2017 (9) TMI 1641 - AT - Income Tax

Penalty u/s 271(1)(c) - defective notice - unexplained investment - Held that - The penalty proceedings initiated on the basis of defective notice has to be cancelled.

Summary

Issues Involved:
1. Validity of Penalty Proceedings Initiated Under Section 271(1)(c) of the Income-tax Act, 1961.
2. Defective Notice Issued Under Section 274 Read with Section 271 of the Act.
3. Merits of the Penalty Levied for Unexplained Investment in Jewellery.

Issue-wise Detailed Analysis:

1. Validity of Penalty Proceedings Initiated Under Section 271(1)(c) of the Income-tax Act, 1961:
The appeal by the assessee challenges the order of the Commissioner of Income-tax (Appeals) - 4, Bengaluru, which upheld the penalty of ?2,08,365/- levied by the DCIT, Circle-2(2), Bangalore under Section 271(1)(c) of the Income-tax Act, 1961 for the assessment year 2011-12. The penalty was based on the addition of ?6,74,320/- for unexplained jewellery found during a search action under Section 132 of the Act. The assessee contended that the penalty proceedings were initiated without proper satisfaction being recorded in the assessment order, rendering the initiation and the subsequent penalty order invalid.

2. Defective Notice Issued Under Section 274 Read with Section 271 of the Act:
The assessee argued that the notice issued under Section 274 read with Section 271 of the Act was defective as it did not specify whether the penalty was for "furnishing inaccurate particulars of income" or "concealment of income." This contention was supported by the decision of the Hon’ble Karnataka High Court in the case of Manjunatha Cotton & Ginning Factory (359 ITR 565) (Kar) and the rejection of Revenue’s SLP by the Hon’ble Apex Court in the case of SSAS Emerald Meadows. The Tribunal observed that the notice issued to the assessee did not delete inappropriate words, making it unclear which specific default was being penalized. The Karnataka High Court had held that such a notice is invalid, and any consequential penalty proceedings/orders are also invalid.

3. Merits of the Penalty Levied for Unexplained Investment in Jewellery:
On the merits, the assessee contended that the addition of ?6,74,320/- was based on a valuation report, which is an estimation, and no penalty can be levied on such a basis. The Revenue, however, argued that the addition was sustained due to the lack of a reconciliation statement from the assessee. Despite this, the Tribunal did not delve into the merits of the penalty, as it found the initiation of penalty proceedings itself to be invalid due to the defective notice.

Conclusion:
The Tribunal, after considering the rival contentions and the material on record, held that the notice issued under Section 274 read with Section 271 of the Act was indeed defective. Following the judgments of the Hon’ble Karnataka High Court in the cases of Manjunatha Cotton & Ginning Factory and SSAS Emerald Meadows, the Tribunal declared the penalty proceedings and the consequent penalty order invalid. Therefore, the penalty of ?2,08,365/- levied under Section 271(1)(c) of the Act for the assessment year 2011-12 was deleted. The grounds raised by the assessee regarding the defective notice were allowed, and the other grounds on the merits of the penalty were not adjudicated due to the invalidation of the penalty proceedings.

Order:
The appeal by the assessee for the assessment year 2011-12 was allowed, and the penalty levied was deleted. The order was pronounced in the open court on 22nd September 2017.