INDIAN TOOL TECHNOLOGY CENTRE,JALANDHAR vs. ITO, WARD 1(1) , JALANDHAR
Facts
The assessee, Indian Tool Technology Centre, received a government grant for a project which did not commence. Unutilized funds were invested in fixed deposits, earning interest, but the assessee was also liable to repay the grant with 10% interest. The assessee claimed a deduction for this interest payable under section 57(iii) of the Income Tax Act, 1961, which was disallowed by the AO and sustained by the CIT(A), leading to a penalty for furnishing inaccurate particulars.
Held
The Tribunal held that the assessee had made a full and true disclosure of income and the claim for deduction, despite being debatable and potentially not legally sustainable, was bona fide and not a case of furnishing inaccurate particulars. The Tribunal also emphasized that omnibus show-cause notices for penalty, without striking off inapplicable portions, indicate non-application of mind and vitiate penalty proceedings. Therefore, the penalty imposed under section 271(1)(c) was deleted.
Key Issues
Whether the penalty for furnishing inaccurate particulars was justified when the assessee made a bona fide, though debatable, claim for deduction, and whether the penalty order was invalid due to a defective show-cause notice under section 274 that did not strike off inapplicable portions.
Sections Cited
250, 271(1)(c), 1961, 271, 274, 56, 57(iii), 260A, 271(2)(c), 22(1), 22(2), 139(1), 139(2), 148, 22(4), 23(2), 142(1), 143(2), 34(4)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, AMRITSAR BENCH, AMRITSAR
Before: SH. UDAYAN DASGUPTA & SH. KHETTRA MOHAN ROY
Per Udayan Dasgupta, J.M.:
This appeal is filed by the assessee against the order of the ld. CIT(A) NFAC, Delhi dated 12.03.2024 passed u/s 250 of the Income Tax Act, 1961 which has emanated from the penalty order of the AO, Ward 1(1), Jalandhar passed u/s 271(1)(c)
of the Act, 1961 dated 29.11.2022 (imposing a penalty of Rs.56.71 lakhs).
2 I.T.A. No. 262/Asr/2024 Assessment Year: 2014-15
Grounds of appeal taken by the assessee in the memorandum of appeal are as
follows:
“1. That the Id. CIT(A) was not justified in confirming the findings of the AO of levying penalty amounting to Rs.56,71,386/- without appreciating the facts and submissions made before him.
That the CIT(A) did not afford proper and sufficient opportunity to the appellant to present its case which is against the cardinal principles of natural justice.
That the order passed by the AO as well as the CIT(A) is against the law and facts of the case.
The appellant craves for leave to add and amend the grounds of appeal during the course of the appellate proceedings.”
Subsequently, the assessee has made a prayer for admission of additional
grounds, which according to the assessee are legal grounds and does not require fresh
facts to be investigated and goes to the root of the matter and prayed for admission of
the same in view of the Hon’ble Apex court decision in NTPC Ltd 229 ITR 383.
The additional grounds submitted before the tribunal on 4th September, 2024 are 4.
as follows:
“1. That having regard to the facts and circumstances of the case, Hon'ble CIT(A) has erred in law and on facts in confirming the action of Ld. AO in passing the impugned assessment order u/s 271(1)(c) and without complying with the mandatory conditions u/s 271 as envisaged under the Income Tax Act, 1961.
3 I.T.A. No. 262/Asr/2024 Assessment Year: 2014-15 2. That having regard to the facts and circumstances of the case, Hon’ble CIT(A) kas erred in law and on facts in confirming the action of Ld. AO in passing the impugned assessment order u/s 271(1)(c) and without considering the fact that no specific limb has been specified in the show cause notice issued u/s 274 read with section 271 of the Act.
That having regard to the facts and circumstances of the case, Hon'ble CIT(A) has erred in law and on facts in confirming the action of Id. Assessing Officer in imposing penalty u/s 271(1)(c) of the Act, ignoring the facts of case and without observing the principles of natural justice.”
