Assam Hire Purchase Company Pvt. Ltd. Vs DCIT (ITAT Delhi)
Penalty Notice Must Name the Exact Charge: Ambiguous Choice Between Two Limbs Vitiates Proceedings u/s 271(1)(c) & 271AAB
The Delhi Bench of the ITAT has held that the AO must clearly identify the exact statutory limb under which penalty is proposed. A notice which leaves the assessee guessing whether the charge is concealment of income or furnishing inaccurate particulars, or whether penalty u/s 271AAB(1A) is proposed under clause (a) or clause (b), is fundamentally defective. On this basis, the Tribunal quashed penalties imposed under both section 271(1)(c) & section 271AAB.
The consolidated order dealt with four appeals of Assam Hire Purchase Company Pvt. Ltd. Two appeals related to disallowance of salary expenditure, while the remaining appeals concerned penalties arising under sections 271(1)(c) and 271AAB.
A search and seizure action was conducted against the assessee on 20-09-2023. During the search proceedings, one Mr. Mark Ranjan Tucker allegedly stated that he had not provided any services to companies associated with Mr. Deepak Choudhury, who controlled the assessee-company.
Based upon this statement and the surrounding material, the AO examined salary payments made to Ms. Yasmin Paul, who was stated to be working as a financial analyst. For AY 2022-23, salary expenditure of ₹3,60,000 was treated as bogus and disallowed. A similar disallowance of ₹3,00,000 was made for AY 2023-24.
The Department’s allegation was that although payments had initially been made to Ms. Yasmin Paul through banking channels, the corresponding amounts were eventually returned in cash to Mr. Deepak Choudhury. The CIT(A) confirmed the disallowances, observing that the assessee had failed to rebut the original statement relied upon by the AO.
Before the Tribunal, the assessee contended that the statement had subsequently been retracted and consequently lacked evidentiary value. It also argued that the addition had been made in a one-sided manner without affording an effective opportunity to cross-examine the person whose statement had been used against it.
At the same time, the assessee expressed its desire to achieve closure and indicated that it was not interested in prolonging the factual controversy. Its counsel left the matter to the Tribunal’s discretion.
The ITAT observed that a proper decision on the controversy would ordinarily require further factual investigation at the lower level. However, considering the overall circumstances and the assessee’s stated desire to close the dispute, it sustained only 10% of the salary disallowance.
Accordingly, for AY 2022-23, the disallowance of ₹3.60 lakh was restricted to ₹36,000. For AY 2023-24, the disallowance of ₹3 lakh was restricted to ₹30,000. The balance 90% was deleted and the assessee’s quantum appeals were partly allowed.
The more significant portion of the ruling concerned the validity of the penalty notices.
For AY 2014-15, the AO observed that the income reported by the assessee exceeded the income assessed or reassessed immediately before such reassessment by ₹1,55,355. He imposed a penalty of ₹48,005 u/s 271(1)(c), representing the tax allegedly sought to be evaded.
The assessee challenged the penalty on the ground that the notices did not identify the specific charge. The notices stated that the assessee had “concealed particulars of income and furnished inaccurate particulars of such income.” The AO did not strike off the inapplicable portion.
The CIT(A) nevertheless sustained the penalty, reasoning that the ultimate penalty order made it clear that the penalty had been levied for furnishing inaccurate particulars of income.
The ITAT rejected this approach. It held that the assessee must be informed of the precise allegation at the stage of initiation of penalty proceedings, and not merely when the final penalty order is passed. Concealment of income and furnishing inaccurate particulars are distinct defaults carrying different connotations. The AO must apply his mind and specify which default is alleged.
Relying upon the Delhi High Court’s ruling in Chetan Gupta, the Tribunal held that failure to strike off the irrelevant limb rendered the notice ambiguous and the initiation of penalty proceedings bad in law. Consequently, the penalty of ₹48,005 u/s 271(1)(c) was quashed.
