2016 (5) TMI 544 - AT - Income Tax

Penalty u/s 271(1)(c) - Held that - Penalty levied u/s 271(1)(c) of the Act is liable to be cancelled on the ground that there was no proper recording of satisfaction in the order of assessment and that the show cause notice u/s 274 of the Act does not satisfy the specific charge against the assessee. Consequently the orders imposing penalty for all the four assessment years are held to be invalid and illegal and are hereby cancelled. Since the order imposing penalty is cancelled, the reduction of the quantum of penalty from 300% to 100% of the tax sought to be evaded has become academic/infructuous and therefore the appeals filed by the revenue are dismissed. - Decided in favour of assessee

Summary

Issues Involved:
1. Imposition of penalty under Section 271(1)(c) of the Income Tax Act.
2. Validity of the show cause notice under Section 274 of the Income Tax Act.
3. Recording of satisfaction by the Assessing Officer (AO) in the assessment order.

Issue-wise Detailed Analysis:

1. Imposition of Penalty under Section 271(1)(c) of the Income Tax Act:
The assessee, an HUF engaged in infrastructure development and trading, faced a search and seizure operation under Section 132 of the Income Tax Act on 18.3.2008, leading to a disclosure of ?8.75 crores. The assessee filed returns for AY 2002-03 to 2007-08 disclosing ?4.75 crores of the additional income. The AO imposed a penalty under Section 271(1)(c) at 300% of the tax sought to be evaded, which the CIT(A) later reduced to 100%. The assessee contended that the additional income disclosed was voluntary and not based on any seized documents or assets, except for specific amounts in AY 2004-05 and 2007-08. The CIT(A) held that penalty under Explanation 5A to Section 271(1)(c) is automatic for income declared in returns filed post-search. However, the CIT(A) reduced the penalty to 100% due to the lack of reasons for the 300% penalty.

2. Validity of the Show Cause Notice under Section 274 of the Income Tax Act:
The assessee argued that the show cause notice under Section 274 did not specify whether the penalty was for "furnishing inaccurate particulars of income" or "concealing particulars of income," rendering it defective. This argument was supported by the ITAT Kolkata Bench's decision in Satyananda Achariya Biswas vs DCIT, which held that such defects make the penalty order illegal. The Tribunal found that the AO did not strike off the irrelevant portion in the notice, making the charge unclear.

3. Recording of Satisfaction by the AO in the Assessment Order:
The Tribunal observed that the AO's assessment order did not indicate that the assessee was guilty of concealing income or furnishing inaccurate particulars. The AO accepted the additional income offered by the assessee without specific comments on the conduct. The Tribunal emphasized that satisfaction for penalty initiation must be discernible from the assessment order, even if not recorded in a specific manner. The absence of such satisfaction and the defective show cause notice led the Tribunal to conclude that the penalty proceedings were not properly initiated.

Conclusion:
The Tribunal held that the penalty under Section 271(1)(c) was unsustainable due to the lack of proper satisfaction recording in the assessment order and the defective show cause notice under Section 274. Consequently, the orders imposing penalty were cancelled, and the appeals by the assessee were allowed, while the appeals by the revenue were dismissed. The ruling emphasized the importance of clear and specific charges in penalty proceedings and the necessity of proper satisfaction recording by the AO.