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Facts
The assessee, a management consultancy company, was levied a penalty of Rs. 3,56,891 under Section 271(1)(c) of the Income-tax Act, 1961, for the assessment year 2011-12. This penalty was imposed following an addition made by the Assessing Officer (AO) on account of notional interest income.
Held
The Tribunal held that the penalty notice issued by the AO was vague and did not specify whether the penalty was for concealment of income or furnishing inaccurate particulars. Citing the decision of the Hon'ble Bombay High Court, the Tribunal found this to be a fundamental defect that vitiates the penalty ab initio.
Key Issues
Whether a penalty notice under Section 271(1)(c) which fails to specify the distinct charge (concealment of income or inaccurate particulars) is invalid and liable to be quashed.
Sections Cited
271(1)(c), 143(3), 274, 139(2), 139(1), 22(1), 22(2), 34, 148, 142(1), 143(2), 22(4), 23(2), 92C
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Income Tax Appellate Tribunal, MUMBAI BENCH “D” MUMBAI
Before: SHRI OM PRAKASH KANT & SHRI RAHUL CHAUDHARY
ORDER PER OM PRAKASH KANT, AM
This appeal by the assessee is directed against order dated 07.07.2025 passed by the Ld. Commissioner of Income-tax (Appeals) – National Faceless Appeal Centre, Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2011-12, in relation to penalty levied by the Assessing Office u/s 271(1)(c) of the Income-tax 1961 (in short ‘the Act’) vide order dated 25.03.2023.
The grounds raised by the assessee are reproduced as under: grounds raised by the assessee are reproduced as under: grounds raised by the assessee are reproduced as under:
1) The learned CIT(A) erred in confirming the penalty levied 1) The learned CIT(A) erred in confirming the penalty levied 1) The learned CIT(A) erred in confirming the penalty levied by the Ld. AO u/s 271(1)(c) of Rs. 3,56,891/ by the Ld. AO u/s 271(1)(c) of Rs. 3,56,891/- which is bad which is bad in law. 2) The learned CIT(A) erred in confirming the penalty levied 2) The learned CIT(A) erred in confirming the penalty levied 2) The learned CIT(A) erred in confirming the penalty levied by the Ld. AO on the ground that inaccurate details were AO on the ground that inaccurate details were AO on the ground that inaccurate details were furnished, without appreciating the fact that the same was furnished, without appreciating the fact that the same was furnished, without appreciating the fact that the same was not specified by the Ld. AO neither in its order u/s 143(3) not specified by the Ld. AO neither in its order u/s 143(3) not specified by the Ld. AO neither in its order u/s 143(3) nor in issuing the penalty notice dated 25.03.2014. nor in issuing the penalty notice dated 25.03.2014. nor in issuing the penalty notice dated 25.03.2014. 3) The learned CIT(A) erred in 3) The learned CIT(A) erred in confirming the action of the confirming the action of the Ld. AO of not specifying the limb under which the penalty Ld. AO of not specifying the limb under which the penalty Ld. AO of not specifying the limb under which the penalty u/s 271(1)(c) is to be issued, i.e. furnishing inaccurate u/s 271(1)(c) is to be issued, i.e. furnishing inaccurate u/s 271(1)(c) is to be issued, i.e. furnishing inaccurate details or concealment of income. details or concealment of income. 4) The learned CIT(A) erred in confirming the action of the 4) The learned CIT(A) erred in confirming the action of the 4) The learned CIT(A) erred in confirming the action of the Ld. AO in imposin Ld. AO in imposing penalty on the ground that inaccurate g penalty on the ground that inaccurate details were furnished, without appreciating the fact that details were furnished, without appreciating the fact that details were furnished, without appreciating the fact that there were no inaccurate details furnished by the assessee there were no inaccurate details furnished by the assessee there were no inaccurate details furnished by the assessee which attract penalty proceedings u/s 271(1)(c). which attract penalty proceedings u/s 271(1)(c). 5) The learned CIT(A) erred in confirming the act 5) The learned CIT(A) erred in confirming the act 5) The learned CIT(A) erred in confirming the action of the Ld. AO in imposing penalty of Rs. 3,56,891/ Ld. AO in imposing penalty of Rs. 3,56,891/- on addition of on addition of Rs. 11,54,988 without appreciating the fact that addition Rs. 11,54,988 without appreciating the fact that addition Rs. 11,54,988 without appreciating the fact that addition was on account of notional interest which by no stretch of was on account of notional interest which by no stretch of was on account of notional interest which by no stretch of imagination can be said as inaccurate furnishing of details imagination can be said as inaccurate furnishing of details imagination can be said as inaccurate furnishing of details by the appellant. ppellant. 