2025 (10) TMI 228 - AT - Income Tax

Penalty under s.271(1)(c) read with s.274 invalid where two-stage show-cause notices failed to specify which limb applied

Dy. Commissioner of Income Tax Circle-11, Pune Versus Honeywell Automation India Ltd.

ITAT PUNE - AT held the penalty proceedings under s.271(1)(c) read with s.274 defective because the show-cause notices, issued at two stages, alleged both ... Penalty u/s 271(1)(c) - Defective notice u/s 274 - as alleged Notice issued u/s 274 r.w.s. 271(1)(c) with both the limbs and without specifying applicable limb for which penalty sought to have initiated - HELD THAT:- As admitted facts that, the notice issued subsequent to passing of OGE did make mention of both charges and limbs. Thus two notices issued at two different stages viz; one immediately upon culmination of assessment and another after passing OGE pursuant to second appellate proceedings, did not clearly communicate specific charge alleged for imposition of penalty as required or mandated by judicial precedents and provisions of section 271(1)(c) r.w.s. 274 of the Act. We see no reasons to deviate from the settled position of law laid down in the case of Mohd. Farhan A. Shaikh [2021 (3) TMI 608 - BOMBAY HIGH COURT (LB)] wherein their Hon’ble lordships while deciding the validity penalty proceedings initiated by a notice issued u/s 271(1)(c) r.w.s. 274 of the Act wherein inapplicable limb or charge was not struck off. Similar issue of validity of imposition of penalty where show cause notice was issued in standard format without sticking off irrelevant charge/limb was travelled to floor’s of Hon’ble Apex Court on many occasion and recently in the case of ‘CIT(LTU) Vs State Bank of India’ [2024 (12) TMI 1282 - SC ORDER]. wherein while dismissing the special leave petition of the Revenue. Decided against revenue. ISSUES PRESENTED AND CONSIDERED 1. Whether a show cause notice issued under section 274 read with section 271(1)(c) that reproduces both limbs/charges of section 271(1)(c) without striking off the inapplicable limb or otherwise specifying which limb is invoked, is a valid initiation of penalty proceedings. 2. Whether resumption of penalty proceedings after an order giving effect (OGE) to appellate/tribunal directions cures the defect of an initial general/standard-form notice that did not specify the applicable limb of section 271(1)(c). 3. Whether, having found the initial notice defective for lack of specification of the applicable limb, any further factual or proportionality arguments (e.g., monetary quantum or percentage of turnover, TP adjustments, or de minimis variation in Form 26AS) require separate determination or become academic. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of a general/standard-form show cause notice under section 274 read with section 271(1)(c) that fails to specify/strike off the inapplicable limb Legal framework: Section 271(1)(c) prescribes penalty for concealment of particulars of income or furnishing inaccurate particulars; section 274 governs initiation of penalty proceedings by issuing a show cause notice. Communication of the charge in the notice must satisfy mandatory conditions for validity. Precedent treatment: The Court followed binding and persuasive authorities holding that a contravention of a mandatory requirement for a communication is fatal and that notices must be precise and not ambiguous. Prior rulings (including the cited jurisdictional High Court and Supreme Court treatments referenced) establish that issuing a standard format notice without striking off inapplicable portions or otherwise specifying the exact charge renders the notice invalid. Interpretation and reasoning: The notice in question was admitted to be a standard-format/blanket form reproducing both limbs of section 271(1)(c) without striking off the inapplicable limb or indicating which limb was invoked for each alleged misstatement. The Court reasoned that such absence of specificity leaves room for ambiguity, is contrary to principles of fair communication, and breaches a mandatory condition required for a valid initiation of penalty proceedings. The Court expressly relied on the principle that precision in the notice is required in the interest of fairness and justice, and that a communication lacking such precision is fatal to the proceedings. Ratio vs. Obiter: The holding that initiation of penalty proceedings is invalid when the SCN fails to specify/strike off the applicable limb of section 271(1)(c) is ratio decidendi of the decision. Conclusions: The initial show cause notice was invalid ab initio for not specifying the applicable limb; penalty proceedings premised on such notice cannot be sustained and the penalty must be deleted on that ground. Issue 2 - Effect of resuming penalty proceedings after issuing an OGE where the subsequent notice still fails to specify the applicable limb Legal framework: Resumption of proceedings after an order giving effect is governed by reassessment/penalty procedure rules; however, the formal requirements for a valid show cause notice (clarity as to charge) remain applicable to any fresh show cause notice. Precedent treatment: Authorities relied upon demonstrate that subsequent procedural steps do not cure a fundamental defect in the initial communication if any fresh notice similarly lacks required specificity; courts have sustained invalidation where notices continued to be ambiguous. Interpretation and reasoning: The subsequent notice dated 17/03/2020, issued after OGE, likewise reproduced both limbs/charges and did not strike off the inapplicable limb or clearly indicate the precise basis of the penalty. The Court held that resumption of the same defective process does not cure the initial defect. Fairness and the mandatory nature of the notice requirement mean that deficiency in either the initial or renewed notice is fatal. Ratio vs. Obiter: The ruling that a renewed or resumed SCN which repeats the ambiguity of the original notice is likewise invalid forms part of the operative ratio. Conclusions: The resumed penalty proceedings were also invalid because the SCN after OGE failed to remedy the fundamental lack of specificity; consequently, penalty imposed pursuant to such defective notices must be deleted. Issue 3 - Consequence for other contested factual/contention issues once notice invalidity is established Legal framework: Where a fundamental jurisdictional or procedural defect invalidates the initiation of proceedings, subsequent merits-based inquiries into culpability, quantification, proportionality, or de minimis considerations become unnecessary to decide. Precedent treatment: Courts have held that when initiation of proceedings is invalid, merits issues become academic unless the initiation defect is cured in a valid manner compliant with law. Interpretation and reasoning: Having found the notice(s) defective and the penalty initiation void, the Court treated other arguments (validity of TP adjustment, percentage of turnover, quantum of variation in Form 26AS, and whether the facts constituted furnishing inaccurate particulars or mere difference of opinion) as rendered academic for the purpose of upholding or deleting the penalty. The Court therefore did not adjudicate those merits issues but expressly stated that they were ancillary once the jurisdictional defect was decided. Ratio vs. Obiter: The conclusion that all other grounds become academic in view of notice invalidity is an application of settled procedural principle and operative in the judgment (ratio as to consequence), though not a determination on merits. Conclusions: The penalty deletion was ordered on procedural grounds; substantive contentions regarding concealment, inaccuracy, proportionality, or de minimis variation were not decided and are rendered academic in the present adjudication. Disposition and consequential holding The penalty imposed under section 271(1)(c) read with section 274 was deleted because the show cause notice initiating penalty proceedings reproduced both limbs of section 271(1)(c) without striking off the inapplicable limb or otherwise specifying the charge, a mandatory defect held to be fatal. The appeal against deletion is dismissed; the cross-objection seeking deletion of penalty is partly allowed to the extent of the above. All other grounds raised by the parties were not adjudicated as they became academic in light of the above holding.