2025 (5) TMI 970 - AT - Income Tax

Tax Penalty Voided: Procedural Flaws and Bona Fide Claim Shield Taxpayer from Unwarranted Financial Penalty Under Section 271(1)(c)

The SC/Tribunal invalidated penalty proceedings under Income Tax Act section 271(1)(c) due to procedural defects. The notice failed to specify the penalty ... Penalty u/s 271(1)(c) - defective notice u/s 274 - non specification of clear charge - HELD THAT:- It is pertinent to note that the notice u/s. 274 r.w.s 274(1)(c) of the Income Tax Act, 1961 dated 20-10-2016 has not at all specified under which limb section 271(1)(c) has been invoked. Thus, the decision of Emerald Meadows [2015 (11) TMI 1620 - KARNATAKA HIGH COURT] and [2016 (8) TMI 1145 - SC ORDER] is squarely applicable in the present case. Besides this, the mere disallowance of the claim which otherwise genuine and under bonafide belief, claimed by the assessee, cannot be the criteria for levying penalty u/s. 271(1)(c). Mere rejection of claim cannot be the ground for levying penalty u/s. 271(1)(c) as held in case of CIT vs. Reliance Petro Products Pvt. Ltd. [2010 (3) TMI 80 - SUPREME COURT]. Thus, the penalty imposed u/s. 271(1)(c) of the Act does not survive. Hence filed by the assessee is allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in these appeals are:Whether the penalty under section 271(1)(c) of the Income Tax Act, 1961, was validly imposed by the Assessing Officer (AO) without recording the mandatory satisfaction as required by law at the time of framing the assessment order.Whether the penalty levied for furnishing inaccurate particulars of income is justified when the claim disallowed by the AO was made in bona fide belief and was subject to judicial scrutiny.Whether the quantum of penalty imposed is excessive and erroneous.Whether the notices issued under section 274 read with section 271(1)(c) adequately specify the grounds and the limb under which penalty proceedings were initiated.Whether the rectification order under section 154 relating to the penalty order was correctly passed and whether the appeal against such rectification order is maintainable.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Validity of penalty initiation and levy under section 271(1)(c) without recording mandatory satisfactionLegal framework and precedents: Section 271(1)(c) imposes penalty for furnishing inaccurate particulars of income, but the AO must record satisfaction before initiating penalty proceedings. The mandatory recording of satisfaction is a condition precedent to levy of penalty. The Hon'ble Apex Court in CIT vs. Emerald Meadows (73 taxmann.com 248 and 241) emphasized that failure to specify the limb under which penalty is imposed and failure to record satisfaction vitiates the penalty proceedings.Court's interpretation and reasoning: The Tribunal noted that the notice issued under section 274 read with section 271(1)(c) dated 20-10-2016 did not specify under which limb of section 271(1)(c) the penalty was imposed. This omission was fatal to the penalty proceedings. The Tribunal relied on the Apex Court's decision in Emerald Meadows to hold that such non-specification invalidates the penalty.Key evidence and findings: The AO initiated penalty proceedings based on disallowance of deduction under section 32AC. The satisfaction recorded by the AO was not properly reflected, and the notice did not specify the exact limb of section 271(1)(c). The assessee did not reply to the show cause notice, but the Tribunal focused on procedural lapses by the AO.Application of law to facts: Since the notice was defective and the AO failed to comply with the mandatory requirement of satisfaction recording and clear specification of penalty grounds, the penalty proceedings were held to be invalid.Treatment of competing arguments: The Revenue relied on the assessment order and penalty order to justify the penalty. The assessee argued that the penalty was not sustainable due to procedural defects and that the claim was bona fide. The Tribunal favored the assessee's submissions based on legal precedents.Conclusion: The penalty imposed under section 271(1)(c) was not validly initiated and hence does not survive.Issue 2: Whether disallowance of deduction under section 32AC amounts to furnishing inaccurate particulars of income warranting penaltyLegal framework and precedents: The Hon'ble Apex Court in CIT vs. Reliance Petro Products Pvt. Ltd. (322 ITR 158) held that mere rejection of a claim made in bona fide belief does not amount to furnishing inaccurate particulars of income attracting penalty under section 271(1)(c).Court's interpretation and reasoning: The assessee claimed deduction under section 32AC for acquisition of pollution control equipment, which was disallowed by the AO on the ground that such assets acquired after 30-09-2013 are not eligible. The assessee's claim was admitted to be pending before the Hon'ble High Court. The Tribunal observed that since the claim was made in bona fide belief and was subject to judicial scrutiny, mere disallowance cannot be a