6) The learned CIT(A) erred in confirming action of the Ld. 6) The learned CIT(A) erred in confirming action of the Ld. 6) The learned CIT(A) erred in confirming action of the Ld. AO in imposing penalty even though the addition by the Ld. AO in imposing penalty even though the addition by the Ld. AO in imposing penalty even though the addition by the Ld. AO was on ad hoc basis. AO was on ad hoc basis. 7) The learned CIT(A) erred in confirming the action of Ld. 7) The learned CIT(A) erred in confirming the action of Ld. 7) The learned CIT(A) erred in confirming the action of Ld. AO by ignoring the judicial decision relied AO by ignoring the judicial decision relied upon by the upon by the appellant and confirming the penalty based on two appellant and confirming the penalty based on two appellant and confirming the penalty based on two judgements judgements judgements which which which are are are not not not relevant relevant relevant to to to the the the facts of this this case.
Briefly stated, facts of the case are that Briefly stated, facts of the case are that the assessee before us the assessee before us is a company engaged in the business of management consultancy. is a company engaged in the business of management consultancy. is a company engaged in the business of management consultancy.
The assessment for the year under consideration was completed The assessment for the year under consideration was completed The assessment for the year under consideration was completed under Section 143(3) of the Income under Section 143(3) of the Income-tax Act, 1961 (“the Act”) vide tax Act, 1961 (“the Act”) vide order dated 25th March, 2014, wherein the Learned Assessing order dated 25th March, 2014, wherein the Learned Assessing order dated 25th March, 2014, wherein the Learned Assessing Officer made an addition by estimating notional interest income at Officer made an addition by estimating notional interest income at Officer made an addition by estimating notional interest income at 15.50%, amounting to ₹53.28 lakhs, and simultaneously initiated 15.50%, amounting to 53.28 lakhs, and simultaneously initiated penalty proceedings under Section 271(1)(c) of the Act. Pursuant penalty proceedings under Section 271(1)(c) of the Act. Pursuant penalty proceedings under Section 271(1)(c) of the Act. Pursuant thereto, and after due process, penalty was levied at ₹3,56,891/–, thereto, and after due process, penalty was levied at thereto, and after due process, penalty was levied at being one hundred percent of the tax sought to be evaded, vide being one hundred percent of the tax sought to be evaded, vi being one hundred percent of the tax sought to be evaded, vi order dated 7th January, 2022. order dated 7th January, 2022.
On appeal, the Learned Commissioner of Income On appeal, the Learned Commissioner of Income On appeal, the Learned Commissioner of Income-tax (Appeals) sustained the penalty, rejecting the contentions advanced on behalf sustained the penalty, rejecting the contentions advanced on behalf sustained the penalty, rejecting the contentions advanced on behalf of the assessee. Hence, the assessee has approached this Tribunal of the assessee. Hence, the assessee has approached this Tribunal of the assessee. Hence, the assessee has approached this Tribunal in further appeal.
We have heard the learned representatives of both sides and We have heard the learned representatives of both sides and We have heard the learned representatives of both sides and have perused the material on record. The primary grievance raised have perused the material on record. The primary grievance raised have perused the material on record. The primary grievance raised in Ground No. 1 pertains to the validity of the penalty notice, it pertains to the validity of the penalty notice, it pertains to the validity of the penalty notice, it being contended that the Assessing Officer did not specify the being contended that the Assessing Officer did not specify the being contended that the Assessing Officer did not specify the precise charge—viz. viz. whether the penalty was initiated for whether the penalty was initiated for concealment of income or for furnishing inaccurate particulars concealment of income furnishing inaccurate particulars thereof. It is urged that this fundamental defect, having been raised . It is urged that this fundamental defect, having been raised . It is urged that this fundamental defect, having been raised before the Learned CIT(A) but not adjudicated, vitiates the penalty before the Learned CIT(A) but not adjudicated, vitiates the penal before the Learned CIT(A) but not adjudicated, vitiates the penal ab initio.
