2016 (3) TMI 112 - AT - Income Tax

Penalty under Income Tax Act invalidated for defective notice; appeal allowed

The Tribunal held that the penalty under Section 271(1)(c) of the Income Tax Act was not sustainable due to a defective notice issued under Section 274. ... Penalty under Section 271(1)(c) - Concealment of income - Held that:- Show cause notice issued by the Assessing Officer for levy of penalty under Section 274 r.w.s. 271 is defective as the Assessing Officer has not specified the grounds on which the penalty sought to be levied. See CIT Vs. Manjunatha Cotton & Ginning Factory [2013 (7) TMI 620 - KARNATAKA HIGH COURT ] - Decided in favour of assessee Issues Involved:1. Validity of penalty under Section 271(1)(c) of the Income Tax Act, 1961.2. Difference in the opening stock.3. Difference in the opening balance of the capital account.4. Validity of the notice issued under Section 274 r.w.s. 271 of the Income Tax Act.5. Telescoping effect on the additions made.Issue-wise Analysis:1. Validity of Penalty under Section 271(1)(c) of the Income Tax Act, 1961:The assessee contended that the authorities below were not justified in upholding the penalty under Section 271(1)(c) of the Act, arguing that there was no concealment of income or furnishing of inaccurate particulars. The assessee further argued that the mistakes were not intentional and were due to differences of opinion between the accountant and the previous tax practitioner. The Tribunal noted that the penalty was levied on the basis of discrepancies in the opening stock and capital account balances, which the assessee had accepted and offered for taxation. However, the Tribunal found that the notice issued under Section 274 was defective, as it did not specify whether the penalty was for concealment of income or furnishing inaccurate particulars.2. Difference in the Opening Stock:The Assessing Officer (AO) found discrepancies in the opening balances of various accounts (Maize, Kardi, and Rice) totaling Rs. 2,67,186. The assessee accepted this discrepancy and offered the amount for taxation. The Tribunal noted that the AO did not specify whether the discrepancy was due to concealment or inaccurate particulars, which is crucial for the validity of the penalty.3. Difference in the Opening Balance of the Capital Account:Similarly, the AO found a discrepancy of Rs. 2,96,158 in the opening balance of the capital account. The assessee accepted this discrepancy as well. The Tribunal observed that the AO did not provide a clear basis for the penalty, failing to specify whether it was for concealment or furnishing inaccurate particulars.4. Validity of the Notice Issued under Section 274 r.w.s. 271 of the Income Tax Act:The Tribunal found that the notice issued under Section 274 was defective. The AO did not specify the grounds for the penalty, whether it was for concealment of income or furnishing inaccurate particulars. This defect rendered the penalty proceedings invalid. The Tribunal cited the jurisdictional High Court's decision in CIT Vs. Manjunatha Cotton & Ginning Factory, which mandates that the notice should clearly specify the grounds for the penalty to ensure that the assessee has a fair opportunity to contest it.5. Telescoping Effect on the Additions Made:The assessee argued that the additions should have a telescoping effect, meaning that the discrepancies in the opening stock and capital account should offset each other. The Tribunal did not delve into this argument in detail, as the primary issue of the defective notice rendered the penalty unsustainable.Conclusion:The Tribunal concluded that the penalty under Section 271(1)(c) was not sustainable due to the defective notice issued under Section 274. The notice failed to specify whether the penalty was for concealment of income or furnishing inaccurate particulars, violating principles of natural justice. Consequently, the penalty was deleted, and the appeal was allowed. The Tribunal did not address the merits of the penalty due to the primary issue of the defective notice.