2017 (5) TMI 1401 - AT - Income Tax

Invalidation of Income Tax Act penalties for 2005-06 and 2006-07 due to defective notices and lack of evidence

The Tribunal invalidated penalty proceedings under Section 271(1)(c) of the Income Tax Act for the assessment years 2005-06 and 2006-07. The penalties ... Penalty u/s 271(1)(c) - defective notice as it does not clearly strike out the charge of penalty - Held that:- We find that the notice issued u/s 274 of the Act by the AO for levying of the penalty is defective in so far it does not spell out the specific charge for penalty. The specific charge for the penalty whether it is levied for the concealment or furnishing of inaccurate particulars of income must emanate from the penalty notice. In the absence of specific charge in the notice, the several courts have decided the issue in favour of assessee . See Manjunatha Cotton & Ginning Factory [2013 (7) TMI 620 - KARNATAKA HIGH COURT] - Decided in favour of assessee. Penalty u/s 271(1)(c) - inaccurate particulars of income on account of low GP ratio declared by the assessee which was subsequently reduced by the ld. CIT(A). - A.Y.06-07. - Held that:- The assessee had furnished complete particulars before the authorities below. However, the addition in the hands of the assessee was made by estimating the GP profit on the turnover. In such circumstances, where no concrete evidence was found against the assessee and the addition being based on estimation, there is no merit in the levy of penalty u/s 271(1)(c) of the Act. Accordingly, we direct the Assessing Officer to delete the penalty levied for concealment u/s 271(1)(c) of the Act.- Decided in favour of assessee. Issues Involved:1. Validity of penalty proceedings under Section 271(1)(c) of the Income Tax Act, 1961.2. Defective notice under Section 274 of the Income Tax Act, 1961.3. Estimation of Gross Profit (GP) and its implications on penalty under Section 271(1)(c).Issue-wise Detailed Analysis:1. Validity of Penalty Proceedings under Section 271(1)(c):The primary issue raised by the assessee was that the Commissioner of Income Tax (Appeals) [CIT(A)] erred in confirming the order of the Assessing Officer (AO) by imposing penalties under Section 271(1)(c) of the Income Tax Act, 1961. The penalties were imposed for the assessment years 2005-06 and 2006-07, amounting to Rs. 1,04,593/- and Rs. 2,93,627/- respectively. The assessee argued that the penalties were unjustified as they were based on irrelevant and extraneous considerations, such as non-compliance and non-cooperation during the assessment proceedings. The assessee also contended that the penalties were imposed without appreciating that the profit was estimated due to the failure to produce books of account.2. Defective Notice under Section 274:The assessee submitted that the notice issued under Section 274 read with Section 271(1)(c) was defective as it did not clearly specify whether the penalty was for concealment of income or furnishing inaccurate particulars of income. The Tribunal found merit in this argument, referencing several judicial decisions, including the Karnataka High Court's judgment in CIT Vs. Manjunatha Cotton & Ginning Factory (359 ITR 565), which emphasized that the specific charge for the penalty must be clearly stated in the notice. The Tribunal also cited the jurisdictional High Court's decisions in Smt. Parama Basak Vs. CIT and CIT Vs. Arti & Sons, which supported the requirement for clear and specific grounds for penalty in the notice. The Tribunal concluded that the penalty proceedings were invalid due to the defective notice and directed the AO to delete the penalties.3. Estimation of Gross Profit (GP) and Penalty Implications:For the assessment year 2006-07, the AO had made additions to the assessee's income based on a low GP ratio, which was determined by applying a 2.8% rate on the total turnover after rejecting the books of accounts. The penalty was levied for furnishing inaccurate particulars of income. The Tribunal noted that the addition was based on an estimation of GP and not on concrete evidence of concealment or inaccurate particulars. The Tribunal held that in cases where income is determined based on estimation, there is no merit in levying penalties under Section 271(1)(c). Consequently, the Tribunal directed the AO to delete the penalty for the assessment year 2006-07 as well.Conclusion:The Tribunal allowed both appeals of the assessee, invalidating the penalty proceedings due to defective notices and the nature of income estimation. The orders of the CIT(A) and the AO were reversed, and the penalties under Section 271(1)(c) were directed to be deleted for both assessment years.Order Pronouncement:The order was pronounced in open court on 26/05/2017.