Case Law Details
DCIT Vs Honeywell Automation India Ltd. (ITAT Pune)
Defective 271(1)(c) Notice Fatal -Penalty Notices Without Specific Charge Invalid -General Format SCN Not Sustainable
Pune Tribunal considered the validity of penalty u/s 271(1)(c) imposed through a standard-format notice without striking off the inapplicable limb.
Assessee, engaged in automation systems, was assessed u/s 143(3) r.w.s. 144C(13) wherein additions were made for TP adjustment, denial of 10A/10AA relief, interest on refund & mismatch with Form 26AS. Penalty proceedings u/s 271(1)(c) were initiated through notices dated 30.01.2015 & 17.03.2020, both in general format mentioning “concealment of income & furnishing inaccurate particulars” without specifying the exact charge. AO finally levied 100% penalty on sustained additions.
CIT(A) deleted penalty, holding that Assessee had disclosed material facts & differences were only due to opinion/adjustments. Revenue appealed.
Before Tribunal, Assessee raised cross objection arguing that penalty notices were defective & invalid, relying on Bombay HC ruling in Mohd. Farhan A. Shaikh v. DCIT (2021) 280 Taxman 334 and SC dismissal in CIT v. SSA’s Emerald Meadows (2016). Tribunal noted that both original & subsequent SCNs failed to strike off inapplicable limb, making initiation itself void. It also cited SC ruling in CIT (LTU) v. SBI (2024) 302 Taxman 365, which reaffirmed Manjunatha Cotton & Ginning Factory principles. Accordingly, Tribunal upheld deletion of penalty, dismissed Revenue’s appeal & partly allowed Assessee’s CO by quashing penalty ab initio.
FULL TEXT OF THE ORDER OF ITAT PUNE
The captioned appeal by the Revenue and Cross Objection thereagainst by the assessee are directed against DIN & Order ITBA/APL/S/250/2024-25/1067969754(1) dt. 26/08/2024 passed by Commissioner of Income Tax Appeals-13, Pune, [‘Ld. CIT(A)] u/s 250 of the Income-tax Act, 1961 [‘the Act’] which in turn arisen out of order of penalty dt. 30/03/2022 passed u/s 271(1)(c) of the Act by Dy. Commissioner of Income Tax, Circle-11, Pune [‘Ld. AO’] anent to assessment year 2010-11 [‘AY’].
2. This adjudication seeks to answer the validity of penalty proceedings qua general notice issued u/s 274 r.w.s. 271(1)(c) of the Act with both the limbs and without specifying applicable limb for which penalty sought to have initiated.
3. Tersely stated facts of the case are that;
3.1 The assessee is a limited company engaged in the business of process control and management systems, filed its original return on 28/09/2010 declaring taxable income of 93,21,75,320/- which was processed u/s 143(1) of the Act. Subsequently the assessee company revised its taxable income to 91,65,28,920/-, which was subjected to scrutiny and consequential order u/s 143(3) r.w.s. 144C(13) of the Act was passed whereby four additions were made viz; (1) disallowance of management service fees (TP adjustment) for sum of 16,97,34,348/- (2) denial of tax exemption claimed u/s 10A(7) & 10AA(9) of the Act for sum of 53,64,06,922/-, (3) addition of interest on refund received 34,93,040/- and (4) variation of income as per 26AS for sum of 18,56,131/-. In consequence vide notice dt. 30/01/2015 a penalty proceedings on all issues were initiated u/s 271(1)(c) r.w.s. 274 of the Act.
3.2 On first two additions/disallowances the matter travelled up to Tribunal, wherein by the order dt. 19/07/2019 passed in ITA 287/PUN/2015 the Ld. Co-ordinate bench vacated the denial of tax exemption/holiday claimed u/s 10A(7) & 10AA(9) r.w.s. 80IA(10) of the Act and allowed the ground relating to TP adjustment for statistical purposes. Pursuant to the direction of the Tribunal, the Ld. AO passed order giving effect [‘OGE’] dt. 16/03/2020 whereby addition on account of interest on refund and variation of income as per 26AS continued but addition on account of TP adjustment finally restricted to 3,39,46,870/-.
