2015 (11) TMI 1281 - AT - Income Tax

Penalty u/s. 271(1)(c) - defective notice - Held that - on the facts of the present case that the show cause notice u/s. 274 of the Act is defective as it does not spell out the grounds on which the penalty is sought to be imposed. Following the decision of the Hon ble Karnataka High Court in the case of CIT & Anr. v. Manjunatha Cotton and Ginning Factory 2013 (7) TMI 620 - KARNATAKA HIGH COURT we hold that the orders imposing penalty in all the assessment years have to be held as invalid and consequently penalty imposed is cancelled. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the order passed under Section 271(1)(c) of the Income Tax Act, 1961.
2. Defective show cause notice under Section 274 of the Income Tax Act.
3. Principles laid down by the Karnataka High Court in CIT & Anr. v. Manjunatha Cotton and Ginning Factory.

Detailed Analysis:

1. Validity of the Order Passed under Section 271(1)(c) of the Income Tax Act, 1961:
The appeal was filed by the assessee against the order of the CIT(Appeals) confirming the penalty imposed by the Assessing Officer (AO) under Section 271(1)(c) of the Income Tax Act, 1961. The penalty was related to the assessment year 2008-09. The assessee's return of income had discrepancies that led to additions in the total income by the AO. The main additions were due to disallowed interest deductions and unexplained sundry creditors.

2. Defective Show Cause Notice under Section 274 of the Income Tax Act:
The primary contention by the assessee was that the show cause notice issued under Section 274 did not specify whether the penalty proceedings were initiated for "concealing particulars of income" or "furnishing inaccurate particulars of income." The notice was deemed defective because the irrelevant columns in the printed form were not struck off, leading to ambiguity. This argument was supported by the decision of the Karnataka High Court in CIT & Anr. v. Manjunatha Cotton and Ginning Factory, which mandates that the notice should clearly state the grounds for penalty.

3. Principles Laid Down by the Karnataka High Court in CIT & Anr. v. Manjunatha Cotton and Ginning Factory:
The Tribunal referred to the principles laid down by the Karnataka High Court, emphasizing that:
- The notice under Section 274 must specifically state the grounds for penalty.
- The assessee should be aware of the exact charge to prepare a defense.
- Penalty proceedings initiated on one ground and concluded on another are invalid.
- The practice of using a standard proforma without striking off irrelevant clauses indicates non-application of mind.

The Tribunal concluded that the show cause notice issued to the assessee was defective as it did not specify the grounds for the penalty. Consequently, following the Karnataka High Court's decision, the orders imposing the penalty were declared invalid, and the penalty was canceled.

Conclusion:
The Tribunal allowed the appeal, holding that the penalty imposed under Section 271(1)(c) was invalid due to the defective show cause notice under Section 274. The other issues raised by the assessee were not adjudicated, as the primary ground of appeal was sufficient to decide the case. The judgment was pronounced in the open court on October 1, 2015.