2023 (12) TMI 873 - AT - Income Tax

Tax Penalty Overturned Due to Flawed Notice; Court Emphasizes Clarity in Tax Proceedings for Fairness.

The appeal concerning the penalty under section 270A of the Income Tax Act, 1961, was allowed. The court found that the penalty notice issued lacked ... Levy of penalty u/s 270A - defective notice - as per assessee AO had not struck off the irrelevant portion and no specific offence committed by the assessee was mentioned by the ld. AO in the show cause notice - whether the assessee has underreported its income or misreported its income - HELD THAT:- We find that the assessee being a charitable trust enjoying registration u/s 12AA of the Act consequentially eligible for exemption u/s 11 of the Act had claimed disallowance of depreciation on certain fixed assets as an application of income, ignoring the amendment brought u/s 11(6) of the Act w.e.f. 01.04.2015. This disallowance of deprecation was accepted by the assessee in the quantum proceedings. AO initiated penalty proceedings u/s 270A of the Act on 01.11.2019 wherein in the said notice issued u/s 274 r.w.s. 270A of the Act, the ld. AO had not struck off the irrelevant portion i.e. whether the assessee has underreported its income or misreported its income. We also find that different rates of penalty are stipulated in Section 270A of the Act for underreporting of income; for misreporting of income and for underreporting as well as misreporting of income. Hence, it is even more onerous on the part of the ld. AO to specifically mention the offence committed by the assessee whether it had underreported the income or misreported the income or committed both the offence so as to apply the respective penalty amounts as stipulated u/s 270A of the Act. This onerous task being not fulfilled by the AO would result in entire penalty proceedings getting vitiated. In view of the specific provisions of the Act and in view of the decision of Mohd. Farhan A. Shaikh [2021 (3) TMI 608 - BOMBAY HIGH COURT (LB)], we direct the AO to delete the penalty levied u/s 270A of the Act in the facts and circumstances of the instant case - Appeal filed by the assessee is allowed. Issues involved:The appeal against the levy of penalty under section 270A of the Income Tax Act, 1961.Summary of Judgment:Issue 1: Justification of penalty under section 270AThe appeal questioned the justification of confirming the penalty under section 270A based on the levy of Rs. 72,99,406. The assessee, a charitable trust, claimed disallowance of depreciation on fixed assets as an application of income, which was accepted in the quantum proceedings. However, the penalty notice issued by the assessing officer did not specify whether the assessee underreported or misreported income, as required by law. Citing a Full Bench decision of the Bombay High Court, it was held that the failure to strike off irrelevant portions in the notice vitiates the penalty proceedings. The judgment emphasized the need for precision in penalty notices to avoid ambiguity and ensure fairness. Consequently, the penalty levied under section 270A was directed to be deleted due to the technical flaw in the notice.Issue 2: Specificity in penalty impositionThe judgment highlighted the importance of the assessing officer specifying whether the assessee underreported income, misreported income, or both, as the penalty rates differ under section 270A based on the type of offense committed. Failure to specify the offense committed by the assessee would render the penalty proceedings invalid. Referring to the relevant provisions of the Act and the decision of the Bombay High Court, the assessing officer was directed to delete the penalty in this case due to the lack of specificity in the penalty notice. As the relief was granted on a technical ground, other grounds raised by the assessee were left open for future adjudication.In conclusion, the appeal was allowed, and the penalty under section 270A was directed to be deleted. The judgment emphasized the importance of following procedural requirements and ensuring clarity in penalty notices to uphold the principles of natural justice and fairness in tax proceedings.