3.3 The penalty proceedings as initiated by original assessment order, vide show cause notice dt. 17/03/2020 were resumed and in relation to three additions viz; (1) TP adjustment (2) interest on refund and (3) income variation as per 26AS the assessee was called upon to showcase as to why penalty for concealing the particulars of income and furnishing inaccurate particulars of income should not be levied. Holding assessee’s explanation unsatisfactory & unconvincing, the Ld. AO levied the penalty equal to 100% of tax sought to be evaded in relation to former three sustained additions/disallowances.
3.4 Aggrieved assessee contested the imposed penalty in an appeal u/s 246A of the Act which was allowed on merits. Aggrieved by the relief granted in first appeal, the Revenue has set this case to reverse the relief on the following grounds;
1. Whether on the facts and circumstances of the cases the Ld. CIT(A) was right in allowing the appeal of the assessee holding that the appellant company has produced all the material facts before the AO and TPO as well and on the basis of the direction of the Hon’ble ITAT, the addition was made which is mere a change of opinion between the appellant and the authority without appreciating the facts that the AO had levied the penalty stating that there was variance found in the TP adjustment shown by the assessee and arrived at by the AO, and that after set-aside by the Tribunal.
2. Whether on the facts and circumstance of the case the Ld CIT(A) was right in allowing the appeal of the assessee holding that the amount of discrepancy of Rs. 18,56,131/- was merely 0.016% of the total turnover ignoring the fact stated by the AO that variation, whether small or big, is a variation and attracts penalty provisions of section 271(1)(c) of the Act.
3. Whether on the facts and circumstance of the case the Ld CIT(A) was right in allowing the appeal of the assessee holding that the amount of discrepancy of Rs. 18,56,131/- was merely 0.016% of the total turnover, without brining as on record whether the said income was reflected in the taxable income of the assessee for any AY or not.”
3.5 Per contra, against the captioned appeal of the Revenue the respondent assessee filed cross objection with following grounds;
1. On the facts and circumstances of the case, the Hon’ble CIT(A) has rightly held that there is no furnishing of inaccurate particulars of income as alleged by the AO in the assessment and penalty orders;
2. The Ld. AO erred in not striking-off the irrelevant limb / charge and initiated penalty by reproducing both the limbs of sec 271(1)(c) of the Act in the notice u/s 274 dated 31 January 2015.
3. On the facts and circumstance of the case and in law, the order dated 16.03.2020 passed by learned AO wherein penalty u/s 271(1)(c) was initiated is bad in law, consequently the initiation of penalty along with the penalty proceedings are bad in law and deserves to be quashed
4. The Ld. AO erred in appreciating that variance in the TP adjustment shown by the Assessee and arrived by the AO is on account of mere disallowance due to difference of opinion with regard to the arm’s length price;
5. The Ld. AO erred in not appreciating that no penalty shall be levied on the variance of 0.0116% of the revenue in comparison with Form 26AS and hence, has erred in objecting to the order of the Hon’ble CIT(A).
4. During the course of hearing, both the rival parties commonly solidified the facts of the case and argued to substantiate as to how each of them deserve relief in present cross appeal. Though at the peroration of hearing both the parties relied on catena of judicial precedents, the respondent assessee however heavily relied on the decision of Hon’ble Jurisdictional High Court in ‘Mohd. Farhan A. Shaikh Vs DCIT’ [2021, 280 Taxman 334 (Bom)] and contended that, the impugned penalty proceedings u/s 271(1)(c) r.w.s. 274 of the Act were initiated by issuance of show cause notice was one without specifying the applicable charge or limb, therefore such initiation of proceedings qua notice at the very outset ab-initio void and thus bad in law. It was further contended that, as against four additions/disallowances made in the original assessment order, three additions/disallowances are finally sustained in OGE. The penalty proceedings initially initiated vide SCN 30/01/2015 which did failed to specify the applicable charge against each of the additions/disallowance. Indeed such SCN was general and issued in a standard format without striking-off inapplicable portion. Similarly the case with the fresh SCN dt. 17/03/2020 issued pursuant to OGE in resuming the erstwhile penalty proceedings initiated u/s 271(1)(c) of the Act. Thus the initiation by a contravention of a mandatory condition or requirement for a communication to be valid communication is fatal, requiring with no further proof.
