2017 (11) TMI 1059 - AT - Income Tax

Tribunal overturns penalty order due to defective notice, highlighting need for clear charges.

The Tribunal allowed the appeal, setting aside the penalty order under section 271(1)(c) due to the invalidity of the notice issued under section 274 read ... Levying penalty u/s 271(1)(c) - addition made of unexplained investment under section 69 - defective notice - Held that:- The perusal of the notice reveals that the AO has not strike out the irrelevant portion of the notice. Further, we have also perused the Assessment Order passed under section 153A rws 143(3) dated 08.06.2012. The perusal of Assessment Order reveals that the AO has not specified under which limb of section 271(1)(c), the penalty is initiated. The AO simply noted “therefor penalty proceeding under section 271(1)(c) is hereby initiated.” Hon’ble Gujarat High Court in Manu Engineering (1978 (9) TMI 18 - GUJARAT High Court) and Delhi High Court in CIT Vs Virgo Marketing (2008 (1) TMI 885 - DELHI HIGH COURT) held that where from a reading of assessment order, it was not clear as to why Assessing Officer chose to initiate penalty proceedings against assessee and under which part of section 271(1)(c), penalty imposed under section 271(1)(c) is liable to be set aside. - Decided in favour of assessee. Issues Involved:1. Levy of penalty under section 271(1)(c) of the Income Tax Act, 1961.2. Validity of the notice issued under section 274 read with section 271 of the Income Tax Act, 1961.3. Non-compliance with the principles of natural justice.Detailed Analysis:1. Levy of Penalty under Section 271(1)(c) of the Income Tax Act, 1961:The core issue revolves around the penalty imposed by the Assessing Officer (AO) under section 271(1)(c) for unexplained investment amounting to Rs. 33,00,000, which was later enhanced to Rs. 3,00,97,000 by the Commissioner of Income Tax (Appeals) [CIT(A)]. The AO levied a penalty of Rs. 1,01,22,335, calculated at 100% of the tax sought to be evaded. The CIT(A) sustained the penalty only on the initial addition of Rs. 33,00,000. The assessee contended that the penalty was wrongly imposed as the AO did not provide a clear finding that the paper found during the search belonged to the assessee and no incriminating material was found against them.2. Validity of the Notice Issued under Section 274 Read with Section 271 of the Income Tax Act, 1961:The assessee argued that the notice issued under section 274 read with section 271 was invalid as it was issued in a standard proforma without striking out the irrelevant portions. The notice did not specify whether the penalty was for 'concealment of particulars of income' or 'furnishing inaccurate particulars of income.' This ambiguity was claimed to be a violation of natural justice principles, as it did not provide the assessee with a clear charge to respond to.The Tribunal examined the notice and found that the AO had indeed not struck out the irrelevant portions, making the notice ambiguous. The Tribunal referred to various judicial precedents, including the Supreme Court's decision in Dilip N. Shroff v. JCIT and the Karnataka High Court's decision in CIT v. Manjunatha Cotton & Ginning Factory, which emphasized the necessity for the AO to clearly specify the charge in the notice.3. Non-Compliance with the Principles of Natural Justice:The Tribunal highlighted that the penalty proceedings under section 271(1)(c) are quasi-criminal in nature and must comply with the principles of natural justice. The failure to specify the exact charge in the notice was seen as a lack of application of mind by the AO and a violation of the assessee's right to a fair hearing. The Tribunal cited the Supreme Court's observation in Dilip N. Shroff that non-striking off of the irrelevant portions in the notice reflects non-application of mind by the AO.Conclusion:The Tribunal concluded that the notice issued under section 274 read with section 271 was invalid due to non-application of mind and failure to specify the exact charge. Consequently, the penalty order passed by the AO was set aside. The Tribunal allowed the appeal filed by the assessee, rendering the discussion on the merits of the penalty redundant.Final Judgment:The appeal filed by the assessee was allowed, and the penalty order under section 271(1)(c) was set aside due to the invalidity of the notice issued under section 274 read with section 271. The Tribunal emphasized the necessity for clear and specific charges in penalty notices to comply with the principles of natural justice. The order was pronounced in the open court on 29th September 2017.