Notice imposing penalty u/s. 270A without specify the specific charge is invalid: ITAT Chennai

Melekandy Puthalath Farook Vs ACIT (ITAT Chennai)

ITAT Chennai held that notice u/s 274 r.w.s.270A of the Act was not a valid notice for the reason that the AO did not specify the satisfaction as to whether assessee had either ‘under reported the income or ‘misreported the income’. Thus, imposition of penalty not justified.

Facts- The assessee sold certain property situated at Kottivakkam for Rs.172 Lacs. The property was purchased on 20-05-2004 for Rs.23 Lacs. However, Long Term Capital Gains (LTCG) was not offered to tax. The Ld. AO computed LTCG of Rs.112.06 Lacs and framed the assessment. Consequently, in the assessment order, Ld. AO initiated penalty u/s 270A for misreporting of income.

The imposition of penalty was confirmed by CIT(A). Being aggrieved, the present appeal is filed.

Conclusion- Held that notice u/s 274 r.w.s.270A of the Act was not a valid notice for the reason that the AO did not specify the satisfaction as to whether assessee had either ‘under reported the income or ‘misreported the income’. In the absence of proper notice, AO could not impose penalty since it was clear violation of principles of natural justice. Issuing a vague notice without specifying the exact charge under which limb the proposed penalty proceedings was being initiated, would vitiate the entire proceedings because the assessee was not given an opportunity to explain its case on specific charge. Therefore, the penalty levied on the basis of invalid or vague notice was held to be void-ab-initio. Reliance was placed on various judicial decisions to support the conclusion.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

Aggrieved by confirmation of penalty u/s 270A for Rs.54.10 Lacs for Assessment Year (AY) 2017-18, the assessee is in further appeal before us. The impugned order has been passed by learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [CIT(A)] on 22-05-2024 in the matter of impugned penalty levied by Ld. Assessing Officer [AO] in its order dated 26-07­2021.

2. The Ld. AR advanced legal arguments and submitted that in the absence of any specific charge in the show-cause notice, the penalty is bad-in-law. Reliance has been placed on certain judicial decisions to support the same. The same include the decision of Chennai Tribunal in the case of M/s Enrica Enterprises Pvt. Ltd. (ITA Nos. 1166 & 1167/Chny/2023 dated 06-03-2024). A copy of the same has been placed on record. The Ld. Sr. DR, drawing attention to the facts of the case, supported levy of penalty. Having heard rival submissions and upon perusal of case records, our adjudication would be as under.

3. Upon perusal of assessment order dated 18-12-2019, it could be seen that the assessee sold certain property situated at Kottivakkam for Rs.172 Lacs. The property was purchased on 20-05-2004 for Rs.23 Lacs. However, Long Term Capital Gains (LTCG) was not offered to tax. The Ld. AO computed LTCG of Rs.112.06 Lacs and framed the assessment. Consequently, in the assessment order, Ld. AO initiated penalty u/s 270A for misreporting of income.

4. During penalty proceedings, a show-cause notice was issued to the assessee u/s 274 r.w.s. 270A on 18-12-2019, a copy of which is on record. The Ld. AO initiated penalty by observing as under: –

Whereas in the course of proceedings before me for the Assessment Year 2017-18, it appears to me under-reporting / misreporting of income.

Another notice was issued on 20-05-2021, wherein a reference was made to earlier notice dated 18-12-2019 and the assessee was show-caused as to why order imposing penalty u/s 270A should not be passed.

5. Finally, in the penalty order. Ld. AO held that it was a case of under-reporting of income in consequence of misreporting of income. Therefore, it was a fit case for levy of penalty u/s 270A(9)(a). Finally, Ld. AO imposed penalty of Rs.54.10 Lacs.

6. During appellate proceedings, the assessee, inter-alia, submitted that penalty was not mandatory. The two charges viz. under reporting of income and misreporting of income are two different charges. Both expressions could not be used interchangeably. The Ld. AO should arrive at clear charge before levy of penalty. The same was not case since Ld. AO had not struck-off applicable limb in the show-cause notice and the notice has been issued in a routine manner. Reference was made to the decision of Tribunal in Enrica Enterprises Pvt. Ltd. (supra) in support of the same.

