2021 (3) TMI 608 - HC - Income Tax

Tax penalty proceedings invalid when notice fails to specify grounds by not striking irrelevant portions

Mr. Mohd. Farhan A. Shaikh Versus The Deputy Commissioner of Income Tax, Central Circle 1 Belgaum., The Assistant Commissioner of Income Tax, Central Circle 1, Belgaum.

The Bombay HC held that penalty proceedings under section 271(1)(c) are vitiated when the notice under section 274 fails to specify applicable grounds by ... Levy of penalty u/s 271(1)(c) - validity of notice issued u/s 274 - mere failure to tick mark the applicable grounds - If the assessment order clearly records satisfaction for imposing penalty on one or the other, or both grounds mentioned in Section 271(l)(c), does a mere defect in the notice-not striking off the irrelevant matter-vitiate the penalty proceedings? - 3 Member bench decision - HELD THAT: - It does. The primary burden lies on the Revenue. In the assessment proceedings, it forms an opinion, prima facie or otherwise, to launch penalty proceedings against the assessee. But that translates into action only through the statutory notice under section 271(1)(c), read with section 274 of IT Act. True, the assessment proceedings form the basis for the penalty proceedings, but they are not composite proceedings to draw strength from each other. Nor can each cure the other's defect. A penalty proceeding is a corollary; nevertheless, it must stand on its own. These proceedings culminate under a different statutory scheme that remains distinct from the assessment proceedings. Therefore, the assessee must be informed of the grounds of the penalty proceedings only through statutory notice. An omnibus notice suffers from the vice of vagueness. Goa Dourado Promotions [2020 (1) TMI 140 - BOMBAY HIGH COURT] and other cases have adopted an approach more in consonance with the statutory scheme. That means we must hold that Kaushalya [1995 (1) TMI 25 - BOMBAY HIGH COURT] does not lay down the correct proposition of law. Has Kaushalya [1995 (1) TMI 25 - BOMBAY HIGH COURT] failed to discuss the aspect of 'prejudice'? - HELD THAT:- No doubt, there can exist a case where vagueness and ambiguity in the notice can demonstrate non-application of mind by the authority and/or ultimate prejudice to the right of opportunity of hearing contemplated under section 274. So asserts Kaushalya. In fact, for one assessment year, it set aside the penalty proceedings on the grounds of non-application of mind and prejudice. - That said, regarding the other assessment year, it reasons that the assessment order, containing the reasons or justification, avoids prejudice to the assessee. That is where, we reckon, the reasoning suffers. Kaushalya’s insistence that the previous proceedings supply justification and cure the defect in penalty proceedings has not met our acceptance. What is the effect of the Supreme Court’s decision in Dilip N. Shroff [2007 (5) TMI 198 - SUPREME COURT] on the issue of non-application of mind when the irrelevant portions of the printed notices are not struck off ? - HELD THAT:- Contravention of a mandatory condition or requirement for a communication to be valid communication is fatal, with no further proof. That said, even if the notice contains no caveat that the inapplicable portion be deleted, it is in the interest of fairness and justice that the notice must be precise. It should give no room for ambiguity. Therefore, Dilip N. Shroff [2007 (5) TMI 198 - SUPREME COURT] disapproves of the routine, ritualistic practice of issuing omnibus show-cause notices. That practice certainly betrays non- application of mind. And, therefore, the infraction of a mandatory procedure leading to penal consequences assumes or implies prejudice. Dilip N. Shroff [2007 (5) TMI 198 - SUPREME COURT] treats omnibus show-cause notices as betraying non-application of mind and disapproves of the practice, to be particular, of issuing notices in printed form without deleting or striking off the inapplicable parts of that generic notice. The core legal questions considered by the Court revolve around the validity and effect of an income tax authority's failure to strike off irrelevant grounds in a penalty notice issued under Section 271(1)(c) read with Section 274 of the Income Tax Act, 1961 ('IT Act'). Specifically, the Court examined:(1) Whether a mere defect in the notice, such as the failure to tick mark or strike off the inapplicable grounds in the printed penalty notice, vitiates the entire penalty proceedings when the assessment order clearly records satisfaction for imposing penalty on one or more grounds under Section 271(1)(c).(2) Whether the earlier decision in Commissioner of Income-Tax v. Smt. Kaushalya failed to consider the aspect of prejudice caused by such defective notices.(3) The impact of the Supreme Court's decision in Dilip N. Shroff v. Joint Commissioner of Income-Tax on the issue of non-application of mind where irrelevant portions of printed notices are not struck off.Issue-wise Detailed Analysis1. Validity of Penalty Notice under Section 271(1)(c) read with Section 274 when the Notice Contains Unticked or Unstruck GroundsLegal Framework and Precedents: Sections 271(1)(c) and 274 of the IT Act govern the imposition of penalty for concealment of particulars of income or furnishing inaccurate particulars. Section 271(1)(c) requires that the Assessing Officer (AO) or Commissioner be satisfied during the course of any proceedings that the assessee has concealed income or furnished inaccurate particulars. Section 274 mandates that no penalty order be passed without giving the assessee a reasonable opportunity of being heard, typically