not identical.
| Clause | Broad statutory situation | Penalty consequence |
|---|---|---|
| Clause (a) | Undisclosed income is admitted during search, the manner of earning is specified, and tax and interest are paid within the prescribed time | 30% of undisclosed income |
| Clause (b) | Undisclosed income is admitted during search and the prescribed return conditions are met, but the case does not fall under clause (a) | 60% of undisclosed income |
| Clause (c) | Cases not covered by clauses (a) or (b) | Penalty ranging from 30% to 90% of undisclosed income |
Because each clause contains different conditions and carries a different penalty consequence, the Tribunal held that a general reference to Section 271AAB is insufficient.
The assessee must know the precise clause being invoked so that an effective response can be filed.
ITAT’s Reasoning Under Section 274
Section 271AAB(3) makes the provisions of Sections 274 and 275 applicable to penalty proceedings under Section 271AAB.
Section 274 requires that the assessee be given a reasonable opportunity of being heard before a penalty is imposed. According to the Tribunal, a reasonable opportunity is meaningful only when the assessee is informed of the specific statutory basis of the proposed penalty.
A notice that simply refers to Section 271AAB, without identifying the applicable clause, does not provide sufficient information to the assessee.
The Tribunal therefore held that the notice must communicate:
- The specific clause of Section 271AAB(1) invoked by the Assessing Officer.
- The relevant factual conditions alleged to exist.
- The basis on which the proposed penalty is calculated.
- The opportunity available to the assessee to rebut those allegations.
For issues involving defective or unclear tax notices, taxpayers may also review the guidance on income-tax demand notice response.
Revenue’s Argument Rejected
The Revenue argued that specification of the particular clause was unnecessary because Section 271AAB does not involve the two specific charges generally associated with Section 271(1)(c), namely:
- Concealment of income; and
- Furnishing inaccurate particulars of income.
The Tribunal rejected this argument.
It held that the requirement to specify the relevant statutory basis does not arise only because Section 271(1)(c) contains two separate charges. In the context of Section 271AAB, clauses (a), (b), and (c) themselves create materially different factual situations and penalty rates.
Accordingly, the assessee is entitled to know which clause is being applied, even though the penalty is not framed in terms of concealment or furnishing inaccurate particulars.
Participation Does Not Cure the Defect
The Revenue also contended that the assessee had participated in the penalty proceedings and had not challenged the validity of the notice at the initial stage.
The Tribunal rejected this contention as well.
It held that participation in penalty proceedings cannot confer jurisdiction where the statutory requirements for valid initiation have not been satisfied. A jurisdictional defect in the initiation of penalty proceedings is not cured merely because the assessee responds to the notice or participates in subsequent proceedings.
The defect was considered fundamental because the assessee was not informed of the specific statutory provision under which he was required to defend himself.
Judicial Precedents Considered
The ITAT relied on the following decisions:
PCIT v. Shri R. Elangovan
The Madras High Court held that failure to specify the applicable category of penalty in the notice vitiated the penalty proceedings.
Shri Kishan Kumar Aggarwal v. ACIT
The ITAT Hyderabad followed the principle that the relevant clause and statutory basis must be clear in penalty proceedings under Section 271AAB.
Baddham Venkateswarlu v. ACIT
The ITAT Visakhapatnam applied the same reasoning in another matter involving penalty under Section 271AAB.
These authorities support the broader principle that a penalty notice must provide sufficient and specific information for the assessee to exercise an effective right of defence.
Final Decision of the ITAT
The ITAT Visakhapatnam held that:
- The notice under Section 274 read with Section 271AAB was defective.
- The notice did not specify the applicable clause of Section 271AAB(1).
- The defect affected the validity of the initiation of penalty proceedings.
- Subsequent notices did not cure the original defect.
- Participation by the assessee did not validate the defective proceedings.
Consequently, the ITAT:
- Quashed the penalty of Rs. 14,01,026.
- Set aside the order of the CIT(A).
- Allowed the assessee’s appeal.
- Did not adjudicate the remaining grounds, leaving them open.
Key Takeaway for Taxpayers
Where a penalty notice under Section 274 read with Section 271AAB merely states that penalty proceedings are proposed under Section 271AAB, without specifying clause (a), (b), or (c), the assessee may have a strong jurisdictional objection.
The validity of the penalty proceedings should be examined by checking:
- The exact language of the Section 274 notice.
- Whether clause (a), (b), or (c) is clearly mentioned.
- Whether the alleged factual conditions are stated.
- Whether the penalty rate corresponds to the clause invoked.
- Whether subsequent notices actually cure the original defect.
- Whether the penalty order travels beyond the contents of the show-cause notice.
In appropriate cases, such a defect may result in the penalty order being quashed without the Tribunal having to examine the merits of the alleged undisclosed income.
For broader assistance with income-tax notices and assessment proceedings, taxpayers may refer to ITR filing and CPC notice reply services and faceless assessment support under Section 144B.
Conclusion
The decision in Manchukonda Yethiraja Subrahmanyam v. ACIT reiterates that a penalty under Section 271AAB must be initiated in accordance with the statutory safeguards contained in Section 274.
Since clauses (a), (b), and (c) of Section 271AAB(1) involve different factual conditions and prescribe different rates of penalty, the assessee must be informed of the precise clause being invoked.
A vague notice that fails to identify the applicable clause denies the assessee a meaningful opportunity to defend the proceedings. Such a defect is jurisdictional in nature and is not cured by participation in the penalty proceedings.
Accordingly, the ITAT Visakhapatnam quashed the penalty of Rs. 14,01,026 and allowed the assessee’s appeal.
For consultation regarding income-tax litigation, search assessments, penalty notices, or tax compliance, taxpayers may schedule an appointment.
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