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Income Tax Appellate Tribunal, MUMBAI BENCH “E”, MUMBAI
Before: SHRI AMARJIT SINGH & SHRI ANIKESH BANERJEE
Instant appeal of the revenue was filed by the assessee against the order of the Learned Commissioner of Income-tax (Appeals) *for brevity, ‘Ld.CIT(A)’] passed under section 250 of the Income-tax Act, 1961 (for brevity, ‘the Act’), date of order 28/12/2023 for A.Y. 2003-04. The impugned order was emanated from the order of the Learned Deputy Commissioner of Income-tax, Central Circle- 7(1),Mumbai (for brevity the “Ld.AO”) passed under section 271(1)(c)of the Act, date of order 30/03/2019.
The revenue has taken the following grounds:- “1. On the facts and in the circumstances of the case and in law, the Ld CITIA) erred in deleting the penalty u/s 271(1)(c) on the ground that the charge of penalty was not specified in the notice u/s 274 r.w.s. 271(1) (c) as the inapplicable limb of charge was not struck off by the A.O., whereas the fact is that the penalty u/s 271(1)(c) was initiated in the original assessment order for furnishing inaccurate particulars of income on some issues.
2 On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in deleting the penalty u/s 271(1)(c) on the ground that the inapplicable limb of charge for the penalty was not struck off by the A.O. in the notice u/s 274 r.w.s 271(1)(c), whereas the fact is that no limb of charge Le. neither furnishing inaccurate particulars of income nor concealment of income, was inapplicable as per the satisfaction recorded by the A.O. under section 271(1)(c) in the assessment order, which was duly served on the assessee making it aware of the charges of penalty.
On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the penalty u/s 271(1)(c) on the ground that the charge was not specified in the notice u/s 274 r.w.s. 271(1)(c), whereas the fact is that the charge of furnishing inaccurate particulars of income was clearly mentioned in the notice u/s 274 r.w.s. 271(1)(c) issued before passing the impugned order levying the penalty.
4. The appellant craves leave to amend or alter any ground and/or add new grounds which may be necessary.”
3. The brief facts of the case is that the assessment was completed and the Ld.AO disallowed the depreciation on BSE card amount to Rs.10,28,320/- and disallowed bad debts amount to Rs.4,21,55,018/-. The notice under section 274 r.w.s. 271(1)(c) of the Act was issued and finally the penalty was levied @100% on tax sought to be evaded amount to Rs.1,75,48,609/-. The aggrieved assessee filed an appeal before the Ld. CIT(A). The Ld.CIT(A) considered the legal ground of the assessee related to the defective notice issued by the Ld.AO under section 274 read with section 271(1)(c) of the Act and on that basis, the Ld.CIT(A) dismissed the alleged penalty orderand allowed the appeal of the assessee. Being aggrieved on the appeal order, the revenue filed an appeal before us.
The Ld.DR vehemently argued and relied on the order of the Hon’ble High Court at Calcutta in the case PCIT vs Thakur Prasad Sao & Sons (P.) Ltd (2024) 163 taxman.com 449(Cal) where the Ld.AO had recorded in assessment order particulars of concealed income / undisclosed income of assessee and on that basis, initiated penalty proceedings under section 271(1)(c) of the Act. The consequential notice under section 274 issued by the Ld.AO to assessee to offer him opportunity of hearing, was specifically of notice for penalty for concealment of particulars of income / undisclosed income, such a notice complied with principles of natural justice and was valid under section 274 of the Act. Accordingly, the Ld.DR fully relied on the order of the Ld.AO and argued that the said notice issued by the Ld.AO on dated 27/12/2011 is valid notice. So the penalty will be sustained.
