2017 (4) TMI 1590 - AT - Income Tax

Levy of penalty under section 271(1)(c) - Validity of notice u/s 274 - HELD THAT - No contrary decision of the Hon ble Apex Court or the Hon ble Bombay High Court has been brought to our notice or placed before us for consideration. Therefore respectfully following case of Manjunatha Cotton Ginning Factory 2013 (7) TMI 620 - KARNATAKA HIGH COURT decision in the case of CIT Vrs Samson Perinchery 2017 (1) TMI 1292 - BOMBAY HIGH COURT we hold that the notice issued under section 274 r.w.s. 271 of the Act dated 29.11.2007 for A.Y. 2005-06 for initiating penalty proceedings under section 271(1)(c) of the Act in the case on hand is invalid and consequently the penalty proceedings are also invalid. In this view of the matter the additional grounds raised by the assessee are allowed. The very basis for the levy of penalty under section 271(1)(c) of the Act has been held to be invalid - Decided in favour of assessee.

Summary

Issues:
Levy of penalty under section 271(1)(c) of the Income Tax Act, 1961 for A.Y. 2005-06.

Analysis:
The appellant, a company engaged in financial activities, filed its return for A.Y. 2005-06 declaring NIL income after adjustments and paid taxes on book profit. The assessment under section 143(3) resulted in additions/disallowances leading to a penalty initiation under section 271(1)(c). The CIT(A) confirmed the penalty on certain disallowances but deleted penalty on others. The appellant contested the penalty on various grounds, challenging the CIT(A)'s decision.

The appellant raised grounds questioning the CIT(A)'s decision to uphold the penalty without proving concealment or inaccurate particulars of income, especially regarding provisions for diminution in value of shares and income tax provision errors. Additionally, the appellant sought to add new grounds challenging the validity of the penalty notice issued by the AO under section 274 r.w.s. 271(1)(c) of the Act, claiming it lacked specifics on the default leading to the penalty.

During the hearing, the appellant presented additional grounds challenging the validity of the penalty notice, arguing that the AO mechanically initiated penalty proceedings without recording satisfaction or specifying the grounds. The Tribunal admitted these additional grounds for consideration as they raised fundamental legal issues regarding the penalty imposition process.

Upon review, the Tribunal found that the penalty notice lacked clarity on the grounds for penalty imposition, in violation of principles of natural justice. Citing precedents, the Tribunal held that penalty proceedings must specify whether it is for concealment of income or furnishing inaccurate particulars. As no contrary decisions were presented, the Tribunal followed the Karnataka High Court's ruling, declaring the penalty notice invalid and consequently, the penalty proceedings as well.

Consequently, the Tribunal allowed the additional grounds raised by the appellant, deeming the penalty proceedings invalid due to the flawed penalty notice. As the basis for penalty imposition was deemed invalid, the Tribunal did not adjudicate on the merits of the penalty levy under section 271(1)(c) of the Act. Therefore, the appellant's appeal for A.Y. 2005-06 was allowed.

In conclusion, the Tribunal's decision highlighted the importance of a clear and specific penalty notice, emphasizing the need for adherence to procedural fairness in penalty proceedings under the Income Tax Act, 1961.