2025 (1) TMI 90 - AT - Income Tax

Levy of penalty u/s. 271AAB - allegation of defective notice - non mentioning of clear charge/default - additional income offered pursuant to the search treated as undisclosed income - whether non-mentioning of specific limb in the penalty show cause notice for which penalty proceeding u/s. 271AAB of the Act is initiated on the assessee would become fatal to the penalty proceeding per se? - HELD THAT - From the notices it is very clear that the Ld. AO had not mentioned the specific limb on which the penalty proceedings u/s. 271AAB is sought to be initiated by him. The ratio laid down in decision of R. Elangovan 2021 (4) TMI 1131 - MADRAS HIGH COURT squarely applies to the case before us wherein held AO should point out to the assessee as to under which of the three clauses, he chooses to proceed against the assessee so as to enable the assessee to give an effective reply. Since the same has not been mentioned, the assessee has been denied reasonable opportunity to put forth their submissions.notice is absolutely vague and none of the irrelevant portions had been struck off nor the relevant portions had been marked or indicated. Hence, the Tribunal is right in observing that the penalty could not have been levied based on such defective notice and more particularly, when the assessee has been strenuously canvassing the jurisdictional issue from the inception. Decided in favour of assessee.

1. ISSUES PRESENTED and CONSIDERED

The core legal question addressed in this judgment is whether the Commissioner of Income Tax (Appeals) was justified in confirming the levy of penalty under Section 271AAB of the Income Tax Act, 1961, given the facts and circumstances of the case. Specifically, the issue revolves around whether the failure to specify the specific limb of Section 271AAB under which penalty proceedings were initiated renders the penalty proceedings invalid.

2. ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents:

Section 271AAB of the Income Tax Act, 1961, deals with the imposition of penalty in cases involving undisclosed income detected during search operations. The section outlines different limbs under which penalties can be levied, each carrying different implications and penalty rates. The legal precedent set by the Madras High Court in the case of PCIT Vs. R. Elangovan establishes that the failure to specify the limb of Section 271AAB in the penalty notice is a fatal defect that vitiates the proceedings.

Court's Interpretation and Reasoning:

The court emphasized that the penalty notice must clearly specify under which limb of Section 271AAB the proceedings are initiated. This requirement is crucial to provide the assessee with a reasonable opportunity to respond and defend against the penalty. The court found that the penalty notices issued to the assessee were vague and did not specify the applicable limb, thereby denying the assessee the opportunity to effectively contest the penalty.

Key Evidence and Findings:

The court noted that the penalty notices dated 09.02.2018 and 02.03.2020 did not mention the specific limb of Section 271AAB under which the penalty was being imposed. This omission was deemed a significant procedural defect, aligning with the precedent set by the Madras High Court.

Application of Law to Facts:

Applying the legal principles from the Madras High Court's decision, the court concluded that the penalty proceedings against the assessee were invalid due to the defective notices. The absence of a specified limb in the penalty notice was a procedural lapse that undermined the validity of the entire penalty process.

Treatment of Competing Arguments:

The court considered the arguments from the Revenue, which relied on the Allahabad High Court's decision in PCIT Vs. Sandeep Chandak. However, the court distinguished the facts of the present case from those in the Allahabad High Court's decision, noting that the latter involved different circumstances. The court favored the precedent that was more beneficial to the assessee, as guided by the Supreme Court's principle of adopting the construction favorable to the taxpayer.

Conclusions:

The court concluded that the penalty proceedings were vitiated due to the defective penalty notices. Consequently, the penalty imposed under Section 271AAB was canceled, and the appeal of the assessee was allowed.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning:

"The provisions of the Act have clearly laid down the procedure to be followed and adhered to while imposing the penalty... Since the same has not been mentioned, the assessee has been denied reasonable opportunity to put forth their submissions."

Core Principles Established:

The judgment reinforces the principle that penalty notices under Section 271AAB must specify the applicable limb to ensure the assessee can adequately respond. Failure to do so constitutes a procedural defect that invalidates the penalty proceedings.

Final Determinations on Each Issue:

The court determined that the penalty proceedings were invalid due to the defective notices, resulting in the cancellation of the penalty imposed. The appeal of the assessee was allowed, setting aside the penalty confirmed by the Commissioner of Income Tax (Appeals).

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