2020 (11) TMI 134 - AT - Income Tax

Penalty u/s. 271(1)(c) - Validity of notice - TP adjustment - Non specification of charge - As contended that the addition was made on account of MAP resolution and that there was no wilful concealment - whether the charge against the Assessee is concealing particulars of income or furnishing of inaccurate particulars of income ? - HELD THAT - As the show cause notice issued in the present case u/s 274 of the Act does not specify the charge against the assessee as to whether it is for concealing particulars of income or furnishing inaccurate particulars of income. The show cause notice u/s 274 of the Act does not strike out the inappropriate words. In these circumstances, we are of the view that imposition of penalty cannot be sustained. See MANJUNATHA COTTON AND GINNING FACTORY OTHS., M/S. V.S. LAD SONS, 2013 (7) TMI 620 - KARNATAKA HIGH COURT - Decided in favour of assessee.

Issues Involved:
1. Imposition of penalty under Section 271(1)(c) of the Income Tax Act, 1961.
2. Validity of the show cause notice issued under Section 274 of the Act.
3. Application of principles from the case of CIT vs. Manjunatha Cotton & Ginning Factory.

Detailed Analysis:

1. Imposition of Penalty Under Section 271(1)(c):
The assessee, a company engaged in manufacturing Multi-Utility Vehicles, filed a return for AY 2006-07 declaring NIL income. The case underwent scrutiny, and a Transfer Pricing Officer (TPO) determined an arm's length price (ALP) adjustment of ?240,11,91,692, leading to a total assessed income of ?307,83,31,369. Penalty proceedings were initiated under Section 271(1)(c) for this adjustment. The assessee's appeal to the ITAT was withdrawn in favor of a Mutual Agreement Procedure (MAP), which determined the ALP at ?91,80,00,000. Despite the MAP resolution, the AO imposed a penalty of ?30,89,98,800 under Section 271(1)(c), contending that the addition was agreed upon and there was no willful concealment.

2. Validity of the Show Cause Notice Issued Under Section 274:
The assessee argued that the show cause notice under Section 274 was defective as it did not specify whether the penalty was for "furnishing inaccurate particulars of income" or "concealing particulars of income." The notice had both charges without striking out the irrelevant portion, which is contrary to the requirement laid down by the Karnataka High Court in CIT vs. Manjunatha Cotton & Ginning Factory. The Tribunal noted that the AO's notice merely placed a tick mark without specifying the exact charge, thus failing to meet the legal requirement of clarity and specificity.

3. Application of Principles from CIT vs. Manjunatha Cotton & Ginning Factory:
The Tribunal referred to the Karnataka High Court's decision in CIT vs. Manjunatha Cotton & Ginning Factory, which established that a show cause notice under Section 274 must clearly state whether the penalty is for concealment of income or furnishing inaccurate particulars. The decision emphasized that vague notices offend principles of natural justice and cannot sustain penalty imposition. The High Court had laid down specific principles, including the necessity for clear grounds in the notice and the requirement that penalty proceedings must align with the grounds stated in the notice.

The Tribunal also cited the Karnataka High Court's decision in CIT vs. SSA’s Emerald Meadows, which upheld the invalidity of penalties where the show cause notice did not specify the charge, a decision affirmed by the Supreme Court.

Conclusion:
The Tribunal concluded that the show cause notice issued to the assessee was defective as it did not specify the grounds for penalty, thereby violating the principles of natural justice. Consequently, the imposition of penalty under Section 271(1)(c) could not be sustained. The appeal by the assessee was allowed, and the penalty was directed to be canceled.

Result:
The appeal by the assessee was allowed, and the penalty imposed under Section 271(1)(c) was canceled. The judgment was pronounced on November 3, 2020.

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