2016 (2) TMI 701 - AT - Income Tax

Penalty u/s 271(1)(c) - Held that - As 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. Levy of penalty in the present case cannot be sustained. - Decided in favour of assessee

Summary

Issues Involved:

1. Validity of the penalty imposed under Section 271(1)(c) of the Income Tax Act.
2. Adequacy and specificity of the show cause notice issued under Section 274 of the Income Tax Act.
3. Application of the principles laid down by the Karnataka High Court in the case of CIT Vs. Manjunatha Cotton & Ginning Factory.

Issue-wise Detailed Analysis:

1. Validity of the penalty imposed under Section 271(1)(c) of the Income Tax Act:

The assessee challenged the orders of the CIT(A) which confirmed the AO's imposition of penalty under Section 271(1)(c) of the Act. The penalty was imposed following a search and seizure operation under Section 132(1) of the Act, which led to the initiation of proceedings under Section 153A. The assessee filed returns declaring undisclosed income, which were accepted by the AO. However, penalty proceedings were initiated against the assessee under Section 271(1)(c) for the assessment years 2007-08 and 2008-09.

2. Adequacy and specificity of the show cause notice issued under Section 274 of the Income Tax Act:

The assessee contended that the AO did not record satisfaction in the assessment order that the assessee was liable to be proceeded against under Section 271(1)(c), except for a general statement: "Penalty proceeding u/s.271(1)(c) initiated." Furthermore, the show cause notice under Section 274 did not specify whether the penalty was for "furnishing inaccurate particulars of income" or "concealing particulars of such income," as the irrelevant portion was not struck out. This lack of specificity was argued to be contrary to the principles laid down by the Karnataka High Court in the case of CIT Vs. Manjunatha Cotton & Ginning Factory, where it was held that a show cause notice must clearly state the exact charge against the assessee.

3. Application of the principles laid down by the Karnataka High Court in the case of CIT Vs. Manjunatha Cotton & Ginning Factory:

The Tribunal considered the submissions and referred to the Karnataka High Court's decision, which emphasized that the notice under Section 274 should specifically state whether the penalty is for concealment of income or for furnishing inaccurate particulars of income. The Court had held that a vague notice with all grounds mentioned would not satisfy the requirement of law and would offend the principles of natural justice. The Tribunal found that the show cause notice in the present case was defective as it did not spell out the grounds for the penalty, thus following the Karnataka High Court's ruling.

The Karnataka High Court laid down several principles, including that penalty proceedings must be specific to the grounds mentioned, the imposition of penalty is not automatic, and the notice should not be vague. The Tribunal concluded that the penalty orders were invalid due to the defective show cause notice, and thus, the penalty imposed was cancelled.

Conclusion:

The Tribunal allowed the appeals of the assessee, holding that the penalty imposed under Section 271(1)(c) could not be sustained due to the defective show cause notice under Section 274. The orders imposing penalty were cancelled, and the appeals were allowed. The Tribunal did not address other arguments on the merits of the penalty orders, as the defect in the show cause notice was sufficient to decide the matter. The order was pronounced in the court on 15.1.2016.