7. The Ld. CIT(A), in para 5.5, held that misreporting of income is always in consequent of under-reporting and no other meaning could be derived from the statute. The Ld. AO was justified in his action in invoking the provisions of Sec. 270A(9). The assessee’s case clearly falls under clause (a) and (e) of Sec.270A(9). Therefore, the penalty was confirmed against which the assessee is in further appeal before us.

Our findings and Adjudication

8. The first and foremost argument of Ld. AR is that no specific charge has been framed against the assessee in first show-cause notice dated 18-12-2019 and therefore, in such a case, penalty proceedings would be bad-in-law. We find that coordinate bench of Tribunal in the cited case of Enrica Enterprises Pvt. Ltd. (supra) adjudicated similar legal ground as raised by the assessee, as under: –

12. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The AO levied penalty u/s.270A of the Act, for both the assessment years on the ground that the assessee has ‘under reporting of income and under reporting as a consequence of misreporting of income’. The AO invoked provisions of clauses (c) & (d) of Sec. 270A(9) of the Act, which deals with claim of expenditure not substantiated by any evidence and recording of any false entry in the books of accounts. The AO has arrived at the above conclusion on the basis of findings in the assessment order, where income admitted by the assessee in the return of income filed in response to notice u/s.153A of the Act, has been accepted. In the revised return filed u/s.153A of the Act, the assessee has admitted taxable income of Rs.2,55,35,485/- which is higher than the last return filed u/s.139(1) of the Act. According to the AO, the assessee has ‘under reporting of income and under reporting as a consequence of misreporting of income’ in respect of marketing expenses, which is clearly evident from information gathered during the course of search coupled with statement recorded from the Director of the assessee company and also enquiries conducted with suppliers of ‘gift articles’ during the course of assessment proceedings. The AO further observed that had search was not taken place u/s.132 of the Act, ‘under reporting of income and under reporting as a consequence of misreporting of income’ would not have come to light. Therefore, the AO opined that it is a clear case of ‘under reporting of income and under reporting as a consequence of misreporting of income’ which attracts provisions of Sec.270A(9) of the Act, and thus, levied penalty for both the assessment years for ‘under reporting of income and under reporting as a consequence of misreporting of income’.

13. The fact with regard to seizure of huge unaccounted cash during the course of search on 6­12-1018 was not disputed. It is also an admitted fact that the assessee company has offered additional income of Rs.16.39 Crs. & Rs.23.62 Crs. towards disallowance of estimated marketing expenses @ 1/3rd of total expenses incurred under the head ‘marketing expenses’ for both the assessment years. The cash seized during the course of search was telescoped against additional income offered by the assessee towards estimated disallowance of marketing expenses. The assessee has filed return of income in response to notice u/s.153A of the Act, for both the assessment years and offered additional income admitted during the course of search in respect of disallowance of marketing expenses and paid taxes. The AO has also accepted return of income filed by the assessee in response to notice u/s.153A of the Act, without any further addition and also recorded a clear finding in the assessment order that after going through the circumstances in its entirety, the income offered by the assessee, including estimated disallowance of portion of marketing expenses, is found to be in order and accepted. In other words, there is no separate addition towards marketing expenses, but the assessment has been completed by accepting additional income offered by the assessee towards estimated disallowance of marketing expenses for both the assessment years.

