Winners India Land Promoters Vs ITO (ITAT Chennai)
Summary: The Income Tax Appellate Tribunal, Chennai ‘B’ Bench, in Winners India Land Promoters Vs ITO, allowed the assessee’s appeal for Assessment Year 2013-14 and directed deletion of a penalty of ₹15,84,376 levied under Section 271(1)(c) of the Income-tax Act, 1961. The Bench comprising Shri Aby T. Varkey, Judicial Member, and Shri S.R. Raghunatha, Accountant Member, held that the Assessing Officer’s show-cause notice dated 28 March 2016 was defective because it retained both alternatives of the statutory penalty provision without specifying whether proceedings concerned concealment of particulars of income or furnishing inaccurate particulars of income. The Tribunal concluded that the notice was vague, reflected non-application of mind and deprived the assessee of a meaningful opportunity to defend the specific charge. Following the binding Madras High Court decision in Babuji Jacob Vs ITO, (2021) 430 ITR 259, and the Bombay High Court Full Bench decision in Mohd. Farhan A. Shaikh Vs DCIT, (2021) 434 ITR 1, the Tribunal invalidated the penalty proceedings and allowed the appeal.
The assessee was a partnership firm engaged in real-estate business. It filed its return of income on 6 October 2014 declaring ₹3,30,034 for AY 2013-14. The Assessing Officer completed scrutiny assessment under Section 143(3) on 28 March 2016 after making additions of ₹46,60,240 for alleged suppression of sales and ₹1,37,160 for non-deduction of tax at source under Section 40(a)(ia). Consequently, the assessed income was determined at ₹51,27,430 against returned income of ₹3,30,034. On the assessment date, the Assessing Officer issued a notice under Section 274 read with Section 271(1)(c). Subsequently, on 29 September 2016, a penalty of ₹15,84,376 was imposed. The Commissioner of Income Tax (Appeals), Chennai-18, confirmed the penalty, prompting the assessee’s appeal before the Tribunal.
The assessee challenged the penalty on both factual and legal grounds but requested the Tribunal to decide the preliminary legal issue first. The authorised representative argued that the prescribed notice was issued mechanically without striking out the inapplicable portion. Consequently, it simultaneously referred to concealment of income and furnishing inaccurate particulars without identifying which statutory default was alleged. The assessee submitted that the two limbs represented different charges and that a person facing penalty proceedings must know the precise allegation against which a defence is required. Reliance was placed on CIT Vs Manjunatha Cotton and Ginning Factory, (2013) 359 ITR 565; CIT Vs SSA’s Emerald Meadows, (2016) 73 taxmann.com 241; Babuji Jacob Vs ITO, (2021) 430 ITR 259; and Mohd. Farhan A. Shaikh Vs ACIT, (2021) 434 ITR 1.
The Revenue opposed the challenge and relied principally on Gangotri Textiles Ltd. Vs DCIT, [2022] 137 taxmann.com 198 (SC), contending that the Supreme Court’s dismissal of the special leave petition in that matter superseded the earlier judicial decisions concerning defective notices. The Departmental Representative also cited Sundaram Finance Ltd. Vs DCIT, [2018] 403 ITR 107, as support for sustaining the penalty. The assessee responded that the dismissal of a special leave petition without grant of leave did not automatically result in merger of the High Court’s judgment into a Supreme Court appellate judgment or amount to a declaration of law under Article 141. The assessee relied on Kunhayammed Vs State of Kerala, (2000) 6 SCC 359, and submitted that the later Madras High Court decision in Babuji Jacob remained binding.
On examining the actual notice dated 28 March 2016, the Tribunal found that both statutory charges had been retained without deletion of the inapplicable alternative. It held that this omission left the assessee uncertain about the allegation to be answered. The Tribunal relied on the Full Bench judgment in Mohd. Farhan A. Shaikh, which approved the approach in PCIT Vs Goa Dourado Promotions (P.) Ltd. and held that the contrary approach in CIT Vs Smt. Kaushalya did not state the correct legal position. It also cited the Karnataka High Court rulings in Manjunatha Cotton and Ginning Factory and SSA’s Emerald Meadows as supporting the requirement to identify the statutory limb.
