2023 (7) TMI 118 - AT - Income Tax

Penalty notice defective; Tribunal quashes imposed penalty for non-disclosure.

The Tribunal allowed the appeal by the assessee, holding that the penalty notice issued under Section 274 r.w.s. 271 was defective and did not comply with ... Levy of penalty u/s. 271(1)(c) - Defective notice u/s 274 - non striking of irrelevant portion - assessee contended that the notice issued before imposing penalty was not accordance with law and on this ground the order imposing penalty should be quashed - HELD THAT:- The show cause notice u/s. 274 r.w.s 271 of the Act is defective as it does not spell out the grounds on which the penalty is sought to be imposed. The Hon’ble Karnataka High Court in the case of CIT vs. SSA’s Emerald Meadows [2015 (11) TMI 1620 - KARNATAKA HIGH COURT] following its own decision in the case of CIT vs Manjunatha Cotton and Ginning factory [2013 (7) TMI 620 - KARNATAKA HIGH COURT] took a view that imposing of penalty u/s 271(1)(c) of the Act is bad in law and invalid for the reason that the show cause notice u/s 274 of the Act does not specify the charge against the assessee as to whether it is for concealment of particulars of income or furnishing of inaccurate particulars of income. It is also noticed that as against the decision of the Hon’ble Karnataka High Court the revenue preferred an appeal in SLP [2016 (8) TMI 1145 - SC ORDER] preferred by the department. Appeal by the assessee is allowed. Issues Involved:1. Legality of the penalty notice issued under Section 274 r.w.s. 271 of the Income-tax Act, 1961.2. Whether the penalty imposed under Section 271(1)(c) for non-disclosure of income was justified.Issue-wise Detailed Analysis:1. Legality of the Penalty Notice Issued Under Section 274 r.w.s. 271 of the Income-tax Act, 1961:The primary contention by the assessee was that the notice issued before imposing the penalty was not in accordance with law. The assessee argued that the show cause notice under Section 274 did not specify whether the penalty was for 'concealing particulars of income' or 'furnishing inaccurate particulars of income.' This lack of specificity was claimed to render the notice defective.The Tribunal reviewed the show cause notice and found that the Assessing Officer (AO) had indeed not struck off the irrelevant portion, failing to specify the exact charge. The Tribunal referred to the Karnataka High Court's decision in CIT vs. Manjunatha Cotton & Ginning Factory, which established that a penalty notice must clearly state the grounds for penalty to allow the assessee to prepare an adequate defense. The Tribunal emphasized that using a standard form without striking off irrelevant portions indicates a non-application of mind by the AO, thus violating principles of natural justice.The Tribunal also noted that the Hon'ble Supreme Court upheld this principle by dismissing the Revenue's Special Leave Petition (SLP) against the Karnataka High Court's decision in SSA's Emerald Meadows, reinforcing the requirement for clear and specific penalty notices.2. Justification of the Penalty Imposed Under Section 271(1)(c) for Non-disclosure of Income:The assessee admitted to receiving a commission from ICICI Bank amounting to Rs. 30,21,251, which was not included in the initial income return but was later offered for assessment during the assessment stage. The AO initiated penalty proceedings under Section 271(1)(c) and imposed a penalty of Rs. 9,29,923, arguing that the omission was significant and the assessee had qualified personnel to maintain accurate accounts.Before the Commissioner of Income Tax (Appeals) [CIT(A)], the assessee argued that the penalty notice was defective and relied on the Karnataka High Court's decision in Manjunatha Cotton & Ginning Factory. However, the CIT(A) referred to the Madras High Court's decision in Sundaram Finance Ltd., which suggested that a defect in the notice did not prejudice the assessee if the purpose of the notice was understood.The Tribunal, however, distinguished the facts of the present case from Sundaram Finance Ltd., noting that in Sundaram Finance Ltd., the relevant column in the notice was marked, which was not the case here. The Tribunal concluded that the defective notice rendered the penalty proceedings invalid, as the assessee was not informed of the specific charge, violating natural justice principles.Conclusion:The Tribunal allowed the appeal by the assessee, holding that the penalty notice issued under Section 274 r.w.s. 271 was defective and did not comply with the legal requirements established by judicial precedents. Consequently, the penalty imposed under Section 271(1)(c) was quashed.