2024 (2) TMI 153 - AT - Income Tax

Penalty proceedings under Section 271(1)(c) quashed due to defective notice lacking specific charges

Distt. Cooperative Bank Ltd., C/o Kashyap & Co. Versus ACIT Circle, Uttar Pradesh

ITAT Delhi held that penalty proceedings u/s 271(1)(c) were invalid due to defective notice. The AO failed to strike off irrelevant portions and did not ... Penalty levied u/s 271(1)(c) - defective notice - non specification of clear charge - non-strike off of the irrelevant part in the notice - whether the penalty proceedings are initiated on account of concealment of income or on account of furnishing inaccurate particulars of income? - HELD THAT:- On perusal of the notice issued u/s 274 read with section 271(1)(c) of the Act it is noticed that the AO did not strike off the irrelevant limb in the notice. AO did not specify the limb for which the notice u/s 271(1)(c) was issued i.e. either for concealment of income or for furnishing inaccurate particulars of income. The notice was issued mechanically stating that the assessee had concealed particulars of income or furnished inaccurate particulars of income. As could be seen from the above in the case of Mr. Mohd. Farhan A. Shaikh . [2021 (3) TMI 608 - BOMBAY HIGH COURT (LB)] while dealing with the issue of non-strike off of the irrelevant part in the notice issued u/s 271(1)(c) of the Act, held that assessee must be informed of the grounds of the penalty proceedings only through statutory notice and an omnibus notice suffers from the vice of vagueness. Thus notice issued by the Assessing Officer was bad in law if it did not specify under which limb of section 271(1)(c) of the Act the penalty proceedings had been initiated i.e. whether for concealment of particulars of income or for furnishing of inaccurate particulars of income. Decided in favour of assessee. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether a show-cause notice issued under section 271(1)(c) read with section 274 is invalid where the Assessing Officer fails to indicate or strike off which limb of section 271(1)(c) (concealment of income or furnishing inaccurate particulars) is being invoked. 2. Whether an omnibus or non-specific notice under section 271(1)(c) necessarily vitiates the penalty proceedings notwithstanding reasons recorded in the assessment order. 3. Whether precedent treating omnibus notices as betraying non-application of mind and implying prejudice is applicable and binding on the Tribunal in the facts of this matter. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of show-cause notice where the specific limb under section 271(1)(c) is not indicated Legal framework: Section 271(1)(c) prescribes levy of penalty for either concealment of particulars of income or furnishing inaccurate particulars of income; section 274 prescribes the form and service of show-cause notice for imposition of penalty. A show-cause notice must inform the assessee of the grounds on which penalty is proposed so as to afford a meaningful opportunity of hearing. Precedent treatment: Higher-court authorities (including a full bench decision and authoritative High Court rulings) have criticized issuance of omnibus printed notices that do not strike off inapplicable limbs and have treated such notices as vulnerable to challenge. Decisions cited include authorities that disapprove the practice of issuing non-specific notices and have held that a penal provision must be strictly complied with. Interpretation and reasoning: The Tribunal observed that the notice merely recited that the assessee had 'concealed particulars of income or furnished inaccurate particulars of income' without indicating which limb was invoked or striking off the inapplicable portion. The Tribunal accepted the reasoning of the Full Bench which held that penalty proceedings must stand on their own and that the statutory notice is the mechanism by which the assessee is informed of the grounds for penalty. An omnibus notice is tainted by vagueness and betrays non-application of mind by the issuing authority. Ratio vs. Obiter: Ratio - A show-cause notice under section 271(1)(c) read with section 274 is invalid if it fails to specify which limb of section 271(1)(c) is invoked (i.e., it is an omnibus notice) and thereby does not adequately inform the assessee of the case to be met. Obiter - Discussion that in some circumstances an assessment order containing reasons might mitigate prejudice (rejected on facts and by precedents relied upon). Conclusions: The Tribunal quashed the penalty orders because the notice failed to intimate the specific charge and was therefore legally defective. Issue 2: Whether reasons recorded in the assessment order can cure an omnibus notice defect Legal framework: Principles of natural justice require adequate notice of allegations so that an assessee can effectively respond; statutory notice is the primary communication of the grounds for penalty and must be precise. Precedent treatment: Some earlier decisions have held that where the assessment order clearly records satisfaction and furnishes reasons why penalty should be initiated, defect in the printed notice may not cause prejudice; conversely, recent Full Bench and High Court decisions disapprove of curing formal notice defects by referring to reasons in the assessment order. Interpretation and reasoning: The Tribunal followed the view that penalty proceedings, though arising from assessment proceedings, are distinct and must be initiated by a valid statutory notice. Reliance on assessment order reasons cannot substitute the explicit, specific statutory notice requirement - an omnibus notice remains vague and indicative of non-application of mind. The Tribunal adopted the Full Bench reasoning that Kaushalya-type authority incorrectly allowed the assessment order to cure notice defects. Ratio vs. Obiter: Ratio - Reasons in the assessment order do not cure the legal defect of an omnibus show-cause notice; penalty proceedings cannot draw procedural validity solely from the assessment order. Obiter - Acknowledgement that in exceptional cases vagueness may not cause prejudice, but that is not the rule where the statute prescribes a mandatory mode of communication. Conclusions: The assessment order's recorded reasons were not held to cure the defective notice; the penalty could not be sustained on that basis. Issue 3: Effect of non-application of mind and prejudice doctrine on omnibus notices Legal framework: Procedural provisions that embody principles of natural justice, particularly where penal consequences follow, must be strictly complied with; contravention of mandatory procedural conditions for communications may be fatal. Precedent treatment: Supreme Court and High Court decisions (as interpreted by the Full Bench) treat omnibus printed notices with unstruck inapplicable portions as betraying non-application of mind and, therefore, implying prejudice sufficient to invalidate penalty proceedings under section 271(1)(c). Interpretation and reasoning: The Tribunal noted that issuing a printed form notice without deleting inapplicable portions reflects lack of application of mind by the assessing authority. Given the mandatory nature and severe consequences of section 271(1)(c), such procedural lapses are treated as fatal; prejudice is implied in the absence of a precise notice. The Tribunal relied on the reasoning that penal provisions with commercial consequences require strict compliance and that ambiguity must be resolved in favour of the assessee. Ratio vs. Obiter: Ratio - Omnibus show-cause notices that reveal non-application of mind and create ambiguity will be held invalid because the procedural defect implies prejudice in the context of section 271(1)(c). Obiter - General observations about possible fact-specific exceptions where prejudice may be shown not to have occurred. Conclusions: The Tribunal concluded that the impugned notices evidenced non-application of mind and implied prejudice; penalty orders based on them were quashed. Cross-references and Application to Present Appeals The Tribunal applied the reasoning of the cited Full Bench and High Court authorities directly to the facts of both assessment years, holding that identical defects in the notices (failure to strike off inapplicable limb and failure to indicate the specific charge) rendered the penalty proceedings invalid for each year; consequently, the Tribunal quashed the penalty orders and did not adjudicate merits of the underlying penalty charges as academic.