The Tribunal examined the jurisdictional ruling in Babuji Jacob in detail. In that decision, the Madras High Court had invalidated penalty proceedings where the notice issued under Section 271(1)(c) did not specify whether the assessee was accused of concealment or furnishing inaccurate particulars. The Tribunal reproduced the substantial questions of law and relevant findings from that judgment. It noted that the Madras High Court had expressly distinguished Sundaram Finance, where the defect had been raised for the first time before the High Court and the factual circumstances indicated that the assessee had not been prejudiced. Applying Babuji Jacob, the Tribunal held that the notice issued to Winners India Land Promoters was legally untenable and directed deletion of the penalty without adjudicating the merits of the additions.
The Tribunal separately rejected the Revenue’s argument based on Gangotri Textiles. It referred to the Supreme Court’s order dated 18 February 2022 declining to interfere with the Madras High Court judgment under Article 136. Relying upon Kunhayammed and Khoday Distilleries Ltd. Vs Sri Mahadeshwara Sahakara Sakkare Karkhane Ltd., (2019) 2 SCC 136, it explained that refusal of special leave does not ordinarily attract the doctrine of merger. In the Tribunal’s analysis, the dismissal did not displace the binding ratio in Babuji Jacob. The Tribunal also distinguished the facts of Gangotri Textiles, where the assessee had omitted disclosure of capital gains from sale of land and a windmill, and the objection concerning notice validity had been raised for the first time before the High Court.
Ultimately, the Tribunal allowed the appeal and directed deletion of the entire penalty of ₹15,84,376. The decision underlines the importance of specificity in show-cause notices under Section 274 read with Section 271(1)(c) and the distinction between an order dismissing a special leave petition and a binding declaration of law under Article 141. The outcome concerns the validity of the penalty proceedings; the Tribunal did not delete or re-adjudicate the assessment additions themselves.
Cases Discussed
1. CIT Vs Smt. Kaushalya (Bombay High Court); (1995) 216 ITR 660 — The Tribunal noted that the Full Bench in Mohd. Farhan A. Shaikh held that this decision did not lay down the correct proposition concerning an unspecified penalty charge.
2. Kunhayammed Vs State of Kerala (Supreme Court); (2000) 6 SCC 359 — Followed on the distinction between refusal of special leave and disposal of an appeal, including the absence of merger upon refusal of leave.
3. CIT Vs Manjunatha Cotton and Ginning Factory (Karnataka High Court); (2013) 359 ITR 565 — Relied upon for invalidating penalty proceedings initiated without identification of the specific charge.
4. CIT Vs SSA’s Emerald Meadows (Karnataka High Court); (2016) 73 taxmann.com 241 — Followed as supporting the invalidity of a notice that failed to specify which limb of Section 271(1)(c) applied.
5. Sundaram Finance Ltd. Vs DCIT (Madras High Court); (2018) 403 ITR 107 — Relied upon by the Revenue, but distinguished in the jurisdictional decision in Babuji Jacob on its different factual and procedural circumstances.
6. CIT Vs Original Kerala Jewellers (Madras High Court); TCA No. 717 of 2018; 18/12/2018 — Referred to within the extracted reasoning of Babuji Jacob concerning the invalidity of penalty notices that fail to identify the charge.
7. Khoday Distilleries Ltd. Vs Sri Mahadeshwara Sahakara Sakkare Karkhane Ltd. (Supreme Court); (2019) 2 SCC 136 — Applied with Kunhayammed for the principle that refusal of special leave does not result in merger.
8. PCIT Vs Goa Dourado Promotions (P.) Ltd. (Bombay High Court); Tax Appeal No. 18 of 2019; 26/11/2019 — The Full Bench in Mohd. Farhan A. Shaikh approved its approach requiring clear identification of the penalty charge.
9. Babuji Jacob Vs ITO (Madras High Court); (2021) 430 ITR 259 — Binding jurisdictional authority followed by the Tribunal for holding the vague notice invalid and deleting the penalty.
10. Mohd. Farhan A. Shaikh Vs DCIT (Bombay High Court, Full Bench); (2021) 434 ITR 1; 11/03/2021 — Followed for the principle that an ambiguous notice concerning the statutory penalty charge invalidates the penalty proceedings.
