2017 (1) TMI 1163 - AT - Income Tax

Penalty under section 271(1)(c) - defective notice - Held that - The show-cause notice issued by the Assessing Officer under section 274 for the year under consideration not being in accordance with law, the penalty order passed by the Assessing Officer in pursuance thereof is liable to be cancelled being invalid. We accordingly cancel the order passed by the Assessing Officer imposing penalty under section 271(1)(c) for the year under consideration and allow the appeal of the assessee. See THE COMMISSIONER OF INCOME TAX & OTHS. Versus M/s MANJUNATHA COTTON AND GINNING FACTORY & OTHS. 2013 (7) TMI 620 - KARNATAKA HIGH COURT - Decided in favour of assessee

Summary

Issues Involved:
1. Validity of penalty order under section 271(1)(c) of the Income Tax Act, 1961.
2. Applicability of Explanation 5A to section 271(1)(c).
3. Adequacy of the show-cause notice under section 274.

Issue-wise Detailed Analysis:

1. Validity of Penalty Order under Section 271(1)(c):
The appeal concerns the penalty of ?3,20,444/- imposed by the Assessing Officer (AO) under section 271(1)(c) of the Income Tax Act, 1961, for the assessment year 2008-09. The penalty was based on the difference between the income declared in the original return and the income assessed after search and seizure operations. The assessee argued that the penalty order was invalid due to the lack of specific mention in the show-cause notice as to whether the penalty was for "furnishing inaccurate particulars of income" or "concealing particulars of such income."

2. Applicability of Explanation 5A to Section 271(1)(c):
The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the penalty, stating that the assessee admitted to undisclosed investment post-search, thus Explanation 5A to section 271(1)(c) applied. This explanation deems the assessee to have concealed particulars of income or furnished inaccurate particulars, justifying the penalty.

3. Adequacy of the Show-Cause Notice under Section 274:
The Tribunal examined whether the show-cause notice under section 274 was valid. The notice did not specify whether the penalty was for "furnishing inaccurate particulars of income" or "concealing particulars of such income," which was argued to be a critical flaw. The Tribunal referenced the case of Suvaprasanna Bhattacharya vs. ACIT, where a similar issue was considered, and the penalty was deemed invalid due to the defective notice. The Tribunal also cited the Karnataka High Court's decision in CIT & Another vs. Manjunatha Cotton & Ginning Factory, which emphasized that the notice must clearly state the grounds for penalty to meet the principles of natural justice.

Conclusion:
The Tribunal concluded that the show-cause notice was defective as it did not specify the grounds for penalty, rendering the penalty order invalid. Consequently, the Tribunal canceled the penalty imposed by the AO and allowed the appeal of the assessee. The decision underscores the necessity for clear and specific communication in penalty notices to uphold the principles of natural justice.