2017 (5) TMI 1350 - AT - Income Tax

Penalty u/s.271(1)(c) - legality of notice issued u/s.274 r.w.s 271(1)(c) - Held that - AO has not struck off either of one reason and has issued notice taking both the basis of imposing penalty by alleging that the assessee has concealed the particulars of income as well as furnishing inaccurate of income. Further in the penalty order framed u/s.271(1)(c) of Act Ld.AO has again quoted both the reasons i, e concealment of particulars of income and furnishing of inaccurate particulars of income for penalizing the assessee u/s.271(1)(c) of the Act. It can be inferred that Ld.AO was unable to make complete application of mind to assess the basis of imposing the penalty. Further Revenue has been unable to prove that the impugned notice is not impaired or prejudice to the right of assessee for providing reasonable opportunity of being heard in order to defend its case for the specific reason for which penalty is imposed. Thus notice issued u/s.274 r.w.s 271(1)(c) of the Act issued in the case of assessee was illegal and bad in laws as it is not specifying particular charge on which the penalty has been imposed i.e for concealment of particulars of income or furnishing inaccurate particulars on income and is therefore liable to be quashed. - Decided in favour of assessee.

Summary

Issues Involved:
1. Legality of the notice issued under section 274 read with section 271(1)(c) of the Income Tax Act, 1961.
2. Confirmation of penalty under section 271(1)(c) of the Income Tax Act, 1961.

Detailed Analysis:

1. Legality of the Notice Issued under Section 274 r.w.s 271(1)(c) of the Income Tax Act, 1961:

The primary issue raised by the assessee was the legality of the notice issued under section 274 read with section 271(1)(c) of the Income Tax Act. The assessee contended that the notice did not specify whether it was issued for "concealing the particulars of income" or "furnishing inaccurate particulars of income." This ambiguity was argued to render the notice illegal and void ab initio.

The Tribunal observed that the Assessing Officer (AO) had merely ticked the phrase "Have concealed the particulars of your income or furnished inaccurate particulars of income" without striking off either of the reasons. This indicated that the AO did not make a complete application of mind to assess the basis for imposing the penalty. The Tribunal further noted that the penalty order also cited both reasons, which implied that the AO was uncertain about the specific charge.

The Tribunal referred to the judgment of the Hon’ble Karnataka High Court in the case of Manjunath Cotton & Ginning Factory, which held that a notice must specify the particular charge for which proceedings are initiated. Drawing up penalty proceedings for one offence and finding the assessee guilty of another offence or both cannot be sustained in law. The Tribunal also cited similar decisions from other cases, including those adjudicated by the Co-ordinate Bench and the Hon’ble Jurisdictional High Court.

The Tribunal concluded that the notice issued was illegal and bad in law as it did not specify the particular charge on which the penalty was imposed. Therefore, the notice was quashed.

2. Confirmation of Penalty under Section 271(1)(c) of the Income Tax Act, 1961:

The second issue was the confirmation of the penalty under section 271(1)(c) amounting to ?6,21,400/- for unexplained expenditure under section 69C of ?16,06,992/- and excess stock of ?6,936/- found during the survey.

The Tribunal noted that the penalty was based on the addition of unexplained expenditure due to a negative cash balance and excess stock found during the survey. The assessee had argued that the negative cash balance represented share application money collected from the Directors but not credited in the books of account.

The Learned Commissioner of Income Tax (Appeals) [Ld.CIT(A)] had confirmed the penalty, observing that the addition was based on material evidence found during the survey. The Ld.CIT(A) cited the Supreme Court's decision in the case of Dharmendra Textile Processors, stating that mens rea is not an essential ingredient for the levy of penalty under section 271(1)(c) since it represents a civil liability. The Ld.CIT(A) also referred to the Gujarat High Court’s decision in the case of National Textiles, which indicated conscious concealment by the assessee.

However, since the Tribunal quashed the notice on the grounds of its illegality, the grounds raised on merits became infructuous. The Tribunal did not interfere with the penalty on the merits as the penalty proceedings themselves were quashed due to the invalid notice.

Conclusion:

The Tribunal allowed the appeal of the assessee, quashing the penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961, due to the illegality and ambiguity of the notice issued under section 274 read with section 271(1)(c). The Tribunal emphasized the necessity for a clear and specific charge in the penalty notice to provide the assessee a reasonable opportunity to defend its case.