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Facts
The assessee, Krishna Enterprises, was issued a penalty order under section 271B for failure to maintain accounts and get them audited as required by section 44AB. The assessee argued that the penalty notice was vague as it did not specify which of the two defaults (failure to get accounts audited or failure to furnish audit report) it was being proceeded against.
Held
The Tribunal held that the penalty notice was ambiguous and therefore not sustainable. Following the decision of the Delhi High Court in Pr. CIT vs M/s Gragerious Projects Pvt. Ltd. & Ors, the Tribunal stated that any ambiguity in a penalty notice must be resolved in favor of the assessee.
Key Issues
Whether the penalty notice issued under section 271B for non-maintenance and non-audit of accounts was valid and not vague, or whether it was ambiguous and required to be quashed.
Sections Cited
271B, 44AB, 271(1)(c), 274, 148, 44AD, 44AA(2)
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Income Tax Appellate Tribunal, DELHI BENCH, C: NEW DELHI
Before: SHRI VIKAS AWASTHY & SHRI BRAJESH KUMAR SINGH
ORDER
PER BRAJESH KUMAR SINGH, AM,
This appeal has been preferred by the assessee against the order dated 20.11.2024 of National Faceless Appeal Centre (NFAC) [hereinafter referred to as the Ld. CIT(A)] pertaining to Assessment Year 2013-14 arising out of penalty order u/s 271B ITA No.- 5654/Del/2024 Krishna Enterprises of the Income-tax Act, 1961(hereinafter referred to as ‘the Act’) passed by the Ld. Assessing Officer (Ld. AO’, for short) dated 23.09.2022.
The grounds of appeal
raised by the assessee reads as under: - “1. On facts and circumstances of the case, the AO/AU has erred in imposing penalty of Rs. 1,50,000/- u/s 271B of IT Act without jurisdiction. Therefore, the penalty imposed need to be deleted.
2. On facts and circumstances of the case, the AO/AU has erred in imposing penalty of Rs.1,50,000/- for not comply with provisions of sec 44AB of IT Act ignoring the fact that the above provisions are not applicable to the appellant. Hence, no penalty could be levied upon appellant.”
3. The assessee was a non-filer and, as per the data available with the AO, the assessee had deposited cash to the tune of Rs. 3,78,06,400/- in his saving bank account maintained with the HDFC Bank Ltd., Rohini, New Delhi. The AO after recording his reasons, issued notice u/s 148 of the act, dated 31.03.2021. In response, the assessee filed his return of income on 14.09.2021 declaring total income of Rs. 61,950/-. During the assessment proceedings, the assessee submitted that the concern was engaged in the business of trading of metals and submitted that ITA No.- 5654/Del/2024 Krishna Enterprises the said cash deposit was in his current account and not in the saving bank account. The AO completed the assessment by estimating the net profit @ 8% of the total turnover of Rs. 4,63,30,254/-. This turnover was declared by the assessee in his return of income filed on 14.09.2021, in response to the aforesaid notice u/s 148 of the Act. The assessee submitted that the turnover of Rs. 4,63,30,254/-, included the said cash deposit of Rs. 3,78,06,400/-. 3.1 Further, the AO initiated penalty proceedings u/s 271B of the Act for non-maintenance of accounts and getting it audited, by observing as under: “ In the return the assessee declared net profit of Rs.61,950/- which is only 0.133% on sales turnover of Rs. 4,63,30,254/-, Therefore, as per provisions of section 44AD of the Act, in a case where books of accounts have not been maintained by the assessee and the turnover is less than Rupees one crore, the net profit can be shown at a minimum of 8% and the assessee is not required to maintain regular books of accounts. However, in a situation where the net profit is to be shown at less than 8% of turnover / sales, in that case the assessee is required to maintain books of accounts Under section 44AA(2) of the Act, and also get the same audited by a Chartered Accountant as per provision of Section 44AB of the Act. 7.2 Further, despite such huge turnover of Rs. 4,63,30,254/- and huge cash deposits in his bank accounts, the assessee did not care to get his accounts audited under Section 44AB of the Act. It is also noteworthy that the assessee did file his return of income only after a notice under Section 148 of the Act, which was issued to him. Thus, it is clear that the appellant is having a non-compliant and deliberate attitude towards the revenue. Therefore, the net profit of the assessee ITA No.- 5654/Del/2024 Krishna Enterprises is taken as 8% of his total sales/turnover of Rs.4,63,30,254/-, which comes to Rs. 37,06,420/-. Since, the assessee has already shown net profit of Rs. 61,950/- in the return filed on 14.09.2021, therefore, remaining amount which comes at Rs. 36,44,470/- Since, the assessee has concealed particulars of his income, penalty proceedings u/s 271(1)(c) of the Act is being initiated separately for concealment of particulars of income. Further, penalty u/s 271B of the I.T. Act is hereby initiated for non-maintenance of accounts and get audited.” (emphasis supplied)
3.2 The AO, thereafter, issued penalty notice dated 24.03.2022, wherein the first paragraph of the penalty notice reads as under: “ Whereas in the course of proceedings before me for the Assessment Year 2013-14, it appears to me that you have failed to get accounts audited or failed to furnish a report of such audit as required under section 44AB of the Income Tax Act, 1961.”