5.1 The learned counsel for the assessee placed before us a Paper The learned counsel for the assessee placed before us a Paper The learned counsel for the assessee placed before us a Paper Book comprising pages 1 to 56, containing, inter alia, copies of the Book comprising pages 1 to 56, containing, inter alia, copies of the Book comprising pages 1 to 56, containing, inter alia, copies of the assessment order dated 25th March, 2014 and the penalty notices assessment order dated 25th March, 2014 and the penalty notices assessment order dated 25th March, 2014 and the penalty notices issued under Section 274 read with Section issued under Section 274 read with Section 271 of the Act. On 271 of the Act. On scrutiny scrutiny scrutiny thereof, thereof, thereof, it it it is is is manifest manifest manifest that that that in in in none none none of of of these these these communications—the assessment order, the notice under Section the assessment order, the notice under Section the assessment order, the notice under Section 274 dated 25th March, 2014, or the subsequent show-cause notice 274 dated 25th March, 2014, or the subsequent show 274 dated 25th March, 2014, or the subsequent show dated 6th August, 2021 dated 6th August, 2021—the Assessing Officer applied his the Assessing Officer applied his mind to specify the distinct charge. The notices are in standard printed specify the distinct charge. The notices are in standard printed specify the distinct charge. The notices are in standard printed form, and the inapplicable portion has not been struck off. form, and the inapplicable portion has not been struck off. form, and the inapplicable portion has not been struck off.
5.2 This aspect is no longer This aspect is no longer res integra. The Hon’ble Bombay High . The Hon’ble Bombay High Court in ACIT v. Md. Farhan A. Shaikh ACIT v. Md. Farhan A. Shaikh [(2021) 434 ITR 1 [(2021) 434 ITR 1 (Bom)] has authoritatively held that where a notice under Section 274 is issued authoritatively held that where a notice under Section 274 is issued authoritatively held that where a notice under Section 274 is issued in a mechanical manner, without striking out the inapplicable in a mechanical manner, without striking out the inapplicable in a mechanical manner, without striking out the inapplicable portion and without indicating clearly whether the charge is for portion and without indicating clearly whether the charge is for portion and without indicating clearly whether the charge is for “concealment “concealment “concealment of of of income” income” income” or or or for for for “furnishing “furnishing “furnishing of of of inaccurate ina ina particulars,” such a notice betrays non particulars,” such a notice betrays non-application of mind and application of mind and violates the principles of violates the principles of audi alteram partem—the very cornerstone the very cornerstone of natural justice. The Hon’ble Court further observed that the two of natural justice. The Hon’ble Court further observed that the two of natural justice. The Hon’ble Court further observed that the two limbs under Section 271(1)(c) are distinct and m limbs under Section 271(1)(c) are distinct and mutually exclusive, utually exclusive, and that a vague or omnibus notice is incurably defective. The and that a vague or omnibus notice is incurably defective. and that a vague or omnibus notice is incurably defective. Hon’ble Bombay High Court Hon’ble Bombay High Court (supra) held that a penalty notice a penalty notice issued on a pre-printed form without striking out the inapplicable printed form without striking out the inapplicable printed form without striking out the inapplicable charge is invalid. The Hon’ble Court The Hon’ble Court found that such an ambiguous such an ambiguous notice indicates a non notice indicates a non-application of mind by the Assessing Officer application of mind by the Assessing Officer (AO) and violates the principles of natural justice, as the assessee (AO) and violates the principles of natural justice, as the assessee (AO) and violates the principles of natural justice, as the assessee must be clearly informed of the specific charge must be clearly informed of the specific charge. The Hon’ble Court The Hon’ble Court emphasized that the two the two charges under Section 271(1)(c) are distinct charges under Section 271(1)(c) are distinct and an omnibus notice is defective and penalty order based on such and an omnibus notice is defective penalty order based on such ground are accordingly liable to be dismissed. ground are accordingly liable to be dismissed.