Brief facts emerging from records are that the assessee company was incorporated on 28th June, 2010 under the Companies Act 1956, with the main object
to establish a common facility center (CPC ) for use of hand tool manufacturers, with
the intention to provide manufacturing facilities like forging , heat treatment,
packaging, finishing, testing, and other allied facilities all under one roof and the
proposed project was also approved by the Department of Industrial Policy and promotion ( DIPP ), Ministry of Commerce, Government of India , on 1st of October,
2010 , and in pursuance to the same Central Government grant of Rs.58.25 crores were
also approved ( by DIPP ) for the proposed project and the first instalment of the grant in aid , being Rs. 17.48 crores was released on 24th November, 2010, with a condition
that the whole of the amount if not utilized within one year from the date of its receipt,
was recoverable from the assessee along with interest @ 10% pa.
4 I.T.A. No. 262/Asr/2024 Assessment Year: 2014-15 6. However, on account of various logistic and technical problems the said project
never commenced and the aid received from the Government was refunded in subsequent years ( FY 2014-15 and 2015-16 ) along with interest @ 10%, as per, pre - condition stipulated by the Government on account of the failure on the part of the
assessee, in utilizing the same for the specific purpose within the time period
earmarked by the DIIP authorities , for which it was sanctioned .
Meanwhile , the said funds received by the assessee (which remained unutilized)
was invested in bank fixed deposits (State bank of Patiala ) against which interest has
been earned / received / receivable, and the assessee having disclosed the same in the
audited financials and in the regular return of income under the head “income from
other sources”, as per provisions of section 56 of the Act, has claimed the deduction
of interest payable to the DIIP authorities calculated @ 10% as per stipulated pre
conditions, as per provisions of section 57(iii) of the Act, and the issue that has arisen
in the instant case is whether the said interest payable to the DIP authorities is allowable
to be set off from the interest receivable or not, which has consequently given rise to
the issue of furnishing of inaccurate particulars.
The AO disallowed the deduction claimed u/s 57 of the Act and the Ld. first
appellate authority sustained the same and the matter travelled to the Hon’ble Tribunal and the tribunal vide order dated 21st February, 2022, has decided the issue against
5 I.T.A. No. 262/Asr/2024 Assessment Year: 2014-15 the assessee on the ground that no expenditure has been incurred by the assessee to
earn the interest income because the funds received as Government aid for specific
purpose were invested in FD , and interest was actually earned by the assessee, whereas
the assessee has not incurred any expenditure to earn the said income and the interest
paid / payable to the government as per conditions , does not fall within the purview of
section 57(iii) of the Act 61.
Now, in course of hearing the Ld. AR, of the assessee submitted that an appeal has been filed against the tribunal order dated 21st February, 2022, before the Hon’ble
jurisdictional Punjab and Haryana High court (ITA-249-2022) (DN 7297542) and the
matter is still sub-judice.
The Ld. AR submitted that in the instant case there is neither any concealment
of income nor furnishing of any inaccurate particulars of income and the assessee has
truly and fully disclosed all particulars of its income in the return as evident from the
contents of the return of income and the assessment order and the claim of the assessee
u/s 57(iii) of the Act , is a legal claim which should have been allowed because interest
paid or payable to the DIIP authorities arises out of a pre - condition of refund back
stipulation on account of unutilized Government aid within a specific timeframe and
the same is not in the nature of capital expenditure, and the question of allowability or
not, of the said deduction claimed by the assessee as per provisions of the Act 61, is a
6 I.T.A. No. 262/Asr/2024 Assessment Year: 2014-15 legal matter, which is a debatable issue, and the very fact that the jurisdictional High
court has admitted the appeal u/s 260A of the Act 61, is proof enough that the matter
or the issue is debatable and no penalty u/s 271(1) (c) of the Act is attracted in case of
debatable issues.
He further submitted that in the instant case penalty has been imposed for
furnishing of inaccurate particulars of income and he elaborated that no particulars
contained in the return filed is factually or arithmetically inaccurate and it does not
contain any incorrect figures and the interest received / receivable on account of FD
has been correctly stated and the corresponding claim of interest payable has also been
rightly claimed u/s 57(iii) of the Act.