ground for penalty.Key evidence and findings: The assessee's return disclosed the deduction claimed, and the AO disallowed it. The assessee did not respond to the show cause notice, but the Tribunal focused on the nature of the claim and the legal position pending in higher courts.Application of law to facts: The Tribunal applied the Reliance Petro Products principle to hold that the penalty cannot be levied merely because the claim was disallowed.Treatment of competing arguments: Revenue contended that furnishing inaccurate particulars was established by disallowance. The assessee argued bona fide claim and judicial admission. The Tribunal accepted the assessee's argument.Conclusion: Disallowance of the deduction under section 32AC does not amount to furnishing inaccurate particulars of income for penalty purposes.Issue 3: Quantum of penalty imposedLegal framework and precedents: Penalty quantum must be reasonable and commensurate with the nature of default. Excessive penalty without proper justification is not sustainable.Court's interpretation and reasoning: The Tribunal noted that the penalty amount of Rs. 5,46,79,979/- (rectified to Rs. 4,92,24,537/-) was excessive considering the book profit under section 115JB and the nature of the claim. Since the penalty itself was held invalid on procedural and substantive grounds, the quantum issue became moot.Key evidence and findings: The penalty was computed on the disallowed deduction amount. The assessee contended excessiveness.Application of law to facts: Since penalty was invalid, quantum determination was unnecessary.Treatment of competing arguments: Revenue justified penalty quantum based on disallowance. Assessee challenged excessiveness. Tribunal dismissed penalty altogether.Conclusion: Quantum of penalty issue did not survive as penalty itself was quashed.Issue 4: Adequacy and validity of notice under section 274 read with section 271(1)(c)Legal framework and precedents: Notice under section 274 must clearly specify the grounds and the limb of section 271(1)(c) invoked. Failure to do so renders penalty proceedings invalid as per Apex Court rulings.Court's interpretation and reasoning: The Tribunal found the notice issued did not specify the limb under which penalty was imposed, violating mandatory requirements.Key evidence and findings: The notice dated 20-10-2016 was silent on the limb of section 271(1)(c).Application of law to facts: Non-specification invalidated the penalty proceedings.Treatment of competing arguments: Revenue did not specifically address this defect. Assessee relied on case law to highlight the defect.Conclusion: Notice was defective and penalty proceedings were invalid.Issue 5: Maintainability and correctness of rectification order under section 154 relating to penalty orderLegal framework and precedents: Rectification under section 154 is permissible to correct mistakes apparent on record. However, if the rectification is consequential to an invalid order, the appeal against rectification may be dismissed as infructuous.Court's interpretation and reasoning: The rectification order dated 25-04-2019 was passed in consonance with the assessee's rectification application regarding the penalty order. Since the penalty order itself was quashed, the appeal against rectification was held to be infructuous.Key evidence and findings: The rectification related directly to penalty order.Application of law to facts: Since penalty order was invalidated, rectification order lost relevance.Treatment of competing arguments: Assessee challenged rectification. Revenue defended it. Tribunal dismissed appeal against rectification as infructuous.Conclusion: Appeal against rectification order dismissed as infructuous.3. SIGNIFICANT HOLDINGS'The notice u/s. 274 r.w.s 274(1)(c) of the Income Tax Act, 1961 dated 20-10-2016 has not at all specified under which limb section 271(1)(c) has been invoked. Thus, the decision of Hon'ble Apex Court in case of CIT vs. Emerald Meadows 73 taxmann.com 248 and 73 taxmann.com 241 is squarely applicable in the present case.''Mere rejection of claim cannot be the ground for levying penalty u/s. 271(1)(c) as held by the Hon'ble Apex Court in case of CIT vs. Reliance Petro Products Pvt. Ltd. 322 ITR 158.''The penalty imposed u/s. 271(1)(c) of the Act does not survive.'Core principles established include:Mandatory requirements for penalty proceedings under section 271(1)(c) include recording of satisfaction and clear specification of the limb of penalty invoked in the notice.Penalty cannot be levied merely on disallowance of a claim made in bona fide belief and pending judicial adjudication.Procedural lapses in penalty initiation render the penalty invalid.Appeals against rectification orders consequential to invalid penalty orders may be dismissed as infructuous.Final determinations:Penalty under section 271(1)(c) imposed for furnishing inaccurate particulars of income was quashed due to procedural defects and substantive merits.Appeal against rectification order under section 154 was dismissed as infructuous.