2017 (4) TMI 468 - AT - Income Tax

Penalty u/s 271(1)(c) - defective notice - Held that - Notice issued under section 274 r.w.s. 271 of the Act did not mention or specify the charge for which the penalty notice was issued, i.e. whether the initiation of penalty proceedings was for concealment of income or for furnishing of inaccurate particulars of income The notice dated 27.12.2010 issued under section 274 r.w.s. 271 of the Act dated 27.12.2010 for initiating penalty proceedings under section 271(1)(c) of the Act for A.Y. 2008-09 is defective and issued without application of mind and is therefore invalid and bad in law. Consequently, the order dated 26.03.2014 levying penalty under section 271(1)(c) of the Act for A.Y. 2008- 09 is also invalid, bad in law and liable to be cancelled. See THE COMMISSIONER OF INCOME TAX & OTHS. Versus M/s MANJUNATHA COTTON AND GINNING FACTORY & OTHS. 2013 (7) TMI 620 - KARNATAKA HIGH COURT - Decided in favour of assessee

Issues Involved:
1. Classification of losses from non-delivery based transactions as speculative under Section 43(5) of the Income Tax Act.
2. Validity of penalty proceedings initiated under Section 271(1)(c) of the Income Tax Act.
3. Enhancement of penalty by the CIT(A).

Detailed Analysis:

1. Classification of Losses from Non-Delivery Based Transactions:
The assessee, a firm engaged in trading shares and securities, filed a return declaring a loss of ?44,86,620/- due to trading and speculation losses. The Assessing Officer (AO) observed that the assessee set off losses from non-delivery based transactions (speculative transactions) against profits from delivery-based transactions. The AO held that losses from non-delivery based transactions should be classified as speculative losses under Section 43(5) of the Income Tax Act and could not be set off against normal business income. This position was upheld by the CIT(A), who confirmed that losses from non-delivery of shares must be classified as speculative and set off only against speculative income as per Section 73 of the Act.

2. Validity of Penalty Proceedings:
The AO initiated penalty proceedings under Section 271(1)(c) for furnishing inaccurate particulars of income. The assessee argued that the penalty proceedings should be dropped as their income was rectified to NIL by setting off previous year's loss. However, the AO rejected this explanation, citing the Supreme Court's decision in CIT vs. Gold Coin Health Food Pvt. Ltd., which allows for the levy of penalty even if there is no positive income after additions. The AO imposed a penalty of 100% of the tax on the income sought to be evaded. The CIT(A) not only upheld this penalty but also enhanced it.

The assessee contended that the notice issued under Section 274 r.w.s. 271 was defective as it did not specify whether the penalty was for concealment of income or for furnishing inaccurate particulars. The Tribunal found that the notice was a standard printed form without the required particulars, indicating non-application of mind by the AO. The Tribunal referred to several judicial pronouncements, including CIT vs. Samson Perinchery and Manjunatha Cotton and Ginning Factory, which held that such notices are invalid. Consequently, the Tribunal held that the notice and the consequent penalty order were invalid and bad in law, leading to the cancellation of the penalty.

3. Enhancement of Penalty by CIT(A):
The CIT(A) enhanced the penalty from ?52,29,550/- to ?1,02,83,292/-. However, since the Tribunal found the initial penalty proceedings to be invalid, the issue of enhancement became academic and required no further adjudication.

Conclusion:
The Tribunal allowed the assessee's appeal, holding that the penalty proceedings initiated by the defective notice were invalid and bad in law. Consequently, the penalty order was cancelled, rendering other grounds of appeal academic. The judgment emphasizes the importance of specific and clear notices for penalty proceedings under Section 271(1)(c) of the Income Tax Act.

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