2016 (7) TMI 616 - AT - Income Tax

Penalty u/s 271(1)(c) - Held 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. - Decided in favour of assessee

Summary

Issues Involved:
1. Imposition of penalty under Section 271(1)(c) of the Income Tax Act, 1961.
2. Validity of the show cause notice under Section 274 of the Income Tax Act, 1961.
3. Application of the principles laid down in the case of CIT & Anr. v. Manjunatha Cotton and Ginning Factory.

Detailed Analysis:

1. Imposition of Penalty under Section 271(1)(c) of the Income Tax Act, 1961:
The Assessee filed a return of income declaring a total income of ?2,14,510 for the Assessment Year (AY) 2009-10. Following a search and seizure operation under Section 132 of the Act, the Assessee filed a revised return declaring total income of ?4,90,510. The Assessing Officer (AO) accepted the revised income but imposed a penalty under Section 271(1)(c) for the difference of ?2,76,000, which was confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. Both authorities relied on Explanation 5A to Section 271(1)(c) to justify the penalty.

2. Validity of the Show Cause Notice under Section 274 of the Income Tax Act, 1961:
The Assessee contested that the show cause notice issued under Section 274 did not specify whether the penalty was for "concealing particulars of income" or "furnishing inaccurate particulars of income." The Tribunal found that the notice was defective as it did not clearly indicate the grounds for the penalty. This defect was highlighted by the Assessee's Counsel, who relied on the Karnataka High Court's decision in CIT & Anr. v. Manjunatha Cotton and Ginning Factory, which held that such ambiguity renders the penalty order null and void.

3. Application of Principles Laid Down in CIT & Anr. v. Manjunatha Cotton and Ginning Factory:
The Tribunal referred to the Karnataka High Court's decision, which laid down several principles regarding the imposition of penalty under Section 271(1)(c):
- The notice under Section 274 must specifically state whether the penalty is for concealment of income or for furnishing inaccurate particulars.
- A printed form notice without striking out the irrelevant part does not satisfy the legal requirement.
- Penalty proceedings initiated on one ground and concluded on another are invalid.
- The principles of natural justice require that the Assessee be clearly informed of the grounds for penalty to adequately contest it.

The Tribunal concluded that the show cause notice in the present case was defective for not specifying the grounds for the penalty. Consequently, the penalty order was deemed invalid and was cancelled.

Conclusion:
The Tribunal allowed the Assessee's appeal, holding that the penalty imposed under Section 271(1)(c) was invalid due to the defective show cause notice under Section 274. The principles from the Karnataka High Court's decision in Manjunatha Cotton and Ginning Factory were pivotal in reaching this conclusion. The order imposing the penalty was thus cancelled, and the Assessee's appeal was allowed.