Introduction: The Income Tax Appellate Tribunal (ITAT) Mumbai has recently given a significant ruling in the case of DCIT, Central Circle Vs Sai Sugam Enterprises. The tribunal has highlighted the need for precision in penalty notices, particularly those issued under section 274 of the Income Tax Act. According to the tribunal, if such notices do not specify the exact charge against the assessee, they are invalid and cannot sustain a penalty.
Issue of the Penalty Notice: The revenue department challenged an order from the Commissioner of Income Tax (Appeals) which stated that the penalty notice issued under section 274 read with section 271(1)(c) was invalid. The notice, according to the CIT(A), did not specify the fault or charge against the assessee, rendering the assessee unable to adequately defend itself.
Precedents Cited: The CIT(A) relied on a Full Bench decision of the Hon’ble Jurisdictional High Court in the case of Mohd. Farhan A. Shaikh, which upheld the need for penalty notices to specify the fault or charge against the assessee. Failure to do so would vitiate the penalty itself.
The ITAT’s Concurring Opinion: The ITAT Mumbai concurred with the CIT(A)’s findings, stating that the penalty notice was defective and hence, bad in law. It reinforced the argument by citing judgments such as that of CIT vs Manjunatha Cotton and Ginning Factory, where the Hon’ble Karnataka High Court made a similar ruling. The Supreme Court also dismissed the Department’s SLP against this decision, lending it further credibility.
Consequences for the Revenue Department: As the notice was found to be defective, the ITAT ruled that any consequent action to levy a penalty would be ‘null’ in the eyes of the law. The revenue’s appeal was therefore dismissed.
Conclusion: The ITAT Mumbai’s ruling sends a clear message about the crucial nature of clarity and precision in legal documentation, particularly in the case of penalty notices. With this judgment, the tribunal reaffirms the importance of safeguarding the rights of the assessee to a fair chance at defense. Any ambiguity in stating the fault or charge against the assessee would render the penalty notice invalid and any subsequent actions void.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This is an appeal preferred by the revenue against the order of the Ld. Commissioner of Income Tax (Appeals)-11, Pune dated 10.02.2023 for the assessment year 2011-12.
2. At the outset, the Ld. AR of the assessee Shri Subodh Ratnaparkhi pointed out that the AO had levied an amount of Rs.71,78,070/- u/s 271(1)(c) of the Income Tax Act, 1961 (hereinafter “the Act”) by penalty order dated 14.02.20 17 for AY. 2011-12. According to him, on appeal, the Ld. CIT(A) has taken note of the fact that in the notice issued by AO before levy of penalty, the AO failed to strike out the faults/charges which are not applicable to assessee. Meaning, AO in the penalty notice didn’t specify the fault/charge against which assessee is being proceeded against for levy of penalty; and so, assesse was in the dark as to what was the fault charged against it for levy of penalty and therefore, the notice itself being invalid the levy of penalty was held to bad and deleted. And the Ld AR, drew our attention to the penalty notice issued u/s 274 r.w.s. 271(1)(c) of the Act dated 06.09.2016 which was held by Ld CIT(A) to be defective/invalid. This action of Ld. CIT(A) has been challenged by the Department before us.
3. We note that Ld CIT(A) found the penalty notice issued by AO was prepared in the standard profoma which contents show that both faults/charge have been spelled out i.e. have concealed the particulars of income and/or furnished inaccurate particulars of such income. But Ld CIT(A) found that AO failed to specify which charge/fault assessee is being alleged for levy of penalty by striking down any one of the two (2) limbs stated therein. According to Ld. CIT(A) by not striking down one of fault/charge, the assessee was not able to defend properly the charge/fault against which the AO was proposing to levy penalty. Therefore, according to Ld CIT(A) the penalty levied by AO is vitiated and ordered deletion of penalty. And for taking such a view, the Ld. CIT(A) has relied on the Full Bench decision of the Hon’ble Jurisdictional High Court in the case of Mohd. Farhan A. Shaikh Vs. DCIT (2021) 434 ITR 1 (Bombay) dated 11.03.2021 wherein it was 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 also held that the contrary view taken by an another division bench in the case of CIT Vs. Smt. Kaushalya (1995) 216 ITR 660 (Bom) does not lay down the correct proposition of law.
4. As noted earlier, we find that the penalty notice dated 06.09.2016 did not explicitly convey to the assessee the specific fault/charge the assessee is being proceeded for levy of penalty. Resultantly, the show cause notice was found to be defective/invalid and therefore it was held by Ld CIT(A) to be bad in law, which impugned action we concur. 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 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 dimmished”
6. Since, we find that show cause notice issued by the AO dated 06.09.2016 u/s 274 r.w.s. 271(1)(c) of the Act is defective/invalid it is held to be bad in law. And therefore, consequential action of AO to levy penalty is held to be ‘null’ in eyes to law and ergo we uphold the action of the Ld. CIT(A) by relying on the Full Bench decision of the Hon’ble Jurisdictional High Court in the case of Mohd. Farhan A. Shaikh (supra) and other judicial precedents supra and consequently dismiss the appeal of the revenue.
7. In the result, the appeal of the revenue is dismissed.
Order pronounced in the open court on this 27/07/2023.