2019 (6) TMI 1283 - AT - Income Tax

Penalty legality questioned: Case highlights need for clear notice and natural justice principles

Harvinder Singh Versus Income-Tax Officer

Harvinder Singh Versus Income-Tax Officer - [2019] 72 ITR (Trib) 274 (ITAT [Amrit]) Issues Involved:1. Legality of penalty under Section 271(1)(c) when initiated for one limb and imposed for another.2. Applicability of the Supreme Court's decision in K. P. Madhusudhanan v. CIT.3. Validity of the notice under Section 274 when inappropriate portions are not struck off.Issue-wise Detailed Analysis:1. Legality of Penalty Under Section 271(1)(c):The primary issue was whether the penalty under Section 271(1)(c) is sustainable when the satisfaction for initiating penalty proceedings is recorded for concealing particulars of income, but the penalty is imposed for furnishing inaccurate particulars of income. The Judicial Member held that such a discrepancy does not make the penalty order illegal, relying on the Supreme Court's decision in K. P. Madhusudhanan v. CIT, which stated that no express invocation of the Explanation to Section 271 is necessary in the notice. However, the Accountant Member disagreed, citing the Karnataka High Court's decision in Manjunatha Cotton and Ginning Factory, which mandates that the grounds for penalty must be specific and clear to the assessee. The Third Member concurred with the Accountant Member, emphasizing that the notice must clearly specify the grounds for penalty to ensure the principles of natural justice are upheld.2. Applicability of the Supreme Court's Decision in K. P. Madhusudhanan v. CIT:The Judicial Member relied on the Supreme Court's decision in K. P. Madhusudhanan to support the view that the penalty order is valid even if the notice does not explicitly invoke the Explanation to Section 271. The Accountant Member and the Third Member, however, found this reliance misplaced. They referred to the Andhra Pradesh High Court's decision in Smt. Baisetty Revathi, which clarified that K. P. Madhusudhanan does not apply to cases where the issue is whether the assessee was adequately informed of the specific charge against them. The Third Member emphasized that the assessee must be clearly informed whether the penalty is for concealment of income or furnishing inaccurate particulars, as these are distinct charges with different implications.3. Validity of the Notice Under Section 274:The Judicial Member held that not striking off inappropriate portions in the notice does not invalidate it, as long as the assessee is aware of the penalty proceedings. This view was supported by the Andhra Pradesh High Court's decision in CIT v. Chandulal. The Accountant Member, supported by the Third Member, disagreed, citing the Karnataka High Court's decision in Manjunatha Cotton and Ginning Factory, which mandates that the notice must specifically state the grounds for penalty. The Third Member further emphasized that the notice's ambiguity offends the principles of natural justice, as it does not give the assessee a fair opportunity to defend against the specific charge.Conclusion:The Third Member concluded that the penalty orders were not sustainable as the Assessing Officer had initiated penalty on one limb of Section 271(1)(c) and imposed it on another limb. The decision was in favor of the assessee, emphasizing the need for clear and specific grounds in the penalty notice to uphold the principles of natural justice. The appeals filed by the assessee were allowed, and the penalty orders were set aside.