14. In light of above factual back ground, if we examine the order passed by the AO imposing penalty u/s.270A(9) of the Act, it is necessary to refer to provisions of Sec.270A of the Act, and the reasons given by the AO to impose penalty u/s.270A(9) of the Act. The provisions of Sec.270A of the Act, deals with penalty for ‘under reporting of income and under reporting as a consequence of misreporting of income’. Sub-section 1 to 6 of Sec.270A of the Act, deals with ‘under reporting of income and under reporting as a consequence of misreporting of income’, has been specified in sub-section 7 of Sec.270A of the Act. Sub-section 8 & 9 deals with ‘under reporting of income and under reporting as a consequence of misreporting of income’ thereof by any person and such cases of ‘misreporting of income’ referred to in sub-sec.8 has been specified in sub sec.9 of Sec.270A of the Act. From the above, it is manifestly clear that provisions of Sec.270A of the Act, has two limbs or two charges for which penalty can be levied. The first limb or first charge is ‘under reporting of income and such under reporting of income’ has been specifically referred to in sub­section 2 to 6 of Sec.270A of the Act. In the present case, these provisions are not relevant, because, the AO has not invoked under reporting of income. The second limb or charge is ‘under reporting of income as consequence of misreporting of income’ thereof and in the present case, the AO invoked second limb of provisions of Sec.270A of the Act. Admittedly, these provisions have been substituted by the Finance Act, 2016 w.e.f.01.04.2017 and applicable for AY 2017-18 onwards. Prior to insertion of Sec.270A of the Act, a similar provision was existed in the statue by way of sec.271(1)(c) of the Act, for concealment of particulars of income or furnishing of inaccurate particulars of income. Provisions of Sec.271(1)(c) of the Act, was also having two limbs or two charges i.e. i) for concealment of particular of income and ii) furnishing of inaccurate particulars of income. If you go by provisions of Sec. 271(1)(c) of the Act & Sec.270A of the Act, and wordings therein both provisions are similar and para materia to each other. Although, the term ‘tax evasion’ has been redefined by way of ‘under reporting of income and under reporting as a consequence of misreporting of income’ but it is synonymous to concealment of particular of income or furnishing of inaccurate particulars of income. Therefore, it is necessary to examine whether penalty proceedings u/s.270A of the Act, is mandatory in nature and further, such penalty can be invoked without providing an opportunity to the assessee as required u/s.274 of the Act.

15. The order imposing penalty u/s.270A of the Act, is an appealable order u/s.246A of the Act before the First Appellate Authority. If penalty u/s.270A of the Act, has been mandatory, there have not been any provision of appeal u/s.246A of the Act. Since, the order imposing penalty Sec.270A of the Act, is an appealable order, then, it cannot be said that penalty u/s.270A of the Act, is not mandatory in nature. Since, penalty u/s.270A of the Act, is not mandatory in nature, the AO is required to give an opportunity to the assessee to show cause ‘as to why’ penalty should not be levied in terms of sec.274 of the Act. Admittedly, the AO issued notice u/s.274 r.w.s.270A of the Act. Sec.274 of the Act deals with the procedure for levy of penalty, wherein, it directs that no order imposing penalty shall be made unless the assessee has been heard or has been given a reasonable opportunity of hearing. Thus, it is evident that the penalty u/s.270A of the Act, cannot be imposed unless the assessee has given a reasonable opportunity and the assessee is being heard. Once, the AO is bound to act to hear the assessee and give reasonable opportunity to explain its case, then, there is no mandatory requirement of imposing penalty, because the opportunity of hearing is not a mere formality, but it is to adhere to the principle of natural justice. Therefore, in our considered view, the penalty u/s.270A of the Act, is not mandatory and it is based on the facts and merits placed before the AO.

16. Having said so, let us come back to notice issued u/s.274 r.w.s.270A of the Act. We have gone through notice u/s 274 r.w.s. 270A of the Act dated 26.07.2021, wherein, the AO has stated that ‘under reporting of income and under reporting as a consequence of misreporting of income’. From the notice, it is not discernable whether penalty has been initiated for ‘under reporting of income’ as per section 270A (1) to (6) or ‘misreporting of income’ as per section 8 & 9 of Sec.270A of the Act. The AO issued a notice in a routine manner without specifying under which clause of Sec.270A of the Act, the assessee is liable for penalty. Though, the AO while passing the impugned order has imposed penalty u/s.270A(9) of the Act, but no such ground was specified in the show cause notice dated 26.07.2021. In our considered view, notice u/s.274 r.w.s.270A of the Act, is not a valid notice for the reason that the AO did not specify the satisfaction as to whether assessee had either ‘under reporting of income’ or ‘misreporting of income’. In absence of proper notice, which is mandatory, the AO cannot impose penalty, because, it is a clear violation of principles of natural justice, because, issuing a vague notice without specifying the charge under which limb the proposed penalty proceedings is initiated, would vitiate the entire proceedings, because, the assessee was not given an opportunity to explain its case on specific charge. Therefore, in our considered view, penalty levied on the basis of invalid or vague notice is invalid and void ab initio.