5. Heard rival party’s submission and arguments and subject to rule 18 of ITAT-Rules, 1963 perused the material placed on record and considered the facts in the light of settled position of law and note that, there is much less dispute between rival parties that, initial show cause notice issued by the Ld. AO to assume the jurisdiction for levy of penalty u/s 271(1)(c) of the Act was of standard format. The said notice was indisputably issued without striking off inapplicable limb or charge. It is also an admitted facts that, the notice issued subsequent to passing of OGE did make mention of both charges and limbs. Thus two notices issued at two different stages viz; one immediately upon culmination of assessment and another after passing OGE pursuant to second appellate proceedings, did not clearly communicate specific charge alleged for imposition of penalty as required or mandated by judicial precedents and provisions of section 271(1)(c) r.w.s. 274 of the Act.
6. In view of the former irrefutable facts, we see no reasons to deviate from the settled position of law laid down by the Hon’ble Jurisdictional High Court of Bombay in the case of Mohd. Farhan A. Shaikh (supra), wherein their Hon’ble lordships while deciding the validity penalty proceedings initiated by a notice issued u/s 271(1)(c) r.w.s. 274 of the Act wherein inapplicable limb or charge was not struck off, their Hon’ble lordships have categorically held that;
“a contravention of a mandatory condition or requirement for a communication to be valid communication is fatal, with no further proof.
That said, even if the notice contains no caveat that the inapplicable portion be deleted; it is in the interest of fairness and justice that the notice must be precise. It should give no room for ambiguity.”
(Emphasis supplied)
7. We are also mindful to quote here that, similar issue of validity of imposition of penalty where show cause notice was issued in standard format without sticking off irrelevant charge/limb was travelled to floor’s of Hon’ble Apex Court on many occasion and recently in the case of ‘CIT(LTU) Vs State Bank of India’ [2024, 302 Taxman 365(SC)] wherein while dismissing the special leave petition of the Revenue, their Hon’ble Lordships vide para 2 categorically laid down that;
‘2. Having regard to the peculiar facts of this case inasmuch as the High Court has followed CIT v. Manjunatha Cotton and Ginning Factory [2013] 35 taxmann.com 250/218 Taxman 423 359 ITR 565 (Karn), we are not inclined to interfere in the matter. The reason being that the aforesaid judgment in Manjunatha Cotton and Ginning Factory case (supra) has been relied upon by the High Court in CIT v. SSA’s Emerald Meadows [2016] 73 taxmann.com 241 (Karnataka) and the said judgment has been sustained by this Court in CIT v. SSA’S Emerald Meadows [2016] 73 taxmann.com 248/242 Taxman 180 (SC)/[SLP (Civil)….CC No.11485/2016 vide order dated 05.08.2016] inasmuch as the said special leave petition was dismissed.’
(Emphasis supplied)
8. The appellant revenue could hardly dislodge the applicability of former judicial precedents (supra) in the present case. In view thereof, we respectfully following the judicial precedent (supra) delete the impugned penalty and allow the Ground No. 2 raised in CO by the respondent assessee. In view of the former adjudication/decision, all other arguments raised & submissions made in relation to main appeal by the appellant revenue and by the respondent assessee in relation to other grounds of CO are thus rendered academic.
9. The appeal of the Revenue in result stands DISMISSED and the cross objection of the assessee stands PARTLY ALLOWED in aforetasted terms.
U/r 34 of ITAT Rules, 1963 the order pronounced in open court on date mentioned hereinbefore.
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