11. Gangotri Textiles Ltd. Vs DCIT (Supreme Court, SLP dismissal); [2022] 137 taxmann.com 198; 18/02/2022 — Relied upon by the Revenue and distinguished by the Tribunal. The refusal of special leave was held not to nullify the binding jurisdictional High Court precedent.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This appeal preferred by the assessee against the order of the Learned Commissioner of Income Tax (Appeal) Chennai-18 (hereinafter referred as the ‘Ld.CIT(A)’) dated 26.08.2026 for the Assessment Year 2013-14 (hereinafter referred as ‘AY’) confirming the penalty levied by the AO u/s 271(1)(c ) of the Income Tax Act 1961 (hereinafter referred the ‘Act’).
2. Brief facts are that the assessee is a partnership firm engaged in the business of Real Estate. The assessee filed its return of income on 06.10.2014 declaring a total income of Rs.3,30,034/- for AY 2013-14. Later the case of the assessee was selected for scrutiny and the AO completed the assessment by making an addition of (i) Rs.46,60,240 for suppression of sales (ii) Rs.1,37,160 for non-deduction of TDS u/s.40a(ia) of the Act. Thus, total addition was made of Rs.47,97,400/- and the AO completed the assessment on 28.03.2016 u/s 143(3) by determining the total income at Rs.51,27,430/- in place of the returned income of Rs.3,30,034/-. Thereafter, the AO is noted to have initiated penalty u/s 271(1)(c ) of the Act by issuing notice u/s 274 r.w.s.271(1)(c ) on 28.03.2016 and finding no response from the assessee is noted to have passed the penalty order on 29.09.2016 levying a penalty of Rs.15,84,376/-. Aggrieved, the assessee appealed before the Ld.CIT(A) who was pleased to dismiss the same. Aggrieved, the assessee is before us.
3. The main grievance of the assessee is against the action of Ld.CIT(A) confirming the penalty. The assessee is noted to have raised issues on merits including legal issue. The Ld.AR wants us to examine the legal wherein challenge is made to the notices issued by the AO u/s.274 r.w.s.271(1)(c) of the Act dated 28.03.2016 as bad in law being defective/invalid in law and therefore, according to assessee, the penalty imposed needs to be quashed.
4. As noted, the assessee has raised several issues, but since assessee has raised the legal issue of AO issuing defective notice, we will deal with it first. The Ld.AR drew our attention to the impugned notice issued by the AO, and pointed out that the AO has not struck down the limbs/faults which are not applicable in the facts of the assessee’s case for levy of penalty. In other words, the AO erred in imposing penalty u/s.271(1)(c) of the Act, without specifically mentioning in the impugned notice u/s.274 r.w.s. 271(1)(c) of the Act, what specific fault/infraction assessee should defend against the proposed penalty 271(1)(c) i.e. whether the assessee furnished inaccurate particulars of his income, or concealed the particulars of his income, without which the impugned notice is bad in law for being vague/arbitrary and not issued without application of mind. In order to buttress his arguments, he has cited the case-law/decision of the Hon’ble jurisdictional Madras High Court in the case of Babuji Jacob reported in 430 ITR 259 (Madras), wherein, in on an identical case, penalty was levied by the AO u/s.271(1)(c) of the Act; and the assessee challenged the imposition of penalty, inter alia, on the ground that the notice issued by AO u/s.271(1)(c) of the Act, in the printed form without specifically mentioning whether the proposed penalty was initiated for concealment of particulars of income or on account of furnishing of inaccurate particulars of income, was bad in law; and the Hon’ble Madras High Court answered the question in favor of assessee and held that such an omission/failure on the part of AO, to specify the fault in the notice is legally untenable and such notice is defective and invalid. Therefore, Ld AR, urged that since AO had issued the impugned notice for captioned assessment years [AYs] without striking down the inapplicable portion in the printed notice, the same was issued without due application of mind and suffers for being vague; and due to omission on the part of AO to spell out clearly the infraction for which assessee was called upon to explain/defend, the assessee didn’t know what was the charge/fault, the AO had in mind, to levy penalty u/s 271(1)(c) of the Act, therefore the impugned notice is bad in law and therefore the penalty levied needs to be deleted. The Ld.AR also relied on the following case laws:
