2024 (5) TMI 1259 - HC - Income Tax

Penalty under Section 271(1)(c) quashed for voluntary disclosure of additional income before assessment completion

THE PRINCIPAL COMMISSIONER OF INCOME TAX KOCHI-1, KOCHI Versus SHRI. AMBADY KRISHNA MENON

Kerala HC ruled in favor of the assessee, quashing penalty under Section 271(1)(c) of the IT Act. The court held that penalty provisions must be strictly ... Penalty u/s 271(1)(c) - defective notice u/s 274 - non specification of clear charge - as argued said notice did not clearly mention which of the two grounds i.e., concealment of income or furnishing inaccurate particulars of income formed the basis on which the notice for penalty had been issued - HELD THAT:- All the more necessary to strictly construe the provisions of Section 271(1)(c) to ensure that only the clear and unambiguous cases of defaults specified therein would attract a penalty. On the facts of this case, we fail to see how an assessee who disclosed his liability to tax, well before the Assessing Authority himself could determine it, can be seen as having concealed or incorrectly stated the facts leading to his liability. To invoke the penal provisions of the Act against an assessee in such a situation would throw to the winds the elements of fairness in tax administration and discourage asssessees from disclosing defects in their tax returns before their Assessing Authorities. This is more so when, as in the present case, the assessee had also paid the interest on the differential tax to cover the period of delay in payment thereof. The payment of statutory interest having compensated the exchequer adequately, to further penalise the assessee would tantamount to an act of overkill and would be antithetical to the rule of law. We are of the firm view that the honesty of an assessee cannot attract the penal provisions under the I.T. Act and that, in the instant case, the essential pre-conditions for the invocation of the provisions of Section 271(1) (c) of the I.T. Act against the assessee were not established. Explanation 1 to Section 271 which clarifies that where as in the instant case, a satisfactory explanation has been offered by the assessee, well before the issuance of a notice to him under Section 148 of the I.T. Act and the admission of additional income made by the assessee has been accepted by the Revenue which completed the assessment under Section 143 read with Section 147 of the I.T. Act on that basis, the explanation offered by the assesee with regard to the differential income has to be been seen as accepted by the Revenue for the purposes of the Explanation under Section 271 of the I.T. Act. Axiomatically, therefore, the said additional income cannot be treated as concealed income for the purposes of Section 271(1)(c) of the I.T. Act. We also find merit in the finding of the Appellate Tribunal in Annexure 'I' order that the notice proposing penalty, that was issued to the respondent/assessee, was inherently defective, in that, it had not specified the particular ground on which the Revenue was proceeding against the assessee for the imposition of the penalty. Thus, in any view of the matter, we find that the imposition of penalty under Section 271(1)(c) of the I.T. Act on the respondent/assessee for the assessment year 2011-12 cannot be legally sustained. Decided in favour of assessee. Issues Involved:1. Validity of penalty proceedings initiated by the Assessing Officer.2. Tribunal's declaration of the penalty order in the absence of prejudice and violation of natural justice.3. Justification of the assessee's challenge to the notice.4. Legality and jurisdiction of the penalty proceedings and order.5. Tribunal's stance on the concealment of long-term capital gain and furnishing of inaccurate particulars.Summary:Issue 1: Validity of Penalty ProceedingsThe Tribunal held that the penalty proceedings initiated by the Assessing Officer were 'void ab initio.' The Tribunal's decision was based on the fact that the notice issued u/s 271(1)(c) did not clearly specify whether the penalty was for 'concealment of income' or 'furnishing inaccurate particulars of income.' This lack of clarity rendered the notice defective and the penalty proceedings invalid.Issue 2: Declaration of Penalty OrderThe Tribunal declared the penalty order invalid, emphasizing that there was no prejudice or violation of natural justice alleged or caused. The Tribunal entertained a belated ground raised for the first time, which was justified given the defective notice.Issue 3: Assessee's Challenge to the NoticeThe assessee challenged the notice on the grounds that it did not specify the exact nature of the default. The Tribunal found merit in this challenge, noting that the assessee had disclosed the differential income and paid the tax and interest before the issuance of the notice u/s 148. This disclosure negated any grounds for penalty under the specified sections.Issue 4: Legality and Jurisdiction of Penalty ProceedingsThe Tribunal found that the penalty proceedings and the penalty order lacked legal standing and jurisdiction. The Assessing Authority failed to establish the preconditions for invoking u/s 271(1)(c), as the assessee had voluntarily disclosed the additional income before the notice u/s 148 was issued.Issue 5: Concealment of Long-Term Capital GainThe Tribunal concluded that the assessee did not conceal long-term capital gain or furnish inaccurate particulars. The assessee's voluntary disclosure and payment of differential tax and interest before the notice u/s 148 were seen as bona fide actions. The Tribunal emphasized that penalizing the assessee in such circumstances would be unfair and contrary to the principles of natural justice.Conclusion:The High Court upheld the Tribunal's decision, dismissing the Revenue's appeal. The Court emphasized that the penalty notice was defective, the assessee's voluntary disclosure negated any grounds for penalty, and the essential preconditions for invoking u/s 271(1)(c) were not met. The appeal was dismissed, answering all questions of law in favor of the assessee and against the Revenue.