5. The Ld.AR invited our attention to the notice dated 27/12/2011 issued by the ACIT, Central Circle 40, Mumbai, annexed in APB page 1. The Ld.AR argued that the notice was duly reproduced by the Ld.CIT(A) in his order. The notice suffers from two defects; first of allthere is absence of section under which the showcause notice U/s 274 of the Act was issued and secondly, there is no mention about the limb under which the penalty was proposed to be levied, whether for concealment of income or for furnishing inaccurate particulars of income. So accordingly, the said notice is invalid. Considering the fact of the case, the Ld.AR informed that related to addition of bad debt amount to Rs.4,21,55,018/- is duly deleted by the order of the co-ordinate bench of ITAT, Mumbai bearing date of order 08/10/2021. So only the disallowance of depreciation on BSE card, Rs.10,03,320/- is sustained for addition. But mere disallowance for expenses cannot be the point of penalty which is duly covered by the order of the Hon’ble Apex Court in CIT vs Reliance Petroproducts (P) Ltd 322 ITR 158 (SC). The Ld. CIT(A) in alleged appeal order had respectfully referred the catena of judgements where the Hon’ble High Courts have taken view against the revenue related issuance of the defective notice. The relevant paragraphs of the alleged appeal order are reproduced as below:- “6. DECISION: 6.1. I have carefully considered the submissions and contentions of the appellant and have also gone through the assessment order, notice by which the impugned penalty proceedings were initiated and also the impugned penalty order, it is seen that the AD had discussed the issues relating to the disallowances of Rs. 10,26,320/- and Rs.4,21,55,018 in paras 5 and 6, respectively, of the assessment order dated 27/12/2011 passed us. 143(3) road with Section 254 of the Act. in both the paragraphs, the AO had mentioned that the penalty proceedings uls 271(1)(c) of the Act were being initiated for furnishing inaccurate particulars and concealment of income. The AO has stated in paras 2 and 4.1 of the impugned penalty order that the penalty proceedings u/s 271(1)(c) of the Act had been initiated by notice uls. 274 read with Section 271(1)(c) issued on 27/12/2011 for concealment and furnishing inaccurate particulars of income. Further, as per para 13 of the impugned order, the penalty has been levied by the AO for concealment of income.
6.2 Before me, the AR of the appellant has, inter alia, filed a copy of notice dated 27/12/2011 issued by the AD u/s. 274 read with Section 271 of the Act for initiating penalty proceedings u/s. 271(1)(c) of the Act. It would be useful to reproduce the contents of the said notice as under:
"NOTICE UNDER SECTION 274 READ WITH SECTION 271 OF THE INCOME TAX ACT, 1961, PAN: AAACT2152P Office of the Asst. Commissioner of Income-tax,
Central Circle 40, Room no 653 Aayakar Bhavan, 6th Floor M.K. Road, Mumbai-400 020. Date: 27/12/2011 To, The Principal Officer Mis Triumph Securities Ltd 121, 1 Floor, Radha Bhavan, Nagindas Master Road, Fort, Mumbai-400023 Whereas in the course of proceedings before me for the assessment year 2003-04 it appears to be that you:- *have without reasonable cause failed to furnish me return of income which you were required to furnish by a notice given under section 22(1)/22(2)/34 of the Indian Income- tax Act. 1922 or which you were required to furnish under Section 139(1) or by a notice given under Section 139(2)/148 of the Income-tax Act, 1961, No. dated or have without reasonable cause failed to furnish it within the time allowed and the manner required by the said Section 139(1) or by such notice.
*have without reasonable cause failed to comply with a notice under Section 22(4)/23(2) of the Indian Income-tax Act, 1922 or under Section 142(1)/143(2) of the Income-tax Act, 1961, No. ________________dated_________________or have without reasonable cause failed to comply with a notice under Section 22(4)/23(2) of the Indian Income-tax Ac, 1922 or under Section 142(1) / 143(2) of the Income-tax Act, 1961. No. ________________dated_________________.
You are hereby requested to appear before me at 11.30 A.M. on 10.01.2012 and show cause why an order imposing a penalty on you should not be made under Section 271 (1) (c) of the Income-tax Act, 1961. If you do not wish to avail yourself of this opportunity of being heard in person or through authorized representative, you may show cause in writing on or before the said date which will be considered before any such order is made under Section 271 (1) (c).
