SEBI- NON-SPECIFIC AND OMNIBUS NOTICE FOR PENALTY NEED TO BE CHALLENGED AS VOID.

[DEV KUMAR KOTHARI]

Provision under study about notices:

SEBI (Prohibition of Fraudulent and Unfair Trading Practices related to Securities Markets) Regulations 2003 ( “PFUTP Regulations,2003”) and other similar provisions  which empowers authorities to levy penalties.

Show cause notice before levying any penalty , fine or punishment:

In any proceeding, as a rule, and particularly in case of any penalty or punishment, the notice must be specific about default, violation, breach of any law or other related matter. In other words, what is the charge against the noticee or what information is sought must be clear beyond any doubt. The notice must be specific so that noticee can reply satisfactory and to the point.

In case of penalty or fine, the notice must also specify the amount of penalty or punishment that can be imposed or the maximum penalty that can be imposed, so that the noticee is made aware of likely penalty, severity of case about penalty which can be imposed, or other penal actions, which can be taken against him.

A notice stating non -specific and many alleged violations of different provisions may not be valid at all.

Judicial pronouncements:

For example, in case of income tax penalty u/s. 271.1.c there can be penalty for two types of cases namely  (1) for concealment of income or (2)  for furnishing inaccurate particulars of income.

Even in this situation of two clauses only courts, including the Supreme Court have held that the charge must be clear and specific. If the notice contains both of likely charges, then the notice is void and penalty imposed will be void.

If a printed form is used and both limbs or clause are mentioned without striking out non applicable item, then the notice is not valid. In this regard, some judgments  of the honourable Supreme Court and corresponding judgment of High Court are as follows:

2016 (8) TMI 1145 - SC ORDER

COMMISSIONER OF INCOME TAX & ANR. VERSUS M/S SSA'S EMERALD MEADOWS Special Leave to Appeal (C)....../2016 (CC No.11485/2016) Dated: - 5-8-2016

2015 (11) TMI 1620 - KARNATAKA HIGH COURT

 COMMISSIONER OF INCOME TAX, BANGALORE AND THE INCOME TAX OFFICER, WARD-6 (3) , BANGALORE VERSUS M/S SSA’S EMERALD MEADOWS I.T.A. N O . 380 OF 2015 Dated: - 23-11-2015

2021 (3) TMI 195 - SC ORDER

PR. COMMISSIONER OF INCOME TAX (CENTRAL) VERSUS M/S. GOLDEN PEACE HOTELS AND RESORTS PVT. LTD. Petition for Special Leave to Appeal (C) No.9919/2020 Dated: - 20-11-2020

2020 (2) TMI 333 - BOMBAY HIGH COURT

THE PRINCIPAL COMMISSIONER OF INCOME TAX (CENTRAL) , BENGALURU VERSUS GOLDEN PEACE HOTELS AND RESORTS PVT. LTD. - TAX APPEAL NO. 13 OF 2019 Dated: - 3-2-2020

2017 (1) TMI 1292 - BOMBAY HIGH COURT  

THE COMMISSIONER OF INCOME TAX-11 VERSUS SHRI SAMSON PERINCHERY -  Income Tax Appeal No. 1154, 953, 1097, 1226 of 2014 Dated: - 5-1-2017

And various other rulings referred to in above judgments can be referred to see history of S.271.1.c and amendments  having different effect.

Ruling in above cases , in relation to  penal provision can be summarised about provision for Penalty u/s 271(1)(c) that for penalty u.s. 271.1. c for - Concealment of income or furnishing of inaccurate particulars of income  a valid  notice must specifically state the clause or charge or limb of provision under which penalty is to  intended.

In conclusion it has been held that the  Tribunal has correctly allowed the appeal filed by the assessee holding the notice issued by the Assessing Officer under Section 274 read with Section 271(1)( c) to be bad in law as it did not specify 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 furnishing of inaccurate particulars of income.