The appeal concerning penalty u/s 271AAB involved the disallowance of ₹3 lakh treated as an allegedly bogus expense. The AO imposed penalty at 60% of the alleged undisclosed income. However, the notices did not specify whether penalty was proposed under clause (a) or clause (b) of section 271AAB(1A).
This distinction was material. Clause (a) provides for penalty at 30% where the prescribed conditions are satisfied, whereas clause (b) provides for a more stringent penalty at 60% where those conditions are not fulfilled. Therefore, an assessee receiving a show-cause notice must be told whether the case falls under clause (a) or clause (b) and the factual basis for invoking that clause.
The CIT(A) upheld the penalty by observing that the bogus expenditure had been discovered during assessment proceedings and that the assessee was consequently aware of the applicable charge. The Tribunal disagreed. The assessee’s supposed knowledge of the surrounding facts could not cure the AO’s failure to identify the statutory provision invoked.
Following Ethirajulu Vajravel Kumaran and Giriraj Enterprise, the ITAT held that the AO was legally bound to mention the precise limb of section 271AAB(1A). Since the consequences, rates & conditions under clauses (a) and (b) were different, failure to specify the applicable clause rendered the proceedings fundamentally defective. The penalty u/s 271AAB was accordingly quashed.
Author’s Comments
The ruling reinforces that a penalty notice is not an empty ritual. It is the foundational document which tells the assessee the exact allegation that must be answered. The AO cannot reproduce every possible charge, retain all alternatives and postpone the selection until the final order.
The principle traditionally applied to section 271(1)(c) has now been extended to section 271AAB because its separate clauses also contemplate different conditions and rates of penalty. Awareness of the assessment addition is not equivalent to notice of the precise penalty charge.
The quantum relief, however, is fact-specific. The Tribunal restricted the salary disallowance to 10% largely because the assessee sought closure of the dispute. The more enduring principle is that where the statute provides multiple penalty limbs, the AO must choose first and issue notice accordingly; the assessee cannot be asked to defend itself against an unidentified charge
Cases Discussed
1. Chetan Gupta v. [Income-tax authority]
The ITAT relied on the Delhi High Court ruling concerning section 271(1)(c), where failure to strike off the inapplicable limb in the penalty notice was held to make the notice ambiguous and the penalty proceedings legally defective.
2. Ethirajulu Vajravel Kumaran
The Chennai Bench of the ITAT held that section 271AAB(1A) contains distinct clauses prescribing different penalty rates and conditions. The AO must therefore specify whether penalty is proposed under clause (a) or clause (b).
3. Giriraj Enterprise
The Pune Bench of the ITAT held that failure to identify the applicable limb of section 271AAB vitiates the penalty proceedings. The decision also considered the principle applicable to section 271(1)(c), observing that different statutory limbs carrying different consequences require the specific charge to be communicated.
4. Shri Naveen Goswami
The decision was referred to in Giriraj Enterprise for the proposition that failure to pinpoint the relevant limb of section 271AAB vitiates the penalty proceedings.
FULL TEXT OF THE ORDER OF ITAT DELHI
1. These are a batch of four appeals pertaining to the same assessee. Since there is a discernable commonality of issues, hence, all these four appeals are being disposed of through a single order.
2. (i) ITA 2997: pertaining to AY 2022-23, arises from order dated 15.01.2026, passed u/s 250 of the Income Tax Act, 1961 (hereafter as “the Act”), by Ld. CIT(A)-24, New Delhi.
(ii) ITA 6441: pertains to AY 2023-24 arises from order dated 10.04.2026, passed u/s 250 of the Act, by Ld. CIT(A)-24, Delhi.
(iii) ITA 6443: pertains to AY 2023-24, arises from order dated 16.04.2026, passed by Ld. CIT(A)-24, Delhi. This order arises from penalty levied u/s 271AAB of the Act.
(iv) ITA 6442: pertains to AY 2014-15, arises from order dated 16.04.2026, passed u/s 250 of the Act by Ld. CIT(A)-24, Delhi. This order arises from penalty levied u/s 271(1)(c) of the Act.
