Case Law Details
Mahendra Brothers Vs DCIT (ITAT Mumbai)
Mumbai ITAT deleted penalties levied u/s 271(1)(c) across multiple years, holding that failure to specify the exact charge (concealment vs. inaccurate particulars) in notice u/s 274 renders penalty proceedings invalid.
The Tribunal observed:
- The AO issued standard/omnibus notices without striking off irrelevant limb, making the charge ambiguous
- Such defective notice violates principles laid down by Bombay HC (Full Bench) in Mohd. Farhan A. Shaikh
- Penalty proceedings are independent and must clearly inform the assessee of the specific allegation
Additionally:
- The quantum addition itself was based on estimation (commission income), further weakening the case for penalty
The ITAT held that:
- Vague notice = invalid jurisdiction for penalty
- Defect cannot be cured by assessment order or subsequent proceedings
Accordingly, penalties for all years were deleted in full, and appeals were allowed, reaffirming strict compliance with procedural requirements for penalty initiation.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. These are three appeals preferred by the same Assessee challenging three separate Orders passed by the Commissioner of Income Tax(Appeals)–48, Mumbai confirming the penalty levied by the Assessing Officer under Section 271(1)(c) of the Act for the Assessment Years 2006-2007, 2007-2008 and 2010-2011. The appeals involving identical issues were heard together and are, therefore, being disposed off by way of common order.
2. We would take-up appeal for the Assessment Year 2006-2007 as the lead matter.
ITA No. 103/MUM/2026 (Assessment Year 2006-2007)
3. The present appeal preferred by the Assessee is directed against the Order, dated 04/09/2025, passed by the Commissioner of Income Tax (Appeals)-48, Mumbai [hereinafter referred to as the ‘CIT(A)’] whereby Learned CIT(A) had dismissed the appeal against the Penalty Order, dated 31/03/2017, passed under Section 271(1)(c) of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’], for the Assessment Year 2006-2007. The delay of 37 days in filing the appeal in condoned accepting the explanation offered by the Assessee and therefore, the application seeking condonation of delay is allowed.
4. The Assessee has raised following grounds of appeal:
“1. On the facts and in the circumstances of the case and in law, the Hon’ble CIT(A) erred in upholding the order passed u/s 271(1)(c) of the Act by the LD AO without appreciating that the order passed is defective and bad in law in the absence of specifying clear limb whether the penalty proceedings were initiated for concealment of particulars of income or furnishing of incorrect particulars of such income and the reasons assigned for doing so are wrong and contrary to the provisions of the Income Tax Act and Rules made there under.
2. On the facts and in the circumstances of the case and in law, the Hon’ble CIT(A) erred in confirming the penalty of Rs 2,12,378 /- u/s 271(1)(c) of the Act without appreciating the fact that penalty cannot be levied when income is determined on estimate basis and the reasons assigned for doing so are wrong and contrary to the provisions of the Income Tax Act and Rules made there under.”
5. The relevant facts in brief are that the penalty amounting to INR.2,12,378/- was levied upon the Assessee under Section 271(1)(c) of the Act for the Assessment Year 2006-2007 vide Penalty Order, dated 31/03/2017. The appeal preferred by the Assessee challenging the aforesaid levy of penalty was dismissed by the Learned CIT(A) vide Order dated 04/09/2025 which has been impugned by way of present appeal on the grounds reproduced in Paragraph 4 above.
6. We have heard the Learned Departmental Representative and have taken into consideration the written submissions and documents forming part of the paper-book placed on record by the Authorised Representative of the Assessee.
7. On perusal of grounds raised by the Assessee in the present appeal against we find that Assessee has challenged the levy of penalty on two grounds. First contention of the Assessee is that penalty under Section 271(1)(c) of the Act was levied in respect of addition made by the Assessing Officer for commission income. Since the said commission income was determined by the Assessing Officer on estimate basis, no penalty would have been levied under Section 271(1)(c) of the Act. Secondly, the notice issued under Section 274 of the Act was bad in law as the Assessing Officer had failed to invoke specific limb of Section 271(1)(c) of the Act and therefore, has failed to confront the Assessee with the charge against the Assessee. Reliance in this regard was placed upon the judgment of Full Bench of the Hon’ble Bombay High Court in the case of Mohd. Farhan A Shaikh Vs. DCIT, Central Circle-1, Belgaum: 434 ITR 1 (Bombay).
