2016 (2) TMI 934 - AT - Income Tax

Penalty u/s 271 (1)(c) - non recording of satisfaction in the order of assessment - Held that - The show cause notice u/s. 274 of the Act is defective as it does not spell out the grounds on which the penalty is sought to be imposed - Decided in favour of assessee

Summary

Issues Involved:
1. Validity of penalty proceedings initiated under Section 271(1)(c) of the Income Tax Act, 1961.
2. Adequacy and specificity of the show cause notice issued under Section 274 of the Act.
3. Applicability of the principles laid down by the Karnataka High Court in CIT Vs. Manjunatha Cotton & Ginning Factory.
4. Reduction of penalty quantum by CIT(A) from 300% to 100%.

Issue-wise Detailed Analysis:

1. Validity of Penalty Proceedings Initiated Under Section 271(1)(c):
The penalty proceedings were initiated based on an addition of Rs. 4,30,00,000/- made by the AO, which was discovered during a search operation. The Assessee contended that the AO did not properly record satisfaction in the assessment order that the Assessee was liable to be proceeded against under Section 271(1)(c). The Tribunal found that the AO merely mentioned "Penalty proceeding u/s.271(1)(c) initiated" without specifying the exact charge, which is not in accordance with the law.

2. Adequacy and Specificity of the Show Cause Notice Issued Under Section 274:
The Assessee argued that the show cause notice under Section 274 was defective as it did not specify whether the penalty was for "furnishing inaccurate particulars of income" or "concealing particulars of such income." The Tribunal observed that the notice did not strike out the irrelevant portion, making it vague and non-specific. This defect rendered the penalty proceedings invalid.

3. Applicability of the Principles Laid Down by the Karnataka High Court in CIT Vs. Manjunatha Cotton & Ginning Factory:
The Tribunal relied heavily on the principles laid down by the Karnataka High Court, which stated that the show cause notice under Section 274 must specifically state the grounds for penalty. The Tribunal noted several key points from the Karnataka High Court's judgment, including the need for clear and specific grounds in the notice, the distinction between concealment of income and furnishing inaccurate particulars, and the requirement for the AO to come to a clear conclusion about the nature of the default. The Tribunal found that these principles were not followed in the present case, making the penalty proceedings invalid.

4. Reduction of Penalty Quantum by CIT(A):
The revenue's appeal was against the CIT(A)'s order reducing the penalty from 300% to 100% of the tax sought to be evaded. However, since the Tribunal decided that the penalty proceedings themselves were invalid due to the defective show cause notice, the question of the quantum of penalty became moot. Consequently, the revenue's appeal was dismissed.

Conclusion:
The Tribunal allowed the Assessee's appeal and cancelled the penalty imposed under Section 271(1)(c) due to the defective show cause notice under Section 274. The revenue's appeal regarding the reduction of penalty quantum was dismissed as the penalty itself was found to be invalid. The Tribunal's decision was pronounced on 03.02.2016.