17. The concepts of ‘under reporting of income’ and ‘misreporting of income’ are two different charges with very clear boundaries. As we have already discussed in earlier part of this order, sub­section 2 to 6 of sec Sec.270A of the Act, deals with concept of ‘under reporting of income’ and for this, separate rate of penalty is provided. Sub-sec.9 deals with concept of ‘misreporting of income’ and for this, separate rate of penalty is provided. Therefore, ‘under reporting of income’ and ‘misreporting of income’ shall not be used interchangeably nor are they synonymous, but each operates under strict definition and do not overlap each other. Since, ‘under reporting of income’ and ‘misreporting of income’ are two concepts and separate charges, the AO before initiating penalty proceedings should specifically arrive at a satisfaction to the effect that, for which charge, he has initiated penalty Sec.270A of the Act. In the present case, if you go by the assessment order passed by the AO, there is no satisfaction in respect of initiation of penalty proceedings u/s.270A of the Act, whether it is for ‘under reporting of income and under reporting as a consequence of misreporting of income’ thereof which is clearly evident from the assessment order passed by the AO, where, the AO simply referred to initiation of penalty proceedings u/s.270A of the Act. Further, said lapse is even continued while issuing show cause notice u/s.274 r.w.s.270A of the Act, where, the AO simply specified ‘under reporting of income and under reporting as a consequence of misreporting of income’, without specifying for which charge the assessee is directed to pay penalty u/s.270A of the Act. There is no whisper as to which limb of Sec.270A of the Act, is attracted and how the ingredients of sub-sec.9 of Sec.270A of the Act are specified. In absence of such particulars, the mere reference to the word ‘misreporting of income’ in the assessment order or in the show cause notice makes the impugned order manifestly arbitrarily. Therefore, we are of the considered view that show cause notice issued by the AO u/s.274 r.w.s.270A of the Act, without specifying the charge under which penalty is proposed u/s.270A of the Act, is a clear case of non-application of mind at the time of issuing show cause notice and thus, in absence of specific charge against the assessee, the assessee is not in a position to counter the show cause notice issued by the AO as well as cogent reply to the show cause notice. In view of vague notice without any whisper as to which limb of section 270A of the Act is attracted and how ingredients of sub-section 9 is specified, initiation of penalty u/s.270A of the Act for ‘misreporting of income’ is not only erroneous, but also arbitrary and thus, penalty proceedings cannot be sustained. This legal position is strengthened by the decision of the Hon’ble Delhi High Court in the case of Prem Brothers Infrastructure LLP (supra), where the Hon’ble Delhi High Court by following the earlier decision in the case of Schneider Electric South East Asia (HQ) Pte Ltd. v. ACIT, International Taxation in WP (C) No.5111 of 2022 dated 28.03.2022, held that in view of vague notice without any whisper as to which limb of section 270A of the Act is attracted and how ingredients of sub-section 9 is specified, initiation of penalty u/s.270A of the Act for ‘misreporting of income’ is not only erroneous, but also arbitrary and bereft of any reason and consequently, penalty order passed by the AO, cannot be sustained. The relevant findings of the Hon’ble Delhi High Court are as under:

6. This court in the case of Schneider Electric South East Asia (HQ) PTE Ltd. Vs. ACIT, International Taxation Circle 3(1)(2), New Delhi and Ors. W.P.(C) No. 5111/2022 vide judgment dated 28.03.2022 observed as under:-

“6. Having perused the impugned order dated 9th March, 2022, this Court is of the view that the Respondents’ action of denying the benefit of immunity on the ground that the penalty was initiated under Section 270A of the Act for misreporting of income is not only erroneous but also arbitrary and bereft of any W.P.(C) 7092/2022 Page 4 of 6 reason as in the penalty notice the Respondents have failed to specify the limb – “underreporting” or “misreporting” of income, under which the penalty proceedings had been initiated.

7. This Court also finds that there is not even a whisper as to which limb of Section 270A of the Act is attracted and how the ingredient of sub-section (9) of Section 270A is satisfied. In the absence of such particulars, the mere reference to the word “misreporting” by the Respondents in the assessment order to deny immunity from imposition of penalty and prosecution makes the impugned order manifestly arbitrary.