2.1 It is proposed that ITA 2997 & ITA 6441 will be dealt with jointly since the issues are common and for that purpose ITA 2997 will be the lead case.
2.2 ITAs 643 & 6442 will be taken up jointly since they pertain to penalties levied.
3. ITA 2997:
A search and seizure action was conducted on the assessee on 20.09.2023. During the course of search proceedings one Mr. Mark Ranjan Tucker gave a statement that he was not providing any service to any company associated with Shri Deepak Choudhury. Thereafter, based on this statement the Ld. AO disallowed an amount of Rs.3,60,000/-, being salary given to one Yasmin Paul, ostensibly for working as a Financial Analyst with the assessee. The Ld. AO held this to be a bogus expense and thereafter disallowed the same.
3.1 The assessee approached the Ld. CIT(A) where also he could not succeed on the basis of finding given on pages 13 to 15 of the impugned order, that the assessee was not able to rebut the original statement of Mr. Tucker that while the payments were made to Yasmin Paul through cheque but eventually cash was handed back to Mr. Deepak Choudhury, who was controlling the assessee-company.
3.2 The aggrieved assessee has approached the ITAT with grounds challenging the addition and has also averred that the impugned addition has been made in a one-sided manner without any opportunity of cross examination being made available to the assessee.
3.3 The Ld. AR argued on the basis of facts recorded by the Ld. AO and Ld. CIT(A) and stated that the statement on the basis of which the impugned addition has been made was retracted and would not have any sort of evidentiary value. However, it was also prayed that the assessee desires closure in the matter and is not interested in contesting the addition any further. The Ld.AR left it to the wisdom of the Bench to appropriately consider the case on merits.
3.4 The Ld. DR relied on the orders of the authorities below.
3.5 We have considered the averments of Ld. AR/DR and have gone through the records before us. We find that this is a facts-based matter and normally better fact finding would be required at lower levels for enabling a fair view in the matter. However, considering the totality of facts and circumstances of the case and the averments of the Ld. AR regarding the assessee’s desire for closing this matter, we deem it fit to sustain 10% of the addition at Rs.36,000/-, and grant consequential relief.
3.6 In the result, this appeal is partly allowed.
4. ITA 6441:
In this case, under similar circumstances as ensuing in ITA 2997, the addition of Rs.3,00,000/- has been made on account of disallowing payment made to Yasmin Paul for the same reason as in AY 2022-23.
Considering the decision rendered for AY 2022-23, we deem it fit to confirm an addition of 10% amounting to Rs.30,000/-, and granting consequential relief.
4.1 In the result, this appeal is partly allowed.
5. ITA 6442:
This matter pertains to a penalty levied u/s 271(1)(c) of the Act. The Ld. AO, has recorded a finding in his order dated 23.12.2025 that the assessee reported income greater than the income assessed or reassessed immediately before such reassessment, by an amount of Rs.1,55,355/-. Thereafter, the Ld. AO imposed a penalty of Rs.48,005/-, being the amount of tax sought to be evaded.
5.1 The assessee approached the CIT(A) with grounds challenging this penalty and also tendered a ground agitating the point that the specific limb of the section was not specified in the notice. The Ld. CIT(A) affirmed the action of Ld. AO and on the issue of non-specification of the exact limb of the section, he has given a finding on pages 14 to 15 of the impugned order that the AO has levied the penalty for furnishing inaccurate particulars of income. On merit also the penalty has been confirmed.
5.2 The aggrieved assessee has approached the ITAT with grounds challenging the penalty levied. Especially there is a challenge about not specifying the limb of the section under which the penalty was proposed to be levied.
