2025 (4) TMI 661 - AT - Income Tax

Penalty Notice Invalidated: Lack of Specificity Renders Income Tax Penalty Order Void Under Section 271(1)(c)

Sri. Riyas Nelliyote Versus The Assistant Commissioner of Income-tax, Circle 2 (1) Kozhikode.

The SC/Tribunal examined the validity of a penalty notice under Section 271(1)(c) of the Income Tax Act. It found the notice defective for not specifying ... Penalty u/s. 271(1)(c) - defective notice u/s 274 - whether the penalty is proposed in respect of concealment of income or for furnishing inaccurate particulars of income? - HELD THAT:- Copy of the assessment order merely mentioned that penalty proceedings have been initiated separately. A copy of the notice issued u/s. 274 of the Act for is also placed on record. On perusal of the notice, we find it is defective and the same has not specified the particular ground on which the AO has proceeded against the assessee for imposing of penalty, viz., whether it is for “concealment of income”, “furnishing inaccurate particulars of income” or for both. In the instant case, it is an undisputed fact that the assessment order and the notice issued u/s. 274 is vague and is not clear under which limb the penalty has been initiated. Therefore, in the light of Shri Ambady Krishna Menon [2024 (5) TMI 1259 - KERALA HIGH COURT] we hold that the notice issued u/s. 274 is bad in law and consequentially the order imposing penalty u/s. 271(1)(c) of the Act arising therefrom is unsustainable and we quash the same. Appeal filed by the assessee is allowed. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:1. Whether the penalty imposed under Section 271(1)(c) of the Income Tax Act, 1961, is valid when the notice issued under Section 274 does not specify the exact charge against the assessee, i.e., whether it is for 'concealment of income' or 'furnishing inaccurate particulars of income'.2. Whether the defect in the notice issued under Section 274 can be considered a curable defect under Section 292B of the Income Tax Act, 1961.ISSUE-WISE DETAILED ANALYSISIssue 1: Validity of Penalty under Section 271(1)(c) with Defective NoticeRelevant legal framework and precedents: Section 271(1)(c) of the Income Tax Act, 1961, deals with the imposition of penalties for concealment of income or furnishing inaccurate particulars of income. Section 274 mandates that a notice must specify the charge against the assessee. The judgment references the precedent set by the jurisdictional High Court in PCIT v. Shri Ambady Krishna Menon, which found that a penalty notice must clearly specify the grounds for penalty imposition.Court's interpretation and reasoning: The Tribunal observed that the notice issued under Section 274 was defective as it did not specify whether the penalty was for 'concealment of income' or for 'furnishing inaccurate particulars of income'. The Tribunal followed the precedent set by the jurisdictional High Court, which emphasized the necessity for the notice to specify the exact charge.Key evidence and findings: The Tribunal examined the assessment order and the notice issued under Section 274. It found that both documents were vague and did not clarify the specific grounds for imposing the penalty.Application of law to facts: Applying the legal principles from the jurisdictional High Court's decision, the Tribunal concluded that the defective notice could not sustain the penalty imposed under Section 271(1)(c).Treatment of competing arguments: The Departmental Representative supported the AO's order and the CIT(A)'s decision, arguing that the defect was curable under Section 292B. However, the Tribunal found that the defect was not merely procedural but substantive, affecting the legality of the penalty notice.Conclusions: The Tribunal concluded that the penalty notice was invalid due to its failure to specify the grounds for penalty, rendering the penalty order unsustainable.Issue 2: Curability of Defect under Section 292BRelevant legal framework and precedents: Section 292B of the Income Tax Act, 1961, provides that a notice or proceeding is not invalid merely due to a mistake, defect, or omission if it is in substance and effect in conformity with the intent and purpose of the Act.Court's interpretation and reasoning: The Tribunal considered whether the defect in the notice could be cured under Section 292B. It concluded that the defect was not curable because it went to the root of the matter, affecting the assessee's ability to understand the charge and defend against it.Key evidence and findings: The Tribunal's decision was influenced by the lack of specificity in the notice, which did not allow the assessee to know the exact nature of the allegations.Application of law to facts: The Tribunal applied the principles from the jurisdictional High Court's decision, determining that the defect in the notice was substantive, not procedural, and thus not curable under Section 292B.Treatment of competing arguments: The CIT(A) had held that the defect was curable, relying on various judicial pronouncements. However, the Tribunal disagreed, emphasizing the need for specificity in the notice as per the jurisdictional High Court's ruling.Conclusions: The Tribunal concluded that the defect in the notice was not curable under Section 292B, reinforcing the decision to quash the penalty order.SIGNIFICANT HOLDINGSThe Tribunal's significant holdings include:1. Verbatim quotes of crucial legal reasoning: '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.'2. Core principles established: A penalty notice under Section 274 must clearly specify the charge against the assessee to be valid. A vague or ambiguous notice cannot sustain a penalty under Section 271(1)(c).3. Final determinations on each issue: The Tribunal determined that the notice issued under Section 274 was defective and not curable under Section 292B, rendering the penalty order unsustainable. Consequently, the appeal filed by the assessee was allowed, and the penalty order was quashed.