2018 (1) TMI 672 - AT - Income Tax

Penalty proceedings u/s.271(1)(c) - without striking off one of the limbs and without specifying the specific charge in the notice initiating penalty proceedings for inaccurate particulars of income - Held that - The notice issued by the Assessing Officer u/s. 274 r.w.s. 271(1)(c) of the Act is on account of non-application of mind and therefore on this account itself the penalty imposed u/s.271(1)(c) is liable to be deleted. Thus, we direct the Assessing Officer to delete the penalty levied u/s.271(1)(c) of the Act. See CIT v. Samson Perinchery 2017 (1) TMI 1292 - BOMBAY HIGH COURT - Decided in favour of assessee

Issues Involved:
1. Validity of penalty proceedings under Section 271(1)(c) of the Income Tax Act.
2. Specification of the charge in the penalty notice.
3. Full and complete disclosure by the assessee.
4. Debatability of the issue.
5. Tax neutrality and timing difference.
6. Motive to obtain tax advantage.

Detailed Analysis:

1. Validity of Penalty Proceedings under Section 271(1)(c):
The primary issue was whether the initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act was proper. The assessee argued that the penalty notice issued by the Assessing Officer (AO) did not specify whether the penalty was for concealment of income or for furnishing inaccurate particulars of income. The Tribunal found that the AO did not strike off the irrelevant portion in the notice, which rendered the initiation of penalty proceedings improper and invalid. This was supported by the precedent set in the case of Meherjee Cassinath Holdings v. ACIT, where it was held that non-striking off the relevant clause in the notice shows non-application of mind by the AO.

2. Specification of the Charge in the Penalty Notice:
The Tribunal emphasized the importance of specifying the charge in the penalty notice. It was noted that the AO issued the notice in a standard proforma without striking out the irrelevant clause, which did not convey to the assessee the specific charge to respond to. This lack of clarity was deemed a violation of the principles of natural justice, as the assessee was not made aware of the exact charge against them. The Tribunal referred to the Hon'ble Supreme Court's decision in Dilip N. Shroff and the Hon'ble Bombay High Court's decision in CIT v. Samson Perinchery, which underscored the necessity of clear communication of charges in penalty notices.

3. Full and Complete Disclosure by the Assessee:
The assessee contended that no penalty could be levied as there was full and complete disclosure of all relevant particulars. References were made to the Tax Audit Report, signed financial statements, and various case laws supporting the argument that complete disclosure negates the basis for penalty. However, since the penalty was deleted on the preliminary point of non-application of mind by the AO, this argument was not further addressed by the Tribunal.

4. Debatability of the Issue:
The assessee argued that no penalty should be levied as the issue was highly debatable, with at least two possible views. The Tribunal acknowledged that penalty should not be imposed in cases where the issue is debatable, referencing case laws like American Express Bank Ltd. v. DDIT and Impulse India (P) Ltd v. ITO. However, this argument was not further explored due to the preliminary decision to delete the penalty based on the improper notice.

5. Tax Neutrality and Timing Difference:
The assessee also argued that the penalty should not be levied in cases where the tax rates are the same in different years or where the issue involves a timing difference. It was pointed out that the change in stock valuation was tax neutral, as it would affect the subsequent year's opening stock identically. The Tribunal referenced the case of CIT v. Excel Industries Ltd. to support this argument. Again, this point was not further discussed due to the preliminary decision.

6. Motive to Obtain Tax Advantage:
Lastly, the assessee argued that there was no motive to obtain any tax advantage, as the impact of the change in the method of valuation of closing stock was minimal compared to the declared and assessed losses. The Tribunal noted the lack of intention or motive to obtain any tax advantage but did not delve deeper into this argument due to the preliminary decision.

Conclusion:
The Tribunal concluded that the penalty proceedings initiated under Section 271(1)(c) were invalid due to the non-application of mind by the AO, as evidenced by the improper notice. Consequently, the penalty was deleted, and the appeal filed by the assessee was allowed, while the Revenue's appeal was dismissed. The Tribunal did not address the other arguments raised by the assessee due to the preliminary finding.

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