1. CIT vs Manjunatha Cotton and Ginning Factory (2013) 359 ITR 565 (Kar)
2. CIT, Bangalore Vs. SSA Emerald Meadows (2016) 73 Taxmann.com 241 (Kar.)
3. Babuji Jacob reported in 430 ITR 259 (Madras-HC)
4. Mohd. Farhan A. Shaikh v. ACIT (2021) 434 ITR 1 (FB) (Bom) (HC)
5. Per contra, the Ld.DR supported the action of the Ld.CIT(A) and has assailed the plea of the Ld.AR of the assessee for cancelling penalty levied u/s.271(1)(c) of the Act on the ground that the notice issued u/s.274 r.w.s.271(1)(c) of the Act was defective and invalid for the failure on the part of the AO not striking down the limbs/fault for levying penalty. According to the Ld.DR, the plea of the assessee is erroneous since the Hon’ble Supreme Court in the case of Gangotri Textiles Ltd. v. DCIT reported in [2022] 137 taxmann.com 198 (SC), has confirmed the action of the Hon’ble Madras High Court repelling similar grounds raised by the assessee that notice issued before penalty was levied u/s.271(1)(c) of the Act was invalid since the notice issued by the AO [u/s.274 r.w.s.271(1)(c) of the Act] had reflected both the two (2) limbs of Clause (c) of Section 271(1) of the Act. Further, according to the Ld.DR, since the decision of the Hon’ble Supreme Court in the case of Gangotri Textiles Ltd. (supra) has been rendered in the year 2022, it nullifies the following other decisions cited by the assessee before this Tribunal:
1. CIT vs Manjunatha Cotton and Ginning Factory (2013) 359 ITR 565 (Kar)
2. CIT, Bangalore Vs. SSA Emerald Meadows (2016) 73 Taxmann.com 241 (Kar.)
3. Babuji Jacob reported in 430 ITR 259 (Madras-HC)
4. Mohd. Farhan A. Shaikh v. ACIT (2021) 434 ITR 1 (FB) (Bom) (HC)
6. Further, she cited the decision of the Hon’ble Madras High Court in the case of Sundaram Finance Ltd. v. DCIT reported in [2018] 403 ITR 107 (Madras) wherein, the assessee had raised similar grounds (defective notice) was dismissed. And therefore, she wants us to reject the legal issue raised by the assessee and the grounds of appeal decided on merits and doesn’t want us to interfere with the order of the Ld.CIT(A).
7. In his rejoinder, the Ld.AR representing the assessee countering the submission of Ld DR for Revenue, submitted that the decision of the Hon’ble Supreme Court in the case of Gangotri Textiles Ltd. was decided by the Hon’ble Madras High Court by order dated 25.08.2020 in favour of the Revenue and the SLP preferred by the assessee has been dismissed by the Hon’ble Supreme Court, refusing to exercise its powers under Article 136 of the Constitution and thus, according to him, dismissal of the SLP was an action without going into the merits of the decision of the Hon’ble Madras High Court. Therefore, the Ld AR asserted that dismissal of SLP in limine by passing a non-speaking order without indicating any reasons for its dismissal implies that the Supreme Court has decided not to exercise its discretion to hear the appeal filed before it. For such a proposition, he relied on the decision of the Hon’ble Supreme Court in the case of Kunhayammed v. State of Kerala reported in [2000] 6 SCC 359 (SC), wherein the Hon’ble Supreme Court has observed as under:
“A petition for leave to appeal to this Court may be dismissed by a non-speaking order or by a speaking order. Whatever be the phraseology employed in the order of dismissal, if it is a non-speaking order, i.e. it does not assign reasons for dismissing the special leave petition, it would neither attract the doctrine of merger so as to stand substituted in place of the order put in issue before it nor would it be a declaration of law by the Supreme Court under Article 141 of the Constitution for there is no law which has been declared.
…iv) An order refusing special leave to appeal may be a non-speaking order or a speaking one. In either case it does not attract the doctrine of merger. An order refusing special leave to appeal does not stand substituted in place of the order under challenge. All that it means is that the Court was not inclined to exercise its discretion so as to allow the appeal being filed.”