Sd/- (AMIT KUMAR SINGH)
Asstt. Commissioner of income-tax Cent. Cir. 40, Mumbai." (Seal)
6.3 It can be seen from the above that there is no mention at all about the charge of either furnishing of inaccurate particulars of income or concealment of the particulars of income, in the notice dated 27/12/2011 issued by the AO u/s. 274 read with Section 271 of the Act for initiating the penalty proceedings u/s. 271(1)(c) of the Act. The notice refers only to the failures to furnish return of income and to comply with notices issued, and here also, the relevant details are left blank and the clause which is not relevant is not struck off. It is only in the last paragraph that there is a mention about imposing of penalty u/s. 271(1)(c) of the Act on the appellant. Thus, I find that in the aforesaid notice, the AO had not specified any of the relevant charges either furnishing of inaccurate particulars of income or concealment of the particulars of income-being brought against the appellant.
6.4 It is pertinent to note that the entire legal controversy about identification of the relevant limb of penalty in the notice u/s. 274 read with Section 271 of the Act started with the judgment of Hon'ble Karnataka High Court in the case of CIT &Anrs Vs. Manjunatha Cotton and Ginning Factory (2013) 359 ITR 0565 (Kar.), wherein it was held that the notice u/s. 274 of the Act should specifically state the grounds mentioned in Section 271(1)(c), ie, whether it is for concealment of income or for furnishing of incorrect particulars of income.
6.5 Subsequent to the above judgment, in the case of CIT v. SSA's Emerald Meadows 73 taxmann.com 241 (Kar.) (HC), a Division Bench of Hon'ble Karnataka High Court, again taking note of the Manjunatha's case, dismissed the appeal filed by the Revenue holding that no substantial question of law arose for determination by the Court.
6.6 However, the Hon'ble Bombay High Court, in the case of CIT Vs. Smt. Kaushalya &Ors. (1995) 216 ITR 0660, has held that assessment having already been made before issue of notice under s 274(1) and assessee fully knowing in detail the exact charge of the Department against him, the notice could not be said to have prejudiced the assessee by any ambiguity in its wordings and mere mistake in language would not invalidate the same.
6.7 Thereafter, the Hon ble Bombay High Court has taken a different view in PCIT v. Goa Coastal Resorts [TXA/24/2019 (Bom)); (8) PCIT v. Goa Dorado [TXA/18/2019 (Bom)): (9) and in the case of PCIT v. New Era Sova Mine [TXA/70/2019 (Bom)).
6.8 I find that this very issue has now been considered by the Full bench of Hon'ble Bombay High Court in the case of Mohd. Farhan A. Shaikhreported in (2021) 125 taxmann.com 253 (Bom). In this case, the Larger Bench of the Hon'ble Jurisdictional High Court was referred an issue, that is, mere failure to tick mark the applicable grounds' in the notice issued under Section 271 of the Income Tax Act, 1961 (IT Act) vitiate the entire penalty proceedings. To this, it was held that a penal provision even with civil consequences, must be construed strictly and ambiguity, if any, must be resolved in the affected assessee's favour. The matter referred to the Hon'ble Full Bench as noted in the said order is as below:
While placing the matter before the Hon'ble the Chief Justice for issue-resolution by a larger Bench, the learned Division Bench has framed this question for reference:
"[In] the assessment order or the order made under sections 143(3) and 153C of the IT Act, [when] the Assessing Officer has clearly recorded satisfaction for the imposition of penalty on one or the other, or both grounds mentioned in Section 271(1)(c), (would) a mere defect in the notice of not stinking out the relevant words [...] vitiate the penalty proceedings?
6. Besides, the Division Bench has also desired the larger Bench to consider two more aspects: (a) "the impact of non-discussion on the aspect of 'prejudice' in the first set of decisions)": (b) and "the effect of the decision of the Hon'ble Supreme Court in case of Dilip N. Shroff v. Joint Commissioner of Income-Tax [2007] 291 ITR 519 (SC) on the issue of non-application of mind where the relevant portions of the printed notices are not struck off
This is how the Hon'ble the Chief Justice constituted this Full Bench for resolving the precedential tangle if any.
