2016 (10) TMI 415 - AT - Income Tax

Levy of Penalty u/s. 271(1) (c) - validity of notice - Held that - In the present case, the notice dt. 30-3-2005 issued to Assessee by the AO U/Sec 274 r/w 271 of the Act does not show on which ground the penalty is sought to be imposed, therefore we hold that the order dt 30-3-2012 levying penalty is not valid. See CIT & Anr. v. Manjunatha Cotton and Ginning Factory 2013 (7) TMI 620 - KARNATAKA HIGH COURT - Decided in favour of assessee

Issues Involved:

1. Validity of the penalty order under Section 271(1)(c) of the Income Tax Act, 1961.
2. Defectiveness of the notice issued under Section 274/271 of the Income Tax Act.
3. Applicability of the Karnataka High Court's decision in CIT & Anr. v. Manjunatha Cotton and Ginning Factory.

Detailed Analysis:

1. Validity of the Penalty Order under Section 271(1)(c) of the Income Tax Act, 1961:

The assessee filed an appeal against the order of the Commissioner of Income Tax (Appeals) confirming the penalty imposed by the Assessing Officer (AO) under Section 271(1)(c) of the Income Tax Act, 1961. The AO had determined the total income of the assessee at ?4,87,850/- and found that the assessee received ?3 lakhs as gifts from three persons, which the assessee could not substantiate. Consequently, the AO deemed the gift claim as bogus and imposed a penalty of ?91,800/- for non-furnishing of proper explanation. The CIT(A) upheld this penalty, leading the assessee to appeal further.

2. Defectiveness of the Notice Issued under Section 274/271 of the Income Tax Act:

The assessee raised additional grounds, arguing that the penalty order dated 31.03.2012 was barred by limitation under Section 275(1)(c) of the Act and was issued without any notice of hearing, rendering it void ab initio. The assessee contended that the notice issued by the AO under Section 274/271 was defective. The Tribunal admitted these additional grounds with the consent of both parties.

3. Applicability of the Karnataka High Court's Decision in CIT & Anr. v. Manjunatha Cotton and Ginning Factory:

The assessee's representative argued that the case was covered by the Karnataka High Court’s decision in CIT & Anr. v. Manjunatha Cotton and Ginning Factory, which held that a notice under Section 274 should specifically state whether the penalty is for concealment of income or furnishing inaccurate particulars of income. The Tribunal in Suvaprasanna Bhattacharya Vs. ACIT had also considered this decision and passed a detailed order on the issue.

The Tribunal reviewed the rival submissions and the material on record. It noted that the Karnataka High Court's decision mandated that the notice under Section 274 should clearly indicate the grounds for penalty, i.e., whether it is for concealment of income or furnishing inaccurate particulars. The Tribunal found that the AO's notice did not strike out the irrelevant part, making it unclear whether the penalty was for "furnishing inaccurate particulars of income" or "concealing particulars of such income."

The Karnataka High Court had established that such vague notices violate principles of natural justice, and penalties based on such notices are invalid. The Tribunal concluded that the notice issued to the assessee was defective and did not meet the legal requirements, thus invalidating the penalty order.

Conclusion:

Following the Karnataka High Court's decision and the Tribunal's precedent in Suvaprasanna Bhattacharya, the Tribunal held that the penalty order dated 30-3-2012 was invalid due to the defective notice under Section 274. Consequently, the penalty of ?91,800/- imposed by the AO and confirmed by the CIT(A) was canceled. The appeal of the assessee was allowed, and the order was pronounced in open court on 24/08/2016.

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