8. Hence, the Ld.AR submitted that the order of the Hon’ble Supreme Court refusing Special Leave Petition to appeal doesn’t attract the doctrine of merger and doesn’t substitute in place of the order under challenge the order of the Hon’ble Supreme Court in order to be the declaration of Law by the Hon’ble Supreme Court under Article 141 of the Constitution. Therefore, according to the Ld.AR, the dismissal of SLP in the case of Gangotri Textiles Ltd., can’t be said to have nullified the following other decisions cited in the impugned order of the Tribunal:
1. CIT vs Manjunatha Cotton and Ginning Factory (2013) 359 ITR 565 (Kar)
2. CIT, Bangalore Vs. SSA Emerald Meadows (2016) 73 Taxmann.com 241 (Kar.)
3. Babuji Jacob reported in 430 ITR 259 (Madras-HC)
4. Mohd. Farhan A. Shaikh v. ACIT (2021) 434 ITR 1 ( FB ) (Bom) (HC)
9. Further, according to the Ld.AR, facts involved in Gangotri Textiles Ltd. (supra), was clearly distinguishable as discussed infra and therefore, the decision cannot be said to have judicial precedence to the case in hand. He pointed out that the Hon’ble Madras High Court in Gangotri Textiles Ltd. (supra) has clearly found in the facts of that case the assessee therein had understood the contents/ faults spelt out in the notices issued u/s.274 r.w.s.271(1)(c) of the Act and observed that there was indeed concealment of the particulars of income/furnishing of inaccurate particulars of income. Moreover, in that case, the Hon’ble High Court noted that the legal ground assailing the defect in the notice was raised for the first time before it and therefore, declined to entertain the same by holding that such a ground doesn’t raise a substantial question of law. Therefore, the Gangotri Textiles (supra) was distinguishable on the facts and therefore, the ratio laid down by the Hon’ble Madras High Court in the case of Gangotri Textiles Ltd. is not applicable to the facts of the present assessee. Moreover, the Ld.AR drew our attention to the fact that the order in the case of Gangotri Textiles Ltd. (supra) in favour of the Revenue was passed on 25.08.2020 whereas the decision in the case of Babuji Jacob v. ITO reported in [2021] 430 ITR 259 (Mad.)(HC) was passed after 08.12.2020 and by the very same Judge, Hon’ble Justice T.S. Shivagnanam, who had taken note of the decision in the case of Sundaram Finance Ltd v. ACIT reported in [2018] 403 ITR 407 which was challenged by Sundaram Finance before the Hon’ble Supreme Court by filing SLP which was dismissed and reported in [2018] 99 taxmann.com 152 (SC). Having considered all the contentions of the Revenue and after considering a host of decision, their Lordships was pleased to hold in the case of Babuji Jacob (supra) that the notice initiating penalty proceedings if found to be defective and invalid, imposition of penalty vitiated/un-warranted. Therefore, according to the Ld.AR, the legal issue raised regarding defective notice u/s.271(1)(c) of the Act needs to be allowed and penalty cancelled.
10. We have heard both the parties and perused the material available on record. Since the assessee has raised, inter-alia, legal issue regarding invalid notice issued u/s.271(1)(c) r.w.s.274 of the Act, we will examine/adjudicate the said legal issue. For doing that, first of all we have to peruse the show cause notice (SCN) issued by the AO u/s 271(1)(c) r.w.s. 274 of the Act dated 28.03.2016 by which the AO gave notice to the assessee as to “why an order imposing a penalty on you should not be imposed u/s 271(1)(c) of the Act?” On perusal of the SCN dated 28.03.2016, we note that both the faults specified in Section 271(1)(c) of the Act are given therein i.e. “have concealed the particulars of his income” or “furnished inaccurate particulars of such income”. In other words, the AO has put to notice the assessee on both the faults without striking down the inapplicable fault which could have specified which fault AO has in mind that assessee has committed i.e. whether he is proposing penalty for the fault of “concealment of particulars of income” or “for furnishing of inaccurate particulars of income”. We note that by not striking down one of fault, the assessee was not in a position to defend properly the charge/fault against which the AO was proposing to levy penalty because both faults are different and distinct. Therefore, the notice was per-se confusing and vague; and infirm in eyes of law, for non-application of mind of the AO before issuing notice u/s.274 r.w.s.271(1)(1)(c) of the Act, as well as exposes the whimsical/arbitrary attitude of the AO, who has scant regard for Rule of Law and therefore, bad in law; and such notice cannot be held to be valid and legally tenable as pleaded by Revenue; and we note that in similar factual background, this Tribunal has consistently held such notices to be bad in law for not specifying the specific fault for which the assessee was being proceeded against for levy of penalty. And such actions of the Tribunal has been upheld by several judgments of the various High Courts. In this regard, we note that in a similar case, where there was difference of opinion by two Division Benches, the Full Bench of the Hon’ble Bombay High Court in the case of Mohd. Farhan A. Shaikh Vs. DCIT (2021) 434 ITR 1 (Bombay) dated 11.03.2021 held that the show cause notice issued prior to levy of penalty without specifying the fault/charge against which the assessee is being proceeded, would vitiate the penalty itself. And thus the Hon’ble High Court upheld the view of the division bench order in the case of PCIT Vs. Goa Dourado Promotions (P.) Ltd. (Tax Appeal No.18 of 2019, dated 26.11.2019) and held that the contrary view taken by the other Division Bench in the case of CIT Vs. Smt. Kaushalya (1995) 216 ITR 660 (Bom) does not lay down the correct proposition of law.