6.9 While making observation on the Judgment of Dilip N. Shroff, it was observed by the Hon'ble High Court that primary burden of proof is on the Revenue. The Assessing Officer must satisfy himself that there is primary evidence to establish that the assessee had concealed the amount or furnished inaccurate particulars. And this onus is to be discharged by the Revenue While considering whether the assessee has discharged his burden, the Assessing Officer should not begin with the presumption that he is guilty. Once the Revenue discharges its primary burden of proof, the secondary burden of proof, would shift on to the assessee. It is because the proceeding under Section 271(1)(c) is of penal nature in the sense that its consequences are intended to be an effective deterrent which will put a stop to practices which the Parliament considers to be against the public interest", So, it was for the Revenue to establish that the assessee shall be guilty of the particulars of income". The Hon'ble High Court also relied on the Judgments of CIT v. Samson Pericherry, ITA/1154/2014 (Bom); PCIT v. Goa Dorado, TXA/18/2019 (Bom) and PCIT v. New Era Sova Mine TXA/70/2019 (Bom), wherein it was observed that "No notice could be issued under Section 274, read with Section 271, of the Act without indicating which particular limb of Section 271(1)(c) was invoked for initiating the penalty proceedings". Finally, the larger Bench of Hon'ble high Courthas decided the matter with following findings:
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?
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 assessee. 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 assessee must be informed of the grounds of the penalty proceedings only through statutory notice. An omnibus notice suffers from the vice of vagueness.
182. More particularly, a penal provision, even with civil consequences, must be construed strictly. And ambiguity, if any, must be resolved in the affected assessee's favour.
183. Therefore, we answer the first question to the effect that Goa Dourado Promotions and other cases have adopted an approach more in consonance with the statutory scheme. That means we must hold that Kaushalya does not lay down the correct proposition of law.
Question No. 2: Has Kaushalya failed to discuss the aspect of 'prejudice'?
Indeed, Kaushalya did discuss the aspect of prejudice. As we have already noted, Kaushalya noted that the assessment orders already contained the reasons why penalty should be initiated. So, the assessee, stresses Kaushalya, "fully knew in detail the exact charge of the Revenue against him". For Kaushalya, the statutory notice suffered from neither non-application of mind nor any prejudice. According to it, "the so-called ambiguous wording in the notice [has not) impaired or prejudiced the right of the assessee to a reasonable opportunity of being heard". It went onto observe that for sustaining the plea of natural justice on the ground of absence of opportunity, it has to be established that prejudice is caused to the concerned person by the procedure followed". Kaushalya closes the discussion by observing that the notice issuing "is an administrative device for informing the assessee about the proposal to levy penalty in order to enable him to explain as to why it should not be done".
185 No doubt, there can exist a case where vagueness and ambiguity in the notice can demonstrate non-application of mind by the authority and/or ultimate prejudice to the right of opportunity of hearing contemplated under section 274. So asserts Kaushalya. In fact, for one assessment year, it set aside the penalty proceedings on the grounds of non- application of mind and prejudice.
That said, regarding the other assessment year, it reasons that the assessment order, containing the reasons or justification, avoids prejudice to the assessee. That is where, we reckon, the reasoning suffers. Kaushalya's insistence that the previous proceedings supply justification and cure the defect in penalty proceedings has not met our acceptance.
Question No. 3: What is the effect of the Supreme Court's decision in Dilip N. Shroff on the issue of non-application of mind when the irrelevant portions of the printed notices are not struck off?
187 In Dilip N. Shroff, for the Supreme Court, it is of "some significance that in the standard Pro-forma used by the assessing officer in issuing a notice despite the fact that the same postulates that inappropriate words and paragraphs were to be deleted, but the same had not been done". Then, Dilip N. Shroff, on facts, has felt that the assessing officer himself was not sure whether he had proceeded on the basis that the assessee had concealed his income or he had furnished inaccurate particulars.
