2020 (2) TMI 512 - AT - Income Tax

Levy of penalty u/s 271(1)(c) - unexplained investments in construction of building, on receipt of valuation report from the DVO - Non striking out the irrelevant portion of the show cause notice u/s 274 - HELD THAT - As seen from the notice, the A.O. has not struck out the irrelevant portion in the above notice. It is not clear whether he has levied the penalty for concealment of particulars of income or furnishing of inaccurate particulars of income . By reading of the penalty order also, it is not clear that whether he has levied the penalty for concealment of income or furnishing inaccurate particulars of income. Hence, the ratio laid down by the ITAT Cochin Bench in the case of M/s.R.R. Holidays Homes (P) Ltd. 2019 (12) TMI 401 - ITAT COCHIN clearly applies Inclined to confirm the deletion of penalty by the CIT(A) in all the assessment years. Further, I also make it clear that the CBDT Circular No.3/2018 clearly applies to the present case of the assessee. There is no merit in the argument of the learned DR that the assessee is not covered by the CBDT Circular in view of para 10(d) of the above Circular. In my opinion, in the present case, the penalty was levied by the Assessing Officer on account of unexplained investments in construction of building, on receipt of valuation report from the DVO and further the addition is not related to any items mentioned in para 10(d). Being so, the department is precluded from filing the appeal in view of the monetary limit of filing the appeal before the Tribunal is ₹ 50 lakh, as prescribed by the CBDT. There is no useful purpose would be served in remitting the appeals to the files of the CIT(A). In the totality of the facts and circumstances of the case, we are inclined to confirm the order of the CIT(A) in deleting the penalty for all the assessment years. - Decided against revenue

Summary

Issues Involved:
1. Validity of penalty levied under Section 271(1)(c) of the Income Tax Act.
2. Non-striking off the irrelevant limb in the notice issued under Section 274.
3. Application of Section 292B of the Income Tax Act.
4. Relevance of the ITAT Cochin Bench and Karnataka High Court decisions.
5. Applicability of CBDT Circular No.3/2018.

Issue-Wise Detailed Analysis:

1. Validity of Penalty Levied Under Section 271(1)(c)
The Revenue filed five appeals against the orders of the CIT(A) which deleted penalties imposed by the Assessing Officer (AO) under Section 271(1)(c) for the assessment years 2000-2001 to 2004-2005. The penalties were based on the unexplained investment in the construction of a shopping complex. The AO had initially determined a discrepancy in the cost of construction and spread the addition over the relevant assessment years. The CIT(A) deleted the penalties, and the Tribunal upheld this deletion, noting that the penalty proceedings were invalid due to procedural defects in the notices issued.

2. Non-Striking Off the Irrelevant Limb in the Notice Issued Under Section 274
The CIT(A) and the Tribunal found that the penalty notices issued under Section 274 were defective as they did not specify whether the penalty was for "concealment of particulars of income" or "furnishing inaccurate particulars of income." This defect was considered fatal to the penalty order. The Tribunal relied on the decision of the Hon'ble Karnataka High Court in the case of Manjunatha Cotton and Ginning Factory, which held that failure to strike off the irrelevant limb in the notice renders the penalty proceedings invalid.

3. Application of Section 292B of the Income Tax Act
The Revenue argued that the provisions of Section 292B, which allow for curing defects in notices, should apply. However, the Tribunal held that Section 292B could not cure the fundamental defect in the penalty notice. The Tribunal emphasized that the defect in the notice was a violation of natural justice and could not be overlooked.

4. Relevance of the ITAT Cochin Bench and Karnataka High Court Decisions
The Tribunal referenced its earlier decision in the case of M/s. R.R. Holidays Homes (P) Ltd. and the Karnataka High Court's decision in SSA’s Emerald Meadows, which supported the view that penalty notices must clearly specify the grounds for penalty. The Tribunal noted that the AO's failure to do so in this case rendered the penalty proceedings void ab initio.

5. Applicability of CBDT Circular No.3/2018
The Tribunal also considered the applicability of CBDT Circular No.3/2018, which limits the monetary threshold for filing appeals. The Tribunal found that the penalties in question did not relate to undisclosed foreign assets or bank accounts, and therefore, the Circular applied, precluding the Revenue from filing the appeal.

Conclusion:
The Tribunal dismissed the Revenue's appeals, confirming the deletion of penalties by the CIT(A) for all assessment years. The Tribunal emphasized that the defect in the penalty notices was a significant procedural lapse that could not be cured by Section 292B, and upheld the principle that penalty proceedings must comply with natural justice requirements.