2016 (1) TMI 718 - AT - Income Tax

Penalty proceedings u/s.271(1)( c) - Held that - On the facts of the present case 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 CIT & Anr. v. Manjunatha Cotton and 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. - Decided in favour of assessee.

Summary

Issues Involved:
1. Legality of the penalty proceedings initiated under Section 271(1)(c) of the Income Tax Act, 1961.
2. Validity of the show cause notice issued under Section 274 of the Income Tax Act, 1961.
3. Applicability of Explanation 5A to Section 271(1)(c) of the Income Tax Act, 1961.
4. Adequacy of the Assessing Officer's satisfaction in initiating penalty proceedings.

Detailed Analysis:

1. Legality of the Penalty Proceedings Initiated 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) of the Income Tax Act. The penalties were imposed following a search and seizure operation under Section 132(1) in the case of the Karta of the Assessee HUF. The AO accepted the income returned by the Assessee and initiated penalty proceedings under Section 271(1)(c) without recording any specific satisfaction regarding the concealment of income. The Tribunal noted that the AO's statement, "Penalty proceedings u/s.271(1)(c) initiated," was not sufficient to meet the legal requirements.

2. Validity of the Show Cause Notice Issued Under Section 274 of the Income Tax Act, 1961:
The Tribunal examined the show cause notice issued under Section 274 and found it defective. The notice did not specify whether the penalty was for "furnishing inaccurate particulars of income" or "concealing particulars of income." The notice's failure to strike out the irrelevant portion rendered it vague and non-compliant with legal standards. The Tribunal relied on the Karnataka High Court's decision in CIT Vs. Manjunatha Cotton & Ginning Factory, which held that such ambiguity in the show cause notice invalidates the penalty proceedings.

3. Applicability of Explanation 5A to Section 271(1)(c) of the Income Tax Act, 1961:
The CIT(A) had applied Explanation 5A to Section 271(1)(c), which deems the Assessee to have concealed income if certain conditions are met following a search operation. However, the Tribunal found that the defective show cause notice and the lack of specific satisfaction recorded by the AO made the imposition of penalty unsustainable, irrespective of Explanation 5A's applicability.

4. Adequacy of the Assessing Officer's Satisfaction in Initiating Penalty Proceedings:
The Tribunal emphasized that the AO must clearly record satisfaction regarding the specific grounds for initiating penalty proceedings under Section 271(1)(c). The satisfaction must be discernible from the assessment order or other related documents. In this case, the AO's generic statement did not meet this requirement. The Tribunal cited principles from the Karnataka High Court's decision, which stressed the necessity for clear and unambiguous initiation and imposition of penalties.

Conclusion:
The Tribunal concluded that the penalty proceedings were invalid due to the defective show cause notice and the lack of specific satisfaction recorded by the AO. Consequently, the penalties imposed for the assessment years 2003-04 to 2007-08 were cancelled, and the appeals by the Assessee were allowed. The Tribunal did not address other arguments on the merits of the penalty orders due to the decisive nature of the procedural defects identified.