2024 (5) TMI 1626 - AT - Income Tax

Penalty under s.271(1)(c) deleted where notice used the word 'or', failing to specify concealment or inaccurate particulars

ITAT, Chennai - AT held the penalty under s.271(1)(c) invalid and deleted it because the penalty notice failed to specify whether the charge was ... Penalty u/s.271(1)(c) - invalid notice issued u/s.271(1)(c) r.w.s.274 - whether the assessee furnished inaccurate particulars of his income or concealed the particulars of his income? - Allegation of non specification of clear charge - proposing penalty for the fault of “concealment of particulars of income” or “for furnishing of inaccurate particulars of income” - HELD THAT:- We find that the penalty notice did not explicitly convey to the assessee the specific fault/charge the assessee was being proceeded against for levy of penalty. Resultantly, the show cause notice is found to be defective/invalid, and therefore it is held to be bad in law. For doing that we also rely on the decision of the Hon’ble Karnataka High Court in the case of CIT vs Manjunatha Cotton and Ginning Factory [2013 (7) TMI 620 - KARNATAKA HIGH COURT] and the Department’s SLP against it has been dismissed by the Hon’ble Supreme Court. We direct the deletion of the penalty levied in this case, since the notice issued by the AO is found to be invalid in the eyes of law. Before parting, we would like to deal with the argument of the Ld. DR that both the faults/limbs are attracted in the facts of this case i.e. the notice was issued for both the faults and it should be read as if assessee had not only concealed the particulars of his income but also inaccurate particulars of such income, such a contention cannot be countenanced for the simple reason that the notice does not say so. As noted that in the impugned notice the conjunction ‘or’ has been used between two faults i.e. concealment of his income or furbishing of inaccurate particulars which is a disjunctive; if the contention of the Ld. DR has to be accepted, then penalty notice ought to have used the conjunction ‘and’ in place of ‘or’ between the two faults which is not discernable from perusal of the impugned notice of penalty. While initiating penalty in the quantum assessment order dated 30.03.2005, the AO has stated in the assessment order that the assessee has concealed Rs.1,28,38,410/-, whereas, the notice initiated u/s.271 r.w.s.274 of the Act, proposed penalty under both the faults which exposes the non-application of mind/whimsical attitude of AO which vitiates the contents of the notice; and handicaps the assessee to properly defend the charge proposed against him and therefore, needs to be held as invalid in the eyes of law and respectfully following the judicial precedents and especially the decision of the Hon’ble Madras High Court in the case of Babuji Jacob [2020 (12) TMI 574 - MADRAS HIGH COURT] we delete the penalty. And the Ld. DR’s contention that no notice was required to be issued against the assessee while initiating penalty cannot be countenanced. Because, the principles of natural justice concerns procedural fairness and ensures a fair decision is reached by an objective decision maker. It should be remembered that by maintaining procedural fairness protects the right of individuals and enhances public confidence in the process. The legal maxims (i) audi alterm partem (the right to be heard) & (ii) memo judex in parte suo (no person shall be a judge in his own cause) are two legal principles which is the core of principles of natural justice. Penalty proceedings and assessment proceedings are distinct; and merely, because addition has been made in the assessment order does not mean that AO has to levy penalty; and since imposing penalty involves civil consequences (the expression civil consequences encompasses infraction of property/personal rights/civil liberties/material deprivation/pecuniary and non pecuniary damages), therefore, notice need to be given because sec.271(1)(c) of the Act specifically says about two distinct faults (i) concealment of the particulars of income (ii) furnishing of inaccurate particulars of such income; and therefore, concept of reasonable opportunity guaranteed u/s.274 of the Act would be illusory if specific charge on which penalty is proposed is not given by AO by way of issuing notice; and as noted above, the principles of natural justice is implied and notice need to be given to assessee before levy of penalty; and therefore, notice issued to assessee has to spell out the specific charge/fault which AO proposes to levy, and should not be vague and should not put the assessee guessing as to what is in the mind of the AO viz whether he proposes concealment of particulars of income or furnishing inaccurate particulars of income. Therefore, the contentions of the DR cannot be accepted and is held to be devoid of merits and therefore rejected. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Revenue appeal is maintainable under administrative instructions where the tax effect is below the prescribed monetary threshold but prosecution has been launched. 2. Whether a show cause notice issued under section 274 read with section 271(1)(c) that recites both limbs of section 271(1)(c) (i.e., 'concealed particulars of income' or 'furnished inaccurate particulars of income') without striking out the inapplicable limb is vitiated for want of a clear charge. 3. Whether issuance of a specific/formal statutory notice is mandated by sections 271 and/or 274 for initiation of penalty proceedings under section 271(1)(c), and whether use of a pre-printed notice affects validity. 4. When initiation of penalty proceedings under section 271(1)(c) is deemed to have occurred and when communication of initiation is complete for purposes of procedural fairness. 5. Whether established principles of natural justice require that the notice initiating penalty proceedings must specify the particular limb of section 271(1)(c) relied upon, and whether prior judicial decisions on defective notices are distinguishable. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Maintainability of Revenue appeal where tax effect is below monetary threshold but prosecution exists Legal framework: Administrative circulars limit departmental appeals below a monetary threshold unless exceptions apply; one such exception is where prosecution has been launched. Precedent treatment: No express judicial rule cited in the text; parties relied on the CBDT circular and its exception clauses. Interpretation and reasoning: The Tribunal accepted the Department's submission that initiation of prosecution places the matter within the circular's exception. The assessee conceded prosecution was launched after reassessment under section 153A; on that basis the Tribunal proceeded to hear the Revenue appeal. Ratio vs. Obiter: Ratio - where prosecution has been launched, the administrative monetary-threshold exception applies and the Revenue appeal is maintainable despite tax effect being below the threshold. Conclusion: Revenue appeal held maintainable because prosecution had been launched, bringing the matter within the circular's exception. Issue 2 - Validity of show cause notice under section 274 read with section 271(1)(c) that lists both limbs without specifying which limb applies Legal framework: Section 271(1)(c) penalises either concealment of particulars of income or furnishing inaccurate particulars; section 274 requires that no penalty order be made unless the assessee has been given a reasonable opportunity of being heard. Precedent treatment: Tribunal relied on and followed High Court decisions holding such composite notices defective - including decisions of the Karnataka High Court (Manjunatha Cotton & Ginning Factory), its subsequent endorsements, and the Madras High Court decision in Babuji Jacob. The Tribunal distinguished the decision in Sundaram Finance Ltd. as factually different (late raising of defect and absence of prejudice). Interpretation and reasoning: The Tribunal emphasised that the two limbs in section 271(1)(c) are distinct and disjunctive; a notice that uses 'or' and does not strike out the inapplicable limb fails to inform the assessee which specific fault is alleged, thereby prejudicing the assessee's ability to prepare an effective defence. The Tribunal found the assessing officer's non-application of mind apparent where the assessment order recorded satisfaction for concealment but the subsequent show cause included both limbs. This ambiguity rendered the notice confusing, vague and invalid. Reliance was placed on decisions holding that absence of specification of the limb vitiates penalty proceedings. Ratio vs. Obiter: Ratio - a show cause notice for penalty under section 271(1)(c) that does not specify which limb (concealment or furnishing inaccurate particulars) is relied upon is defective and vitiates the penalty; this rule is binding on the Tribunal in the facts presented. Conclusion: The show cause notice was invalid for failing to specify the particular limb of section 271(1)(c); penalty consequent upon that notice was deleted. Issue 3 - Whether sections 271 or 274 mandate issuance of a specific statutory/formal notice and status of pre-printed notices Legal framework: Section 274 requires that the assessee be heard or be given reasonable opportunity; neither section 271 nor section 274 prescribes language that a particular format of statutory notice must be issued prior to initiation. Precedent treatment: The Department argued legislative language does not mandate issuance of a specific statutory