2016 (3) TMI 642 - AT - Income Tax

Penalty proceedings 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. Thus 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. Immunity from penalty for additional income disclosed under Section 132(4).
2. Applicability of Explanation 5A of Section 271(1)(c).
3. Validity of penalty proceedings under Section 271(1)(c) based on defective show cause notice under Section 274.

Issue-wise Detailed Analysis:

1. Immunity from penalty for additional income disclosed under Section 132(4):
The assessee argued that the additional income disclosed during the search and seizure operation under Section 132(4) should grant immunity from penalty under Section 271(1)(c). The assessee contended that the disclosure was voluntary and prior to any detection by the revenue, thus, there was no attempt to conceal particulars of income. However, both the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the disclosure did not grant immunity from penalty, referencing Explanation 5A of Section 271(1)(c) as amended by the Finance (No.2) Act 2009 with retrospective effect.

2. Applicability of Explanation 5A of Section 271(1)(c):
Explanation 5A to Section 271(1)(c) deems that any income declared in a return filed after a search operation is considered as concealed income or inaccurate particulars of income. The CIT(A) upheld the AO's decision to impose penalties based on this explanation, stating that the income declared in the return filed under Section 153A post-search operation was deemed to be concealed. This was irrespective of whether the income was voluntarily disclosed by the assessee during the search.

3. Validity of penalty proceedings under Section 271(1)(c) based on defective show cause notice under Section 274:
The assessee challenged the validity of the penalty proceedings on the grounds that the show cause notice issued under Section 274 did not specify whether the penalty was for "furnishing inaccurate particulars of income" or "concealing particulars of such income." The Tribunal found that the AO did not strike out the irrelevant portion in the printed show cause notice, making it unclear which charge was being levied. Citing the Karnataka High Court's decision in CIT v. Manjunatha Cotton & Ginning Factory, the Tribunal held that such a defective notice violated principles of natural justice and rendered the penalty proceedings invalid. The Tribunal emphasized that the notice should clearly state the grounds for penalty to allow the assessee to adequately prepare a defense.

Conclusion:
The Tribunal concluded that the penalty proceedings were invalid due to the defective show cause notice under Section 274. Consequently, the penalties imposed for all assessment years were cancelled. The Tribunal did not address other arguments on the merits of the penalty orders due to the conclusion on the defective notice issue. All four appeals by the assessee were allowed, and the penalties were annulled.

Order:
The Tribunal pronounced the order in the open court on 10/02/2016, allowing all four appeals of the assessee and cancelling the penalties imposed under Section 271(1)(c).