5.3 Before us the Ld. AR requested that the assumption of jurisdiction could be taken up first and thereafter, if required, the case could be dealt with on merits. It was argued that the notice issued by the Ld.AO has been reproduced on page 5 of the impugned order and in the said notice dated 06.05.2025, and a second notice dated 03.09.2025, it was pointed out that in the very first paragraph itself it is mentioned that “you have concealed particulars of income and furnished inaccurate particulars of such income”. The Ld. AR relied on a number of authorities to canvass the point that the striking of the limb of section not proposed to be utilized, was a mandatory condition of law. Since this has not been done therefore the consequential penalty order was invalid in the eyes of law.
5.4 The Ld. DR relied on the impugned order and reiterated the finding of the Ld. CIT(A) that the penalty has been levied for furnishing inaccurate particulars of income and since this was done in an unambiguous manner hence there was no error in the impugned penalty order.
5.5 We have considered the rival submissions and have gone through the records before us. It is now a well settled principle of law that during the initiation of penalty proceedings u/s 271(1)(c) of the Act, the Ld.AO has to spell out exactly whether the assessee was proposed to be penalized for furnishing inaccurate particulars of income or for concealment of the same. The Ld. AO is supposed to “strike of” the provision out of the two which he does not propose to refer to. There are a number of coordinate bench decisions and even High Court decisions on this proposition and we can do no better than to cite the case of Chetan Gupta reported in 181 taxmann.com 946 (Del.), order dated 15.12.2025. The head notes from this case clinch the issue in favour of the assessee as under: “A perusal of the notice issued to the assessee would reveal that notice was not confined to the ground that the assessee has concealed the income with respect to the addition made. It also incorporate ‘or furnished inaccurate particulars of such income’. In other words, the notice does not state the specific ground on which notice has been issued nor a tick (?) has been put on the specific ground on which the notice was required to be issued. [Para 7]” Accordingly, there is no hesitation in holding that the initiation of proceedings were bad in law and therefore the penalty proceedings are also untenable, deserving to be quashed.
5.6 In the result, this appeal is allowed.
6. ITA 6443:
In this case allegedly bogus expenses of Rs.3,00,000/- were disallowed and added. Thereafter, the Ld.AO issued penalty notices dated 27.03.2025 and 26.07.2025. It is seen that the assessee did not respond to the notices issued and thereafter penalty was levied at 60% of the allegedly undisclosed income of Rs.3,00,000/-.
6.1 The assessee approached the CIT(A) with his grievance and challenged the penalty levied on him. It was also raised as a ground of appeal that the exact limb of the section which was purportedly violated by the assessee was not specified in the notice u/s 274 r.w.s. 271AAB of the Act. However, the Ld. CIT(A) dismissed this claim on the basis of finding on pages 14 & 15 of the impugned order by holding that the allegedly bogus expenses were unearthed during assessment proceedings only and therefore the assessee was aware as to which limb of the said section was applicable on him.
6.2 The assessee has now approached the ITAT with grounds challenging the penalty levied and also challenging the fact that the exact limb of the section was not specified in the notice issued.
6.3 Before us the Ld. AR again requested that the issue of not specifying the limb of the section which was proposed to be utilized for levying the penalty, needed to be taken up before proceeding any further in the matter. It was argued that the notice for the impugned penalty was extracted on pages 4 & 5 of the impugned order. It was pointed out that in neither of these two notices dated 27.03.2025 and 25.07.2025 was the exact limb of the penalty specified. The Ld. AR read out the first paragraph of the notice dated 25.07.2025 for the benefit of the Bench as under: –
“Whereas in the course of proceedings before me for the assessment year 2023-24, it appears to me that a search was conducted in your case and you were found to have undisclosed income”.
The Ld. AR stated that the penalty notice was legally defective and therefore the consequential penalty was invalid in the eyes of law. 6.4 The Ld. DR relied on the orders of the authorities below.
