M/S.ALLIED DIGITAL SERVICES LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 1(3), MUMBAI, MUMBAI

The Assessee being aggrieved challenged the said decision of the AO in levying the penalty, by filing the first appeal before the Ld. Commissioner and also raised a technical/legal issue qua not specifying the charge or limb, under which the penalty was supposed to be levied and/or without recording the satisfaction for imposing penalty. The Ld. Commissioner, not only rejected the grounds raised by the Assessee on merits, but also on this legal aspect as well and vide impugned order dated 11.07.2025, ultimately, dismissed the appeal of the Assessee.

Thus, the Assessee being aggrieved has preferred the instant appeal challenging the impugned order and at the outset has submitted that in view of various judgments including in the case of CIT vs. Manjunatha Cotton & Ginning Factory (2013) 73 taxmann.com 248/218 taxman 423 (Karnataka) passed by the Hon‟ble Karnataka High Court and CIT vs. Shri Samson Perinchery vs. ACIT (ITA No.4625 to 4630/M/2013) decided by the Hon‟ble Mumbai Tribunal etc., the penalty levied on the basis of defective notice, as also issued in this case, is liable to be deleted/quashed.

On the contrary, the Ld. D.R. refuted the claim of the Assessee by mentioning the fact that in the assessment order the AO has specifically made the satisfaction qua initiation of penalty proceeding for furnishing of inaccurate particulars of income thereby concealing the said income and ultimately, vide penalty order dated 25.02.2019 levied the penalty for concealment of income and filing of inaccurate particulars of income and therefore, the penalty order cannot be faulted with.

We have heard the parties and perused the material available on record. Admittedly, the AO initiated the penalty proceedings in the assessment order for filing of inaccurate particulars of income, however, thereafter issued a notice under Section 274 r.w.s. 271 (c) of the Act dated 28.03.2013 for concealment of particulars of income OR furnishing of inaccurate particulars of income meaning thereby without specifying any specific charge/limb. The AO further vide penalty order, ultimately levied the penalty under consideration for concealment of income OR furnishing inaccurate particulars of income, which goes to show that the AO while levying penalty was also confused and/or unclear qua limb/charge of penalty levied. Thus, the decision of the AO in levying the penalty is hit by the judgment of the Jurisdictional High Court in the case of Md. Farhan A Shaikh (supra) .

On the contrary, the Ld. D.R. refuted the claim of the Assessee by placing reliance on the judgment in the case of Veena Estate (P.) Ltd. vs. CIT (2024) 461 ITR 483 (Bom.) passed by the Hon'ble Jurisdictional High Court, concerning the identical issue, wherein it was held that if an Assessee does not challenge the validity of notice during the penalty or appellate proceedings but instead responds substantially to the allegations, such objections are barred at a later stage.

We have heard the parties and perused the material available on record. As the issue/ground raised by the Assessee qua notice u/s 274 of the Act, goes to the root of the case, hence for the sake of brevity, we are inclined to decide this ground first. Admittedly, the AO issued the penalty notice dated 27.12.2018 u/s 274 of the Act which is reproduced herein below:

Coming to the judgment relied on by the Ld. D.R. in the case of Veena Estate (P.) Ltd. (supra), we observe that in that particular case the notice u/s 274 of the Act was challenged after 23 years for the first time before the Hon'ble High Court by raising additional ground, which was not admitted and rejected by the Hon'ble High Court by interim order. Here it is not the case so, as in the instant case the Assessee has challenged the notice u/s 274 r.w.s. 271 of the Act before the second appellate authority and within a reasonable time and therefore the judgment referred to by the Ld. D.R. is factually dissimilar.

Even otherwise, the Hon'ble Jurisdictional High Court in the Full Bench case in the case of Md. Farhan A Shaikh (supra) has elaborately dealt with the issue and the relevant judgments and therefore respectfully following the said judgment, we are inclined to delete the penalty imposed by the AO and affirmed by the Ld. Commissioner. Thus, the penalty is deleted.

We further observe that the Hon’ble Jurisdictional High Court, recently in the case of Principal Commissioner of Income Tax -6 vs. Colo Colour Private Limited (Income Tax Appeal No. 48 of 2022), decided on 16.09.2025, also dealt with an identical issue, qua not specifying the relevant limb/charge for initiating the penalty proceedings and held as under: 16. It is well settled that the condition precedent for levy of penalty under Section 271(1)(c) is only when the Assessing Officer, in the course of proceedings, is satisfied that an assessee has concealed the particulars of his income or has furnished inaccurate particulars of income. Thus, in applying the penalty provisions under Section 271(1)(c), it was necessary for the Assessing Officer to reached to a conclusion, that the assessee had consciously concealed the particulars of his income and/or had deliberately furnished inaccurate particulars of income to gain an undue advantage of not offering the real income to tax. A clear subjective satisfaction of these essentials is a sine qua non for the Assessing Officer to levy a penalty. Penalty proceedings are penal in nature, as the intention of such provisions is to create an effective deterrent, which will restrain the assessee from adopting any practices detrimental to the fair and realistic assessment as the law would mandate.

The Hon’ble High Court has held that there cannot be two opinions that section 271(1)(c) of the Act is required to be strictly construed. Hence, in the absence of a clear position regarding concealment of particulars of income or furnishing of inaccurate particulars of income in the facts of the present case, penalty proceedings could not have been initiated.

The Hon’ble Karnataka High Court in the case of Manjunatha Cotton & Ginning Factory, 359 ITR 565 (Kar), has also dealt with identical notice and held as under: 7.2. The Hon'ble Karnataka High Court in the case of Manjunatha Cotton & Ginning Factory, 359 ITR 565 (Kar) observed that the levy of penalty has to be clear as to the limb under which it is being levied. As per Hon'ble High Court, where the Assessing Officer proposed to invoke first limb being concealment, then the notice has to be appropriately marked. The Hon'ble High Court also held that the standard proforma of notice under section 274 of the Act without striking of the irrelevant clause would lead to an inference of non- application of mind by the Assessing Officer and levy of penalty would suffers from non-application of mind.

The Hon'ble High Court of Delhi in the case of M/s. Sahara India Life Insurance Company Ltd. 432 ITR 84 (Del.) while following the above judgement in CIT v. Manjunatha Cotton & Ginning Factory 359 ITR 565 (Kar), held as under: "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 the 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 i.e. whether for concealment of particulars of income or for hesitation to delete the penalty levied by the AO and affirmed by the Ld. Commissioner.

Thus, on the aforesaid analyzations, we are unable to sustain the penalty levied under section 271(1)(c) of the Act. Hence, the same is deleted.

In the result the Assessee‟s Appeal is allowed. Order pronounced in the open court on 26.02.2026.