2018 (2) TMI 669 - AT - Income Tax

Penalty u/s 271(1)(c) - AO disallowed and added the depreciation and insurance expenses to the total income of the assessee - defective notice - Held that - The show cause notice issued in the present case u/s 274 of the Act does not specify the charge against the assessee as to whether it is for concealing particulars of income or furnishing inaccurate particulars of income. The show cause notice u/s 274 of the Act does not strike out the inappropriate words. In these circumstances, we are of the view that imposition of penalty cannot be sustained. - Decided in favour of assessee

Summary

Issues Involved:
1. Validity of the ex parte decision by CIT(A).
2. Validity of imposition of penalty under Section 271(1)(c) of the Income Tax Act, 1961.
3. Specificity of the charge in the show cause notice under Section 274 of the Act.

Issue-Wise Detailed Analysis:

1. Validity of the ex parte decision by CIT(A):
The assessee challenged the CIT(A)'s decision to proceed ex parte without affording an opportunity of being heard. The tribunal noted that the appeal before CIT(A) was decided ex parte, implying that the assessee was not given a fair chance to present its case. This procedural lapse was a significant point of contention.

2. Validity of imposition of penalty under Section 271(1)(c) of the Income Tax Act, 1961:
The assessee contested the imposition of penalty under Section 271(1)(c) by the AO, which was upheld by CIT(A). The penalty was based on the AO's conclusion that the assessee had no business during the year and thus, deductions for Keyman insurance and depreciation were not allowable. The AO deemed the assessee to have concealed income and furnished inaccurate particulars of income. However, the tribunal emphasized that the penalty proceedings must be clear and specific about the charges against the assessee.

3. Specificity of the charge in the show cause notice under Section 274 of the Act:
The tribunal examined the show cause notice issued under Section 274, which did not specify whether the penalty was for concealment of income or for furnishing inaccurate particulars of income. The notice failed to strike out the irrelevant portion, leading to ambiguity. The tribunal referred to several judicial precedents, including the decisions of the Hon’ble Karnataka High Court in CIT vs. SSA’s Emerald Meadows and CIT vs. Manjunatha Cotton and Ginning Factory, which held that such ambiguity renders the penalty invalid. The tribunal also noted the Supreme Court's dismissal of the department's SLP against the Karnataka High Court's decision, reinforcing the requirement for specificity in the notice.

The tribunal considered the arguments presented by the Department Representative (DR), who cited various judicial pronouncements suggesting that it is not mandatory to specify the charge in the show cause notice. However, the tribunal found these references unconvincing, particularly distinguishing the context of the cited cases from the present issue of specificity in the notice.

Conclusion:
The tribunal concluded that the imposition of penalty could not be sustained due to the defective show cause notice under Section 274, which did not specify the charge against the assessee. The tribunal preferred to follow the view favorable to the assessee, as established by the Karnataka High Court, and directed the cancellation of the penalty.

Order:
The appeal of the assessee was allowed, and the imposition of penalty was directed to be canceled. The order was pronounced in the open Court on 09.02.2018.