2024 (5) TMI 1556 - AT - Income Tax

Scope and applicability of rectification powers u/s 254(2) - Penalty u/s.271(1)(c) - concealment of income or furnishing of inaccurate particulars of income or both - HELD THAT - Validity of the jurisdiction assumed by the AO for imposing penalty u/s. 271(1)(c) of the Act in absence of striking off the irrelevant default in the body of the show cause notice issued u/s. 274 of the Act therefore the view so taken by us cannot be sought to be reviewed in the garb of an application filed by the revenue u/s. 254(2) of the Act. As the department had failed to point out as to how the order passed by us while disposing off the captioned appeal suffers from any mistake which is glaring patent obvious and apparent from record therein rendering the same amenable for rectification under sub-section (2) to Section 254 therefore the present application filed by it does not merit acceptance. As the review of an order passed by the Tribunal does not fall within the scope and gamut of the jurisdiction vested u/s. 254(2) of the Act therefore we are afraid that the present application filed by the revenue cannot be accepted. We may herein observe that as stated by the AR and rightly so the revenue in the garb of the present application filed u/s. 254(2) of the Act had in fact sought for a review of the order so passed by us while disposing off the appeal which as observed by us hereinabove does not fall within realm of the powers vested with u/s. 254(2) of the Act. Accordingly the miscellaneous application filed by the revenue u/s.254(2) of the Act is dismissed in terms of our aforesaid observations.

Summary

The core legal questions considered in the judgment revolve around the validity of penalty proceedings initiated under section 271(1)(c) of the Income Tax Act, 1961, particularly focusing on the requirements of section 274(1) regarding the issuance of show cause notices. The principal issues include whether the penalty notices were defective for not clearly specifying the nature of the default-whether concealment of income or furnishing inaccurate particulars of income-and whether such defect vitiates the assumption of jurisdiction by the Assessing Officer (AO) and violates principles of natural justice. Additionally, the scope and applicability of rectification powers under section 254(2) of the Act, vis-`a-vis review of Tribunal orders, and the effect of dismissal of Special Leave Petitions (SLPs) by the Supreme Court on the binding nature of High Court decisions were examined.

On the first issue concerning the validity of penalty notices under section 274 read with section 271(1)(c), the Tribunal analyzed the legal framework established by the Income Tax Act and relevant judicial precedents. Section 274(1) mandates that a show cause notice must clearly specify the default alleged to justify imposition of penalty under section 271(1)(c). The question was whether the use of the word "or" instead of "and" in the notice, thereby not distinctly identifying whether the penalty was for concealment or furnishing inaccurate particulars, rendered the notice defective and the penalty proceedings invalid.

Judicial precedents cited include decisions of the Madras High Court in Sundaram Finance Ltd. and Gangotri Textiles Ltd., where similar contentions were rejected. These courts held that the defect in the notice was not fatal where the assessee was not prejudiced and had understood the nature of the allegations, as evidenced by the replies filed. The courts emphasized that the issue is a mixed question of fact and law, which ought to have been raised at the earliest stage and cannot be raised belatedly for the first time before the High Court. The Supreme Court's dismissal of SLPs in these cases was noted, but it was clarified that such dismissal does not amount to merger of the High Court's order into that of the Supreme Court or confer binding precedent status beyond the High Court's judgment.

The Tribunal also referred to decisions of other High Courts, such as Andhra Pradesh and Bombay, which held that a defective notice does not invalidate penalty proceedings if the assessee had full opportunity to defend against the penalty and no prejudice was caused. The Tribunal underscored that penalty proceedings are distinct from assessment proceedings and require fresh consideration of the nature of the offence or violation to determine the applicability of penalty.

Applying the law to the facts, the Tribunal observed that the assessee had duly responded to the show cause notices, understood the allegations, and had ample opportunity to present its defense. There was no prior objection or plea of prejudice raised by the assessee regarding the alleged defect in the notice. The Tribunal found no violation of principles of natural justice or jurisdictional error by the AO. The failure to strike off irrelevant portions in the notice was held to be a procedural lapse that did not affect the validity of the proceedings or cause prejudice to the assessee. Consequently, the Tribunal upheld the penalty proceedings and rejected the revenue's contention that the penalty orders were liable to be quashed for want of valid jurisdiction.

