2019 (3) TMI 1031 - AT - Income Tax

Penalty u/s. 271(1)(c) - Non striking off one of the limbs and without specifying the specific charge in the notice initiating penalty proceedings for inaccurate particulars of income in the Assessment Order - defective notice - non specification of charge - HELD THAT - An identical situation has been considered by the Coordinate Bench in Meherjee Cassinath Holdings v. ACIT 2017 (5) TMI 904 - ITAT MUMBAI as to whether the action of the AO in initiating 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 in the Assessment Order and in the case of CIT v. Samson Perinchery 2017 (1) TMI 1292 - BOMBAY HIGH COURT and also various decisions held that action of the Assessing Officer in non-striking off relevant clause in the notice shows that the charge being made against the assessee is not firm therefore proceedings suffer from non-compliance with principles of natural justice in as much as the Assessing Officer himself is not sure of the charge and the assessee is not made aware as to which of the two limbs of section 271(1)(c) he has to respond. We hold that the notice issued by the AO u/s. 274 r.w.s 271(1)(c) is on account of non-application of mind and therefore the penalty proceedings initiated are bad in law. Thus, we direct the Assessing Officer to delete the penalty levied U/s. 271(1)(c). - Decided in favour of assessee.

Issues Involved:
1. Enhancement of penalty under Section 271(1)(c) of the Income Tax Act.
2. Rejection of Books of Accounts and estimation of income.
3. Legality of initiation of penalty proceedings.
4. Non-application of mind by the Assessing Officer in penalty proceedings.
5. Bonafide claim of loss by the assessee.
6. Support of the Department for the penalty levied.
7. Judicial precedents and principles of natural justice.

Detailed Analysis:

1. Enhancement of Penalty Under Section 271(1)(c) of the Income Tax Act:
The appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeals) enhancing the penalty under Section 271(1)(c) and directing the Assessing Officer to levy penalty on a loss of ?4,04,27,000. The penalty was enhanced based on the disallowed loss by the Assessing Officer.

2. Rejection of Books of Accounts and Estimation of Income:
The Assessing Officer rejected the Books of Accounts and estimated the income from purchases at 10% due to the non-furnishing of purchase details by the assessee. However, the Tribunal, considering the assessee's submissions, estimated the income at NIL, as the purchases recorded in earlier years were accepted in proceedings under Section 143(3).

3. Legality of Initiation of Penalty Proceedings:
The assessee's counsel argued that the initiation of penalty proceedings was bad in law because the Assessing Officer did not specify the limb (either concealment of income or furnishing inaccurate particulars) on which the penalty was proposed. The notice issued under Section 274 read with Section 271 did not strike off the inappropriate limb, leading to ambiguity.

4. Non-application of Mind by the Assessing Officer in Penalty Proceedings:
The counsel for the assessee submitted that there was a complete non-application of mind by the Assessing Officer in initiating penalty proceedings, making the levy of penalty illegal, void, and bad in law. The penalty notice's failure to strike off the irrelevant portion was cited as evidence of this non-application of mind.

5. Bonafide Claim of Loss by the Assessee:
The assessee argued that the loss declared, which was not allowed by the Assessing Officer, was never set off in subsequent years, indicating no intention to claim an excess loss. This was presented as proof of the assessee's bona fide claim of the loss.

6. Support of the Department for the Penalty Levied:
The Department's representative supported the orders of the authorities below, stating that the income was estimated because the assessee failed to furnish details. The penalty was levied because of this failure, and the Commissioner of Income Tax (Appeals) rightly enhanced the penalty on the disallowed loss.

7. Judicial Precedents and Principles of Natural Justice:
The Tribunal referred to several judicial precedents where non-application of mind by the Assessing Officer and failure to strike off the irrelevant portion in the penalty notice were held to make the penalty proceedings bad in law. The Tribunal cited decisions from various cases, including Meherjee Cassinath Holdings v. ACIT and CIT v. Samson Perinchery, to support the assessee's contentions. These cases established that the penalty proceedings must comply with the principles of natural justice, and the charge against the assessee must be clear and firm.

Conclusion:
The Tribunal concluded that the penalty proceedings initiated by the Assessing Officer were bad in law due to non-application of mind and failure to strike off the irrelevant portion in the penalty notice. Consequently, the penalty levied under Section 271(1)(c) was directed to be deleted. The Tribunal did not address other arguments raised by the assessee as they became academic following the preliminary finding. The appeal of the assessee was allowed, and the order was pronounced in the open court on March 15, 2019.

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