8. On perusal of record, it emerges that in the quantum proceedings, the Assessing Officer had, vide Assessment Order, dated 26/03/2014, made addition of (a)INR.1,73,480/- holding the same to be commission income for providing bogus sale bills and (b)INR.5,34,446/- holding the same to be indirect expenses related to bogus sales. Since the First Appellate authority declined to grant any relief to the Assessee, the issue travelled to the Tribunal. Vide Common Order, dated 04/09/2019, the Tribunal granted substantial relief to the Assessee as the disallowance made in respect of indirect expenses was deleted. Further, the Tribunal reduced the rate of commission income from 2% to 0.5%. Meanwhile, penalty proceedings were initiated in the case of the Assessee. On perusal of notice, dated 26/03/2014, issued under 274 read with Section 271(1)(c) of the Act we find that the said notice does not inform the Assessee about the charge against the Assessee – whether penalty under Section 271(1)(c) of the Act was sought to be levied for concealment of particulars of income or for furnishing inaccurate particulars of income. The notice has been issued without deleting or striking off the inapplicable part. The Full Bench of the Hon’ble Bombay High Court in the case Mohd. Farhan A Shaikh Vs DCIT (supra) has held that mere defect in the notice – not striking off the irrelevant matter would vitiate the penalty proceedings. The relevant extract of the aforesaid judgment reads as under:
“Answers:
Question No. 1: If the assessment order clearly records satisfaction for imposing penalty on one or the other, or both grounds mentioned in Section 271(1)(c), does a mere defect in the notice—not striking off the irrelevant matter—vitiate the penalty proceedings?
181. It does.The primary burden lies on the Revenue. In the assessment proceedings, it forms an opinion, prima facie or otherwise, to launch penalty proceedings against the Appellant. But that translates into action only through the statutory notice under section 271(1)(c), read with section 274 of IT Act. True, the assessment proceedings form the basis for the penalty proceedings, but they are not composite proceedings to draw strength from each other. Nor can each cure the other’s defect. A penalty proceeding is a corollary; nevertheless, it must stand on its own. These proceedings culminate under a different statutory scheme that remains distinct from the assessment proceedings. Therefore, the Appellant must be informed of the grounds of the penalty proceedings only through statutory notice. An omnibus notice suffers from the vice of vagueness.”(Emphasis supplied)
9. In view of the above, we find merit in the contention advance on behalf of the Assessee that penalty levied Section 271(1)(c) of the Act cannot be sustained as per the judgment of the Full Bench decision of the Hon’ble jurisdictional High Court in case of Mohd. Farhan A Shaikh (supra). Thus, penalty proceedings stand vitiated and accordingly, penalty of INR.2,12,378/- levied under Section 271(1)(c) of the Act is deleted. Ground No.1 raised by the Assessee is allowed and Ground No.2 raised by the Assessee is dismissed as having been rendered infructuous.
10. In the result, in terms of paragraph 9 above, the appeal preferred by the Assessee is allowed.
ITA No. 104/MUM/2026 [Assessment Year 2007-2008] & ITA No. 105/MUM/2026 [Assessment Year 2010-2011]
11. Now we would take up appeals preferred by the Assessee for the Assessment Year 2007-2008 & 2010-2011 which are directed against two separate Orders, each dated 04/09/2025, passed by the Learned CIT(A) under Section 250 of the Act. The delay of 37 in filing the aforesaid appeals in condoned accepting the explanation offered by the Assessee and therefore, the respective applications seeking condonation of delay are allowed.
12. For the Assessment Year 2007-2008 and 2010-2011 penalty of INR.4,15,831/- and INR.12,65,659/-, respectively, was levied upon the Assessee under Section 271(1)(c) of the Act. The CIT(A) dismissed the appeal preferred by the Assessee challenging the levy of the aforesaid penalty. Hence the present appeals. During the course of hearing the Learned Departmental Representative had agreed that there is no change in the prevailing facts and circumstances. We note that in the quantum proceedings, the Tribunal had passed a common order for the Assessment Years 2006-2007, 2007-2008 and 2010-2011 granting identical relief to the Assessee by deleting the disallowance of indirect expenses and reducing the rate of commission income from 2% to 0.5%. On perusal of notices issued under Section 274 of the Act for the Assessment Years 2007-2008 and 2010-2011, each dated 26/03/2014, we find that the aforesaid notices have been issued without deleting or striking off the inapplicable part and therefore, the judgment of the Hon’ble Bombay High Court in the case of Mohd. Farhan A Shaikh (supra) would be applicable. Given the aforesaid, adopting the reasoning while deleting penalty levied under Section 271(1)(c) of the Act for the Assessment Year 2006-2007 in Paragraph 8 to 10 hereinabove, we hold that penalty levied under Section 271(1)(c) of the Act for the Assessment Year 2007-2008 and 2010-2011 cannot be sustained as per the judgment of the Full Bench decision of the Hon’ble jurisdictional High Court in case of Mohd. Farhan A Shaikh (supra). Thus, penalty proceedings for the Assessment Year 2007-2008 and 2010-2011 stand vitiated and accordingly, the penalty of INR.4,15,831/- and INR 12,65,659/- levied for the Assessment Years 2007-2008 and 2010-2011, respectively, stands deleted. Thus, Ground No.1 raised by the Assessee in both the appeals is allowed and Ground No.2 raised by the Assessee both the appeals is dismissed as having been rendered infructuous.
13. In the result, in terms of paragraph 12 above, the appeal for the Assessment Year 2007-2008 and 2010-2011 is allowed.
14. In conclusion the three appeals preferred by the Assessee for Assessment Year 2006-2007, 2007-2008 and 2010-2011 are allowed
Order pronounced on 21.04.2026.
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