11. As noted earlier, we find that the impugned penalty notice dated 28.03.2016 didn’t explicitly convey to the assessee the specific fault/charge the assessee was being proceeded against for levy of penalty. Resultantly, the show cause notice is found to be defective/invalid, and therefore it is held to be bad in law. For doing that we also rely on the decision of the Hon’ble Karnataka High Court in the case of CIT vs Manjunatha Cotton and Ginning Factory reported in (2013) 359 ITR 565 (Kar) and further notes that the Department’s SLP against it has been dismissed by the Hon’ble Supreme Court. We also find that Hon’ble Karnataka High Court in the case of CIT Vs. SSA’s Emerald Meadows, reported in (2016) 73 taxmann.com 241 (Kar) endorsed the same view in Manjunatha Cotton and Ginning Factory (supra) and held as under:-
“3. The Tribunal has allowed the appeal filed by the assessee holding the notice issued by the Assessing Officer under section 274 read with Section 271(1)(c) of the Income Tax Act, 1961 (for short ‘the Act’), to be 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 of income. The Tribunal, while allowing the appeal of the assessee, has relied on the decision of the Division Bench of this Court rendered in the case of CIT Vs. Manjunatha Cotton & Ginning Factory (2013) 359 ITR 565/218 Taxman 423/35 taxmann.com 250(Kar).
4. In our view, since the matter is covered by judgment of the Division Bench of this Court, we are of the opinion, no substantial question of law arises in this appeal for determination by this Court. The appeal is accordingly dismissed.”
12. And as noted, the Hon’ble Madras High Court had an occasion to deal with similar question in the case of Babuji Jacob (supra) wherein, the Hon’ble High Court (DB) had framed substantial question of law, inter-alia, as under:
“i. Whether the notice issued under Section 271(1)(c) of the Act dated 30.3.2016 in the printed form without specifically mentioning whether the proceedings are initiated on the ground of concealment of income or on account of furnishing of inaccurate particulars is valid and legal ?
ii. Whether the proceedings initiated by the respondent/the Assessing Officer is legal and valid?
iii. Whether the Appellate Tribunal is justified otherwise in rejecting the said technical ground of wrong initiation of the penalty proceedings under Section 271(1)(c) of the Act in misreading the show cause notice dated 30.3.2016 proving perversity in the findings of facts at para 6.5 of the impugned http://www.judis.nic.in order? “
13. The Hon’ble Madras High Court’s observation regarding defective show cause notice in that case as under:-
8. A show cause notice was issued to the assessee proposing to initiate proceedings under Section 271(1)(c) of the Act vide notice dated 30.3.2016. A copy of the said notice dated 30.3.2016 has been furnished in the typed set of papers and we find that the said notice does not specifically state as to whether the assessee is guilty of concealing particulars of his income or has furnished inaccurate particulars of income.