Regarding the revenue's application under section 254(2) of the Act seeking rectification of the Tribunal's order, the Tribunal examined the scope of this provision. Section 254(2) permits correction of "mistake apparent from the record" but does not empower the Tribunal to review or re-adjudicate its decisions on merits. The Tribunal relied on authoritative Supreme Court judgments which clarified that an error requiring long-drawn reasoning or involving debatable points of law does not constitute a "mistake apparent from the record." The Tribunal emphasized that the revenue was effectively seeking a review of the order, which is impermissible under section 254(2).

The Tribunal further analyzed the effect of dismissal of SLPs by the Supreme Court on the binding nature of High Court decisions. It was held that dismissal of an SLP, especially by a non-speaking order, does not amount to merger of the High Court's order into that of the Supreme Court. Such dismissal merely indicates that the Supreme Court declined to exercise its discretionary jurisdiction and does not constitute a declaration of law or res judicata. Hence, the revenue could not rely on the dismissal of SLPs to claim binding precedent or to seek rectification of the Tribunal's order.

The Tribunal also distinguished the facts of the present case from those in the cited High Court and Supreme Court decisions, noting that the assessee had not raised the jurisdictional objection at the earliest stage and that the issue was a mixed question of fact and law. The Tribunal rejected the revenue's reliance on non-jurisdictional High Court decisions for rectification purposes, holding that such decisions cannot form the basis for rectification under section 254(2).

In addressing the competing arguments, the Tribunal gave due consideration to the revenue's submissions and judicial precedents cited but found that these did not demonstrate any patent, obvious, or glaring error in the original order. The Tribunal agreed with the assessee's contention that the revenue's application was a disguised attempt to review the order, which is beyond the Tribunal's jurisdiction under section 254(2). The Tribunal also noted that failure to consider certain arguments or alleged errors of judgment do not amount to mistakes apparent from the record.

Ultimately, the Tribunal concluded that the penalty notices were valid and the penalty orders rightly upheld, and that the miscellaneous applications filed by the revenue for rectification of the Tribunal's order did not merit acceptance. The applications were dismissed accordingly.

The significant holdings of the judgment include the following:

"...a notice issued under section 274 would not be invalid simply because the AO failed to strike off the inappropriate portion of language in said notice describing alleged offence."

"...no prejudice was caused to the assessee by the defective nature of notice as he had full opportunity before the ITO to set out his defense against the levy of penalty u/s.271(1)(c) of the IT Act."

"...failure to indicate either of the options in the penalty notice will not vitiate principles of law."

"...a mistake apparent on the record must be an obvious and patent mistake and not something which can be established by a long-drawn process of reasoning on points on which there may conceivably be two opinions."

"...the powers under Section 254(2) of the Act are only to correct and/or rectify the mistake apparent from the record and not beyond that."

"...dismissal of a special leave petition in limine by a non-speaking order does not constitute res judicata and does not attract the doctrine of merger."

"...review of an order passed by the Tribunal does not fall within the scope and gamut of the jurisdiction vested u/s. 254(2) of the Act."

These principles collectively establish that procedural defects in penalty notices under section 274 read with section 271(1)(c) do not invalidate penalty proceedings unless prejudice is demonstrated; that rectification under section 254(2) is confined to correcting patent mistakes apparent on the record and does not permit review on merits; and that dismissal of SLPs by the Supreme Court does not convert High Court decisions into binding apex court precedents.

The final determinations on the issues are that the penalty notices were valid and the penalty orders rightly upheld; the revenue's miscellaneous applications under section 254(2) seeking rectification of the Tribunal's order were not maintainable as they amounted to impermissible review; and the dismissal of SLPs does not affect the binding nature of the Tribunal's order. Consequently, all miscellaneous applications filed by the revenue were dismissed.