In response to the penalty notice, the assessee filed its reply, but the AO stated that the response filed by the assessee was duly considered but was not found tenable as the assessee had not submitted any explanation or valid reasons for failing to get its book of account audited u/s 44AB of the Act for A.Y. 2013-14. Accordingly, the AO levied a penalty of Rs. 1,50,000/- as computed in para 6 of his order, as under:
Total gross receipts 1 Rs. 4,63,30,250/- ITA No.- 5654/Del/2024 Krishna Enterprises 2 1/2% of the total Rs. 2,31,651/- Commission received 3 Maximum penalty Rs. 1,50,000/- leviable u/s 271B
Aggrieved by the said order, the assessee filed an appeal before the Ld. CIT(A).
In the appellate proceedings, the assessee submitted that the provisions of section 44AB of the Act were not applicable in its case because the assessee had not maintained any books of accounts. It was further submitted that the penalty notice was vague as the AO had not spelt out what was the fault for which the assessee was being proceeded against the levy of penalty. Reliance was placed on various judicial precedents in this regard. He further submitted that the section u/s 271A and 271B operate independently of each other and that penalty u/s 271B can be levied only when books of accounts were maintained and assessee failed to get them audited.
The Ld. CIT(A), did not agree with the above submissions of the assessee and confirmed the action of the AO for the levy of penalty u/s 271B of the Act.
ITA No.- 5654/Del/2024 Krishna Enterprises 8. Aggrieved with the said order, the assessee filed an appeal before us and submitted written submissions, the relevant extract of which is reproduced as under: “ Ground No.1 Validity of penalty proceedings The validity of the penalty proceedings is challenged on the ground of the ambiguity in the Show Cause notice through which the impugned proceedings were initiated. The enclosed Show cause notice dated 24.03.2022 deals with the two distinct defaults one is failure to get the accounts audited and the other one is failure in furnishing of tax audit report as per requirement of sec 44AB of IT Act. The above two defaults have been mentioned with the conjecture of "or" which implies that the appellant is in default of either of the two compliances but there is no clarity as to the particular default for which the penalty proceedings are initiated. Thus, show cause notice is per-se vague which fails to spelt out what was the default for which the appellant is being proceeded against for imposition of penalty. Since the AO has not struck down the irrelevant portion/fault which is not applicable in the facts and circumstances of the case, the notice is vague and therefore, bad in law as is held by the Co-ordinate Bench of the Tribunal in the case of Parkinson Electrical Corp Vs ITO 84 Taxman 82(Del) (Mag.). The above view was a also taken by Hon'ble Guwahati bench of ITAT in the case of North Eastern Constructions GAU/2019 vide order dated 17.06.2020. The issue in dispute is squarely covered by the decision of the Supreme Court in the case of CIT vs SSA's Emerald Meadows (2016) 73 Taxmann 248(SC). The Hon'ble Apex Court held that the notice issued by the AO under section 274 read with section 271(1) (c) of the Act was bad in law, as it did not specify under which limb of section 271(1)(c) of the Act was bad in law as it did not specify under which limb of section 271(1)(c) penalty proceedings had been initiated i.e. whether for concealment of particulars of income or furnishing of inaccurate particulars of income confirming the Karnataka High Court decision of Commissioner Of Income Tax -Vs- Manjunatha Cotton & Ginning Factory (Supra).