He further submitted that all the primary facts were duly disclosed in the return
and the claim was not without any basis , in other words it can be said that the claim is
not a fanciful claim, because the Government aid itself has been received by the
assessee with pre conditions attached, and the assessee was very much aware that
interest @ 10% will be automatically imposed on the said amount if the time frame is
breached, as per conditions governing such aid . In the instant case when the project
failed to commence, the interest burden automatically devolved on the assessee and in
order to counter the same the assessee took steps to invest the funds in bank FD to meet
the interest payable out of the interest receivable on such FD from banks and the
7 I.T.A. No. 262/Asr/2024 Assessment Year: 2014-15 interest received / receivable from bank is directly linked to the interest paid / payable
to the DIIP authorities and the same has been rightly claimed as expenditure u/s 57(iii)
by the assessee (not being capital in nature).
The Ld. AR further relied on the Hon’ble Apex court in the case of Reliance
Petroproducts Pvt Ltd 322 ITR 158 (SC), to submit that the assessee has made a claim
under a particular head in the return, which is up to the department to accept and merely
because the said claim is not accepted or not sustainable, by itself, will not amount to
furnishing of inaccurate particulars.
He further submitted that in the instant case whether the claim for deduction u/s
57(iii) is legally allowable or not is very much an arguable matter and is very much
debatable (and the matter is before the jurisdictional High Court ) the claim of the
assessee is bonafide, and he relied on the case of [Urmila Rajendra Mundra vs ITO
[ITA - 577 (JP) of 2025 ] to submit that when two views are possible , adoption of one
such view cannot attract the penalty provisions , because in the instant case the
disclosure is full, and the claim made by the assessee if any may be a wrong claim but
the same is not a false claim by any stretch of imagination as such cases the question
of filing inaccurate particulars by the assessee does not arise .
Thereafter, the Ld AR , argued on the additional ground regarding issue of notice
u/s 274 of the Act , dated 15/12/2016 , which is on the issue of the notice not being a
8 I.T.A. No. 262/Asr/2024 Assessment Year: 2014-15 technically valid notice , where the inapplicable portion has not been struck off ,
concealing the particulars of income or furnished inaccurate particulars of income,
which is contended to be a fundamental error that goes to the root of the matter and has
vitiated the impinged order of penalty. (The notice u/s 274 is as follows):
9 I.T.A. No. 262/Asr/2024 Assessment Year: 2014-15
On this technical aspect of the matter the ld. AR of the assessee relied upon the
following decisions:
(i) CIT v Manjunatha Cotton and Ginning factory [2013] 359 ITR 565 Karnataka ), (ii) CIT v Emerald Meadows [2016] 386 ITR (st) 13 ( SC ) (iii) Kishan Kumar Sharma v ITO ITA No 14 /ASR/2018 (Coordinate Bench order ), (iv) Md Farhan A Shaikh v DCIT Bombay High Court (Full Bench ) [2021] 434 ITR 1, where the Hon’ble court has held in paragraph – 179 of the order as follows:
“179. Besides, the prima facie opinion in the assessment order need not always translate into actual penalty proceedings. These proceedings, in fact, commence with the statutory notice under s. 271(1)(c) r/w s. 274. Again, whether this prima facie opinion is sufficient to inform the assessee about the precise charge for the penalty is a matter of inference and, thus, a matter of litigation and adjudication. The solution, again, is a tick mark; it avoids litigation arising out of uncertainty.
One course of action before us is curing a defect in the notice by referring to the assessment order, which may or may not contain reasons for the penalty proceedings. The other course of action is the prevention of defect in the notice-and that prevention takes just a tick mark. Prudence demands prevention is better than cure.
Answers:
Question No. 1: If the assessment order clearly records satisfaction for imposing penalty on one or the other, or both grounds mentioned in s. 271(2)(c), does a mere defect in the notice- not striking off the irrelevant matter-vitiate the penalty proceedings?
10 I.T.A. No. 262/Asr/2024 Assessment Year: 2014-15
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 s. 271(1)(c) r/w s. 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.
