2017 (2) TMI 807 - AT - Income Tax

Penalty u/s. 271(1)(c) - unexplained income of assessee - validity of notice - whether the proceedings were initiated for concealment of penalty or for furnishing inaccurate particulars ? - Held that - The reason for adding the amounts in the hands of assessee is only because the AO did not find necessary entries in the books of account of the above two concerns. If that is the case, since those people have owned up the amounts, necessary proceedings could have been initiated in their hands. However, in order to settle the matter, assessee had accepted the addition and paid the taxes accordingly. In these circumstances, we are of the opinion that assessee s explanation given has not been disproved. Just because an addition has been made and agreed by assessee, it does not automatically lead to levy of penalty u/s. 271(1)(c). Notice does not specify for what offence the proceedings are initiated.The copy of the notice placed on record do indicate that it is a printed proforma, without striking-off the relevant columns and simply signed by the AO which has served on assessee. On similar facts, as in the case of Manjunatha Cotton & Ginning Factory 2013 (7) TMI 620 - KARNATAKA HIGH COURT has held that the practice of the department sending a printed form where all the grounds mentioned in 271 are mentioned would not satisfy the requirement of law when the consequence of assessee not rebutting the initial presumption is serious in nature and he had to pay penalty from 10% to 300% of tax liability. As the said provisions have to be held to be strictly construed, notice u/s. 274 should satisfy the grounds which he has to meet specifically. - Decided in favour of assessee

Summary

Issues Involved:
1. Validity of penalty under Section 271(1)(c) of the Income Tax Act.
2. Whether the penalty notice under Section 274 r.w.s. 271(1)(c) was valid.
3. Merits of the penalty imposed based on unexplained income.

Detailed Analysis:

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

The assessee appealed against the penalty of ?2,44,000/- imposed under Section 271(1)(c) by the Ld. Commissioner of Income Tax (Appeals)-1, Hyderabad. The penalty was based on deposits totaling ?7,38,500/- which were not reflected in the books of account of two concerns, Laxmi Wines and Mallikarjuna Bar & Restaurant. The AO initially treated ?29,00,200/- as unexplained income, but upon reassessment, only ?7,38,500/- was confirmed as unexplained. The assessee accepted this addition to avoid further litigation.

2. Whether the Penalty Notice under Section 274 r.w.s. 271(1)(c) was Valid:

The assessee contested the validity of the penalty notice, arguing that it did not specify whether the penalty was for "concealment of income" or "furnishing inaccurate particulars." The notice was a printed proforma without striking off the irrelevant columns, which the assessee argued violated the principles of natural justice. This argument was supported by the Hon'ble Karnataka High Court's decision in CIT & Anr. Vs. Manjunatha Cotton & Ginning Factory [359 ITR 565], which held that such vague notices are invalid.

3. Merits of the Penalty Imposed Based on Unexplained Income:

The assessee argued that the deposits were related to the sales of Laxmi Wines and Mallikarjuna Bar & Restaurant, and affidavits to this effect were submitted. The AO added the amounts as unexplained income because they were not reflected in the books of the two concerns. The Tribunal noted that the AO did not disprove the assessee's explanation and that accepting the addition to settle the matter does not automatically justify a penalty under Section 271(1)(c).

Tribunal's Findings:

- The Tribunal found that the AO's reason for adding the amounts was the absence of necessary entries in the books of the two concerns. Since the amounts were owned up by the concerns, proceedings could have been initiated against them instead.
- The Tribunal emphasized that merely agreeing to an addition does not justify a penalty under Section 271(1)(c) without disproving the assessee's explanation.
- The Tribunal also found the penalty notice to be invalid as it did not specify the exact charge, thus violating the principles of natural justice as laid down in the Manjunatha Cotton & Ginning Factory case.
- The Tribunal cited similar cases, including M/s. Nivee Property Developers Private Ltd. and Lalitkumar M Sakhala, where penalties were quashed due to similar issues with the penalty notices.

Conclusion:

The Tribunal concluded that both on principles of law and on the facts, there was no scope for the levy of penalty under Section 271(1)(c). Consequently, the penalty was cancelled, and the appeal of the assessee was allowed.

Order:

The appeal of the assessee was allowed, and the penalty imposed under Section 271(1)(c) was cancelled. The order was pronounced in the open court on 30th December 2016.