2025 (4) TMI 1079 - AT - Income Tax

Penalty u/s 270A - allegation of defective notice u/s 274 - assessee claimed that the AO in the show cause notice for levying penalty did not specifically pointed out as to whether the penalty was w.r.t. concealment of income or furnishing inaccurate particulars of income - HELD THAT - Since the issue in hand which basically hinges on the alleged defective show cause notice issued in terms of section 274 of the Act is exactly similar following this Bench s decision in the case of Raj Kumar Agrawal 2024 (8) TMI 1531 - ITAT RANCHI we therefore set aside the penalty order and direct the AO to delete the penalty imposed on the assessee. Appeals of assessee are allowed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these appeals are:

Whether penalty under Section 270A of the Income Tax Act, 1961 (the Act) was rightly levied on the assessee for the Assessment Years 2017-18 and 2018-19;
Whether the initiation of penalty proceedings was valid, given that the show cause notice issued under Section 274 of the Act did not specifically state whether the penalty was for concealment of income or for furnishing inaccurate particulars of income;
Whether the failure to strike off the inapplicable limb(s) in the penalty notice under Section 274 vitiates the penalty proceedings;
Whether the Assessing Officer (AO) correctly applied the provisions of Section 270A(2)(a) and Section 270A(9)(a) of the Act;
Whether the penalty proceedings were conducted in accordance with the principles of natural justice and relevant judicial precedents.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Penalty Imposed under Section 270A

Relevant Legal Framework and Precedents: Section 270A of the Act empowers the AO to impose penalty for concealment of income or furnishing inaccurate particulars of income. The penalty proceedings are initiated by issuing a show cause notice under Section 274 of the Act. The notice must clearly specify the nature of default, i.e., whether it relates to concealment or furnishing inaccurate particulars.

Precedents relied upon include the decisions of the Hon'ble Karnataka High Court in CIT & Anr. vs. Manjunatha Cotton & Ginning Factory (359 ITR 565), the Full Bench of Bombay High Court in Mohd. Farhan A. Shaik vs. Dy. CIT (125 taxmann.com 253), and the Hon'ble Supreme Court's dismissal of SLP in Pr. CIT vs. Golden Peace Hotels and Resorts (124 taxmann.com 249), which emphasize that a defective notice under Section 274, particularly one that does not strike off the inapplicable limb(s), renders the penalty proceedings void.

Court's Interpretation and Reasoning: The Tribunal observed that the show cause notice issued under Section 274 did not specifically indicate whether the penalty was for concealment of income or furnishing inaccurate particulars. The AO failed to strike off the irrelevant portion(s) of the notice, resulting in ambiguity. The Tribunal relied on its recent decision in Raj Kumar Agrawal vs. CIT (ITA Nos. 255-258/Ran/2023) where a similar defect led to cancellation of penalty orders.

Key Evidence and Findings: The assessee had admitted certain undisclosed expenditure during the search and paid due taxes. However, no adverse inference or finding of concealment or inaccurate particulars was recorded during assessment proceedings under Section 153A. The penalty notice was silent on the specific limb under which penalty was proposed.

Application of Law to Facts: The Tribunal applied the principle that penalty proceedings are distinct from assessment proceedings and require strict adherence to procedural safeguards. The defective notice under Section 274 failed to provide the assessee with clear and unambiguous charge, violating principles of natural justice.

Treatment of Competing Arguments: The Revenue argued that the penalty was rightly imposed and the notice was valid. The Tribunal rejected this, emphasizing the binding precedents that a notice which is ambiguous or defective in specifying the charge cannot sustain penalty proceedings.

Conclusions: The penalty imposed under Section 270A was held to be invalid and set aside due to defective show cause notice under Section 274.

Issue 2: Validity of Initiation of Penalty Proceedings under Section 274

Relevant Legal Framework and Precedents: Section 274 requires that before imposing penalty, the AO must issue a show cause notice specifying the nature of default. The notice must be clear and unambiguous to enable the assessee to prepare a proper defense. The Hon'ble Karnataka High Court in Manjunatha Cotton & Ginning Factory and the Hon'ble Supreme Court in SSA Emeralds Meadows vs. CIT (242 taxmann 180) have held that ambiguous or defective notices are void ab initio.