We may, in this context, respectfully observe that a contravention of a mandatory condition or requirement for a communication to be valid communication is fatal, with no further proof. That said, even if the notice contains no caveat that the inapplicable portion be deleted, it is in the interest of fairness and justice that the notice must be precise. It should give no room for ambiguity. Therefore, Dilip N. Shroff disapproves of the routine, ritualistic practice of issuing omnibus show-cause notices. That practice certainly betrays non application of mind. And, therefore, the infraction of a mandatory procedure leading to penal consequences assumes or implies prejudice.
In Sudhir Kumar Singh, the Supreme Court has encapsulated the principles of prejudice. One of the principles is that "where procedural and/or substantive provisions of law embody the principles of natural justice, their infraction per se does not lead to invalidity of the orders passed. Here again, prejudice must be caused to the litigant, "except in the case of a mandatory provision of law which is conceived not only in Individual interest but also in the public interest".
Here, section 271(1)(c) is one such provision. With calamitous, albeit commercial, consequences, the provision is mandatory and brooks no trifling with or dilution. For a further precedential prop, we may refer to Rajesh Kumar v. CIT ((2007) 2 SCC 181], in which the Apex Court has quoted with approval its earlier judgment in State of Orissa v. Dr. Binapani Dei [AIR 1967 SC 1269]. According to it, when by reason of action on the part of a statutory authority, civil or evil consequences ensue, principles of natural justice must be followed. In such an event, although no express provision is laid down on this behalf, compliance with principles of natural justice would be implicit. If a statue contravenes the principles of natural justice, it may also be held ultra vires Article 14 of the Constitution.
As a result, we hold that Dilip N. Shroff treats omnibus show-cause notices as betraying non-application of mind and disapproves of the practice, to be particular, of issuing notices in printed form without deleting or striking off the inapplicable parts of that generic notice. (emphasis added)
6.10 Further, in another judgment, the Hon'ble Bombay High Court in Pr. CIT Vs. Golden Peace Hotels and Resorts (P.) Ltd. (2021) 124 taxmann.com 248 (Bom) also took similar view that where inapplicable portions were not struck off in the penalty notice, the penalty was vitiated. The SLP of the Department against this judgment has recently been dismissed by the Hon'ble Apex Court in Pr.CIT Vs. Golden Peace Hotels and Resorts (P.) Ltd. (2021) 124 taxmann.com 249 (SC).
6.11 I find that this very issue has recently been considered by the Hon'ble Delhi ITAT as well in the case of ACIL Ltd. Vs ACIT, [2022] 137 taxmann.com 339 (Delhi -Trib.), wherein it was held as follows: "9. We have gone through the record in the light of the submissions made on either side. From the orders under challenge, it is very clear that the main grievance of the assessee is that the levy of penalty on the basis of notice which is vague and illegal cannot be sustained. Such a question of the legality or otherwise of assumption of jurisdiction by the learned Assessing Officer under a notice issued under section 271(1)(c) of the Act without striking off of the relevant limb under which the penalty is proposed is no longer res integra, and the Hon'ble jurisdictional High Court in the case of Pr. CIT v. Sahara India Life Insurance Co. Ltd. [2019] 108 taxmann.com 597/2021) 432 (TR 84 (Delhi), while noticing the addition of the Hon'ble Karnataka High Court in CIT v Manjunatha Cotton & Ginning Factory (2013) 35 taxmarin.com 250/218 Taxman 423/359 ITR 565 dealt with this issue.
