2018 (1) TMI 673 - AT - Income Tax

Penalty u/s 271 (1)(c) - defective show cause notice - Held that - The show cause notice issued in the present case u/s 274 of the Act does not specify the charge against the assessee as to whether it is for concealing particulars of income or furnishing inaccurate particulars of income. The show cause notice u/s 274 of the Act does not strike out the inappropriate words. In these circumstances, we are of the view that imposition of penalty cannot be sustained. The plea of the assessee for cancelling imposition of penalty which is based on the decisions referred to in the earlier part of this order has to be accepted. We therefore hold that imposition of penalty in the present case cannot be sustained and the same is directed to be cancelled. - 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.

Issue-wise Detailed Analysis:

1. Imposition of Penalty under Section 271(1)(c) of the Income Tax Act, 1961:
The assessee, a company engaged in investment and finance, faced penalty proceedings under Section 271(1)(c) of the Income Tax Act, 1961, for the assessment years 2006-07 to 2008-09. The Assessing Officer (AO) observed significant deposits and credit entries in the assessee's bank account, which were explained as share application money and related transactions. However, the AO concluded that the assessee was providing accommodation entries and earning commission income, which was not disclosed. The AO estimated the commission income at 0.20% of the cheques issued and added ?2,30,350/- for A.Y. 2006-07, ?1,45,113/- for A.Y. 2007-08, and ?2,04,798/- for A.Y. 2008-09. Additionally, unexplained cash deposits of ?2,02,000/- in A.Y. 2007-08 and ?1,57,400/- in A.Y. 2008-09 were also added. The AO imposed a penalty equal to 100% of the tax sought to be evaded.

2. Validity of the Show Cause Notice under Section 274 of the Income Tax Act, 1961:
The assessee contended that the penalty was based on assumptions and the unexplained cash deposits could be justified by withdrawals from the same account. The AO rejected this plea, and the CIT(A) upheld the penalty. However, it was noted that the show cause notice under Section 274 did not specify whether the penalty was for furnishing inaccurate particulars or concealing income. Citing the Karnataka High Court's decision in CIT vs. SSA’s Emerald Meadows and Manjunatha Cotton and Ginning Factory, the tribunal found the penalty invalid due to the defective notice. The Supreme Court's dismissal of the revenue's appeal against the Karnataka High Court's decision reinforced this view. The tribunal also referenced similar judgments from the Bombay High Court and ITAT Kolkata, which supported the necessity of specifying the charge in the notice.

Conclusion:
The tribunal concluded that the penalty imposition could not be sustained due to the defective show cause notice, which failed to specify the charge. The appeal of the assessee was allowed, and the penalty was directed to be cancelled.