Case Law Details
Malla Appalaraju Vs ITO ( ITAT Visakhapatnam)
The Income Tax Appellate Tribunal (ITAT), Visakhapatnam, has ruled in favor of Malla Appalaraju, setting aside a penalty imposed under Section 271(1)(c) of the Income Tax Act, 1961. The penalty of ₹12,23,211 was levied for an alleged unexplained investment under Section 69. The tribunal found that the penalty notice issued by the Assessing Officer (AO) was defective as it failed to specify whether the penalty was for “concealment of income” or for “furnishing inaccurate particulars of income.”
The case originated from an assessment order for AY 2011-12, where the AO had estimated the income of the assessee’s liquor business and added ₹39,58,613 under unexplained investments. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this addition, leading to the imposition of a penalty under Section 271(1)(c). The assessee challenged the penalty order before the ITAT, arguing that the notice lacked clarity on the specific charge, thereby violating legal principles.
A vague or defective penalty notice invalidates the entire penalty proceedings. The tribunal observed that failure to specify the charge deprived the assessee of a fair opportunity to defend himself. It reaffirmed that a defective notice vitiates the entire penalty proceedings, making the order legally unsustainable.
The ruling highlights the importance of procedural correctness in tax penalty cases. The ITAT concluded that since the penalty notice was fundamentally flawed, the penalty order was void ab initio and had to be set aside. Accordingly, the appeal of the assessee was allowed, reinforcing the principle that tax authorities must adhere to due process when imposing penalties.
FULL TEXT OF THE ORDER OF ITAT VISAKHAPATNAM
This appeal filed by the assessee is against the order of the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [“Ld. CIT(A)-NFAC”] in DIN & Order No. ITBA/nfac/s/250/2023-24/1055126515(1), 14/08/2023 arising out of the order passed U/s. 271(1)(c) of the Income Tax Act, 1961 [“the Act”] for the AY 2011-12.
2. Briefly stated the facts of the case are that the assessee, an individual, was engaged in the business of Indian Made Foreign Liquor (IMFL) in the name and style of “Ravi Wines” for the AY 2011- The assessee has e-filed his return of income on 27/09/2011 by admitting total income from the said business at Rs. 5,98,610/- on gross receipts of Rs. 3,14,06,199/-. Thereafter, the case was selected for scrutiny manually with the approval of the competent Authority and accordingly, the Ld. AO completed the assessment U/s. 143(3) on 28/03/2014 wherein the Ld. AO (i) estimated the income from IMFL business at Rs. 11,45,268/- and (ii) made addition of Rs. 39,58,613/- U/s. 69 of the Act under explained investment. Thus, the Ld. AO determined the assessed income of the assessee at Rs. 51,03,881/-. Aggrieved by the assessment order passed by the Ld. AO U/s. 143(3) of the Act and the additions made therein, the assessee filed an appeal before the Ld. CIT(A). On appeal, the Ld. CIT(A), with regard to the estimation of income from IMFL business of Rs. 11,45,268/-, directed the Ld. AO to re-compute the income @ 5% of the purchase price of the stock which was put to sale, net of all the deduction. With regard to addition made by the Ld. AO towards unexplained investment U/s. 69, the Ld. CIT(A) has upheld the decision of the Ld.AO. Thereafter, the Ld. AO issued a show cause penalty notice U/s. 274 r.w.s 271(1)(c) of the Act, dated 28/03/2014 which was served on the assessee on 7/4/2011 and the assessee has submitted his reply on 21/03/2018. However, the Ld. AO did not consider the explanation and submissions of the assessee and observed as under:
“Keeping in view the facts and circumstances of the case as discussed above and also the decision of the Ld. CIT(A), it is held that the addition made on account of estimation of income is not considered for levy of penalty U/s. 271(1)(c) of the Act as the same is done on estimation basis. However, the total addition made of Rs. 39,58,613/- towards unexplained investment U/s. 69 attracts the provisions of section 27(1)(c) as the same amount to ‘concealment of income’ because the assessee was unable to explain the sources for the same with any material evidences and the Ld. CIT(A) has also upheld this addition with his observations………………. ”
Accordingly, the Ld. AO levied the penalty of Rs. 12,23,211/- U/s. 271(1)(c) of the Act and passed the order on 27/03/2018. Against the penalty order passed by the Ld. AO, the assessee filed an appeal before the Ld. CIT(A). On appeal, the Ld. CIT(A) – NFAC dismissed the appeal of the assessee and upheld the penalty levied by the Ld.AO. Aggrieved by the order of the Ld.
CIT(A)-NFAC, the assessee is in further appeal before the Tribunal by raising the following grounds of appeal:
“1. The order of the Ld. CIT(A) is contrary to the facts and also the law applicable to the facts of the case.
2. The CIT(A) is not justified in upholding the penalty of Rs. 12,23,211/- levied by the AO U/s. 271(1)(c) of the Act.
3. The CIT(A) ought to have considered that the penalty is not warranted as appellant neither concealed the particulars of income nor furnished inaccurate particulars of income.
4. Any other grounds may be urged at the time of hearing. ”
3. Further, the assessee has also filed an additional ground vide letter dated 04/12/2023 which reads as under:
“The notice dated 28/03/2014 issued without mentioning the charge for the proposed penalty is invalid and is liable to be quashed as void ab initio”.
4. At the outset, the AR drawn our attention to the penalty notice issued U/s. 271(1)(c) of the Act and submitted that the Ld. AO did not mention the charge for the proposed penalty ie., whether it is for “concealment of particulars of income” or “furnishing of inaccurate particulars of income” which is required to be mentioned to decide the validity of the notice. Since the Ld. AO has not mentioned the reason in the notice issued U/s. 271(1)(c) as to why the penalty was being proposed to be imposed, the penalty notice itself is null and void and the penalty order passed by the Ld. AO based on such invalid notice is liable to be quashed.
Section 271(1)(c) penalty notice invalid if AO Fails to mention why the penalty was being proposed to be imposed
5. On the other hand, the Departmental Representative [DR] heavily relied on the order of the Ld. AO. The Ld. DR further submitted that the assessee has clearly understood the nature of charge against him as it is evident from his reply to the notice U/s. 274 r.w.s 271(1)(c) of the Act and therefore no prejudice is done to the assessee by simply not mentioning the reason in the notice and that solely does not render the notice invalid.
6. We have heard both the sides and perused the material available on record as well as the orders of the Ld. Revenue As per the provisions of section 271(1)(c) of the Act, it is mandatory to mention the reason in the notice as to whether the assessee has concealed the particulars of his income or furnished inaccurate particulars of such income. We have also carefully gone through the notice issued U/s. 274 r.w.s 271(1)(c) of the Act, dated 28/03/2014. On perusal of the said notice, we find that this is not the case of non-striking off of the relevant limb in the penalty notice issued to the assessee. This is the case where the Ld. AO has not even mentioned the reason as to why they are invoking the penalty provisions. It is a settled law that a defect in the notice vitiates the entire proceedings. Therefore, considering the facts and circumstances of the case, we are of the considered view that since there is no proper notice stating whether it is for “concealment of particulars of income” or “furnishing of inaccurate particulars of income”, we have no hesitation to come to a conclusion that since the notice itself is not valid, the penalty order passed on the basis of such invalid notice is void ab initio. It is ordered accordingly.
7. In the result, appeal of the assessee is allowed.
Pronounced in the open Court on 28th May, 2024.
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