10. In the case of Manjunatha Cotton & Ginning Factory (supra). Vide paragraph 60, the Hon'ble Karnataka High Court has held as follows:-
60, Clause (c) deals with two specific offences, that is to say, concealing particulars of income or furnishing inaccurate particulars of income. No doubt, the facts of some cases may attract both the offences and in some cases there may be overlapping of the two offences but in such cases the initiation of the penalty proceedings also must be for both the offences. But drawing up penalty proceedings for one offence and finding the assessee guilty of another offence or finding him guilty for either the one or the other cannot be sustained in low. It is needless to point out satisfaction of the existence of the grounds mentioned in section 271(1)(c) when it is a sine qua non for initiation or proceedings, the penalty proceedings should be confined only to those grounds and the said grounds have to be specifically stated so that the assessee would have the opportunity to meet those grounds. After, he places his version and tries to substantiate his claim, if at all, penalty is to be imposed, it should be imposed only on the grounds on which he is called upon to answer. It is not open to the authority, at the time of imposing penally to impose penalty on the grounds other than what assessee was called upon to meet. Otherwise though the initiation of penalty proceedings may be valid and legal, the final order imposing penalty would offend principles of natural justice and cannot be sustained. Thus once the proceedings are initiated on one ground, the penalty should also be imposed on the same ground. Where the basis of the initiation of penalty proceedings is not identical with the ground on which the penalty was imposed, the imposition of penalty is not valid. The validity of the order of penalty must be determined with reference to the information, facts and materials in the hands of the authority imposing the penalty at the time the order was passed and further discovery of facts subsequent to the imposition of penalty cannot validate the order of penalty which, when passed, was not sustainable.
In CIT v. SSA's Emerald Meadows (2016) 73 taxmann.com 241 the Hon'ble Karnataka High Court Considered the question of law as to,- "Whether, omission if assessing officer to explicitly mention that penalty proceedings are being initiated for furnishing of inaccurate particulars or that for concealment of income makes the penalty order liable for cancellation even when it has been proved beyond reasonable doubt that the assessee had concealed income in the facts and circumstances of the case?"
And the Hon'be High Court ruled answered the same in favour of the assessee observing that:
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 Commissioner of Income Tax V. Manjunatha Cotton And Ginning Factory (2013) 359 ITR 565. 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.
6.11 I find that this very issue has recently been considered by the Hon'ble Delhi ITAT as well in the case of ACIL Ltd. Vs ACIT, [2022] 137 taxmann.com 339 (Delhi -Trib.), wherein it was held as follows:
"9. We have gone through the record in the light of the submissions made on either side. From the orders under challenge, it is very clear that the main grievance of the assessee is that the levy of penalty on the basis of notice which is vague and illegal cannot be sustained. Such a question of the legality or otherwise of assumption of jurisdiction by the learned Assessing Officer under a notice issued under section 271(1)(c) of the Act without striking off of the relevant limb under which the penalty is proposed is no longer res integra, and the Hon'ble jurisdictional High Court in the case of Pr. CIT v. Sahara India Life Insurance Co. Ltd. [2019] 108 taxmann.com 597/(2021) 432 ITR 84 (Delhi), while noticing the addition of the Hon'ble Karnataka High Court in CIT v. Manjunatha Cotton & Ginning Factory (2013) 35 taxmann.com 250/218 Taxman 423/359 ITR 565 dealt with this issue.
10. In the case of Manjunatha Cotton & Ginning Factory (supra). Vide paragraph 60, the Hon'ble Karnataka High Court has held as follows:-
60. Clause (c) deals with two specific offences, that is to say, concealing particulars of income or furnishing inaccurate particulars of income. No doubt, the facts of some cases may attract both the offences and in some cases there may be overlapping of the two offences but in such cases the initiation of the penalty proceedings also must be for both the offences. But drawing up penalty proceedings for one offence and finding the assessee guilty of another offence or finding him guilty for either the one or the other cannot be sustained in law. It is needless to point out satisfaction of the existence of the grounds mentioned in section 271(1)(c) when it is a sine qua non for initiation or proceedings, the penalty proceedings should be confined only to those grounds and the said grounds have to be specifically stated so that the assessee would have the opportunity to meet those grounds. After, he places his version and tries to substantiate his claim, if at all, penalty is to be imposed, it should be imposed only on the grounds on which he is called upon to answer. It is not open to the authority, at the time of imposing penalty to impose penalty on the grounds other than what assessee was called upon to meet. Otherwise though the initiation of penalty proceedings may be valid and legal, the final order imposing penalty would offend principles of natural justice and cannot be sustained. Thus once the proceedings are initiated on one ground, the penalty should also be imposed on the same ground. Where the basis of the initiation of penalty proceedings is not identical with the ground on which the penalty was imposed, the imposition of penalty is not valid. The validity of the order of penalty must be determined with reference to the information, facts and materials in the hands of the authority imposing the penalty at the time the order was passed and further discovery of facts subsequent to the imposition of penalty cannot validate the order of penalty which, when passed, was not sustainable.
