2015 (12) TMI 1617 - AT - Income Tax

Penalty u/s.271(1)(c) - Held that - 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 in the case of CIT Vs. Manjunatha Cotton & Ginning Factory 2013 (7) TMI 620 - KARNATAKA HIGH COURT we hold that the orders imposing penalty in all the assessment years have to be held as invalid and consequently penalty imposed is cancelled. For the reasons given above, we hold that levy of penalty in the present case cannot be sustained - Decided in favour of assessee

Summary

Issues Involved:
1. Imposition of penalty under Section 271(1)(c) of the Income Tax Act, 1961.
2. Validity of the show cause notice issued under Section 274 of the Act.
3. Application of Explanation 5A to Section 271(1)(c) of the Act.
4. Satisfaction of the Assessing Officer (AO) regarding concealment of income or furnishing inaccurate particulars of income.

Detailed Analysis:

1. Imposition of Penalty under Section 271(1)(c) of the Income Tax Act, 1961:
The Assessee challenged the orders of the CIT(A) confirming the AO's imposition of penalty under Section 271(1)(c). The penalty was imposed following a search and seizure operation under Section 132(1), where the Assessee disclosed undisclosed income for AYs 2004-05 to 2009-10. The AO initiated penalty proceedings, asserting that the income declared would not have been disclosed but for the search operation. The CIT(A) upheld the penalty, citing Explanation 5A to Section 271(1)(c), which deems the Assessee to have concealed particulars of income if certain conditions are met.

2. Validity of the Show Cause Notice Issued under Section 274 of the Act:
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 income." The notice did not strike out the irrelevant portion, leading to ambiguity. The Tribunal referred to the Karnataka High Court's decision in CIT Vs. Manjunatha Cotton & Ginning Factory, which held that such notices must clearly state the grounds for penalty. A vague notice violates principles of natural justice, rendering the penalty order unsustainable.

3. Application of Explanation 5A to Section 271(1)(c) of the Act:
Explanation 5A applies to cases where an Assessee is found in possession of undisclosed assets or income during a search initiated after June 1, 2007. The Assessee claimed that the disclosure was voluntary and not due to any detection by the revenue. However, the CIT(A) held that Explanation 5A was applicable, as the income was not declared in the original returns but was included in the returns filed post-search. This explanation deems the Assessee to have concealed income, justifying the penalty.

4. Satisfaction of the Assessing Officer (AO) Regarding Concealment of Income or Furnishing Inaccurate Particulars of Income:
The Assessee contended that the AO did not properly record satisfaction of concealment or furnishing inaccurate particulars. The AO merely stated, "Penalty proceedings u/s.271(1)(c) initiated," without specifying the exact charge. The Tribunal found that the AO's failure to clearly state the grounds for penalty in the show cause notice and assessment order was a significant procedural lapse. The Karnataka High Court's principles emphasize that the AO must explicitly state whether the penalty is for concealment or inaccurate particulars, and the penalty should be imposed on the same grounds as initiated.

Conclusion:
The Tribunal concluded that the show cause notice under Section 274 was defective, as it did not specify the grounds for penalty, violating principles of natural justice. Consequently, the penalty orders were deemed invalid. The Tribunal allowed the Assessee's appeals, canceling the penalties imposed for AYs 2004-05 to 2008-09. The decision underscores the necessity for clear and specific grounds in penalty notices and the importance of procedural compliance by the AO.