notice; the Tribunal relied on case law requiring clear communication of the charge and applied natural justice principles, following High Court decisions that invalidated defective notices. Interpretation and reasoning: The Department's contention that no specific notice is required was rejected on natural justice grounds. The Tribunal distinguished the absence of a statutory-form requirement from the requirement of effective and intelligible communication of the charge. While some sections expressly prescribe form or manner of notice, the Tribunal reasoned that procedural fairness demands a notice that enables the assessee to know the precise charge; a pre-printed form that leaves the particular limb unspecified fails that test. The Tribunal observed that opportunity to be heard could be afforded by various means, but the statutory requirement under section 274 that the assessee be given reasonable opportunity presupposes intelligible communication of the charge. Ratio vs. Obiter: Ratio - although section 274 does not prescribe a statutory form of notice, natural justice requires that a notice initiating penalty proceedings specify the precise charge so as to afford a meaningful opportunity to be heard; pre-printed or vague notices that do not do so are invalid. Conclusion: The absence of a mandated statutory format does not excuse issuance of a vague pre-printed notice; such a notice which fails to specify the fault violates natural justice and is invalid. Issue 4 - Timing of initiation and communication of penalty proceedings Legal framework: Section 271 contemplates initiation of penalty proceedings during the pendency of proceedings under the Act; section 271(1B) recognizes that recording of satisfaction in the assessment order may constitute the requisite recording for initiation. Precedent treatment: Department relied on the assessment order's recorded satisfaction and on section 271(1B) to show initiation during assessment; Tribunal accepted that initiation can be recorded during assessment and that communication of initiation is effected by service of the assessment order/demand notice. Interpretation and reasoning: The Tribunal noted that the AO had recorded satisfaction in the assessment order before completion of assessment, satisfying legal requirements for initiation. The Tribunal accepted that initiation is complete upon service of the demand notice along with the assessment order and that penalty proceedings are properly initiated within the course of assessment when satisfaction is recorded. However, even where initiation occurs during assessment, the Tribunal held that any subsequent notice must be clear as to the charge to satisfy section 274's requirement of opportunity to be heard. Ratio vs. Obiter: Ratio - initiation may be validly recorded during assessment (including in the assessment order) and communicated by service of the assessment/demand notice, but this does not obviate the requirement that any show cause notice give a clear specification of the charge. Conclusion: Initiation during assessment was correctly recorded and communicated, but procedural fairness demands that the assesseee be informed precisely of the charge when offered the opportunity to be heard. Issue 5 - Application of natural justice and treatment of prior authorities (distinguishing Sundaram Finance) Legal framework: Principles of natural justice (audi alteram partem; nemo judex in causa sua) apply to quasi-judicial/administrative proceedings; section 274 embodies the requirement for reasonable opportunity to be heard. Precedent treatment: The Tribunal followed High Court precedents invalidating vague notices and distinguished Sundaram Finance where the defect was raised late and prejudice was not shown; Madras High Court decisions (including Babuji Jacob) were applied to hold similar notices invalid where the assessee had contemporaneously raised objection and prejudice was apparent. Interpretation and reasoning: The Tribunal emphasised that where the assessee raises a timely objection that the notice fails to specify the charged limb, and where prejudice results (inability to properly defend), the line of authorities invalidating the notice applies; cases upholding notices on different facts (e.g., late objections, absence of prejudice) do not govern the present facts. Ratio vs. Obiter: Ratio - natural justice compels that a penalty notice must enable the assessee to know the precise charge; earlier decisions rejecting technical objections on different factual matrices are distinguishable. Conclusion: Natural justice requires specification of the limb of section 271(1)(c) in the notice; decisions upholding notices on different facts are distinguishable and do not prevent invalidation of a vague notice in which prejudice is shown.