ITAT deletes penalty on Failure of AO to mention specific limb of section 271(1)(c); Penalty cannot be imposed for mere valuation difference

Penalty U/s. 271(c) Addition for difference on account of method of valuation of Closing Stock without any intention to  to conceal income or furnishing of inaccurate particulars of income not justified

A perusal of the penalty order reveals that the AO has rejected the contentions of the assessee on the basis that the addition made on account of difference in valuation closing stock and wrong claim of expenses is amounts to furnishing of inaccurate particulars of income. However, such difference on account of method of valuation does not lead that there was conscious or intention to conceal the income or furnishing of inaccurate particulars of income, when the assessee has offering income to the tune of Rs. 5.23 Crores. Therefore, we cannot assume that the assessee would indulge in furnishing of inaccurate particulars of income of Rs. 3.31 lacs. We find that the assessee has offered an explanation which is not found to be false and same has been substantiated , therefore, the case of the assessee is not covered by Explanation 1 to section 271(1)(c) of the Act, hence, we are of the considered opinion that penalty under section 271(1)(c) of the Act is not exigible in this case , we therefore, delete the same.

Penalty notice issued under section 271(1)(c) is bad in law as it does not specify by which limb of section 271(1)(c) of the Act under which it has been initiated.

Penalty notices under section 274 read with section 271(1)(c) were issued in the typed format without the striking off either of the two charges i.e. * have concealed the particulars of your income or……………….. or “furnished inaccurate particulars of income “. Thus, the penalty proceedings were initiated without specifying any particular or specific charge against the assessee in either the assessment order or even the penalty notice. It is important to point out that no charge either of “concealment of income” or “furnishing of inaccurate particulars” was made in the assessment orders in all these cases. Thus, we find that the charge against which the penalty is to be levied was not specific. It is now a settled proposition that when the charge itself is not a specific and is vague, penalty cannot be levied. The Hon’ ble Supreme Court in the case of T. Ashok Pai v. CIT (2007) 292 ITR 11 (SC) has laid down that it is a settled proposition that concealment of income and furnishing inaccurate particulars of income carry different connotation.

It is settled proposition that where the charge for levying penalty is not specific, the notice issued under section 271(1)(c) is bad in law as it does not specify by which limb of section 271(1)(c) of the Act under which it has been initiated. When the notice does not specify the charge for levy of penalty, it has been held that the penalty cannot be levied.

Further reliance in the case of CIT v. Manjunatha Cotton Ginning Factory [2013] 359 ITR 565 (Kar)/263 CTR 153/ 93 DTR 111(Karn)[2012] 82 CCH 282 Kar HC, wherein, it was observed in para 59 as under: the practice of the Department sending a printed form where all the ground mentioned in Section 271 are mentioned would not satisfy the requirement of law when the consequences of the assessee not rebutting the initiated presumption is serious in nature and he had to pay penalty from 100% to 300% of the tax liability. As the said provision’s’ have to be held to be trictly construed, notices issued under section 274 should satisfy the grounds, which / he has to meet specifically. Otherwise, principle of natural justice is offended if the show cause is vague. On the basis of such proceedings, no penalty could be imposed on the assessee.” This decision was further followed, by the Hon’ ble Karnataka High Court, in the case of CIT v. SSA’ S Emerald Meadows [I.T.A. No. 380/2015 dated 23^rd November 2015] wherein the Hon’ ble High Court has dismissed the appeal of the Revenue by observing that the Tribunal had allowed the appeal of the assessee holding that the notice issued by the Assessing Officer under section 274 read with section 271(1)(c) of Income Tax Act, 1961 was bad-in-law as it did not specify which limb of Section 271(1)(c) of the Act, the penalty proceedings had been initiated i.e. whether’ for concealment of particulars of income or furnishing of inaccurate particulars. The Tribunal , while allowing the appeal of the assessee, had relied on the decision of the Division Bench of this Court rendered in the case of CIT V. Manjunatha Cotton Ginning Factory [2013] 359 ITR 565. It was further pointed out that SLP filed by the Department against this decision was dismissed by Hon’ ble Supreme Court on 05-08-2016 reported as CIT v. SSA’ S Emerald Meadows [2016] 73 taxmann.com 248 (SC). We may also draw support from the recent decision of coordinated bench Mumbai Tribunal in the case of Meharjee Cassinath Holdings Pvt. Ltd. v. ACIT Circle 4(2) in I.T.A. No. 2555/ Mum/2012 order dtd. 28.04.2017 has also held that the notice issued u/s. 274 by the AO is untenable as it suffers from the vires of non-application of mind. In this case though the AO recorded in the assessment order that penalty proceeding under section 271(1)(c) are to be initiated for furnishing of inaccurate particulars of income, however, in the notice u/s. 274 both the limbs of section 271(1)(c) were reproduced in the preforma notice and the relevant clauses were not struck off. Whereas in the case of the assessee no specific charges were levied in the assessment order as well as penalty show cause notice.

Considering above facts and circumstances and relying judicial precedents as discussed above, we are therefore, of the considered opinion that the show-cause notice under section 274 is not mere empty formality but it has a definite purpose to make the assessee aware of the exact charges against him and the case, which is required to meet out. A clear notice not only a statutory requirement but even for the purpose of principle of audi alteram partem which requires that no one should be condemned unheard, a notice in clear term specifying the clear charges against an assessee is required to be given by an Assessing Officer before imposing a penalty.