2021 (11) TMI 325 - AT - Income Tax

Tribunal Invalidates Penalties Under Income Tax Act

Dy. C.I.T., Range-6, Lucknow. Versus M/s Scooters India Ltd. And (Vice-Versa)

Dy. C.I.T., Range-6, Lucknow. Versus M/s Scooters India Ltd. And (Vice-Versa) - [2022] 96 ITR (Trib) 460 (ITAT [Luck]) ISSUES PRESENTED AND CONSIDERED 1. Whether a show-cause notice issued under section 274 read with section 271(1)(c) that does not specify which limb of section 271(1)(c) (concealment of income or furnishing inaccurate particulars) is a valid notice and can support the levy of penalty. 2. Whether established precedents holding that non-specific penalty notices offend principles of natural justice and render penalty proceedings void apply despite Departmental reliance on authorities (including Dharmendra Textile Processors and Sundaram Finance) alleged to support levy of penalty. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of show-cause notice under section 274 read with section 271(1)(c) when the notice fails to specify the particular limb (concealment or furnishing inaccurate particulars) Legal framework: Section 271(1)(c) prescribes penalty for either concealment of income or furnishing inaccurate particulars of income; section 274 governs issuance of show-cause notices for imposing penalties. Penalty proceedings under section 271(1)(c) are treated as quasi-criminal in character and must conform to principles of natural justice. Precedent treatment: The Court followed the line of authority that requires specificity in the show-cause notice - notably the decisions upholding that a printed form or a notice listing both limbs without striking the irrelevant part does not satisfy the requirement that the assessee be informed of the precise charge (as reflected in the Karnataka High Court decision affirmed by the Supreme Court in SSA's Emerald Meadows and in various tribunal decisions cited). Interpretation and reasoning: The Tribunal examined the impugned notices and found they indiscriminately specified both limbs (concealment and furnishing inaccurate particulars) without identifying which limb was the basis for penalty. That non-specificity indicates non-application of mind by the Assessing Officer and prevents the assessee from knowing which specific charge to meet. Given the quasi-criminal nature of penalty proceedings, the notice must clearly state the basis so the assessee can prepare an effective defence; failure to do so offends natural justice. Ratio vs. Obiter: Ratio - A show-cause notice under section 274 read with section 271(1)(c) that does not specify which limb of section 271(1)(c) is invoked is void ab initio and cannot sustain a penalty. Obiter - Observations on assessment order language replicating the nebulous charge underscore the point but are ancillary. Conclusion: The Tribunal concluded that the impugned notices were non-specific and therefore void; penalties imposed on the basis of such notices are illegal and liable to be deleted. Issue 2 - Applicability of contrary authorities relied on by the Revenue (Dharmendra Textile Processors and Sundaram Finance) and treatment of those precedents Legal framework: When considering precedent, the appropriate test is whether the earlier decision addressed the same legal question and facts (in particular, whether it considered validity of section 274/271(1)(c) notices and the requirement of specificity), and whether any departure is warranted on distinguishable facts. Precedent Treatment (followed/distinguished/overruled): - Dharmendra Textile Processors: Distinguished. That decision arose under Central Excise and addressed mens rea/strict liability issues, not the validity/specificity of section 274/271(1)(c) notices; therefore it does not govern the present question about notice specificity and natural justice in penalty notices under the Income Tax Act. - Sundaram Finance (Madras High Court): Distinguished on facts. Sundaram Finance was decided on the factual finding that the assessee had not shown prejudice and had not raised defect in the notice at earlier stages; it did not repudiate the principle that a non-specific notice may be invalid where prejudice is shown or where the issue was raised below. Thus Sundaram Finance does not negate the line of authority requiring notice specificity where the point was timely taken. Interpretation and reasoning: The Tribunal analyzed the scope of each relied-upon authority. Dharmendra Textile was held inapplicable because it concerned a different statutory scheme and did not consider the notice-specificity question under section 271(1)(c). Sundaram Finance was held fact-distinguishable because there the defect was raised late and the court found no prejudice; by contrast, in the present matters the challenge to notice validity was taken before the first appellate authority and before the Tribunal and prejudice was asserted. The Tribunal also cited the Supreme Court's confirmation (in SSA's Emerald Meadows) of the requirement that notice specify the limb of section 271(1)(c), thereby supporting the line of authorities relied on by the assessee. Ratio vs. Obiter: Ratio - Authorities that require specific identification of the limb in the show-cause notice (as affirmed by higher court decisions) are binding on the issue. Distinguishing Dharmendra Textile and Sundaram Finance is ratio-based to the extent those cases did not directly address or were factually different on the notice-specificity point. Obiter - Extended discussion of how earlier cases were treated in other tribunals is explanatory rather than constituting new law. Conclusion: The Tribunal held that the contrary authorities relied upon by the Revenue do not override the settled principle that notice specificity is required; those authorities are distinguishable on facts or scope and therefore do not assist the Revenue in sustaining penalties based on non-specific notices. Cross-references and Practical Outcome 1. Cross-reference: Issue 1 and Issue 2 are interrelated - the legal requirement of specificity (Issue 1) is supported by higher court precedent (SSA's Emerald Meadows and Manjunath Cotton) and distinguishes authorities cited by the Revenue (Issue 2). 2. Practical conclusion: Because the show-cause notices failed to specify which limb of section 271(1)(c) was invoked and the assessee raised the objection before appellate authorities, the penalty orders founded on those notices are void and were deleted; appeals by the Revenue were dismissed and cross-objections rendered infructuous.