2018 (2) TMI 1638 - AT - Income Tax

Penalty u/s 271(1)(c) - defective notice - AO has issued vague notice without striking off inappropriate portion in the notice whether the penalty has been levied for concealment of particulars of income or furnishing of inaccurate particulars of income - Held that - With the view taken by the coordinate bench in the case of M/s. Cenzar Industries Ltd. vs. ITO (2018 (1) TMI 236 - ITAT MUMBAI), we are of the considered view that the penalty proceedings initiated by the AO by issue of notice under section 274 r.w.s 271(1)(c) without striking off the irrelevant portion of notice is a clear case of non application of mind by the AO, whether penalty has been initiated for concealment of particulars of income or furnishing of inaccurate particulars of income. AO has issued printed form of notice without striking off irrelevant portion and also in the penalty order he does not specify under which charge penalty has been initiated. Therefore, we are of the considered view that the penalty proceeding initiated by the AO is bad in law and liable to be quashed. - Decided in favour of assessee.

Issues Involved:
1. Violation of principles of natural justice in passing the penalty order ex-parte.
2. Penalty upheld despite pending rectification application under section 154.
3. Penalty levied for furnishing inaccurate particulars and concealing income.
4. Discrepancy in the method of allocation/absorption of fixed overheads.

Issue-wise Detailed Analysis:

1. Violation of Principles of Natural Justice:
The assessee contended that the penalty order under section 271(1)(c) was passed ex-parte by the Assessing Officer (AO) without giving the assessee an opportunity to present its case, thus violating the principles of natural justice. The Tribunal noted that the AO issued a notice under section 274 r.w.s. 271(1)(c) on 12.03.2014, but the assessee neither appeared before the AO nor filed any explanation. Consequently, the AO proceeded to levy the penalty, considering the assessee had no objection. The Tribunal did not find sufficient grounds to support the assessee's claim of natural justice violation.

2. Penalty Upheld Despite Pending Rectification Application:
The assessee argued that the penalty was upheld by the CIT(A) on the premise that no appeal was filed against the addition made by the AO, ignoring the fact that the issue was fit for rectification under section 154. The Tribunal observed that the CIT(A) confirmed the penalty because the assessee failed to demonstrate any fault on the AO's part while computing the disallowance. The CIT(A) also noted that the rectification application was still pending, and thus, upheld the penalty.

3. Penalty for Furnishing Inaccurate Particulars and Concealing Income:
The AO levied a penalty of ?22,62,959 under section 271(1)(c) for furnishing inaccurate particulars and concealing income. The Tribunal noted that the AO initiated penalty proceedings on both grounds—furnishing inaccurate particulars and concealing income. However, the Tribunal emphasized that the AO must specify the exact charge in the penalty notice and order. The Tribunal referred to judicial precedents, including the Hon'ble Karnataka High Court's decision in CIT vs. Manjunatha Cotton & Ginning Factory and the Hon'ble Bombay High Court's decision in Shri Samson Perinchery vs. ACIT, which held that penalty proceedings must clearly state whether they are for concealment of income or furnishing inaccurate particulars. The Tribunal found that the AO's notice and penalty order did not meet this requirement, rendering the penalty proceedings invalid.

4. Discrepancy in Method of Allocation/Absorption of Fixed Overheads:
The assessee contended that the additions made by the AO, which formed the basis for the penalty, were due to different methods adopted for allocation/absorption of fixed overheads in a sales order executed by its Domestic Tariff Unit. The Tribunal noted that the assessee had already included a significant portion of the disallowed amount in its return of income, and the differential value arose from methodological differences. The Tribunal found merit in the assessee's argument that this discrepancy did not amount to furnishing inaccurate particulars of income.

Conclusion:
The Tribunal concluded that the penalty proceedings initiated by the AO were invalid due to the issuance of a vague notice under section 274 r.w.s. 271(1)(c) without specifying the exact charge. Consequently, the Tribunal quashed the penalty proceedings and deleted the penalty levied by the AO. The appeal filed by the assessee was allowed.

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