8. This Court is of the opinion that the entire edifice of the assessment order framed by Respondent No.1 was actually voluntary computation of income filed by the Petitioner to buy peace and avoid litigation, which fact has been duly noted and accepted in the assessment order as well and consequently, there is no question of any misreporting.

9.  This Court is further of the view that the impugned action of Respondent No.1 is contrary to the avowed Legislative intent of Section 270AA of the Act to encourage/incentivize a taxpayer to (i) fast-track settlement of issue, (ii) recover tax demand; and (iii) reduce protracted litigation. 10. Consequently, the impugned order dated 09th W.P.(C) 7092/2022 Page 5 of 6 March, 2022 passed by Respondent No.1 under Section 270AA (4) of the Act is set aside and Respondent No.1 is directed to grant immunity under Section 270AA of the Act to the Petitioner.”

7. This Court is of the opinion that the only addition in the assessment order framed by Respondent No.1 is in respect of disallowance under section 14A of the Act. The Petitioner has made a disallowance of Rs.3,20,14,010/- which was recomputed by the Assessing Officer at Rs.6,82,45,759/-. Thus, this is a case where the amount of underreporting of income is consequent to increase in the disallowance voluntarily estimated by the assessee.

This court is conscious of the fact that there can be cases where underreporting of income may result in misreporting of income, however, in peculiar facts of the present case, the underreporting allegedly done by the assessee cannot amount to misreporting as the assessee had furnished all the details of the transactions relating to disallowance made under Section 14A of the Act and the AO as well as assessee has used the same details to arrive at different conclusions i.e. differing quantum of disallowances under Section 14A of the Act. This by no stretch of imagination can be held to be ‘misreporting’.

8. This Court also finds that there is not even a whisper as to which limb of Section 270A of the Act is attracted and how the ingredient of sub-section (9) of Section 270A is satisfied. In the absence of such particulars, the mere reference to the word “misreporting” by the Respondents in the penalty order to deny immunity from imposition of penalty and prosecution makes the impugned order manifestly arbitrary. W.P.(C)

9. Consequently, the impugned penalty order dated 28th March, 2022 passed by Respondent No.1 under Section 270A of the Act is quashed and Respondent No.1 is directed to grant immunity under Section 270AA of the Act to the Petitioner.

18. At this stage, it is relevant to consider the decision of Hon’ble Madras High Court in the case of Babuji Jacob v. ITO reported in [2021] 430 ITR 259 (Madras), where the Hon’ble High Court has dealt with the issue of show cause notice u/s.274 r.w.s.271(1)(c) of the Act, and after considering its earlier decision in the case of Sudaram Finance Ltd. v. ACIT reported in [2018] 93 com 250, held that issuing a printed form of notice without striking inapplicable portion in the notice and not charging the assessee for particular evasion vitiates the entire penalty proceedings, including the order passed by the AO imposing penalty u/s.271(1)(c) of the Act. A similar view has been taken by the Hon’ble Karnataka High Court in the case of CIT v. Manjunatha Cotton & Ginning Factory reported in [2013] 359 ITR 565, where the issue of show cause notice and consequent penalty proceedings has been dealt in detail and held that penalty proceedings consequent to vague and invalid notice becomes invalid and liable to be quashed. The Hon’ble Supreme Court has upheld the decision of the Hon’ble Karnataka High Court in the case of CIT v. SSA’s Emerald Meadows reported in [2016] 73 taxmann.com 241. From the ratio of above case laws, it is undisputedly clear that satisfaction of the AO should be discernable from the show cause notice issued by the AO u/s.274 r.w.s.270A of the Act. In absence of any particular charge for which, the assessee is directed to pay penalty u/s 270A of the Act, entire penalty proceedings becomes invalid and liable to be quashed.

19. In this view of the matter and by following the ratio laid down by the Hon’ble Supreme Court and various High Courts referred to hereinabove, we are of the considered view that show cause notice issued by the AO u/s.274 r.w.s.270A of the Act, is vogue, non specific to charge and thus, is illegal and liable to be quashed. Thus, we quashed the order passed by the AO imposing penalty u/s.270A(9) of the Act.

