2020 (10) TMI 1152 - HC - Income Tax

Penalty proceedings u/s 271(1) (c) - certain observations made by the AO during the quantum assessment and based upon the statement given by the assessee to the Survey party can solely be a basis for levy of penalty - Defective notice u/s 274 - HELD THAT - AO did not specifically state under which limb of the penalty provision, the assessee would fall and therefore, the assessee was put to prejudice as regards the allegation which he has to meet. Apart from that, the learned counsel for the appellant would submit that the re-assessment proceedings in the name of the appellant/assessee is erroneous as if at all there was any material, it is only the firm which is to be assessed and not the appellant/assessee. - It would be too late for the assessee to raise such a contention as the re-assessment proceedings stood concluded as of the year 2008. Nevertheless, if it had been raised at the appropriate time, probably it might have been taken note of by the AO. This is not a case, where the assessee had no explanation to offer and the explanation offered was not tested for its correctness in the proper manner to pave way for levy of penalty. Substantial Questions of Law are answered in favour of the appellant/assessee

Summary

Issues:
1. Levy of penalty under section 271(1)(c) of the Income Tax Act, 1961 based on rejected explanations.
2. Confirmation of penalty despite rejection of explanations on unexplained credits.
3. Failure to distinguish disproved and unproved facts in confirming penalty.
4. Consideration of lack of precise charge in the show cause notice for penalty.

Analysis:
1. The appeal challenged the order of the Income Tax Appellate Tribunal regarding the levy of penalty under section 271(1)(c) of the Income Tax Act, 1961 for the Assessment Year 2004-05. The substantial questions of law raised included the correctness of the rejection of explanations for current account balances in the partnership firm and the validity of the survey statement used as the basis for the penalty. The High Court noted that penalty proceedings must be independently adjudicated, and the quantum assessment cannot solely justify the penalty imposition.

2. The assessee, an individual managing partner in a firm, faced penalty proceedings due to unexplained credits in the partnership's current account. Despite the assessee providing explanations, the Assessing Officer and subsequent authorities were not convinced. The Court observed that the explanations offered were not thoroughly considered, and the rejection lacked convincing findings. The Tribunal upheld the penalty, emphasizing the inadequacy of the explanations provided by the assessee.

3. The Court highlighted the importance of assessing the correctness of the explanations offered by the assessee. It noted discrepancies between the letter submitted by the assessee regarding the reconstitution of the firm and the statement recorded during the survey. The Assessing Officer's reliance on specific statements without proper evaluation of the explanations provided by the assessee was deemed insufficient to justify the penalty imposition.

4. The appellant raised concerns about the defect in the show cause notice for penalty proceedings, citing lack of specificity regarding the alleged violations under the penalty provision. Additionally, the appellant argued that if any material warranted assessment, it should have been directed towards the firm, not the individual assessee. The Court acknowledged these procedural lapses and concluded that the penalty imposition lacked a solid basis due to the inadequacy of explanations provided by the assessee.

In conclusion, the High Court allowed the Tax Case Appeal, ruling in favor of the appellant/assessee on all substantial questions of law raised. The Court emphasized the necessity for a thorough evaluation of explanations provided by the assessee before imposing penalties and highlighted the importance of procedural correctness in penalty proceedings.