2016 (5) TMI 244 - AT - Income Tax

Penalty u/s 271(1)(c ) - Held that - In the present case 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. 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 penalty imposed under Section 271(1)(c) of the Income Tax Act, 1961.
2. Validity of the show cause notice issued under Section 274 of the Act.
3. Applicability of Explanation 5A to Section 271(1)(c) of the Act.
4. Recording of satisfaction by the Assessing Officer (AO) regarding concealment or furnishing of inaccurate particulars of income.

Detailed Analysis:

1. Legality of Penalty Imposed under Section 271(1)(c) of the Income Tax Act, 1961:
The assessee challenged the penalty imposed by the AO under Section 271(1)(c) of the Act for the assessment years 2006-07 and 2007-08. The penalty was levied based on the income disclosed during search operations and subsequent returns filed under Section 153A of the Act. The assessee argued that the disclosure was made under Section 132(4) on the condition that no penalty would be imposed, and the returns filed should be treated as returns under Section 139(1), thus exempting them from penalty.

2. Validity of the Show Cause Notice Issued under Section 274 of the Act:
The assessee contended that the show cause notice issued under Section 274 did not specify whether the penalty was for "furnishing inaccurate particulars of income" or "concealing particulars of such income." The AO used a printed form without striking out the irrelevant portions, leading to ambiguity. The Tribunal referred to the Karnataka High Court's decision in CIT Vs. Manjunatha Cotton & Ginning Factory, which held that such notices must clearly state the grounds for penalty to meet the requirements of natural justice. The Tribunal found the show cause notice defective and invalid, rendering the penalty orders unsustainable.

3. Applicability of Explanation 5A to Section 271(1)(c) of the Act:
The CIT(A) upheld the penalty based on Explanation 5A to Section 271(1)(c), which deems undisclosed income found or declared after a search as concealed income if not declared in the return filed under Section 139(1). The assessee argued that there was no finding of concealment or furnishing inaccurate particulars in the assessment order. The Tribunal did not delve into the merits of this argument due to the conclusion on the defective show cause notice.

4. Recording of Satisfaction by the Assessing Officer (AO):
The Tribunal noted that the AO's assessment order merely stated, "Penalty u/s.271(1)(c) initiated separately," without recording specific satisfaction about concealment or furnishing inaccurate particulars. This was deemed insufficient under the law. The Tribunal emphasized that the AO must clearly indicate the basis for initiating penalty proceedings, as per the principles laid down by the Karnataka High Court.

Conclusion:
The Tribunal held that the show cause notice under Section 274 was defective for not specifying the exact charge, thus violating principles of natural justice. Consequently, the penalty orders were invalidated, and the appeals of the assessee were allowed. The Tribunal did not address other arguments on the merits of the penalty due to the decisive conclusion on the defective notice.

Order Pronounced:
The appeals of the assessee were allowed, and the orders imposing penalty were canceled. The decision was pronounced in the court on 23.03.2016.