by issuing a show-cause notice specifying the grounds.Precedents such as Manjunatha Cotton and Ginning Factory v. CIT (Karnataka High Court) have held that the notice under Section 274 must clearly specify the particular ground (concealment or inaccurate particulars) on which penalty proceedings are initiated. The failure to strike off irrelevant grounds in a printed form notice leads to vagueness, non-application of mind, and invalidates penalty proceedings. This view is supported by decisions like SSA's Emerald Meadows, Samson Perinchery, New Era Sova Mine, and Goa Dourado Promotions.Conversely, the earlier Bombay High Court decision in Commissioner of Income-Tax v. Smt. Kaushalya took a different view. It held that if the assessment order clearly records the grounds for penalty, the notice's failure to strike off irrelevant portions does not vitiate the proceedings, especially where no prejudice is caused to the assessee. Kaushalya emphasized that the assessment order and other proceedings could complement the notice to inform the assessee of the charge.Court's Interpretation and Reasoning: The Court examined the statutory scheme and the nature of penalty proceedings. It emphasized that penalty proceedings are distinct and independent from assessment proceedings and must stand on their own. The assessment order may form the basis for penalty proceedings, but it cannot cure defects in the statutory notice. The notice under Section 274 is the primary communication that informs the assessee of the charge and enables a fair opportunity to defend.The Court noted that issuing an omnibus printed notice without striking off irrelevant grounds betrays non-application of mind by the AO and creates confusion, disabling the assessee from effectively defending the case. It held that penal provisions must be strictly construed, and ambiguity resolved in favour of the assessee. The Court rejected Kaushalya's approach of relying on the assessment order to cure defects in the notice, observing that this imposes an unfair burden on the assessee to glean the charge from multiple sources.Thus, the Court favored the line of cases following Manjunatha, which require the notice to specify clearly and unambiguously the grounds on which penalty proceedings are initiated by striking off irrelevant portions.Key Evidence and Findings: The Court analyzed facts from the referenced appeals, including instances where the AO issued a printed form notice without striking off irrelevant grounds, and the assessment order did not explicitly specify the grounds of penalty. It found that such notices are vague and violate the principles of natural justice.Application of Law to Facts: The Court applied the principle that penalty proceedings are quasi-criminal and require strict compliance with procedural safeguards. It held that the absence of a clear, unambiguous notice specifying the grounds for penalty vitiates the proceedings, regardless of the contents of the assessment order.Treatment of Competing Arguments: The Court acknowledged the Revenue's argument that the assessment order and other proceedings inform the assessee of the charge, and that mere technical defects in the notice should not invalidate penalty proceedings absent prejudice. However, it found that the strict requirement of clarity in the notice is necessary to protect the assessee's right to a fair hearing and to avoid litigation arising from ambiguity.Conclusion: The Court concluded that a mere defect in the notice, such as failure to strike off irrelevant grounds, vitiates the penalty proceedings even if the assessment order records satisfaction for imposing penalty on one or more grounds under Section 271(1)(c). This aligns with the precedents following Manjunatha and rejects the Kaushalya approach.2. Consideration of Prejudice in Kaushalya and Other DecisionsLegal Framework and Precedents: The principle of natural justice requires that the assessee be given a reasonable opportunity to defend himself, and prejudice caused by procedural defects is a key consideration. The Supreme Court in Sudhir Kumar Singh v. State of U.P. clarified that infraction of procedural or substantive provisions does not automatically lead to invalidity unless prejudice is shown, except in cases involving mandatory provisions conceived in public interest.Kaushalya held that the assessee suffered no prejudice because the assessment order clearly disclosed the grounds for penalty, and the notice was not ambiguous to the extent of impairing the right to be heard. However, Kaushalya also recognized that vagueness and ambiguity in a notice could demonstrate non-application of mind and prejudice in some cases.Court's Interpretation and Reasoning: The Court found that Kaushalya did discuss prejudice but erred in holding that the assessment order alone cures defects in the notice and prevents prejudice. The Court emphasized that the notice itself must be clear and unambiguous to enable the assessee to prepare a defense. Reliance on other proceedings to cure a defective notice imposes an unfair burden and undermines the principles of natural justice.Key Evidence and Findings: The Court noted that the Revenue's practice of issuing omnibus printed notices without striking off irrelevant grounds causes confusion and prejudice to the assessee. Prejudice arises because the assessee cannot ascertain the precise charge and thus cannot effectively respond.Application of Law to Facts: The Court held that prejudice must be assessed on the basis of the notice and the opportunity it affords. Where the notice is vague or ambiguous, prejudice is presumed, especially in penal proceedings. The