2021 (10) TMI 824 - AT - Income Tax

Penalty u/s 271(1)(c) - defective notice u/s 274 - allegation of non specification of charge or non striking off irrelevant portion - HELD THAT - DR fairly accepted the Jurisdictional High Court decision in Mr. Mohd. Farhan A. Shaikh Vs DCIT 2021 (3) TMI 608 - BOMBAY HIGH COURT and the fact that Assessing Officer has not applied his mind on the issue of penalty notice in non striking of charge, whether the penalty is levied for furnishing in accurate particulars of income or concealment of income which is clearly evident on record. Accordingly, we quash the penalty notice and allow the ground of cross objections in favour of the assessee.

Summary

Issues Involved:
1. Validity of Penalty Notice under Section 271(1)(c) of the Income Tax Act, 1961.
2. Interpretation of Reimbursement of Expenses as Fees for Technical Services.
3. Application of Judicial Precedents regarding Penalty Proceedings.

Issue-wise Detailed Analysis:

1. Validity of Penalty Notice under Section 271(1)(c) of the Income Tax Act, 1961:
The primary issue raised by the assessee in the Cross Objection was the validity of the penalty notice. The assessee contended that the penalty notice issued by the Assessing Officer (AO) did not specify whether the penalty proceedings were initiated for "concealment of particulars of income" or for "furnishing inaccurate particulars of income." This lack of specificity was argued to render the penalty proceedings void-ab initio. The Tribunal noted that the AO's notice was indeed defective as it failed to strike off the irrelevant limb, thereby not making the charge clear to the assessee. The Tribunal referred to the judgment of the Hon’ble Karnataka High Court in the case of CIT vs. M/s. SSA’s Emerald Meadows, which held that such ambiguity in the penalty notice invalidates the penalty proceedings. The Tribunal also cited the Hon’ble Supreme Court's dismissal of the Revenue's Special Leave Petition against this judgment, reinforcing the principle that the penalty notice must clearly specify the charge.

2. Interpretation of Reimbursement of Expenses as Fees for Technical Services:
The assessee, a company incorporated in Hong Kong and part of the CLSA Group, provided regional and operational support services, including back-office support, to its group companies. The dispute arose over the treatment of reimbursements amounting to ?41,45,88,932/- received by the assessee for costs incurred in procuring services from other service providers. The AO treated these reimbursements as fees for technical services, thereby including them in the total income liable to tax in India. The assessee argued that these reimbursements were on a pure cost-to-cost basis without any profit element and hence should not be considered as income chargeable to tax. The CIT(A) partly allowed the penalty appeal, observing that there was a genuine dispute on the character of the income and that the assessee had not artificially split the receipts to avoid tax. The Tribunal upheld this view, noting that the split between taxable and non-taxable receipts was genuine and not intended to evade taxes.

3. Application of Judicial Precedents regarding Penalty Proceedings:
The Tribunal extensively relied on judicial precedents to adjudicate the issues. It referred to the Hon’ble Karnataka High Court's decision in CIT vs. Manjunatha Cotton & Ginning Factory, which held that the penalty notice must clearly indicate the charge under Section 271(1)(c). The Tribunal also cited the Hon’ble Jurisdictional High Court's decision in the case of Mohd. Farhan A. Shaikh v. DCIT, which emphasized that a defect in the penalty notice cannot be cured by referring to the assessment order. The Tribunal concluded that the AO's failure to specify the charge in the penalty notice indicated non-application of mind, rendering the penalty order unsustainable.

Conclusion:
The Tribunal quashed the penalty notice due to its defective nature and allowed the assessee's cross-objection. Consequently, the Revenue's appeal was dismissed as infructuous. The decision underscored the importance of clarity and specificity in penalty notices under Section 271(1)(c) and reaffirmed the principle that any ambiguity must be resolved in favor of the assessee. The order was pronounced on 07.09.2021.