M/S.NISHIGANDHA TRADING CO.LTD,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX 5(2)(1), MUMBAI

The present appeal has been preferred by the assessee against the order dated 18.08.2017 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2012-13.

The assessee has challenged the order of Ld. CIT(A) confirming the penalty as levied by the AO under section 271(1)(c) of the Act both on merit as well as on technical issue.

We would like to first adjudicate the appeal of the assessee on technical ground wherein the assessee has challenged the order of Ld. CIT(A) upholding the order of AO wherein the 2 M/s. Nishigandha Trading Co. Ltd. penalty is levied u/s 271(1)(c) of the Act by issuing show cause notice without specifically mentioning the charge on which the penalty was proposed to be levied.

The facts in brief are that the assessment was framed under section 143(3) of the Act vide order dated 10.03.2015 assessing the income at Rs.2,09,77,880/- against the return of income of Rs.1,97,38,710/- by making two additions namely; (1) cessation of liability u/s 41(1) – Rs.8,53,712/- (2) Disallowance u/s 14A – Rs.3,85,458/- The AO initiated penalty proceedings under section 271(1)(c) by issuing notice under section 274 read with section 271(1)(c) of the Act for furnishing of inaccurate particulars of income qua the cessation of liability whereas no penalty proceedings were initiated in respect of disallowance made under section 14A of the Act. The penalty notice dated 10.03.2015 was issued under section 274 read with section 271(1)(c) wherein the specific charge was not stated i.e. the notice was issued in a standard format without striking off the redundant limb in the notice. Thereafter, the penalty was also imposed finally for inaccurate particulars of income equal to 100% of the tax sought to be evaded at Rs.2,90,177/- vide order dated 29.09.2015 passed under section 271(1)(c) of the Act.

The Ld. CIT(A) dismissed the appeal of the assessee by holding that non striking of the relevant part in the notice would not vitiate entire penalty proceedings by following the decision of Hon’ble Bombay High Court in the case of CIT vs. Smt. Kaushalya & ors. (1995) 216 ITR 660.

After hearing both the parties and perusing the material on record including the impugned order, we observe that the AO has initiated the penalty proceedings in respect of addition made qua the cessation of liability of Rs.8,53,712/- by issuing notice dated 10.03.2105 under section 274 read with section 271(1)(c). We observe that the said notice was issued in a standard format without striking off the redundant or irrelevant part of the notice and the notice states that penalty has been initiated for concealing the particulars of income or for furnishing of inaccurate particulars of income. Thus the notice has been issued by the AO in a mechanical manner without application of mind. By issuing such notice, the assessee is deprived of his legitimate right to respond to the specific charge on which the penalty was proposed to be levied by the AO and therefore the penalty proceedings itself are invalid and can not be sustained for violation of principles of natural justice. The Ld. CIT(A) has passed the order dismissing the appeal of the assessee on this technical issue by following the order of Hon’ble Bombay High Court in the case of CIT vs. Smt. Kaushalya & ors. (supra) However, the Hon’ble Bombay High Court in the subsequent decisions in the case of CIT vs. Shri Samson Perinchery (2017) 392 ITR 4 (Bom.) and CIT vs. Mrs. Piedade Perinchery ITXA No.1310 of 2014 order dated 10.01.2017 (Bom. – HC) has held that failure to state the limb in the notice issued u/s 271(1)(c) of the Act would render the proceedings invalid. Similarly the Karnatka High court has laid the same ratio in CIT Vs SSA’s Emerald Meadows (2016) 73 Taxmann.com 241 Karnataka wherein SLP dismissed as reported in (2016) 73 Taxmann.com 248 (SC) and CIT vs. Manjunath Cotton and Ginning Factory

Since we have allowed the appeal of the assessee on technical issue there is no need to adjudicate the ground raised on merits.

In the result, the appeal of the assessee is partly allowed.