5.3 In the present case, In the present case, the assessment order dated 25.03.2014 the assessment order dated 25.03.2014 available on PB- 40, 40, itself records that penalty proceedings were ords that penalty proceedings were initiated initiated initiated “for “for “for furnishing furnishing furnishing inaccurate inaccurate inaccurate particulars particulars particulars of of of income income income /concealment of income” /concealment of income”—an expression reflecting uncertainty in an expression reflecting uncertainty in the mind of the Assessing Officer. the mind of the Assessing Officer. The relevant part of the The relevant part of the assessment order is reproduced as unde assessment order is reproduced as under:
“5.16 In view of the above discussions, total income of the “5.16 In view of the above discussions, total income of the “5.16 In view of the above discussions, total income of the assessee having regard LO the Arm's Length Price is assessee having regard LO the Arm's Length Price is assessee having regard LO the Arm's Length Price is determined determined at Rs.53,28,069/- regarding international at Rs.53,28,069/ regarding international transaction of advancing loan to its AE as per provisions of transaction of advancing loan to its AE as per provisions of transaction of advancing loan to its AE as per provisions of section 92C of the IT Act section 92C of the IT Act 1961. Penalty proceeding u/s 271 1961. Penalty proceeding u/s 271 (1) (c) of the IT Act is also initiated for furnishing inaccurate (1) (c) of the IT Act is also initiated for furnishing inaccurate (1) (c) of the IT Act is also initiated for furnishing inaccurate particulars of income(concealment of income.” particulars of income(concealment of income.” 5.4 The same ambiguity pervades the notice under Section 274, a The same ambiguity pervades the notice under Section 274, a The same ambiguity pervades the notice under Section 274, a copy of which (Paper Book page 24) has been exa copy of which (Paper Book page 24) has been examined by us mined by us. For ready reference said notice is reproduced as under: ready reference said notice is reproduced as under:
5.5 Further, in show cause notice dated 06.08.2021 also the Further, in show cause notice dated 06.08.2021 also the Further, in show cause notice dated 06.08.2021 also the Assessing Officer has not referred to specific charge for levy of the Assessing Officer has not referred to specific charge for levy of the Assessing Officer has not referred to specific charge for levy of the penalty.
5.6 The omission to strike out the inapplicab The omission to strike out the inapplicable limb is not a mere le limb is not a mere technicality; it goes to the root of jurisdiction. Ubi jus ibi technicality; it goes to the root of jurisdiction. technicality; it goes to the root of jurisdiction. remedium—where there is a wrong, the law must afford a remedy where there is a wrong, the law must afford a remedy— where there is a wrong, the law must afford a remedy and the assessee cannot be made to suffer for the procedural lapses and the assessee cannot be made to suffer for the procedural lapses and the assessee cannot be made to suffer for the procedural lapses of the Revenue.
5.7 In background of the above facts In background of the above facts of the case , of the case , relying on the decision of the Hon’ble Bombay High Court in the case of Md. decision of the Hon’ble Bombay High Court in the case of Md. decision of the Hon’ble Bombay High Court in the case of Md. Farhan A. Shaik (supra) Farhan A. Shaik (supra), we cancel the penalty levied cancel the penalty levied by the Assessing Office and uphe Assessing Office and upheld by the Ld. CIT(A). The order of the Ld. ld by the Ld. CIT(A). The order of the Ld. CIT(A) on the issue in dispute is accordingly set aside. The ground A) on the issue in dispute is accordingly set aside. The ground A) on the issue in dispute is accordingly set aside. The ground No. 2 and 3 of the appeal of the assessee are allowed. The other No. 2 and 3 of the appeal of the assessee are allowed. The other No. 2 and 3 of the appeal of the assessee are allowed. The other grounds are only rendered academic. grounds are only rendered academic.
In the result, the appeal of the assessee is allowed. In the result, the appeal of the assessee is allowed. In the result, the appeal of the assessee is allowed.