2018 (1) TMI 1549 - AT - Income Tax

Penalty levied u/s. 271(1)(c) - non specification of specific charge against the assessee as to whether the assessee is guilty of having concealed particulars of income or having furnished inaccurate particulars of income ? - 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 of t M/S SSA S EMERALD MEADOWS 2015 (11) TMI 1620 - 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. Provision of section 292B cannot cure the basic defect in assumption of jurisdiction and only cure the mistake, defect or omission in return of income, assessment, notice or the proceeding is in substance and effect in conformity with or according to intent and purpose of the Act. As we have already seen that the Hon'ble Karnataka High Court in the decision referred to earlier view the show cause notice and the reasons mentioned in the show cause notice are part of the process of the natural justice and the defect in such notice cannot be overlooked. In view of the aforesaid decision we do not find any infirmity in the arguments advanced by the learned AR before us. Contention of the Ld. DR is that the assessee has participated in the penalty proceedings and hence the error, if any that has occurred would be cured in view of the provisions of sec. 292B/292BB of the Act. Opposing the said contention, reliance was placed on the decision rendered by the Bangalore Bench of the Tribunal in the case of Shri K. Prakash Shetty vs. ACIT 2014 (6) TMI 976 - ITAT BANGALORE wherein it was held that the provisions of sec. 292BB would not come to the rescue of the revenue, when the notice was not in substance and effect in conformity with or according to the intent and purpose of the Act. In our view, the notice issued by the AO was not in substance, and effect in conformity with or according to the intent and purpose of the Act, since the Assessing Officer did not specify the charge for which penalty proceedings were initiated and further there was non-application of mind on the part of the Assessing Officer. - Decided in favour of assessee.

Issues Involved:
1. Confirmation of penalty levied under section 271(1)(c) of the Income Tax Act.
2. Validity of notice issued under section 274 of the Income Tax Act.
3. Application of section 292B and section 292BB of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Confirmation of Penalty Levied under Section 271(1)(c):

The primary issue in these appeals is the confirmation of the penalty levied under section 271(1)(c) of the Income Tax Act. The brief facts for the assessment year 2008-09 reveal that the assessee originally declared an income of ?6,01,250/- but revised it to ?1,07,37,350/- after a survey under section 133A revealed additional income of ?1,01,36,100/-. The Assessing Officer (AO) completed the assessment under section 143(3) read with section 147, further adding ?2 lakhs under section 69 and ?16,00,740/- due to discrepancies in the books, resulting in a total assessed income of ?1,25,38,090/-. The AO initiated penalty proceedings and levied a penalty of ?40,70,658/- under section 271(1)(c), stating that the additional income was declared only after the survey operations, indicating that the revised return was not voluntary but due to the detection of undisclosed investments.

The CIT(A) confirmed the penalty, observing that the additional income was admitted only due to the survey and not voluntarily. The CIT(A) emphasized that the assessee admitted to suppressing profits in the original return and that the disclosure was made only after being confronted with evidence during the survey.

2. Validity of Notice Issued under Section 274:

The assessee raised a primary objection regarding the validity of the notice issued under section 274, arguing that it did not specify the specific charge against the assessee—whether for concealing particulars of income or furnishing inaccurate particulars of income. The assessee relied on several judgments, including the Karnataka High Court's decision in CIT & Anr. v. Manjunatha Cotton and Ginning Factory, which held that the notice under section 274 should specifically state the grounds for penalty. The Tribunal found that the AO had not struck out the irrelevant part in the notice, making it unclear whether the penalty was for concealment or furnishing inaccurate particulars.

The Tribunal referred to the Karnataka High Court's principles, which state that the notice under section 274 should clearly specify the grounds for penalty, and initiating penalty proceedings on one ground while imposing penalty on another is invalid. The Tribunal concluded that the show cause notice was defective and did not meet the legal requirements, rendering the penalty orders invalid.

3. Application of Section 292B and Section 292BB:

The Department argued that any error in the notice could be cured under sections 292B and 292BB, as the assessee had participated in the penalty proceedings. However, the Tribunal, referring to the Bangalore Bench's decision in Shri K. Prakash Shetty vs. ACIT, held that section 292B cannot cure the basic defect in the assumption of jurisdiction and that the notice must be in substance and effect in conformity with the Act's intent and purpose. The Tribunal found that the notice was not in conformity with the Act, as the AO did not specify the charge, indicating non-application of mind.

Conclusion:

The Tribunal concluded that the levy of penalty could not be sustained due to the defective notice under section 274 and the non-application of mind by the AO. Consequently, the penalty orders were cancelled, and the appeals by the assessee were allowed. The Tribunal applied the same reasoning to the appeal for the assessment year 2009-10, resulting in the cancellation of the penalty proceedings for both years.

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