2020 (8) TMI 814 - AT - Income Tax

Penalty u/s 271(1)(c) - defective notice - Capital gain computation - addition by invoking the provisions of section 50C - HELD THAT - We find, the AO, in the instant case, made addition u/s 50C on account of difference between the stamp duty value and actual sales consideration received by the assessee on the sale of the property. A perusal of the notice issued u/s 274 r.w. section 271(1)(c), shows that the inappropriate words in the said notice has not been struck off and the said notice does not specify the limb under which the penalty was levied. Similar view has been taken in various other decisions relied on by the ld. Counsel placed in the paper book. Since the inappropriate words in the notice has not been struck off, therefore, following the decision of the Hon ble Karnataka High Court in the case of Manjunatha Cotton and Ginning Factory 2013 (7) TMI 620 - KARNATAKA HIGH COURT and SSA's Emerald Meadows 2015 (11) TMI 1620 - KARNATAKA HIGH COURT where the SLP filed by the Revenue has been dismissed, we hold that the penalty proceedings initiated by the AO are not in accordance with the law and, therefore, has to be quashed. We accordingly quash the penalty proceedings and direct the AO to cancel the penalty. Since the assessee succeeds on this legal ground, the grounds challenging the penalty on merit are not being adjudicated. Medical expenses on director disallowed - AO noted that the assessee should have entered the perquisite in the hands of Shri Raman Kumra, the non-executive director which was not done in the instant case - HELD THAT - CIT(A), in the instant case, has passed an ex parte order due to nonappearance of the assessee. A perusal of the paper book page 50 shows that the assessee has filed an adjournment application before the CIT(A) on 24th August, 2016 seeking adjournment of the case to 2nd September, 2016. However, the same was rejected by the CIT(A) and he passed the order on 26th August, 2016. Considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore the issue to the file of the CIT(A) with a direction to grant one more opportunity to the assessee to substantiate its case and decide the issue as per fact and law.

Summary

Issues Involved:
1. Legality of penalty proceedings under Section 271(1)(c) of the Income Tax Act.
2. Allowability of medical expenses as business expenditure under Section 37 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Legality of Penalty Proceedings under Section 271(1)(c):

The primary issue in ITA No. 5058/Del/2016 pertains to the confirmation of a penalty of ?3,78,030/- levied by the AO under Section 271(1)(c) of the Income Tax Act. The AO made an addition of ?13,23,400/- by invoking Section 50C, which was upheld by the CIT(A). Subsequently, the AO initiated penalty proceedings and levied a penalty of 100% of the tax sought to be evaded. The assessee contended that the notice issued under Section 274 read with Section 271(1)(c) was defective as it did not specify the limb under which the penalty was initiated, thereby vitiating the entire penalty proceedings.

The Tribunal found merit in the assessee's argument, citing the Hon'ble Karnataka High Court's decision in CIT v. Manjunatha Cotton And Ginning Factory and other related judgments, which held that a vague notice without specifying the limb of Section 271(1)(c) under which the penalty is being levied is invalid. The Tribunal observed that the inappropriate words in the notice were not struck off, leading to ambiguity and non-application of mind by the AO. Consequently, the penalty proceedings were quashed, and the AO was directed to cancel the penalty.

2. Allowability of Medical Expenses as Business Expenditure:

In ITA No. 5059/Del/2016, the issue revolves around the disallowance of medical expenses amounting to ?18,36,725/- incurred by the assessee company for the treatment of its non-executive director, Late Shri Raman Kumra. The AO disallowed the expenses on the grounds that they should have been treated as perquisites in the hands of the director and that there was no evidence of the director being involved in the day-to-day management of the company.

The assessee argued that the expenses were incurred wholly and exclusively for the purpose of business, as the director was instrumental in the company's sales operations, and his illness and subsequent death led to a significant drop in sales. The Tribunal noted that the CIT(A) had passed an ex parte order without considering the adjournment application filed by the assessee. Given the importance of the director's role in the company and the drastic decline in sales post his demise, the Tribunal deemed it appropriate to restore the issue to the file of the CIT(A) for fresh adjudication, granting the assessee an opportunity to substantiate its claim.

Conclusion:

The Tribunal allowed ITA No. 5058/Del/2016, quashing the penalty proceedings under Section 271(1)(c) due to a defective notice. ITA No. 5059/Del/2016 was allowed for statistical purposes, with the issue of medical expenses being remanded back to the CIT(A) for a fresh decision after granting the assessee an opportunity to present its case.