2022 (7) TMI 851 - AT - Income Tax

Penalty u/s 271(1)(c) - Defective notice u/s 274 - non specification of charge - as per assessee notice was issued for both the limbs without strike off irrelevant limb and specifying the charge for which the notice was issued - assessee submits that since the notice was issued without specifying the charge for which notice was issued the penalty proceedings initiated were bad in law - HELD THAT - As could be seen from the above in the case of Mr. Mohd. Farhan A. Shaikh 2021 (3) TMI 608 - BOMBAY HIGH COURT while dealing with the issue of non-strike off of the irrelevant part in the notice issued u/s.271(l)(c) of the Act, held that assessee must be informed of the grounds of the penalty proceedings only through statutory notice and an omnibus notice suffers from the vice of vagueness. In SAHARA INDIA LIFE INSURANCE COMPANY, LTD. 2019 (8) TMI 409 - DELHI HIGH COURT held that the notice issued by the Assessing Officer was bad in law if it did not specify under which limb of section 271(1)(c ) of the Act the penalty proceedings had been initiated i.e. whether for concealment of particulars of income or for furnishing of inaccurate particulars of income. Ratio of the full bench decision of the Hon'ble Bombay High Court (Goa) squarely applies to the facts of the assessee's case as the notice u/s. 274 r.w.s. 271(l)(c) of the Act was issued without striking off the irrelevant portion of the limb and failed to intimate the assessee the relevant limb and charge for which the notices were issued. Thus, respectfully following the said decision we hold that the penalty order passed u/s. 271(1)(c) by the Assessing Officer is bad in law and accordingly the penalty order passed u/s. 271(l)(c) of the Act for Assessment Year 2008-09 is quashed - Decided in favour of assessee.

Summary

Issues involved:
1. Failure to specify the exact limb of Section 271(1)(c) in penalty notice.
2. Imposition of penalty on software development expenses.
3. Whether an omnibus notice vitiates penalty proceedings.

Analysis:

Issue 1: Failure to specify the exact limb of Section 271(1)(c) in penalty notice:
- The appeal was filed against the order of the Commissioner of Income Tax (Appeals) for the assessment year 2008-09.
- The assessee contended that the penalty order was bad in law as the penalty proceedings were initiated and levied without specifying the exact limb of Section 271(1)(c) of the Act.
- The penalty notice did not mention the specific charge against the assessee, leading to ambiguity in the penalty proceedings.
- The Assessing Officer did not strike off the irrelevant limb in the notice, failing to specify the charge for which the notice was issued.
- Citing relevant judgments, the assessee argued that the penalty proceedings were invalid due to the lack of specificity in the notice.
- The Tribunal observed that an identical issue was addressed by the Hon'ble Bombay High Court, which emphasized the importance of informing the assessee of the grounds of penalty proceedings through a statutory notice without any ambiguity.
- The Tribunal, following the precedent, held that the penalty order passed by the Assessing Officer was bad in law due to the lack of specification in the notice, and consequently, quashed the penalty order for Assessment Year 2008-09.

Issue 2: Imposition of penalty on software development expenses:
- The assessee raised grounds challenging the imposition of penalty under Section 271(1)(c) on software development expenses, which were treated as capital expenses instead of revenue expenses.
- The Tribunal did not delve into the merits of these grounds as the preliminary legal issue regarding the penalty notice was decided in favor of the assessee, rendering further adjudication on these grounds academic.

Issue 3: Whether an omnibus notice vitiates penalty proceedings:
- The Tribunal highlighted the significance of a statutory notice specifying the grounds of penalty proceedings to avoid ambiguity and ensure fairness.
- Citing the judgment of the Hon'ble jurisdictional High Court and the full bench decision of the Hon'ble Bombay High Court, the Tribunal emphasized the need for precision in penalty notices to prevent vagueness and uphold the principles of natural justice.
- The Tribunal concluded that the penalty order was quashed due to the defective penalty notice, aligning with the legal principles established by the relevant judgments.

In conclusion, the Tribunal allowed the appeal of the assessee based on the invalidity of the penalty order due to the lack of specificity in the penalty notice, as per the legal precedents discussed during the proceedings.