2023 (6) TMI 1219 - HC - Income Tax

Penalty Quashed: ITAT Dismisses Appeal Due to Defective Notice, Emphasizes Clarity in Tax Penalty Orders.

Pr. Commissioner Of Income Tax, Delhi -7 Versus Unitech Reliable Projects Pvt. Ltd.

The ITAT quashed the penalty order against the respondent due to a defective penalty notice under Section 271(1)(c) of the Income Tax Act, which failed to ... Penalty u/s 271(1)(c) - Defective notice - cessation/remission of liability u/s 41(1) - HELD THAT:- Penalty proceedings entail civil consequences for the assessee. The AO is required to apply his mind to the material particulars, and indicate clearly, as to what is being put against the respondent/assessee when triggering the penalty proceedings. In case the AO concludes, that a case is made out under Section 271(1)(c) of the Act, he needs to indicate, clearly, as to which limb of the said provision is attracted. The reason we say so is, that apart from anything else, the pecuniary burden may vary, depending on the infraction(s) committed by the respondent/assessee. In a given case, where concealment has taken place, a heavier burden may be imposed, than in a situation where an assessee is involved in furnishing inaccurate particulars. Therefore, it is necessary for the AO to indicate, broadly, as to the provision/limb under which penalty proceedings are triggered against the assessee.Clearly, this has not happened in the instant case. As a matter of fact, even in the assessment order, whereby proceedings were triggered, there is no indication whatsoever, as to which limb of Section 271(1)(c) of the Act was triggered. Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether penalty proceedings under Section 271(1)(c) of the Income Tax Act are vitiated where the notice under Section 274 does not specify which limb of Section 271(1)(c) (concealment of income or furnishing of inaccurate particulars) is invoked. 2. Whether the assessing officer's failure to indicate the specific limb in the assessment order and in the penalty notice warrants quashing of the penalty notwithstanding material on record suggesting concealment or inaccuracy. 3. Whether the Tribunal and lower authorities properly applied prevailing precedent holding that non-specification of the limb renders penalty proceedings invalid, and whether that principle gives rise to a substantial question of law warranting interference by this Court. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of penalty proceedings where penalty notice does not specify limb of Section 271(1)(c) Legal framework: Penalty under Section 271(1)(c) is attracted either for concealment of income or for furnishing inaccurate particulars of income; procedural requirement for notice under Section 274 to initiate penalty proceedings. Precedent Treatment: The Tribunal relied upon the Supreme Court's affirmation of a High Court decision (SSA's Emerald Meadows line of authorities) and coordinate bench decisions of this Court which hold that omission to specify which limb of Section 271(1)(c) is being invoked renders the penalty notice/ proceedings bad in law. Interpretation and reasoning: The Court emphasises that penalty proceedings impose civil consequences and require the Assessing Officer to apply his mind and communicate clearly what is alleged. Distinguishing between the two limbs is material because the nature of infraction and the pecuniary burden differ. Hence, specificity in the notice is necessary to enable the assessee to meet the case against it and to ensure fairness of the proceedings. Ratio vs. Obiter: Ratio - A notice under Section 274 read with Section 271(1)(c) must indicate which limb of Section 271(1)(c) is being pursued; failure to do so vitiates the penalty proceedings. Obiter - Observations on the comparative quantum of burden under different limbs and on the necessity of AO's broad indication may be persuasive but ancillary to the principal holding. Conclusion: The Tribunal correctly quashed the penalty proceedings because the notice did not specify which limb of Section 271(1)(c) was invoked; therefore, the penalty proceedings are invalid. Issue 2 - Effect of omission in assessment order as well as notice to indicate limb of Section 271(1)(c) Legal framework: The assessment order and the penalty notice are both documents in which the AO must indicate the basis for invoking penalty provisions; Section 274 prescribes modalities for initiating penalty proceedings. Precedent Treatment: Coordinate bench rulings of this Court and the Supreme Court-backed line of High Court decisions require specificity; the Court notes its own prior decision reaching the same conclusion. Interpretation and reasoning: The Court points out that even the assessment order stated that 'Penalty proceeding u/s 271(1)(c) is being initiated separately for concealment of income & for furnishing inaccurate particulars of income,' which is a generic statement and not a specification of the limb applicable to the assessee. Given the civil ramifications and the difference in potential liability between the limbs, the omission in both the assessment order and the notice undermines the fairness and validity of proceedings. Ratio vs. Obiter: Ratio - Where the assessment order and the notice lack a clear indication of which limb is invoked, penalty proceedings cannot be sustained. Obiter - The Court's emphasis on the AO's need to apply mind to material particulars and broadly indicate the provision/limb is an explanatory policy consideration reinforcing the ratio. Conclusion: The omission in both the assessment order and the penalty notice justified quashing of penalty proceedings; the Tribunal's order setting aside the penalty was correct and requires no interference. Issue 3 - Whether the matter raises a substantial question of law warranting interference Legal framework: Appellate interference is warranted where a substantial question of law arises; prior binding precedent is relevant to determine if such a question exists. Precedent Treatment: The Court notes that the issue is well-traversed and covered by binding decisions (including Supreme Court confirmation of the High Court line) and coordinate bench rulings, leaving no open substantial question of law for re-examination. Interpretation and reasoning: Given the settled precedents holding notice non-specification to be fatal and the Tribunal applying those precedents to set aside penalty, the Court finds no reason to entertain the appeal. The Court reiterates that the question is covered by precedent and therefore not a fit case to reconsider the point. Ratio vs. Obiter: Ratio - Where existing authoritative precedent squarely governs the issue, higher appellate courts will decline to reopen settled law absent exceptional circumstances. Obiter - Comments on the procedural and substantive justice rationale behind such deference. Conclusion: No substantial question of law arises; the Court declines to interfere with the Tribunal's decision and dismisses the appeal. Ancillary procedural point - Condonation of delay Legal framework: Courts may condone short delays in filing/re-filing appeals upon appropriate application and demonstration of shortness of delay. Interpretation and reasoning: The Court accepted the revenue's representation that the delays (24 days and 28 days) were short and condoned them. Ratio vs. Obiter: Ratio - Short delay where explained may be condoned; not central to the principal legal issue about penalty validity. Obiter - None. Conclusion: Delay in filing and re-filing the appeal was condoned; however, condonation did not lead to interference with the Tribunal's order on merits.