2018 (3) TMI 1597 - AT - Income Tax

Penalty u/s 271(1)(c) for disallowance - rejection for deduction under Sec. 57(iii) - defective notice - AO failed to strike off the irrelevant default in the Show cause notice - Held that - AO had merely issued the Show cause notice u/s 274 in the standard proforma without pointing out the defaults for which the assessee was being proceeded against - in such situation the assessee is not informed and rather is left guessing of the defaults for which he is being proceeded against for - thus AO had clearly failed to discharge his statutory obligation - thus penalty u/s 271(1)(c) imposed by the AO is clear violation of the mandate of Sec. 274(1) of the Act and hence cannot be sustained - Decided in favor of assessee.

Summary

Issues Involved:
1. Confirmation of penalty levied under Section 271(1)(c) of the Income Tax Act, 1961.
2. Validity of penalty initiation under Section 271(1)(c) for both 'furnishing of inaccurate particulars of income' and 'concealment of income'.

Issue-wise Detailed Analysis:

1. Confirmation of Penalty Levied Under Section 271(1)(c) of the Income Tax Act, 1961:

The assessee filed an appeal against the order of CIT(A)-22, Mumbai, which confirmed the penalty of ?12,14,140/- under Section 271(1)(c) for disallowance of interest expenses under Section 57 amounting to ?39,29,247/-. The CIT(A) observed that the assessee had borrowed ?11 crores but utilized only ?2.75 crores for earning income from other sources. The CIT(A) concluded that the claim of deduction of the entire interest expenditure of ?76,84,062/- lacked bonafide as only part of the borrowed funds were used for earning interest income. Consequently, the penalty was upheld under Clause (B) of Explanation 1 to Section 271(1)(c).

2. Validity of Penalty Initiation Under Section 271(1)(c) for Both 'Furnishing of Inaccurate Particulars of Income' and 'Concealment of Income':

The assessee contended that the penalty initiation under both limbs, 'furnishing of inaccurate particulars of income' and 'concealment of income', was bad in law. The assessee argued that the 'Show cause' notice issued under Section 274 r.w. Section 271(1)(c) did not specify the exact charge, thus violating the principles of natural justice. The Tribunal observed that the notice issued in the standard proforma without specifying the default reflected non-application of mind by the A.O. The Tribunal held that the failure to clearly specify the charge in the notice deprived the assessee of a reasonable opportunity to defend against the penalty, rendering the penalty order invalid.

Conclusion:

The Tribunal concluded that the penalty proceedings initiated and the subsequent penalty imposed under Section 271(1)(c) were invalid due to the non-specific nature of the 'Show cause' notice. The penalty of ?12,14,140/- was quashed, and the appeal filed by the assessee was allowed. The Tribunal refrained from adjudicating the merits of the penalty, focusing solely on the procedural lapse in the penalty initiation process.