6.5 We have considered the rival submissions and have gone through the records before us, including the notice issued by the Ld. AO for levying the impugned penalty. In this case, we can do no better than to rely on two coordinate bench orders as follows:
i. In the case of Ethirajulu Vajravel Kumaran reported in 180 taxmann.com 11 (Chennai – Trib.) [2025], order dated 21.10.2025, the following paragraphs are relevant:
“104. We observe that the provisions contained in Section 271AAB(1A) of the Act are structured into two distinct limbs. As per the said sub-section, the imposition of penalty is contemplated either under clause (a) or clause (b). Clause (a) prescribes a penalty at the rate of 30% of the undisclosed income, subject to the fulfilment of specific statutory conditions enumerated therein. Conversely, clause (b) provides for a more stringent penalty at the rate of 60% of the undisclosed income, which becomes applicable in the event of non-fulfilment of the conditions stipulated under clause (a). It necessarily follows that the AO, while initiating penalty proceedings u/s 271AAB(1A) of the Act, is legally bound to clearly specify, in the show-cause notice, the precise limb i.e., whether clause (a) or clause (b), under which the proposed penalty is sought to be levied. Such specification is essential, as the consequences of each clause differ both in terms of rate and the underlying conditions of applicability.
105. In the present case, however, the AO has failed to discharge this mandatory obligation, inasmuch as the show- cause notice dated 27.03.2022 issued to the assessee does not delineate whether the penalty is proposed under clause (a) or under clause (b) of Section 271AAB(1A) of the Act. This omission, in our considered view, renders the penalty proceedings fundamentally defective.”
ii. In the case of Giriraj Enterprise reported in 176 taxmann.com 870 (Pune – Trib.), order dated 24.07.2025 [2025], the following paragraphs are relevant:
“27. We find the Delhi Bench of the Tribunal in the case of Shri Naveen Goswami (supra) has also quashed the penalty proceedings initiated u/s 271AAB of the Act on the ground that the failure on the part of the Assessing Officer in not pinpointing the relevant limb of section 271AAB(a) to (c) vitiates the entire proceedings. Therefore, in absence of non-mentioning of the relevant limb u/s 271AAB(a) to (c), the penalty proceedings initiated by the Assessing Officer are not in accordance with law and therefore, the same are liable to be quashed.
28. So far as the order of the Ld. CIT(A) upholding the penalty notice by distinguishing the decision in the case of Mohd. Farhan A. Sheikh (supra) is concerned, we are of the considered opinion that the Ld.CIT(A) is not justified in doing so. Even though the said decision was in context of section 271(1)(c) of the Act, however, the Hon’ble Bombay High Court has observed that the two limbs prescribed u/s 271(1)(c) carry different connotations and therefore, it is important for the Assessing Officer to convey the specific charge while issuing notice u/s 271(1)(c) of the Act. We find the provisions of section 271AAB(1A) have also got two parts. As per the said sub-section, the penalty is either leviable under clause (a) or (b). Under clause (a) the penalty is leviable @ 30% of the undisclosed income and under clause (b) the penalty is leviable @ 60% of the undisclosed income. Further, under clause (a), there are certain conditions which are required to be fulfilled and in case the said conditions are not met, in that event, penalty is leviable under clause (b). Therefore, the Ld. CIT(A) in our opinion was not justified in distinguishing the decision of the Hon’ble Bombay High Court in the case of Mohd. Farhan A. Sheikh (supra). Even otherwise also, since the Hon’ble Madras High Court has taken a view directly on this issue and no contrary decision of any other Hon’ble High Court was brought to our notice, therefore, the decision of the Hon’ble Madras High Court will be binding on the Revenue. We, therefore, hold that the failure on the part of the Assessing Officer to mention the specific limb which is applicable to the case of the assessee for levy of penalty u/s 271AAB(1A) vitiates the entire proceedings. We, therefore, quash the penalty proceedings initiated by the Assessing Officer and partly sustained by the Ld. CIT(A).”
6.6 Accordingly, the impugned penalty becomes untenable in the eyes of law considering that the exact limb of the section on which the penalty is supposed to be levied, has not been specified.
7. In the result, this appeal is allowed.
Order pronounced in the open court on 15.09.2026
