ITAT allows appeal against section 271(1)(c) penalty due to defective notice using "or/and" between limbs

ITAT Mumbai allowed the assessee's appeal against penalty proceedings under section 271(1)(c) relating to disallowance of set-off of inter-head losses. The tribunal held that the penalty notice was defective as the AO used "or/and" between both limbs of section 271(1)(c), indicating uncertainty about which specific ground the penalty was being imposed. Following the Bombay HC precedent, the tribunal ruled that such defective notice vitiates the entire penalty proceedings, resulting in the appeal being allowed.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

• Whether the penalty notice issued under section 274 read with section 271(1)(c) of the Income Tax Act, 1961, is valid when it ambiguously uses the phrase "or/and" between the limbs of concealment of income and furnishing inaccurate particulars, thereby not specifying the exact charge under which penalty proceedings are initiated;
• Whether such a defective or ambiguous notice can sustain the levy of penalty under section 271(1)(c);
• Whether the Assessee's challenge to the validity of the penalty notice under section 274 at the appellate stage is maintainable;
• Whether the precedents relied upon by both parties, especially the Hon'ble Jurisdictional High Court's decisions in Md. Farhan A Shaikh vs. DCIT (2021) and Veena Estate (P.) Ltd. vs. CIT (2024), are applicable and determinative in the present facts;
• Whether the penalty imposed under section 271(1)(c) for concealment or furnishing inaccurate particulars of income is justified, given the procedural infirmities in the notice and the facts of the case.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of the penalty notice under section 274 read with section 271(1)(c) when it ambiguously uses "or/and" between concealment and furnishing inaccurate particulars

Relevant legal framework and precedents: Section 274 of the Income Tax Act mandates issuance of a show cause notice before imposing penalty under section 271(1)(c) for concealment of income or furnishing inaccurate particulars. The notice must clearly specify the charge under which penalty proceedings are initiated. The Hon'ble Jurisdictional High Court in Md. Farhan A Shaikh vs. DCIT (2021) extensively examined the validity of penalty notices and held that a mere defect or inclusion of irrelevant material in the notice vitiates the penalty proceedings.

Court's interpretation and reasoning: The Tribunal observed that the penalty notice dated 27.12.2018 used the phrase "or/and" between the two limbs of concealment of income and furnishing inaccurate particulars, indicating uncertainty by the AO as to the exact charge under which penalty was initiated. This ambiguity was found to be a fundamental defect.

Key evidence and findings: The notice text was reproduced verbatim, showing the ambiguous use of "or/and." The Tribunal noted that such uncertainty in the charge goes to the root of the case and affects the Assessee's right to know the precise allegations and prepare a defense.

Application of law to facts: Following the binding precedent of the Hon'ble Jurisdictional High Court in Md. Farhan A Shaikh, the Tribunal held that the defect in the notice-non-striking of irrelevant matter and failure to specify the charge clearly-vitiates the penalty proceedings and justifies deletion of the penalty.

Treatment of competing arguments: The Revenue relied on the judgment in Veena Estate (P.) Ltd. vs. CIT (2024), which held that objections to penalty notices not raised at an early stage are barred later. However, the Tribunal distinguished that case on facts, noting that in Veena Estate, the challenge was raised after 23 years and for the first time before the High Court, whereas in the present case, the Assessee challenged the notice timely before the appellate authority.

Conclusions: The Tribunal concluded that the defective and ambiguous penalty notice cannot sustain the penalty and that the penalty proceedings are vitiated.

Issue 2: Maintainability of the Assessee's challenge to the penalty notice validity at the appellate stage

Relevant legal framework and precedents: The principle that procedural defects in penalty notices can be challenged at any stage, especially when they affect fundamental rights, is well established. The Hon'ble Jurisdictional High Court in Md. Farhan A Shaikh allowed such challenges, while in Veena Estate, the delay and failure to raise objections earlier led to rejection.

Court's interpretation and reasoning: The Tribunal emphasized that the Assessee raised the issue of the defective penalty notice within a reasonable time before the appellate authority and not belatedly. Therefore, the Assessee's challenge is maintainable and deserves consideration.

Key evidence and findings: The record showed the Assessee's timely challenge to the notice's validity during penalty proceedings and appeals.

Application of law to facts: The Tribunal applied the principle that procedural defects affecting the root of the case cannot be waived or barred if raised timely.

Treatment of competing arguments: The Tribunal rejected the Revenue's reliance on Veena Estate as factually distinguishable.

Conclusions: The challenge to the penalty notice is maintainable and validly raised.

Issue 3: Justification for levy of penalty under section 271(1)(c) given the procedural infirmities

Relevant legal framework and precedents: Section 271(1)(c) penalizes concealment of income or furnishing inaccurate particulars. However, penalty proceedings must comply with procedural safeguards, including valid notice under section 274.

Court's interpretation and reasoning: Since the penalty notice was defective and ambiguous, the Tribunal found that the penalty imposed cannot stand. The procedural infirmity undermines the validity of the penalty order.

Key evidence and findings: The penalty order imposing Rs. 9,97,234/- was based on the ambiguous notice and the AO's findings of concealment or inaccuracy in particulars.

Application of law to facts: The Tribunal applied the principle that procedural defects vitiate penalty imposition, and therefore deleted the penalty without examining other grounds.

Treatment of competing arguments: The Tribunal did not delve into the merits of concealment or inaccuracy due to the procedural defect.

Conclusions: The penalty is deleted on procedural grounds.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"The AO has used or/and in between both of the limbs, which goes to show that the AO was not sure under which limb the penalty proceedings have been initiated and to be carried out. Therefore, issue emerges 'as to whether the defective notice and/or not mentioning the charge/limb specifically in the notice u/s 274 r.w.s. 271(1)(c) of the Act can justify the levy of penalty'. The Hon'ble Jurisdictional High Court in the case of Md. Farhan A Shaikh (supra) has dealt with the identical issue and considered various judgments in this respect and ultimately held 'mere defect in the notice - non striking of the irrelevant matter - vitiate the proceedings' and therefore respectfully following the dictum laid down by the Hon'ble Jurisdictional High Court, in our considered view, the penalty under consideration is liable to be deleted."

The Tribunal also clarified:

"In the instant case, the Assessee has challenged the notice u/s 274 r.w.s. 271 of the Act before the second appellate authority and within a reasonable time and therefore the judgment referred to by the Ld. D.R. is factually dissimilar."

Core principles established include:

• A penalty notice under section 274 must clearly specify the charge under which penalty is proposed; ambiguity or uncertainty vitiates the proceedings;
• Mere defects or inclusion of irrelevant matter in the penalty notice can invalidate the penalty;
• Challenges to defective penalty notices are maintainable if raised timely before the appellate authority;
• Procedural compliance is fundamental to the validity of penalty imposition under section 271(1)(c).

Final determination: The penalty imposed under section 271(1)(c) of the Income Tax Act, 1961, for concealment of income or furnishing inaccurate particulars for the assessment year 2011-12 is deleted due to the defective and ambiguous penalty notice issued under section 274. Other grounds raised by the Assessee were not adjudicated as the penalty was quashed on procedural grounds.

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