Court's Interpretation and Reasoning: The Tribunal noted that the AO's failure to strike off the inapplicable limb in the notice rendered the initiation of penalty proceedings bad in law. The Tribunal referred to the principle that penalty proceedings cannot be initiated in a routine or mechanical manner and must comply with natural justice.

Key Evidence and Findings: The show cause notice issued was in a printed form and did not specify the limb of penalty. The assessee's written submissions highlighted this defect and cited relevant case law.

Application of Law to Facts: The Tribunal held that the defective initiation of penalty proceedings vitiates the entire penalty order, irrespective of the merits of the case.

Treatment of Competing Arguments: The Revenue's reliance on the lower authorities' orders was rejected in light of binding judicial precedents emphasizing the requirement of specificity in penalty notices.

Conclusions: The initiation of penalty proceedings was held to be invalid and the penalty order set aside.

Issue 3: Application of Sections 270A(2)(a) and 270A(9)(a)

Relevant Legal Framework: Section 270A(2)(a) provides for penalty for concealment of income or furnishing inaccurate particulars, while Section 270A(9)(a) deals with the manner and quantum of penalty.

Court's Interpretation and Reasoning: The Tribunal did not delve deeply into the application of these specific subsections given the fundamental defect in the penalty notice. The defective initiation and ambiguous notice rendered the application of these provisions moot.

Conclusions: Since the penalty proceedings were quashed on procedural grounds, the correctness of applying these subsections did not arise for consideration.

Issue 4: Adherence to Precedents and Principles of Natural Justice

Relevant Legal Framework and Precedents: The principles of natural justice require that the assessee be given a clear and unambiguous notice specifying the charge to enable effective defense. The Tribunal relied on the Hon'ble Karnataka High Court and Bombay High Court decisions, as well as the Supreme Court's affirmations, underscoring this principle.

Court's Interpretation and Reasoning: The Tribunal emphasized that penalty proceedings are distinct from assessment proceedings and cannot be imposed routinely without strict compliance with procedural safeguards.

Conclusions: The defective notice violated principles of natural justice and rendered the penalty proceedings invalid.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"We must reiterate and we feel appropriate in this context of adjudication also to revisit the classic decision of Hon'ble Karnataka High Court in CIT & Anr. vs. Manjunatha Cotton & Ginning Factory 359 ITR 565 (Kar.) wherein the court had enshrined that levy of penalty is altogether different from assessment procedures. The penalty cannot be levied in a routine manner. The principles of natural justice must be followed wherein the notice served on the assessee must clearly and unambiguously specify the charge on which the Department proposes to levy the penalty so that the assessee can be ready with his defence and prepare his case and submissions accordingly."
"In view thereof, even without going into the merits of the extant cases only on the very legal premise that in the penalty notice issued u/s 274 r.e.s.271(1)(c) of the Act, the inapplicable words were not struck off, the levy of penalty therefore is vitiated and is held bad in law. We therefore, set aside the orders of the ld. CIT(A) and direct the AO to delete the penalty from the hands of the assessee for the years hereinabove enumerated in the cause title."

Core principles established include:

Penalty proceedings under the Act require strict compliance with procedural safeguards and principles of natural justice;
A show cause notice under Section 274 must clearly specify the nature of default (concealment or furnishing inaccurate particulars); failure to do so renders the notice and subsequent penalty proceedings void;
Failure to strike off inapplicable limbs in a penalty notice is a fatal defect;
Penalty cannot be imposed in a routine or mechanical manner without clear and specific charges;
Where penalty notice is defective, penalty orders must be set aside irrespective of the merits of the case.

Final determinations:

The penalty orders for AY 2017-18 and AY 2018-19 were set aside;
The Assessing Officer was directed to delete the penalty imposed on the assessee for both years;
The appeals filed by the assessee were allowed on the ground of defective penalty notices under Section 274.

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