14. And the Hon’ble Madras High Court observed further as under:
13. The first aspect to be considered is as to whether the notice issued under Section 271(1)(c) of the Act dated 30.3.2016 is legally valid and proper. Admittedly, the notice did not specifically mention as to whether the assessee concealed particulars of his income or furnished inaccurate particulars or both.
14. Such notices, which did not specify as to which limb of Section 271(1)(c) of the Act would get attracted, were held to be bad in law in the decision of the Karnataka High Court in the case of CIT Vs. Manjunatha Cotton and Ginning Factory [reported in (2013) 359 ITR 565], which was followed in the decision of the Karnataka High Court in the case of CIT, Bangalore Vs. SSA Emerald Meadows [reported in (2016) 73 Taxmann.com 241] and in the decision of this Court, to which, one of us (TSSJ) was a party, in the case of CIT Vs. Original Kerala Jewellers [TCA.No.717 of 2018 dated 18.12.2018].
15. Thus, by applying the law laid down in the above decisions, we can safely hold that such notices are bad in law. Consequently, the penalty proceedings initiated are to be held to be wholly invalid.
15. Thereafter, the Hon’ble High Court even noted the decision in the case of Sundaram Finance Ltd., which was also cited by the Ld.DR before us and observed in this regard as under:
32. The decision of this Court in the case of Sundaram Finance Ltd., was couched on a different factual position wherein the Court rejected the plea of the assessee, which was a limited company, when they raised an argument with regard to the validity of the notice for the first time before the High Court and considering the administrative set up of the said assessee and the fact that the assessee was never prejudiced on account of the alleged defect, the Court rejected the argument of the assessee.
33. In the case on hand, we find that at the first instance, while replying to the penalty show cause notice dated 30.3.2016, the assessee raised a specific plea that there was no concealment of income, that he had not furnished inaccurate particulars of income and that the notice was not proper. Therefore, the phraseology, which was adopted by the assessee, if read as a whole, would clearly show that he had objected to the issuance of the notice and as there was no basis for issuance of the notice under Section 271(1)(c) of the Act, both limbs in the said provision do not get attracted. Hence, the decision of this Court in the case of Sundaram Finance Ltd., cannot be applied.
And thereafter, the Hon’ble Madras High Court held that the notice initiating penalty proceedings was defective and invalid and allowed the appeal of the assessee and answered the question of law in favour of the assessee.
16. In the light of the discussion (supra) we find that the notice issued u/s.274 r.w.s 271(1)(c) by the AO dated 28.03.2016 were infirm/invalid in the eyes of law for all the captioned AYs. Therefore, in light of the aforesaid decision of the Hon’ble Madras High Court in the case of Babuji Jacob (supra), and other case laws discussed, we direct the deletion of the penalty levied in all the three captioned appeals. And since the penalty notice issued by AO itself are invalid & legally untenable, consequent penalty levied for concealment of particulars of income are null in eyes of law. Therefore, assessee succeeds and the penalty levied is directed to be deleted.
17. Before parting, we would like to deal with the submissions of Ld.AR for Revenue against the legal issue, we allowed supra. The main contention of the Revenue is that the case laws cited by the Ld.AR of the assessee, especially in the case of Babuji Jacob (supra) and other cases are nullified in the light of the decision of the Hon’ble Supreme Court in the case of Gangotri Textiles Ltd. (supra). According to the Revenue, similar legal issue [defective notice] was raised by that assessee i.e. Gangotri Textiles Ltd., initially before the Hon’ble Madras High Court, which contention/issue was repelled by the Hon’ble High Court and thereby the Hon’ble High Court was pleased to pass an order in favour of the Revenue by order dated 25.08.2020. And such a decision was challenged by the assessee before the Hon’ble Supreme Court by filing SLP which was dismissed on 18.02.2022 by the Hon’ble Supreme Court which order reads as under:
We have heard Shri Arvind P. Datar, learned senior counsel appearing on behalf of the petitioner.
In the facts and circumstances of the case, we do not want to interfere with the impugned judgment and order passed by the High Court in exercise of powers under Article 136 of the Constitution of India. Hence, the Special Leave petitions stand dismissed.
Pending application(s) shall stand disposed of.
