2023 (10) TMI 776 - AT - Income Tax

Penalty Order Under Section 271(1)(c) Invalid Due to Lack of Specific Charge; Assessee's Appeal Allowed

The penalty order under section 271(1)(c) of the Act was deemed invalid as it was issued without specifying the exact charge, rendering the proceedings ... Penalty u/s 271(1)(c) - Defective notice - non specification of clear charge - non-strike off of the irrelevant part in the notice issued - HELD THAT:- As decided in Sahara India Life Insurance Co. Ltd. [2019 (8) TMI 409 - DELHI HIGH COURT] the notice issued by the AO was bad in law if it did not specify under which limb of section 271(1)(c) the penalty proceedings had been initiated i.e. whether for concealment of particulars of income or for furnishing of inaccurate particulars of income. Ratio of the full bench decision of MR. MOHD. FARHAN A. SHAIKH [2021 (3) TMI 608 - BOMBAY HIGH COURT] squarely applies to the facts of the assessee's case as the notice u/s. 274 r.w.s. 271(1)(c) dated 26.12.2016 was issued without striking off the irrelevant portion of the limb and failed to intimate the assessee the relevant limb and charge for which the notices were issued. Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether a penalty under section 271(1)(c) can be validly initiated and levied where the notice under section 274 (read with section 271(1)(c)) is an omnibus form that does not specify or strike off which limb of section 271(1)(c) - concealment of particulars of income or furnishing of inaccurate particulars - is being alleged. 2. Whether failure to specify the exact limb in the statutory notice constitutes non-application of mind and/or causes prejudice to the assessee such that the penalty proceedings and order are vitiated. 3. Whether assessment-order reasoning can cure defects in a statutory penalty notice that is vague or omnibus in form. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of penalty proceedings initiated by an omnibus notice not specifying the limb of section 271(1)(c) Legal framework: Section 271(1)(c) imposes penalty for either concealment of particulars of income or for furnishing inaccurate particulars of income; section 274 prescribes the statutory notice procedure for initiation of penalty proceedings. The notice is the vehicle that informs the assessee of the grounds on which penalty is proposed. Precedent treatment: Higher-court authorities have held that a statutory notice must inform the assessee of the grounds of penalty; omnibus or printed form notices that leave both limbs intact without deletion have been criticized and, in several authoritative pronouncements, treated as legally defective. Interpretation and reasoning: The Tribunal reasons that penalty proceedings must stand on their own statutory footing and the statutory notice is essential to translate departmental satisfaction into actionable proceedings. An omnibus notice that fails to specify which limb is invoked suffers from vagueness and does not fulfill the statutory requirement of informing the assessee of the charge. The assessment order, though it may contain reasons, cannot substitute for a statutory notice that is precise and unambiguous. Ratio vs. Obiter: The conclusion that an omnibus notice not specifying the limb vitiates penalty proceedings is applied as the operative ratio of the decision in this appeal. Conclusions: Penalty proceedings initiated and penalty levied where the notice did not specify which limb of section 271(1)(c) was invoked are bad in law; the levy of penalty cannot be sustained on that footing. Issue 2: Non-application of mind and prejudice arising from omnibus/printed notices Legal framework: Principles of natural justice require that notice of a proceeding give sufficient particulars to enable an informed response; for statutory penal provisions with significant consequences, strict compliance with procedural mandates is required. Precedent treatment: Authorities treating omnibus printed notices without deletion as demonstrating non-application of mind and as giving rise to prejudice have been relied upon; other authorities have suggested that prejudice must be shown unless the provision is mandatory and substantial consequences follow. Interpretation and reasoning: The Tribunal notes that issuing a generic printed notice without striking irrelevant portions is indicative of a ritualistic practice and non-application of mind by the issuing authority. Such non-application of mind in a penal context is particularly objectionable and implies prejudice because the assessee is not properly informed of the precise charge and cannot effectively prepare a response. Even where the assessment order contains reasons, the statutory notice is the prescribed means of informing the assessee and cannot be rendered redundant. Ratio vs. Obiter: The finding that omnibus notices betray non-application of mind and generally imply prejudice is treated as a binding reason for quashing the penalty in the present matter (ratio). The recognition that there may be exceptional cases where prejudice must be shown is acknowledged (obiter on possible exceptions). Conclusions: Failure to delete inapplicable portions in the statutory notice constitutes non-application of mind and, given the mandatory character of section 271(1)(c), leads to invalidation of penalty proceedings absent a valid, specific notice. Issue 3: Whether assessment-record reasons can cure defects in the statutory notice Legal framework: Assessment proceedings and penalty proceedings operate under distinct statutory schemes; the statutory notice under section 274 is the formal mode of conveying the grounds for penalty. Precedent treatment: Some authorities have held that if the assessment order records reasons, prejudice may not be established and defect in notice could be cured; other authoritative pronouncements and the present Tribunal take the contrary view that the assessment order cannot cure a defective statutory notice. Interpretation and reasoning: The Tribunal rejects the proposition that detailed reasons in the assessment order cure defects in a vague omnibus penalty notice. It emphasizes that penalty proceedings must be initiated by a valid statutory notice and that the two proceedings are not composite or mutually curative. Reliance on assessment-record reasoning to validate a defective notice undermines the statutory scheme and the assessee's right to clear notice. Ratio vs. Obiter: The rejection of the curing effect of assessment-record reasons on a defective notice is applied as part of the Tribunal's operative reasoning (ratio). Conclusions: The presence of reasons in the assessment order does not validate penalty proceedings initiated by an omnibus or non-specific statutory notice; hence defects in the notice cannot be cured by prior assessment findings. Disposition applied to the present appeal The Tribunal applied the above legal principles and precedents to the facts before it, found the statutory notice to be omnibus and non-specific as to which limb of section 271(1)(c) was invoked, held that the notice demonstrated non-application of mind and implied prejudice, and concluded that the penalty order is bad in law. Accordingly, the penalty was quashed and the appeal was allowed.