2022 (3) TMI 78 - AT - Income Tax

Penalty imposed u/s 271(1)(c) - Disallowance on account of travel expenses - Defective notice u/s 274 - arguments of non striking of irrelevant potion in notice - as submitted that AO has not stated as to whether on the addition of disallowance of travel expenses on which the penalty has been levied was a case of furnishing of inaccurate particulars of income or was a case of concealment of income - HELD THAT - The first step is to record satisfaction and come to a finding while completing the assessment as to whether the assessee has concealed its income or furnished inaccurate particulars of income. AO thereafter has to levy penalty u/s 271(1)(c) of the Act for non-satisfaction of either of the limbs which gets attracted. Thereafter, notice u/s 274 r.w.s 271(1)(c) of the Act is to be issued to the assessee. The aforesaid notice should specifically indicate on what ground penalty is sought to be imposed, whether for concealment of income or for furnishing of inaccurate particulars of income. In the present case, the perusal of assessment order passed by the AO reveals that in the assessment order, no specific finding has been recorded by the AO as to whether it is a case of concealment of income or a case of furnishing of inaccurate particulars of income. Further in the notice dated 26.12.2008 issued u/s 274 r.w.s 271 of the Act, the inapplicable portion or limb of section 271(1)(c) of the Act has not been struck off. It is a settled law that the two limbs i.e. concealment of particulars of income and furnishing of inaccurate particulars of income carry different connotations. Various High Courts have held that AO must indicate in the notice for which of the two limbs he proposes to impose the penalty and for this the notice has to be appropriately marked. If in a printed format of the notice the inapplicable portion is not struck off thus not indicating for which limb the penalty is proposed to be imposed, it would lead to an inference as to non application of mind, thus vitiating imposition of penalty. Penalty u/s 271(1)(c) was not leviable when the notice issued by AO did not specify as to whether the proceedings were initiated for concealment of particulars of income or for furnishing of inaccurate particulars of income - See M/S. SAHARA INDIA LIFE INSURANCE COMPANY, LTD. 2019 (8) TMI 409 - DELHI HIGH COURT - Decided in favour of assessee.

Summary

Issues:
Levy of penalty under Section 271(1)(c) of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Levy of Penalty under Section 271(1)(c) of the Act

The case involved an appeal by the assessee against the order of the Commissioner of Income Tax (Appeals) for the assessment year 2006-07. The Assessing Officer had made various disallowances, including disallowances on trading account, foreign travel, interest capitalized in WIP, depreciation on building, interest capitalized for building construction, and unproved purchases/sales. The CIT (Appeals) deleted the addition on account of purchases but confirmed the rest of the disallowances, leading to a penalty imposed under Section 271(1)(c) of the Act. The main contention raised by the assessee was the lack of proper satisfaction recorded by the Assessing Officer regarding the disallowance of travel expenses and the absence of specific grounds for imposing the penalty. The assessee argued that the penalty was arbitrary, unjust, and not legally tenable. The Assessing Officer did not specify whether the disallowance of travel expenses constituted a case of furnishing inaccurate particulars of income or concealment of income. The assessee relied on the decision of the Hon'ble Supreme Court in CIT Vs. Reliance Petro Products Pvt. Ltd. to support their argument that mere disallowance of expenses would not attract penalty under Section 271(1)(c) of the Act.

Analysis: The Tribunal noted that for the imposition of penalty under Section 271(1)(c) of the Act, the Assessing Officer must be satisfied that the assessee has concealed income or furnished inaccurate particulars of income. The Tribunal highlighted that the AO must record satisfaction and come to a finding regarding either concealment of income or furnishing inaccurate particulars of income before levying the penalty. The notice issued under Section 274 r.w.s 271(1)(c) of the Act must specify the grounds for imposing the penalty, whether for concealment of income or furnishing inaccurate particulars of income. In this case, the AO failed to specify the nature of the penalty in the assessment order or the notice, which was a crucial procedural lapse. The Tribunal referred to the decision of the Hon'ble Delhi High Court in PCIT vs. Sahara India Life Insurance Co. Ltd., which emphasized that a penalty under Section 271(1)(c) was not leviable if the notice did not specify the grounds for initiating penalty proceedings. As the Revenue did not provide any material to challenge the decision of the Hon'ble Delhi High Court, the Tribunal set aside the penalty imposed by the AO, thereby allowing the appeal of the assessee.

Conclusion: The Tribunal concluded that the penalty under Section 271(1)(c) of the Act was not justified due to the procedural irregularity of not specifying the grounds for the penalty in the notice. Following the precedent set by the Hon'ble Delhi High Court, the Tribunal allowed the appeal of the assessee, setting aside the penalty imposed by the Assessing Officer.