20. Coming back to merits of penalty levied u/s 270A of the Act. The assessment proceedings and penalty proceedings are two separate proceedings. The findings in the assessment proceedings cannot be considered as conclusive and final for the purpose of imposing penalty. The Hon’ble Supreme Court in the case of CIT v. Anwar Ali, reported in [1970] 76 ITR 696 (SC) observed that the findings in assessment proceedings may constitute evidence in the penalty proceedings, but it does not follow that penalty is mandatory whenever addition or disallowance is made. Further, the jurisdictional High Court in the case of CIT v. Gem Granites reported in [2013] 86 CCH 160 (Madras), observed that merely because, the assessment proceedings namely the quantum assessment having been confirmed, cannot automatically lead to the conclusion that the penalty proceedings are justified. In other words, there should be an independent finding from the AO regarding under reporting of income or misreporting of income in the penalty proceedings which alone can lead to conclusion that it is a fit case for levy of penalty.

The bench, in para-14, held that sub-section (1) to (6) of Sec.270A of the Act deals with under reporting of income. Under reporting as a consequence of ‘misreporting of income’ has been specified in sub­section 7 of Sec.270A. Sub-section 8 & 9 deals with ‘under reporting of income’ and ‘under reporting as a consequence of misreporting of income’ thereof by any person and such cases of ‘misreporting of income’ referred to in sub-sec. (8) has been specified in sub-sec.(9) of Sec.270A of the Act. It is clear that the provisions of Sec.270A of the Act have two limbs or two charges for which penalty could be levied. The first limb is ‘under reporting of income’ and such ‘under reporting of income’ has been specifically referred to in sub-section (2) to (6) of Sec.270A of the Act. The second limb is ‘under reporting of income’ as a consequence of ‘misreporting of income’ thereof. Prior to insertion of Sec.270A of the Act, a similar provision existed in the statue by way of Sec. 271(1)(c) of the Act which had similar two limbs i.e., concealment of particulars of income and furnishing of inaccurate particulars of income. The said provisions also required framing of specific charge against the assessee. Further, the penalty u/s 270A was not mandatory in nature and therefore, Ld. AO was required to issue show-cause notice before levy of penalty. No penalty could be levied unless the assessee had been given a reasonable opportunity of hearing to defend its case. Upon perusal of show-cause notice, the bench observed that from the notice, it was not discernable whether penalty was initiated for ‘under reporting of income’ as per section 270A sub-sections (1) to (6) or ‘misreporting of income’ as per sub-section 8 & 9 of Sec.270A of the Act. The AO issued the notice in a routine manner without specifying under which clause of Sec.270A of the Act, the assessee was liable for penalty. Though Ld. AO while passing the impugned order had imposed penalty u/s. 270A(9) of the Act but no such ground was specified in the show-cause notice dated 26.07.2021. Therefore, notice u/s 274 r.w.s.270A of the Act was not a valid notice for the reason that the AO did not specify the satisfaction as to whether assessee had either ‘under reported the income or ‘misreported the income’. In the absence of proper notice, AO could not impose penalty since it was clear violation of principles of natural justice. Issuing a vague notice without specifying the exact charge under which limb the proposed penalty proceedings was being initiated, would vitiate the entire proceedings because the assessee was not given an opportunity to explain its case on specific charge. Therefore, the penalty levied on the basis of invalid or vague notice was held to be void-ab-initio. Reliance was placed on various judicial decisions to support the conclusion.

9. We find that the appeal before us has similar facts. In the assessment order, Ld. AO has not specified the exact charge against the assessee but initiated penalty proceedings simplicitor. In the show-cause notice issued to the assessee u/s 274 r.w.s. 270A on 18-12-2019, Ld. AO initiated penalty on both the limbs i.e., under-reporting as well as misreporting of income. Finally, in the penalty order, Ld. AO held that it was a case of under-reporting of income in consequence of misreporting of income. Therefore, it was a fit case for levy of penalty u/s 270A(9)(a). We find that no specific charge has been framed against the assessee in the show-cause notice dated 18-12-2019. Respectfully following the aforesaid decision of coordinate bench, we would hold that in such a case, the impugned penalty would be bad-in-law. Therefore, we direct Ld. AO to delete the same. Delving into the merits has been rendered infructuous.

10. The appeal stands partly allowed in terms of our above order.

Order pronounced on 5^th November, 2024