In CIT v. SSA's Emerald Meadows [2016] 73 taxmann.com 241 the Hon'ble Karnataka High Court Considered the question of law as to, - "Whether, omission if assessing officer to explicitly mention that penalty proceedings are being initiated for furnishing of inaccurate particulars or that for concealment of income makes the penalty order liable for cancellation even when it has been proved beyond reasonable doubt that the assessee had concealed income in the facts and circumstances of the case?"
And the Hon'able High Court ruled answered the same in favour of the assessee observing that:
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 Commissioner of Income Tax V. Manjunatha Cotton And Ginning Factory (2013) 359 ITR 565. 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.
The Special Leave Petition filed by the Revenue challenging the aforesaid judgement of the High Court was dismissed by the Hon'ble Supreme Court holding:
We do not find any merit in this petition. The special leave petition is, accordingly, dismissed.
In the case of Sahara India Life Insurance Co. Ltd. case (supra), Hon'ble Delhi High Court, upheld the view taken by the Tribunal basing on the decision of the Hon'ble Karnataka High Court in the case of Manjunatha Cotton & Ginning Factory (supra) and SSA's Emerald Meadows (supra) wherein it was held that the notice issued by the learned Assessing Officer would be bad in law if it did not specify which limb of section 271(1)(c) of the Act the penalty proceedings had been initiated under i.e., whether for concealment of particulars of income or for furnishing of inaccurate particulars thereof. Relevant observations of the Hon'ble High Court read that,- "21. The Respondent had challenged the upholding of the penalty imposed under section 271(1)(c) of the Act, which was accepted by the ITAT. It followed the decision of Karnataka High Court in CIT v. Manjunatha Cotton & Ginning Factory 359 ITR 565 (Kar.) and observed that the notice issued by the AO would be bad in law if it did not specify which limb of section 271(1)(c) the penalty proceedings had been initiated under l.e. whether for concealment of particulars of income or for furnishing of inaccurate particulars of income. The Karnataka High Court had followed the above judgement in the subsequent order in Commissioner of Income Tax v. SSA's Emerald Meadows (2016) 73 taxmann.com 241 (Kar), the appeal against which was dismissed by the Supreme Court of India in SLP No. 11485 of 2016 by order dated 5th August, 2016.
On this issue again this court is unable to find any error having been committed by the ITAT."
It is, therefore, clear that for the AO to assume jurisdiction u/s 271(1)(c), proper notice is necessary and the defect in notice u/s 274 of the Act vitiates the assumption of jurisdiction by the learned Assessing Officer to levy any penalty. In this case, facts stated supra clearly establish that the notice issued under section 274 read with 271 of the Act is defective and, therefore, we find it difficult to hold that the learned AO rightly assumed jurisdiction to passed the order levying the penalty. As a consequence of our findings above, we direct the assessing officer to delete the penalty in question."
6.12 This issue has further been considered by the Hon'ble Jurisdictional High Court in another recent decision in the case of [2022] 135 taxmann.com 244 (Bombay) Ganga Iron & Steel Trading Co. vs CIT, wherein the penalty was directed to be deleted placing reliance on the decision of Hon'ble Full Bench in the case of Mohd. Farhan A. Shaikh (supra), with following findings:
"B. We may at the outset refer to the judgment of the Full Bench of this Court in Mohd. Farhan A. Shaikh (supra) wherein this precise question was considered and answered. The said question reads as under:
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?
