2016 (7) TMI 1226 - AT - Income Tax

Penalty levied as per Explanation 5A to Sec. 271(1)(c) - defective notice - 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. Following the decision of the Hon ble Karnataka High Court in the case of Manjunatha Cotton and Ginning Factory (2013 (7) TMI 620 - KARNATAKA HIGH COURT ) we hold that the orders imposing penalty in the assessment year under consideration has to be held as invalid and consequently penalty imposed is cancelled. 7.3 For the reasons given above we hold that levy of penalty in the present case cannot be sustained. We therefore cancel the orders imposing penalty u/s 271(1)(c) of the Act on the assessee and this ground of the assessee s appeal is allowed.

Summary

Issues Involved:
1. Deletion of penalty under Section 271(1)(c) of the Income Tax Act, 1961.
2. Applicability of Explanation 5A to Section 271(1)(c) in cases of assessment under Section 153C.
3. Interpretation of the non obstante clause in Section 153C.
4. Validity of penalty notices under Section 274.

Detailed Analysis:

1. Deletion of Penalty under Section 271(1)(c):
The primary issue revolves around whether the Commissioner of Income Tax (Appeals) [CIT(A)] was correct in deleting the penalty imposed by the Assessing Officer (AO) under Section 271(1)(c) of the Income Tax Act. The AO had levied a penalty on the assessee for undisclosed investments totaling ?1,43,74,155, which were admitted and offered to tax during the search proceedings. However, the CIT(A) deleted the penalty on the grounds that the income declared in response to the notice under Section 153C was accepted without any additions, implying no concealment of income.

2. Applicability of Explanation 5A to Section 271(1)(c):
The Revenue contended that Explanation 5A to Section 271(1)(c) applies to the assessee since the search was conducted after June 1, 2007, and the income was not declared in the original return filed under Section 139. The CIT(A) held that Explanation 5A is not applicable as the search was not conducted on the assessee but on another entity, SALTEE Group. The Tribunal disagreed with the CIT(A) on this point, stating that the applicability of Explanation 5A does not require the assessee to be the party searched under Section 132.

3. Interpretation of the Non Obstante Clause in Section 153C:
The CIT(A) opined that the non obstante clause in Section 153C overrides the provisions of Section 139, and therefore, the return filed under Section 139 is irrelevant in reassessment proceedings under Section 153C. The Tribunal found this interpretation incorrect, emphasizing that the penalty provisions under Explanation 5A to Section 271(1)(c) are applicable irrespective of whether the reassessment is under Section 153C or any other section.

4. Validity of Penalty Notices under Section 274:
A significant point of contention was the validity of the penalty notices issued under Section 274. The Tribunal observed that the notices were vague and did not specify whether the penalty was for concealment of income or for furnishing inaccurate particulars of income. Citing the Karnataka High Court's decision in the case of Manjunatha Cotton and Ginning Factory, the Tribunal held that such vague notices violate the principles of natural justice and are invalid. Consequently, the penalty imposed under Section 271(1)(c) was canceled on this ground.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to delete the penalty, albeit for different reasons. While the CIT(A) focused on the non-applicability of Explanation 5A due to the search not being conducted on the assessee, the Tribunal emphasized the invalidity of the penalty notices under Section 274. The appeals by the Revenue were dismissed, and the penalty under Section 271(1)(c) was canceled due to the defective notices.