assessment order cannot substitute for clear communication in the notice.Treatment of Competing Arguments: The Court rejected the Revenue's contention that no prejudice arises because the assessee is aware of the charge from assessment proceedings. It held that penalty proceedings are independent and require separate clear communication.Conclusion: Kaushalya's reliance on the assessment order to negate prejudice is not acceptable. The notice itself must be clear to avoid prejudice, and failure to strike off irrelevant grounds in the notice leads to prejudice and vitiates penalty proceedings.3. Effect of Dilip N. Shroff on Non-application of Mind in Printed NoticesLegal Framework and Precedents: The Supreme Court in Dilip N. Shroff observed that the use of printed proforma notices without deleting irrelevant portions reflects non-application of mind by the AO. The Court held that an assessing officer must apply his mind before initiating penalty proceedings and issuing notices.Court's Interpretation and Reasoning: The Court endorsed Dilip N. Shroff's disapproval of the routine practice of issuing omnibus printed notices without striking off irrelevant grounds. It held that such practice betrays non-application of mind and is fatal to the validity of penalty proceedings. The Court emphasized that a mandatory procedural requirement like issuing a clear notice cannot be treated as a mere formality.Key Evidence and Findings: The Court found that the failure to strike off irrelevant grounds in the printed notice is a violation of mandatory procedural requirements, implying prejudice to the assessee.Application of Law to Facts: The Court applied the principle that contravention of a mandatory condition for valid communication is fatal without need for further proof. It held that the practice of issuing omnibus notices is impermissible.Treatment of Competing Arguments: The Court acknowledged the Revenue's argument that the notice's form is not prescribed and that the assessment order reveals the charge. However, it rejected this, emphasizing the necessity of clear, precise notice to satisfy natural justice.Conclusion: Dilip N. Shroff treats omnibus show-cause notices without striking off irrelevant grounds as reflecting non-application of mind, rendering penalty proceedings invalid.Additional Observations on Precedential Conflict and Doctrine of PrecedentThe Court undertook an extensive analysis of the doctrine of precedent, ratio decidendi, and the binding nature of decisions. It distinguished between the ratio (the legal principle necessary for the decision) and obiter dicta (non-binding observations). The Court emphasized that only the ratio binds and that conflicting precedents must be resolved by identifying the true ratio and material facts on which they are based.Applying this, the Court found that the precedential conflict between Kaushalya and the later decisions (Goa Dourado Promotions, Samson Perinchery, New Era Sova Mine) arises because Kaushalya relied on the assessment order to cure defects in the notice, whereas the later decisions require the notice itself to be clear and unambiguous. The Court held that Kaushalya does not lay down the correct proposition of law and that the later line of cases is more consistent with the statutory scheme and principles of natural justice.Summary of Significant Holdings'A penalty proceeding under section 271(1)(c) of the Income Tax Act is distinct and independent from the assessment proceedings. The statutory notice under section 274 read with section 271(1)(c) is the primary communication that informs the assessee of the grounds of penalty and enables a fair opportunity to defend. A mere defect in the notice, such as failure to strike off irrelevant grounds in a printed form notice, vitiates the penalty proceedings even if the assessment order records satisfaction for imposing penalty.''The practice of issuing omnibus, catch-all, printed notices without striking off inapplicable portions reflects non-application of mind by the assessing authority and is impermissible. Such practice offends the principles of natural justice and results in prejudice to the assessee.''The earlier decision in Commissioner of Income-Tax v. Smt. Kaushalya, which held that the assessment order could cure defects in the notice and prevent prejudice, does not lay down the correct law and is overruled to the extent it conflicts with the requirement of clear and unambiguous notice.''The Supreme Court's decision in Dilip N. Shroff disapproves of omnibus show-cause notices and treats the failure to strike off irrelevant grounds as non-application of mind, rendering penalty proceedings invalid.''Prejudice to the assessee is presumed where the notice is vague or ambiguous, particularly in penal proceedings. The assessee must be informed clearly and specifically of the grounds on which penalty is sought to be imposed.''The Assessing Officer's satisfaction regarding concealment or furnishing inaccurate particulars must be recorded during the course of proceedings and reflected in the assessment order or other order. However, the penalty proceedings must be initiated and conducted independently, with a clear notice under section 274.''Strict compliance with procedural requirements in penalty proceedings is mandatory. Ambiguity or vagueness in the notice cannot be cured by referring to other documents or proceedings.''The doctrine of precedent requires that only the ratio decidendi binds. Conflicting precedents must be resolved by identifying the true ratio and material facts. The later line of cases requiring clear, unambiguous notices is the correct legal position.'