Second penalty notice under section 274 valid for imposing penalty under section 271(1)(c) for disallowed section 10B deduction

ITAT Mumbai held that the second penalty notice u/s 274 was valid for imposing penalty u/s 271(1)(c) regarding disallowance of deduction u/s 10B, as the penalty was levied on the same ground on which proceedings were initiated. CIT(A) erred in deleting the penalty without considering the complete facts and the second notice. However, no penalty could be levied for transfer pricing addition as the second notice did not reference this issue and the assessee was not put to notice regarding inaccurate particulars relating to transfer pricing. The matter was remanded to CIT(A) for adjudication on merits regarding the s.10B deduction penalty. Revenue appeal was partly allowed.

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Issues Involved:
1. Deletion of penalty under Section 271(1)(c) for not specifying the charge in the notice.
2. Validity of the penalty proceedings initiated under Section 271(1)(c) for furnishing inaccurate particulars of income.
3. Validity of the penalty proceedings initiated under Section 271(1)(c) for concealment of income.

Detailed Analysis:

1. Deletion of Penalty under Section 271(1)(c) for Not Specifying the Charge in the Notice:
The Revenue challenged the CIT(A)'s order that deleted the penalty on the ground that the charge of penalty was not specified in the notice under Section 274 read with Section 271(1)(c) of the Income Tax Act, 1961. The CIT(A) relied on the Full Bench judgment of the Hon'ble Bombay High Court in the case of Mohd. Farhan A Shaikh Vs. DCIT, which held that the penalty notice must specify whether it is for concealment of particulars of income or for furnishing inaccurate particulars of income. The notice issued was an omnibus notice without striking off the inapplicable limb, rendering it void-ab-initio.

2. Validity of the Penalty Proceedings Initiated for Furnishing Inaccurate Particulars of Income:
The assessment order dated 31.03.2016 initiated penalty proceedings for furnishing inaccurate particulars of income in respect of certain additions/disallowances. The CIT(A) failed to consider the Second Penalty Notice issued on 16.01.2021, which specifically charged the assessee with furnishing inaccurate particulars of income for the disallowance of deduction under Section 10B. The Tribunal noted that the Second Penalty Notice fulfilled the requirement of informing the assessee about the grounds of penalty proceedings, thus meeting the test laid down by the Hon'ble Bombay High Court. The Tribunal held that the Second Penalty Notice was valid and remanded the issue of levy of penalty for furnishing inaccurate particulars of income in relation to the deduction claimed under Section 10B back to the file of CIT(A) for adjudication on merits.

3. Validity of the Penalty Proceedings Initiated for Concealment of Income:
The assessment order also initiated penalty proceedings for concealment of income in respect of other additions/disallowances. The Tribunal observed that the CIT(A) did not consider the Second Penalty Notice while deleting the penalty. The Tribunal highlighted that the penalty proceedings should be confined to the grounds on which they were initiated. The Tribunal rejected the contention that only the First Penalty Notice was relevant and emphasized that the issuance of notice under Section 274 is a statutory requirement before passing the penalty order. The Tribunal noted that the Second Penalty Notice did not reference the transfer pricing addition of INR 7,46,225/-, and therefore, no penalty could be levied in relation to this addition.

Conclusion:
The Tribunal held that the Second Penalty Notice was valid for the disallowance of deduction under Section 10B and remanded the issue back to CIT(A) for adjudication on merits. However, the penalty in relation to the transfer pricing addition of INR 7,46,225/- was deleted as the Second Penalty Notice did not reference it. The appeal filed by the Revenue was partly allowed.

Order Pronounced on 17.01.2023.

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