Initiation of penalty proceedings u/s 271(1)(c) without specifying basis makes such proceedings void -ab-initio

Brief of the case:

• The ITAT Bangalore in the case of Shri E. Krishnappa vs. ITO held that initiation of penalty proceedings u/s 271(1)(c) without mentioning its basis i.e. concealment of income or furnishing inaccurate particulars or both would make the proceedings illegal because AO’s satisfaction of the existence of the grounds mentioned in Section 271(1)(c) is a mandatory for initiation of proceedings.
• The additional ground can be admitted by the tribunal if it challenges the very legality of penalty proceedings as the same being non-curable defect.

Facts of the case:

• The assessee filed his return of income for Assessment Year 2007-08 on 30.7.2007 declaring income of Rs.2,22,430. For Assessment Years 2008-09 and 2009-10, the assessee filed his returns of income on 8.1.2010 declaring income of Rs.81,96,000 and Rs.27,45,805 respectively. A survey under Section 133A of the Income Tax Act, 1961 (in short ‘the Act’) was conducted at the assessee’s premises on 11.11.2009.
• The assessee along with one Sri M.N. Reddy developed a layout of sites known as ‘Singapore Layout’ at Vidyaranyapura, Bangalore and sold the sites jointly. Consequent to the survey under Section 133A of the Act the assessee declared his share of income from the joint venture at ‘Singapore Layout’.
• For AY 2007-08 , 2008-09 and 2009-10 the assessee filed a revised return of income declaring an income of Rs. 84,56,800, Rs. 81,96,000 ,Rs. 27,96,500 respectively for the AY 2007-08,2008-09,2009-10.
• Subsequently, the case of assessee was reopened u/s 148 and AO passed an order to levy penalty @100% of the income from joint venture disclosed in revised return filed after survey on the ground that the assessee had concealed particulars of his income and furnished inaccurate particulars of income.
• The same were also confirmed by CIT(A). Aggrieved assessee is in appeal before ITAT Bangalore.

Contention of the Assessee:

• The learned counsel for the assessee contended that the additional grounds raised with regard to the validity of the notices issued under Section 274 read with sec 271 of the Act is a jurisdictional issue. It was contended that the issue regarding the validity of the defective notices issued under Section 274 read with sec 271 of the Act is a jurisdictional matter, which is not a curable defect as per the statute.

• It was also submitted that the show cause notices issued under Section 274 read with sec 271 do not spell out the charge against the assessee; i.e. as to whether the assessee is guilty of having concealed particulars of income or of having furnished inaccurate particulars of income.
• Therefore, the AO did not disclose the basis of initiation of penalty proceedings in show cause notice which is the mandatorily procedural requirement, non-compliance had made the proceedings void-ab-initio.
  

Contention of the Revenue:

• The learned counsel for the department submitted that since the assessee had raised the additional grounds before the Tribunal for the first time and not before the authorities below, the said additional grounds be remanded to the file of the learned CIT (Appeals) for consideration. Reliance was placed on the decision of the Hon’ble Madhya Pradesh High Court in the case of CIT vs. Tolaram Hassomal.

Held by ITAT Bangalore:

• ITAT noted that the assessee raised additional grounds i.e. grounds other than those raised before CIT(A). Under these grounds assessee brought to the notice of tribunal that the show cause notices issued to the assessee under Section 274 read with sec 271 of the Act, the Assessing Officer has not spelt out as to whether the assessee has concealed the particulars of his income or furnished inaccurate particulars of his income.
• Such additional grounds raised by assessee are purely question of law and no facts are required to be investigated other than the information and details available in the records of the Department and most importantly by way of these grounds the very validity of the notices has been challenged.
• Tribunal thus , concluded that such ground raised by assessee were admitable by placing reliance on the decision of Hon’ble High Court of Karnataka in the case of CIT vs Manjunatha Cotton & Ginning Factory reported in 359 ITR 565.
• In the present case AO has not specified under which limb of the penalty u/s.271 (1)(c) of the Act is to be levied; i.e. whether the penalty proceedings are being initiated for concealment of particulars of income or for furnishing of inaccurate particulars of income.
• The same issue has been dealt with by the Hon’ble Karnataka HC in the case of Manjunatha Cotton & Ginning Factory wherein the court held that notice issued under Section 274 should satisfy the grounds on which penalty proceedings to be initiated falling to do so would offend principles of natural justice as the show cause notice is vague. On the basis of such proceedings, no penalty could be imposed on the assessee.
• Relying on the aforesaid judgement tribunal ordered to delete the penalty and accordingly allowed the assessee’s appeal.