Concealment of income and furnishing of inaccurate particulars of income in Section 271(1)(c) of the Act, carry different meanings/ connotations. Therefore, the satisfaction of the Assessing Officer with regard to only one of the two breaches mentioned under Section 271(1)(c) of the Act, for initiation of penalty proceedings will not warrant/ permit penalty being imposed for the other breach. This is more so, as an Assessee would respond to the ground on which the penalty has been initiated/notice issued. It must, therefore, follow that the order imposing penalty has to be made only on the ground of which the penalty proceedings has been initiated, and it cannot be on a fresh ground of which the Assessee has no notice.

Reasoned judgements have been passed by High Courts and SLP filed by revenue have been dismissed.

The Rule also apply to other penalty notices including SCN issued by any direct tax authority, indirect tax authority, ROC, SEBI,  etc.:

It is widely   known that SEBI has wide powers to levy huge penalties and that too substantial amount as minimum under various Regulations. For example, SEBI (Prohibition of Fraudulent and Unfair Trading Practices related to Securities Markets) Regulations 2003 ( “PFUTP Regulations,2003”) have many provisions of violations for which huge penalty can be imposed.

 Ongoing through  some of notices and orders it is found that notices issued are vague and omnibus type notice which covers all or many of  provisions under which penalty can be levied.  Various clauses are independent and mutually exclusive and are for different violations. However, noticee is left to utter confusion and to imagination about charge applicable in his case and penalty that could be levied.

in valid notice being non-specific, omnibus and incomplete:

As per some  show cause notice  issued by Adjudicating Officer/ AO notice is  for alleged violation of Regulation 3(a),(b),(c),(d), 4(1), 4(2)(a) of PFUTP Regulations, 2003.

It is not stated in the notice as to how and which of clause is triggered or is applicable in case of noticee and for which noticee is required to file a reply against the notice.

Therefore, the notice is not specific about violation for which penalty was intended. The notice is silent about specific clause and amount of penalty, which could be imposed.  The notice does not satisfy principal of natural justice at all.

Thus, the notice is invalid , illegal and void ab initio  consequently the order imposing penalty should also be void.

Various clauses of Regulations covered or mentioned in SCN are as follows:

Entire clause 3 has been covered in the SCN

3. Prohibition of certain dealings in securities

No person shall directly or indirectly-

(a) buy, sell or otherwise deal in securities in a fraudulent manner;

(b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made there under;

(c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange;

(d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under.

From clause 4  sub clauses 4(1), 4(2)(a)  have been mentioned in the SCN:

4. Prohibition of manipulative, fraudulent and unfair trade practices

(1) Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities.

[Explanation.– For the removal of doubts, it is clarified that any act of diversion, misutilisation or siphoning off of assets or earnings of a company whose securities are listed or any concealment of such act or any device, scheme or artifice to manipulate the books of accounts or financial statement of such a company that would directly or indirectly manipulate the price of securities of that company shall be and shall always be deemed to have been considered as manipulative, fraudulent and an unfair trade practice in the securities market.]

(2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:-

(a) indulging in an act which creates false or misleading appearance of trading in the securities market;

All clauses are  for different kind of violations and are mutually exclusive. Therefore, under which provision any violation has taken place for which SCN is issued must be specific and any  omnibus type SCN, as issued by A.O. of SEBI is void and penalty levied in pursuance of such notice must also be void ab initio.

Surprisingly in orders issued by AO, SEBI and also in appeal by SAT, these aspects have not been discussed, In fact penalty has also  been imposed without specifying violation for which penalty has been levied.  

Order of  penalty:

If  the SCN is void, as a consequence order levying penalty will also be void.

In view of author any order levying penalty must state specifically:

1. Which provision has been violated ?
2. How violation has taken place?
3. What is extent and severity of such violation?
4. What are monetary advantage obtained by noticee? Or
5. What are monetary  disadvantages or loss suffered by complainant or the authority or state or revenue or any other person who need to be compensated?
6. There  should be computation of any profit or loss as a basis for penalty.
7. How much penalty has been imposed for which violation if at all, and under which provision? As far as applicable in any case.