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.
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 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".
11 I.T.A. No. 262/Asr/2024 Assessment Year: 2014-15
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 s. 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?
In Dilip N. Shroff, for the Supreme Court, it is of "some significance that in the standard Pro-forma used by the AO 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 AO 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-
12 I.T.A. No. 262/Asr/2024 Assessment Year: 2014-15
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, s. 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 & Ors. vs. CIT 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 Art. 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.
Conclusion:
We have, thus, answered the reference as required by us, so we direct the Registry to place these two tax appeals before the Division Bench concerned for further adjudication.”
13 I.T.A. No. 262/Asr/2024 Assessment Year: 2014-15 17. Relying on all above cases and judicial precedents, he prayed for deletion of the
penalty imposed both on merits and also on the issue of defective notice u/s 274 of the
Act 61.
The Ld DR relied on the order of the Ld CIT ( A ) and in respect of the issue of
defective notice dated 15/12/2016 , issued u/s 274 of the Act 61, which is now
challenged by the assessee, he argued that ground has been raised by the assessee for
the first time before the tribunal and the AO has clearly stated in the assessment order
( last paragraph ) that penalty in this case has been initiated for furnishing of inaccurate
particulars relating to deduction claimed u/s 57(iii) of the Act, and as such the assessee
was fully aware of the charges made and no prejudice has been caused by not striking
off the specific limb of the 274 notice, and on this issue he relied on the decision of the
Bombay High Court in the case of “ Veena Estates Pvt Ltd v CIT, Mumbai, ITN 302
of 2002 order dated 11/01/2024, which relied on the decision of the Madras High
Court in Sundaram finance ltd v ACIT dated 23/04/2018 IT 876 and 877 of 2008 , to
hold that even if there is defect in the notice it has caused no prejudice to the assessee.
The Ld DR prayed for upholding the order of the Ld CIT ( A ).
We have considered the rival submissions and the materials on record and
various judicial precedents cited before us. On the merits of this case we find that the
assessee has made full and true disclosure of his interest income received and the claim
14 I.T.A. No. 262/Asr/2024 Assessment Year: 2014-15 of expenditure by way of deduction u/s 57(iii) of the Act 61, was also declared clearly
in the return of income with full particulars, and the bonafide of the said claim cannot
be doubted , and none of which has been found to be incorrect on facts and figures ,
though it may or may not be legally sustainable in the eye of law , but the issue is
certainly debatable and two opinions are possible .
Presently we are concerned with the issue of penalty only , and we are of the
opinion that filing of inaccurate particulars of income refers to a situation where the
assessee has reported the income in the return but files incorrect or fabricated
information about the nature of income knowing the same to be erroneous and
furnishes false details ( including false entries in books of accounts ) about the amount
, its description or source of that income which also includes claiming deductions for
expenses that cannot be substantiated by evidence or are not legally allowable.
However, bona-fide difference in legal interpretation says, making a claim that
is not sustainable in law, by itself does not automatically amount to furnishing
inaccurate particulars, provided all the primary facts were duly disclosed in the return
and the claim was not without any basis, in other words the claim should be bonafide
and in the instant case we consider it so, irrespective of difference in legal opinion by
higher courts, regarding its allowability u/s 57(iii) of the Act, 61.
15 I.T.A. No. 262/Asr/2024 Assessment Year: 2014-15 23. Respectfully, following the law laid down by the Hon’ble Supreme Court in the
case of CIT v. Reliance Petro Products Pvt. Ltd. (supra) we are of the opinion that no
inaccurate particulars of income has been filed by the assessee in the return and as such
we have no hesitation in deleting the penalty on merits.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in accordance with Rule 34(4) of the Income Tax (Appellate
Tribunal) Rules, 1963 as on 18.11.2025.
Sd/- Sd/- (Khettra Mohan Roy) (Udayan Dasgupta) Accountant Member Judicial Member *GP/Sr.PS* Copy of the order forwarded to: (1) The Appellant: (2) The Respondent: (3) The CIT concerned (4) The Sr. DR, I.T.A.T True Copy By Order
