2019 (8) TMI 1122 - AT - Income Tax

Penalty u/s 271(1)(c) - defective notice - non specification of charge - HELD THAT - Show cause notice u/s. 271(1)(c) of the Act dated 09.04.2013 for Assessment Year 2009-10 is defective as it does not spell out the grounds on which the penalty is sought to be imposed. The Hon ble Karnataka High Court in the case of CIT vs. SSA s Emerald Meadows 2016 (8) TMI 1145 - SC ORDER wherein following its own decision in the case of CIT vs Manjunatha Cotton and Ginning factory 2013 (7) TMI 620 - KARNATAKA HIGH COURT took a view that imposing of penalty u/s 271(1)(c) of the Act is bad in law and invalid for the reason that the show cause notice u/s 274 of the Act does not specify the charge against the assessee as to whether it is for concealment of particulars of income or furnishing of inaccurate particulars of income. Show cause notice issued in the case on hand under section 271(1)(c) of the Act dated 09.04.2013 for Assessment Year 2009-10 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 under section 271(1)(c) does not strike out the inappropriate words .Imposition of penalty cannot be sustained. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the penalty order under section 271(1)(c) of the Income Tax Act, 1961.
2. Non-service of show-cause notice under section 274(1) of the Act.
3. Lack of precise charge of concealment or furnishing of inaccurate particulars of income.
4. Consideration of material on record.
5. Application of Explanation 1 to section 271(1)(c) of the Act.
6. Penalty in respect of adjustment of interest from bank deposits with capital work in progress.
7. Penalty in respect of transfer pricing adjustments.
8. Aggregation of engineering division transactions with other transactions and their arm's length nature.

Issue-wise Detailed Analysis:

1. Validity of the penalty order under section 271(1)(c) of the Income Tax Act, 1961:
The Tribunal examined whether the penalty order under section 271(1)(c) was valid. The assessee argued that the notice issued was not in accordance with law as it did not specify the exact charge, i.e., whether it was for "furnishing inaccurate particulars of income" or "concealing particulars of income." The Tribunal referred to the binding decision of the Karnataka High Court in the case of Manjunatha Cotton & Ginning Factory (359 ITR 565), which held that such ambiguity in the notice renders the penalty order invalid.

2. Non-service of show-cause notice under section 274(1) of the Act:
The assessee contended that the penalty order was passed without observing the principles of natural justice as the show-cause notice under section 274(1) was not served. The Tribunal noted that the notice did not strike out the irrelevant portion, thus failing to specify the exact charge against the assessee. This defect was considered fatal to the levy of penalty.

3. Lack of precise charge of concealment or furnishing of inaccurate particulars of income:
The Tribunal reiterated that the show-cause notice must clearly state whether the penalty is for "concealment of particulars of income" or "furnishing inaccurate particulars of income." The Tribunal found that the notice in question did not meet this requirement, thereby violating the principles of natural justice.

4. Consideration of material on record:
The assessee argued that the AO and CIT(A) did not consider the material on record while passing the penalty and appellate orders. The Tribunal did not find it necessary to delve into this issue in detail, given that the penalty order was already deemed invalid due to the defective notice.

5. Application of Explanation 1 to section 271(1)(c) of the Act:
The Tribunal examined whether the AO and CIT(A) correctly applied Explanation 1 to section 271(1)(c). The Tribunal noted that the explanation offered by the assessee should be considered bona fide, and if it is, no penalty should be imposed. However, due to the defective notice, the Tribunal did not need to further analyze this aspect.

6. Penalty in respect of adjustment of interest from bank deposits with capital work in progress:
The Tribunal did not specifically address this issue separately, as the primary ground for quashing the penalty was the defective notice under section 271(1)(c).

7. Penalty in respect of transfer pricing adjustments:
Similar to the previous issue, the Tribunal did not need to address this separately due to the overarching defect in the penalty notice.

8. Aggregation of engineering division transactions with other transactions and their arm's length nature:
The Tribunal did not provide a separate analysis for this issue, as the decision to quash the penalty was based on the defective notice.

Conclusion:
The Tribunal concluded that the penalty order under section 271(1)(c) could not be sustained due to the defective show-cause notice, which did not specify the exact charge against the assessee. The penalty was therefore directed to be canceled, and the assessee's appeal for Assessment Year 2009-10 was allowed. The decision emphasized the importance of clear and specific charges in penalty notices to uphold the principles of natural justice.