2025 (1) TMI 498 - AT - Income Tax

Penalty u/s 272A(1)(d) - assessee allegedly failed to comply with the notices u/s 142(1) and u/s 143(2) - AO proceeded to make a best judgment assessment u/s. 144 making an addition u/s 68 of the Act for unexplained cash deposit - CIT(A) concluded that the assessee failed to demonstrate reasonable cause u/s 273B and upheld the penalty - HELD THAT - Non-compliance was not due to any willful default or mala fide intent on the part of the assessee. The lapse occurred due to the negligence of the authorized representative, which was beyond the control of the assessee. There are many judicial precedents where it is held that an assessee should not be penalized for the omissions or errors of their legal representative when the assessee has placed bona fide reliance on them. In the present case, the failure of the representative to communicate notices cannot be attributed to any fault of the assessee, who is a senior citizen relying on professional guidance for compliance. The show-cause notice issued by the AO under Section 274 r.w.s. 272A(1)(d) of the Act failed to specify the exact section or details of non-compliance. Instead, it vaguely referred to multiple provisions Sections 143(2), 142(1), 142(2A) without clearly identifying the specific default. This amounts to non-application of mind by the AO. The inclusion of Section 142(2A) of the Act (related to a special audit) in the show-cause notice was erroneous and irrelevant, as the assessee was not required to maintain any books of accounts, being a senior citizen deriving income from pension and bank interest. The invocation of an inapplicable provision demonstrates a mechanical and baseless approach by the AO, further rendering the penalty proceedings unsustainable. Section 273B of the Act provides relief from penalties under Section 272A(1)(d) of the Act, if the assessee can demonstrate a reasonable cause for non-compliance. In this case, the affidavits filed by the assessee and the authorized representative explain the genuine reasons behind the non-compliance. There was no evidence to suggest any mala fide intent or willful defiance by the assessee. Therefore, the penalty imposed does not stand in light of the reasonable cause demonstrated by the assessee Assessee complied with the initial notice u/s 143(2) and only failed to comply with subsequent notices due to a communication gap. This shows that the assessee had the intention to comply with the proceedings and that the subsequent default was inadvertent and not deliberate. Hence, the penalty imposed cannot be justified - Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether the penalty of Rs. 20,000/- imposed under Section 272A(1)(d) of the Income Tax Act, 1961, was justified given the circumstances of non-compliance with notices issued under Sections 143(2) and 142(1) of the Act.
• Whether the assessee demonstrated a "reasonable cause" for non-compliance under Section 273B of the Act, thereby warranting relief from the penalty.
• Whether the principles of natural justice were violated by the CIT(A) in dismissing the affidavits submitted by the assessee without conducting an inquiry or providing an opportunity for rebuttal.
• Whether the show-cause notice issued under Section 274 r.w.s. 272A(1)(d) was vague and lacked specificity, thereby invalidating the penalty proceedings.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification of Penalty under Section 272A(1)(d)

• Relevant legal framework and precedents: Section 272A(1)(d) of the Income Tax Act provides for a penalty for failure to comply with notices. Section 273B offers relief if reasonable cause is demonstrated. Judicial precedents emphasize the need for clear communication and justifiable reasons for non-compliance.
• Court's interpretation and reasoning: The court noted that the penalty was imposed due to non-compliance with notices sent to the authorized representative's email, which the assessee was unaware of.
• Key evidence and findings: Affidavits were submitted explaining the communication failure between the assessee and the representative. The CIT(A) dismissed these as afterthoughts without proper inquiry.
• Application of law to facts: The court found that the non-compliance was not willful but due to negligence by the representative, which was beyond the assessee's control.
• Treatment of competing arguments: The Department argued for the penalty's validity, citing multiple compliance opportunities. The court, however, focused on the lack of intent and the representative's failure.
• Conclusions: The penalty was deemed unjustified as the non-compliance was inadvertent and not deliberate.

Issue 2: Reasonable Cause under Section 273B

• Relevant legal framework and precedents: Section 273B provides that no penalty shall be imposed if reasonable cause is demonstrated for non-compliance.
• Court's interpretation and reasoning: The court considered the affidavits and the lack of mala fide intent as evidence of reasonable cause.
• Key evidence and findings: The affidavits explained the communication gap and were supported by the fact that the representative handled multiple clients.
• Application of law to facts: The court found that the assessee showed intent to comply and that the lapse was due to the representative's negligence.
• Treatment of competing arguments: The Department's argument of sufficient compliance opportunities was countered by the court's focus on the representative's failure.
• Conclusions: The court held that the reasonable cause was demonstrated, and the penalty could not be sustained.

Issue 3: Violation of Principles of Natural Justice

• Relevant legal framework and precedents: The principles of natural justice require fair hearing and consideration of evidence.
• Court's interpretation and reasoning: The court found that the CIT(A) violated these principles by dismissing affidavits without inquiry.
• Key evidence and findings: The affidavits were not given due consideration, and no opportunity for rebuttal was provided.
• Application of law to facts: The court emphasized the need for a fair process and found the CIT(A)'s actions lacking.
• Treatment of competing arguments: The Department's support for the CIT(A)'s decision was outweighed by the court's focus on procedural fairness.
• Conclusions: The court concluded that the principles of natural justice were violated.

Issue 4: Vagueness of Show-Cause Notice

• Relevant legal framework and precedents: A valid penalty notice must specify the exact nature of non-compliance.
• Court's interpretation and reasoning: The court noted the notice's vagueness and lack of specificity regarding non-compliance.
• Key evidence and findings: The notice referred to multiple sections without clear identification of the default.
• Application of law to facts: The court found the notice's ambiguity deprived the assessee of a fair defense opportunity.
• Treatment of competing arguments: The Department's defense of the notice was countered by the court's emphasis on clarity and specificity.
• Conclusions: The court held that the vague notice invalidated the penalty proceedings.

3. SIGNIFICANT HOLDINGS

• "The affidavits must be read in their entirety, and selective acceptance or rejection without valid reasoning is impermissible."
• "The non-compliance was not due to any willful default or mala fide intent on the part of the assessee."
• "The inclusion of an inapplicable provision demonstrates a mechanical and baseless approach by the AO."
• "The penalty of Rs. 20,000/- imposed under Section 272A(1)(d) of the Act, was unjustified and deserves to be set aside."

The Tribunal concluded that the penalty was unjustified due to the lack of willful default, the reasonable cause demonstrated, the violation of natural justice principles, and the vagueness of the show-cause notice. The appeal was allowed, and the penalty order was quashed.