2017 (2) TMI 1091 - AT - Income Tax

Tribunal cancels penalty under Income Tax Act due to lack of evidence and invalid notice

Sri Venkata Ratnam Meka Versus Addl. Commissioner of Income Tax, Range-7, Hyderabad

The Tribunal allowed the assessee's appeal and canceled the penalty imposed under section 271(1)(c) of the Income Tax Act. It held that the penalty was ... Penalty u/s. 271(1)(c) - disallowance of expenditure - Held that:- The levy of penalty on the mere disallowance of expenditure cannot be sustained. AO has not made out a case of concealment or furnishing of inaccurate particulars in the order. Just because assessee has not produced the books of account and expenditure claim is unverifiable, it cannot be stated that assessee has concealed particulars of income or furnished inaccurate particulars. As seen from the order, AO has not disallowed any specific expenditure, but made a roundsum disallowance of ₹ 10 Lakhs. He did not even bother to name the nature of expenditure disallowed. In these circumstances, the mere disallowance of expenditure does not attract levy of penalty. Assessee claimed before the AO that the notice does not specify the nature of offence calling for penalty. Assessee has raised an additional ground contesting that the notice issued does not specify whether the proceedings were initiated for ‘concealment of penalty’ or ‘for furnishing inaccurate particulars’. The copy of the notice placed on record do indicate that it is a printed proforma, without striking-off the relevant columns and simply signed by the AO which was served on assessee. On similar facts, the Hon'ble Karnataka High Court in the case of Manjunatha Cotton & Ginning Factory [2013 (7) TMI 620 - KARNATAKA HIGH COURT] has held that the practice of the department sending a printed form where all the grounds mentioned in 271 are mentioned would not satisfy the requirement of law when the consequence of assessee not rebutting the initial presumption is serious in nature and he had to pay penalty from 10% to 300% of tax liability. As the said provisions have to be held to be strictly construed, notice u/s. 274 should satisfy the grounds which he has to meet specifically. Otherwise, the principles of natural justice are offended, if the show cause notice is vague. On the basis of such proceedings, no penalty could be imposed on assessee. - Decided in favour of assessee Issues Involved:1. Justification of penalty u/s 271(1)(c) of the Income Tax Act.2. Applicability of the Supreme Court decision in MAK Data (P) Ltd. case.3. Validity of the notice issued u/s 274 r.w.s. 271(1)(c) without specifying the charge.4. Consideration of additional grounds raised by the assessee.Issue-wise Detailed Analysis:1. Justification of Penalty u/s 271(1)(c) of the Income Tax Act:The assessee appealed against the penalty of Rs. 3,36,601/- levied by the AO on the disallowance of Rs. 10,00,000/- as unverifiable expenditure. The assessee contended that the AO did not find the expenses claimed to be false or bogus and that there was no satisfaction recorded by the AO that the assessee furnished inaccurate particulars. The penalty was contested as it was based on an agreed disallowance to avoid litigation and not due to any concealment or inaccurate particulars of income. The Tribunal noted that the AO did not specify any particular expenditure disallowed but made a round sum disallowance, which does not attract penalty.2. Applicability of the Supreme Court Decision in MAK Data (P) Ltd. Case:The CIT(A) relied on the MAK Data (P) Ltd. case, where the Supreme Court held that surrender of income is not voluntary if made due to AO's detection. However, the Tribunal distinguished this case, noting that the assessee did not file a revised return or appeal against the addition but accepted the disallowance due to non-availability of books. The Tribunal emphasized that mere disallowance of expenditure does not automatically lead to penalty unless there is clear evidence of concealment or furnishing inaccurate particulars, which was not established in this case.3. Validity of the Notice Issued u/s 274 r.w.s. 271(1)(c) Without Specifying the Charge:The assessee raised an additional ground that the notice u/s 274 r.w.s. 271(1)(c) did not specify whether the penalty was for 'concealment of income' or 'furnishing inaccurate particulars.' The Tribunal admitted this ground, noting that the notice was a printed proforma without striking off the irrelevant parts, which is insufficient to meet legal requirements. Citing the Karnataka High Court decision in Manjunatha Cotton & Ginning Factory, the Tribunal held that such vague notices offend the principles of natural justice and cannot sustain a penalty.4. Consideration of Additional Grounds Raised by the Assessee:The Tribunal considered the additional ground raised by the assessee regarding the notice's validity and found it to be purely legal. The Tribunal noted that similar issues had been adjudicated in other cases, such as M/s. Nivee Property Developers Private Ltd. and Lalitkumar M Sakhala, where penalties were quashed due to non-specific charges in the notices. The Tribunal followed these precedents and quashed the penalty in the present case as well.Conclusion:The Tribunal concluded that the penalty u/s 271(1)(c) could not be sustained as the AO did not establish a case of concealment or furnishing inaccurate particulars. The notice issued was vague and did not specify the charge, violating the principles of natural justice. Consequently, the Tribunal allowed the assessee's appeal and cancelled the penalty.