Appeal Success: Invalid Penalty Notice Leads to Penalty Overturned

The appeal challenged the penalty imposed under section 271(1)(c) of the Income-tax Act, 1961 for excess stock of silver. Despite the penalty notice retaining both limbs of the penalty provision, the penalty was imposed based only on one limb. Relying on Bombay High Court judgments, the Appellate Tribunal held that such a notice with both limbs intact renders the penalty invalid. Consequently, the penalty was overturned, and the direction was given to delete the penalty. The appeal was allowed, and the penalty under section 271(1)(c) was set aside on 9th June 2022.

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Issues:
Penalty imposition under section 271(1)(c) of the Income-tax Act, 1961 based on excess stock of silver found during survey action. Legality of penalty notice under section 274 with both limbs intact. Applicability of judgments by the Bombay High Court regarding defects in penalty notices.

Analysis:
The appeal pertains to the imposition of a penalty of Rs. 5,07,650 under section 271(1)(c) of the Income-tax Act, 1961 by the Assessing Officer (AO) based on the excess stock of silver found during a survey action conducted under section 133A of the Act. The penalty was confirmed by the CIT(A)-4, Pune. The key issue in this case is whether the penalty under section 271(1)(c) is sustainable when the penalty notice under section 274 retains both limbs - "concealing the particulars of income and furnishing of inaccurate particulars of income" - despite the penalty being imposed only with reference to one of them.

Upon review of the relevant material, it was observed that the AO issued the notice under section 274 keeping both limbs of penalty under section 271(1)(c) intact, even though the penalty was imposed solely on the basis of the excess stock of silver. The legal question raised was whether such a penalty notice is valid. The Full Bench of the Bombay High Court in the case of Mohd. Farhan A. Shaikh Vs. Dy. CIT and in Pr. CIT Vs. Golden Peace Hotels and Resorts (P.) Ltd. held that a defect in the notice, where irrelevant words are not struck off, renders the penalty invalid, despite the AO's satisfaction recorded in the assessment order.

Citing the legal precedents and the legal position established by the Bombay High Court judgments, the Appellate Tribunal concluded that when the penalty charge is not properly set out in the notice under section 274, and both limbs remain without striking off the inapplicable one, the penalty order is vitiated. Consequently, in line with the Full Bench judgment, the impugned penalty was overturned, and the direction was given to delete the penalty imposed by the AO.

In the final order, the appeal was allowed, and the penalty imposed under section 271(1)(c) was set aside. The decision was pronounced in the Open Court on 9th June 2022.

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