18. According to the Revenue, since the Hon’ble Supreme Court upheld the action of the Hon’ble Madras High Court in the case of Gangotri Textiles Ltd. (supra), similar legal issue raised by the assessee in respect of defective notice should be answered against the assessee. Further according to the Revenue, since the SLP has been dismissed in 2022, all other orders cited by the Tribunal in the impugned order stands nullified. We don’t agree with the contention of the Revenue. Doctrine of merger doesn’t take place when the Hon’ble Supreme Court refuses Special Leave to appeal. In other words, the order of the Hon’ble High Court [under challenge before the Hon’ble Supreme Court] doesn’t get substituted by the order of the Hon’ble Supreme Court. This position of law has been clarified by the Hon’ble Supreme Court itself that SLP dismissal or refusal by the Hon’ble Supreme Court to entertain Special Leave to appeal before it, doesn’t mean that the order challenged before it, gets substituted by the order of the Supreme Court and in such an event the doctrine of merger doesn’t take place. In other words, the order challenged before the Hon’ble Supreme Court [in the case of Gangotri Textiles supra, by the Hon’ble Madras High Court] doesn’t merge with the decision of the Hon’ble Supreme Court and therefore, it can’t be held to be a declaration of law by the Hon’ble Supreme Court under Article 141 of the Constitution. For such a proposition, we rely on the following decisions:
I. Kunhayammed v. State of Kerala (2000)6 SCC 359
II. Khoday Distilleries v. Sri Mahadeshwara Sahakara Sakkare Karkhane (2019) 2 SCC 136
19. Having said so, we also find force in the submission of the Ld.AR that the order passed by the Hon’ble Madras High Court in the case of Gangotri Textiles Ltd., was on the peculiar facts of that case and so, it is distinguishable. And in that case, the defect in the notice was raised for the first time before the Hon’ble Madras High Court, which was also a fact, the Hon’ble High Court noted to refuse admission of the same; and secondly, the Hon’ble High Court took note of the distinguishing facts of the case, wherein the assessee didn’t disclose about the sale of its land & windmill in its RoI filed u/s.139(1) of the Act on 26.09.2012 and after ‘13’ months of issuance of statutory notice u/s.143(2) of the Act, the assessee by letter dated 03.03.2015, admitted that due to oversight, it didn’t offer the capital gains in its return and attached a summary of total income adjusting profit on the LTCG & STCG; and even at that stage, didn’t bother to file revised return. Considering the aforesaid facts, the Hon’ble High Court wondered as to how the assessee while responding to the penalty notice dated 12.03.2015, could have asserted that there was no concealment of income or furnishing of inaccurate particulars of income as envisaged, sec.271(1)(c) of the Act. The Hon’ble High Court took note of the fact that, the assessee didn’t disclose about the sale of the land & windmill in its return which fact/omission was clearly discernable from the perusal of the RoI/ITR, wherein, at the relevant column, it is stated as ‘nil’. In such factual back ground, the Hon’ble High Court held that “it will not only be a case of filing of inaccurate particulars, but also a case of concealment of income” meaning in the peculiar facts both faults are attracted. Therefore, in the aforesaid factual back ground, the assessee having understood the ingredients of the penalty proposed to be levied against it, coupled with the omission on the part of the assessee of not raising the invalidity/legal issue pertaining to the notice before the Ld.CIT(A)/Tribunal, refused to entertain the legal issue regarding defect in the notice and was of the view that there was no substantial question of law against the action of the Tribunal confirming the penalty u/s.271(1)(c) of the Act. Therefore, the decision rendered in Gangotri Textiles Ltd.supra, is distinguishable on the peculiar facts of that case and therefore, dismissal of the SLP refusing leave to appeal, as noted supra would not come to the aid of the Revenue to wipe out the stare-decisis/judicial precedent of ratio laid down by the Hon’ble jurisdictional High Court in the case of Babuji Jacob (supra). Therefore, we don’t find any merits in the submissions/written submissions by the Revenue against the legal issue of defective notice dated 28.03.2016 before us and which has been decided on the binding ratio of the Hon’ble jurisdictional High Court in the case of Babuji Jacob (supra) and other case laws cited supra; and hence, we don’t find any merit in the submissions of the Ld.DR for Revenue and hence rejected.
20. In the result, appeal filed by the assessee are allowed.
Order pronounced on the 07th day of July, 2026, in Chennai.
