2019 (6) TMI 289 - AT - Income Tax

Levy of penalty u/s 271(1)(c) - peak balance lying in the escrow bank account with HSBC Bank, Geneva - defective notice - non application of mind by AO - HELD THAT - It is a settled principle of law that before taking any action, including levy of penalty under section 271(l)(c) of the Act, the Assessing Officer should issue a valid show cause notice to the assessee. In the present case, a bare perusal of the notice dated 28.03.2014 issued by the AO under section 274 read with section 271 of the Act shows that the same has been issued without any application of mind. The said notice has been issued in a standard format without indicating the default on the part of the Assessee and the reason for which penalty proceedings are initiated. The said notice also makes a reference to section 24(1)/22(2)/22(4)/ 23(2)/34 of the Income-tax Act 1922 and sections139(I)/I39(2)/I42(I)/l43(2) and 148 of the Income-tax Act, 1961 without cancelling the irrelevant part in the notice. In view thereof, we are of the view that penalty proceedings have been initiated, in the present ease, without application of mind thereby rendering the initiation of such proceedings and consequent passing of the penalty order under section 271(1)(c) of the Act to be illegal and bad in law. This view of ours is supported by the decision of CIT vs. Samson Perinchery 2017 (1) TMI 1292 - BOMBAY HIGH COURT wherein the decision of Karnataka High Court in the case of CIT vs. Manjunatha Cotton Ginning Factory 2013 (7) TMI 620 - KARNATAKA HIGH COURT was also considered, AO while issuing notice under section 274 r.w.s 271 of the Act, has not applied his mind. Hence, the penalty proceedings initiated in the present case is without application of mind thereby rendering the initiation of the proceedings and consequent passing of the order u/s 271(1)(c) is bad in law. Hence, we quash the penalty on this count also. - Decided in favour of assessee.

Issues Involved:

1. Sustaining the levy of penalty under section 271(1)(c) of the Income Tax Act, 1961.
2. Validity of the notice issued under section 274 read with section 271(1)(c).
3. Recording of satisfaction by the Assessing Officer (AO) for initiating penalty proceedings.
4. Application of Explanation 5A of section 271(1)(c).
5. Merits of the penalty levied.

Issue-wise Detailed Analysis:

1. Sustaining the Levy of Penalty under Section 271(1)(c):

The primary issue in this appeal was whether the Commissioner of Income Tax (Appeals) [CIT(A)] erred in sustaining the levy of penalty under section 271(1)(c) on ?3,99,01,729 being the peak balance in an escrow bank account with HSBC Bank, Geneva. The assessee argued that the funds did not belong to him and were offered to tax only to buy peace of mind. The AO initiated penalty proceedings for filing inaccurate particulars of income leading to concealment of income, which the CIT(A) upheld. The Tribunal noted that the assessee had disclosed the foreign bank account during the search but claimed it was an escrow account over which he had no control. The funds were provided by a prospective joint venture partner and not by the assessee.

2. Validity of the Notice Issued under Section 274 Read with Section 271(1)(c):

The Tribunal observed that the notice issued by the AO under section 274 read with section 271(1)(c) did not specify the default committed by the assessee, i.e., whether it was for concealment of income or furnishing inaccurate particulars of income. The notice was issued in a standard format without striking out the irrelevant parts, indicating non-application of mind by the AO. The Tribunal relied on the decision of the Bombay High Court in CIT vs. Samson Perinchery and the Karnataka High Court in CIT vs. Manjunatha Cotton & Ginning Factory, which held that such notices are invalid.

3. Recording of Satisfaction by the AO for Initiating Penalty Proceedings:

The Tribunal noted that the AO did not record any satisfaction regarding the amount of ?3,99,01,729 in the assessment order. The satisfaction was only recorded for the differential amount of ?50,98,271. The Tribunal relied on the Supreme Court's decision in CIT vs. S.V. Angidi Chettiar, which held that the AO must record satisfaction in the course of assessment proceedings before initiating penalty proceedings. Since no satisfaction was recorded for the amount of ?3,99,01,729, the penalty could not be sustained.

4. Application of Explanation 5A of Section 271(1)(c):

The Tribunal did not specifically adjudicate on the application of Explanation 5A of section 271(1)(c) as it had already decided to delete the penalty on the grounds of non-recording of satisfaction and invalid notice under section 274 read with section 271(1)(c).

5. Merits of the Penalty Levied:

The Tribunal noted that the penalty was levied primarily for non-disclosure of certain facts, non-cooperation, and the alleged non-voluntary nature of the disclosure. The Tribunal found that the assessee had explained the nature and source of funds in the bank account and had offered the peak balance to tax to buy peace of mind. The Tribunal concluded that the penalty was not warranted as the AO had not recorded satisfaction for the amount of ?3,99,01,729 and the notice issued was invalid.

Conclusion:

The Tribunal allowed the appeal of the assessee, quashing the penalty levied under section 271(1)(c) on the grounds of non-recording of satisfaction by the AO and the invalidity of the notice issued under section 274 read with section 271(1)(c). The Tribunal did not adjudicate on the other issues raised by the assessee, including the application of Explanation 5A and the merits of the penalty.

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