After considering various decisions of the Hon'ble Supreme Court and of this Court including the decision in Dilip N. Shroff (supra) the Full Bench answered the aforesaid question as under:
“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 assessee. But that translates into action only through the statutory notice under section 271(1)(c), read with Section 274 of the 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 assessee must be informed of the grounds of the penalty proceedings only through statutory notice. An omnibus notice suffers from the vice of vagueness.
More particularly, a penal provision, even with civil consequences, must be construed strictly. And ambiguity, if any, must be resolved in the affected assessee's favour.
Therefore, we answer the first question to the effect that Goa Dourado Promotions and other cases have adopted an approach more in consonance with the statutory scheme. That means we must hold that Kaushalya does not lay down the correct proposition of law."
It is thus clear from the law as laid down that even if there was an order recording satisfaction for imposing penalty on one or the other, or on both grounds as mentioned in section 271(1)(c) of the said Act, if the show cause notice suffers from the vice of vagueness the same would vitiate such notice"
We find that the law as laid down by the Full Bench applies on all fours to the facts of the present case as in the show cause notice dated 12-2-2008, the Assistant Commissioner of Income-tax is not clear as to whether there was concealment of particulars of income or that the Assessee had furnished inaccurate particulars of income. We therefore find that issuance of such show cause notice without specifying as to whether the Assessee had concealed particulars of his income or had furnished inaccurate particulars of the same has resulted in vitiating the show cause notice." (emphasis added)
6.13 It would be seen from the above decisions that where the charge is not properly set out in the notice u/s 274, that is, both the limbs stand therein without striking off of the inapplicable limb, but the penalty has been levied for one of the two, such a penalty order gets vitiated. However, in the present case, the situation is even worse, as the notice does not mention either of the charges/limbs. Accordingly, respectfully following the judgment of the Full Bench of the Hon'ble jurisdictional High Court and other decisions referred to above, I hold that the penalty in this case gets vitiated as the notice issued u/s 274 r.w.s. 271 has to be held as void ab initio. 1. therefore, overturn the impugned order and direct the AO to delete the penalty of Rs.1,75,48,609/- levied by the AO on the appellant u/s.271(1)(c) of the Act.”
We have considered the rival submissions and examined the documents on record. The notice issued under Sections 271(1)(c) and 274 of the Act, dated 27/12/2011, does not specify the particular provision under which the penalty is imposed or the specific limb of the offense alleged. It is well-settled that when the basis for initiating penalty proceedings differs from the grounds on which the penalty is ultimately imposed, such imposition is invalid. The validity of a penalty order must be assessed based on the information, facts, and materials available to the authority at the time the order was passed. Subsequent discoveries or additional facts cannot validate an otherwise unsustainable penalty order. The DR has relied on the judgment of the Hon'ble Calcutta High Court in Thakur Prasad Sao & Sons (P.) Ltd. (supra), where the Hon'ble Court ruled in favor of the revenue by taking a contrary view. However, this issue is entirely legal and has been conclusively decided by the larger bench of the Hon'ble Jurisdictional High Court in Mohammed Farhan A. Shaikh (supra). Various judicial pronouncements, including the decision of the Hon'ble Karnataka High Court in CIT v. SAS Emerald Meadows (73 taxmann.com 241), against which the Special Leave Petition (SLP) filed by the department was dismissed by the Hon'ble Supreme Court (73 taxmann.com 248), have consistently held that a notice under Section 274/271(1)(c) of the Act must explicitly state the specific charge or limb of the offense. In this case, the notice fails to identify the specific charge and does not clearly distinguish between "concealment of income" and "furnishing inaccurate particulars of income."
In light of the binding judicial precedents cited above and the principle of ratio decidendi, we hold that the impugned penalty is legally unsustainable. Accordingly, we find no reason to interfere with the appellate order under challenge. The revenue's ground of appeal is dismissed.
5. In the result, the appeal of the revenue bearing