2024 (5) TMI 1107 - AT - Income Tax

Penalty u/s 271(1)(c) - allegation of defective notice on non specification of clear charge - concealment of particulars of income or furnishing of incorrect particulars of such income - test of prejudice - non strike off any one of the twin charges against the assessee - whether assessee has been prejudiced by the non striking of the one of twin limbs on which penalty can be levied? HELD THAT - Facts clearly shows that issue of non striking of any of twin charges were not raised before ld AO or CIT (A) for both the years. It is argued before us for the first time. It is also a fact that assessee was fully aware why penalty proceedings are initiated. It is also not shown before us that what prejudiced is caused to the assessee by not striking off one of the twin charges in a notice issued u/s 274 r.w.s. 271 (1) (c) of the Act. Thus, It is apparent that notwithstanding the defective notice, the assessee was fully aware of the reason as to why the Assessing Officer sought to impose penalty. Thus, significant features of the case in hand are that penalty proceedings were initiated during the assessment proceedings. The Assessing Officer had although issued a notice without a tick mark, it appears that both the limbs under section 271(1)(c) namely concealment of particulars of income and furnishing inaccurate particulars of such income were attracted in the facts of the case. Further At no point of time, the assessee had a grievance in regard to the section 271(1) (c) notice being in any manner vague, ambiguous and not being understood by the assessee in regard to the limbs under section 271(1)(c) being attracted. Assessee had wholeheartedly participated at the hearing before the Assessing Officer and The notice was in fact, responded by the assessee on both the counts as falling under section 271(1)(c) of the IT Act. As per binding decision of Veena Textiles 2024 (1) TMI 701 - BOMBAY HIGH COURT we hold that non striking of any limb in notice u/s 274 rws 271 (1) (c) of the Act does not come to rescue of the assessee where the assessee never having raised any objection from very inception on account of defect in notice, the assessee was prevented from raising such grounds, without showing prejudice caused to him. Hence, Ground No 1 is dismissed. Penalty imposed on Estimation of income on bogus purchases - HELD THAT - When the addition is sustained based on estimates penalty u/s 271 (1) c) is not sustainable. See M/S ETCO PROFILES PVT. LTD. 2015 (6) TMI 1214 - ITAT, MUMBAI In the present case AO made addition of 12.5 % of the Bogus purchases which was confirmed by the ld CIT (A), on appeal before ITAT it was reduced to 5 % - Once, the source of payment of purchases have been made through books of accounts and through account payee cheques and there is corresponding sales, then merely because some adhoc GP rate has been applied on such alleged bogus purchases to factor in suppression of alleged gross profit, no penalty can be levied. Thus, it was held that on such estimates penalty cannot be levied. Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the penalty notice issued without specifying the grounds for concealment of income.
2. Legitimacy of penalty imposition when income is determined on an estimated basis.

Summary:

Issue 1: Validity of the Penalty Notice
The assessee contended that the penalty notice dated 18th March 2015, issued u/s 271(1)(c) of the Income-tax Act, 1961, was invalid because it did not specify whether the penalty was for "concealment of particulars of income" or "furnishing of inaccurate particulars of income." The Tribunal noted that the issue of non-striking of any of the twin charges was raised for the first time before them. The Tribunal observed that the assessee was fully aware of the reasons for the penalty proceedings and had participated in the hearings without any grievance regarding the notice's ambiguity. Citing the decision in Veena Estate Pvt. Ltd., the Tribunal concluded that the defect in the notice did not prejudice the assessee, and therefore, the penalty notice was not invalid. Consequently, Ground No. 1 was dismissed.

Issue 2: Penalty on Estimated Income
The assessee argued that penalty u/s 271(1)(c) could not be levied when income is determined on an estimated basis. The Tribunal referred to similar cases, such as ETCO Profiles Pvt. Ltd. and MUM Gems, where penalties were deleted because the additions were based on estimates. In the present case, the addition was made by estimating 12.5% of the bogus purchases, which was later reduced to 5% by the ITAT. The Tribunal held that since the income was estimated, penalty u/s 271(1)(c) was not sustainable. Thus, Ground No. 2 was allowed, and the penalty was deleted for both assessment years.

Conclusion:
The appeals were partly allowed, with the penalty u/s 271(1)(c) being deleted based on the estimated nature of the income, while the validity of the penalty notice was upheld despite its defects.