ITA No.- 5654/Del/2024 Krishna Enterprises Recently, the jurisdictional Delhi High Court in the decision of Pr. CIT vs M/s Sahara India Life Insurance Company Ltd in 426, 427, 429/2019 dt: 02.08.2019 has upheld the quashing of penalty order on the ground of non-specification of the particular limb of default covered by the penal provision of sec 271 (1) (c). The Benches of Tribunal in Parkinson Electrical Corp Vs ITO (supra) and North Eastern Constructions (supra) have taken a view that non-specification of the default resulting from non-striking of the irrelevant limb of the penal section of 271(1)(c) is also applicable on the penalties levied u/s 2718 of IT Act. The Ld. CIT(A) dismissed the above ground assuming the fact the show cause notice was issued for both the defaults covered by section 2718 of the Act(Ref para 5.1.17 page 17 of the Ld. CIT(A) Order) which assumption is repugnant to the physical fact available on record.
8.1 The Ld. DR supported the orders of the authorities below.
We have heard both the parties and considered the material available on record. The assessee in respect of Ground no. 1, in his written submission, states that show-cause notice dated 24.03.2022 u/s 271B of the Act deals with the two distinct defaults, one is failure to get the accounts audited and the other one is failure in furnishing of tax audit report as per requirement of sec 44AB of IT Act. It has been further submitted that the above two defaults have been mentioned with the conjecture of "or" which implies that the appellant is in default of either of the two compliances but there is no clarity as to the particular default for ITA No.- 5654/Del/2024 Krishna Enterprises which the penalty proceedings are initiated, and therefore, it was bad in law. 9.1 This plea of the assessee was not accepted by the Ld. CIT(A) and was dealt by the him in para no. 5.2.9 and 5.2.17 of his order, which are reproduced as under: “ 5.2.9. In Ground No.2. the appellant had contended that "The penalty proceedings have been initiated vide notice dated 24.03.2022 (Annexure- 2) where the default mentioned inter alia are two distinct defaults one is failure to get the accounts audited and the other one is failure in furnishing of tax audit report as per requirement of sec 44AB of IT Act. The above two defaults have been mentioned with the conjecture of "or" which implies that the appellant is in default of either of the two compliances but there is no clarity as to the particular default for which the penalty proceedings are initiated. Thus, it is evident that the AO has given a show cause notice, which is per-se vague. Apparently and admittedly, the appellant had committed both the defaults ie. the appellant firm had FIRSTLY not got its books of accounts audited when it was mandated to do so, thereby the appellant firm had clearly defaulted and had not complied with the provisions of section 44AB, thereby attracting the levy of penalty u/s 271B. SECONDLY, the appellant firm had also not submitted the audit report which it was mandated to submit and had defaulted in this regard also which again attracts levy of penalty u/s 271B. Therefore, this contention of the appellant that the assessing officer had not clarified whether the penalty u/s 271B was levied for failure to get its accounts audited or for failure to submit the audit report within the specified date is not a valid and legally tenable argument at all because the appellant admittedly had neither maintained books of accounts nor audited its accounts and had not submitted the audit report as mandated u/s 44AB, and therefore the appellant's above contention will not come to the rescue to the appellant. 5.2.17. The above quoted decisions are not applicable to the instant case of the appellant because these decisions were rendered in the context of penalty u/s 271(1)(c). Penalty u/s 271(1)(c) is levied depending upon the merits of the quantum additions made in the assessment order with specific emphasis on whether there was any concealment of income or whether there was any furnishing of inaccurate particulars. Therefore, the courts have held that the specific limb as to whether the penalty notice ITA No.- 5654/Del/2024 Krishna Enterprises was issued for concealment of income or whether it was issued for furnishing of inaccurate particulars needs to be ticked/struck off as the case may be. But, the issue under discussion in the instant case of the appellant is one of a procedural penalty u/s 271B. Penalties like procedural penalty u/s 271B are mandatorily leviable if there is a procedural lapse as stipulated by law. In the appellant's case, the appellant had lapsed on both the counts and committed the twin defaults of not getting the books of accounts audited and not submitting the audit report. Further, at this juncture, it is relevant to point to the fact that the appellant firm was very much aware of its defaults because appellant had committed the twin defaults of not getting its accounts audited and also not submitted the audit report, and hence there wasn't any necessity to strike down any portion of the penalty notice as contended by the appellant. The assessing officer had therefore issued a valid penalty notice communicating clearly to the appellant and as well as rightly show causing the appellant as to why penalty u/s 271B not levied in the case of the appellant for committing both the defaults of not getting the books of accounts audited as well as not submitting the audit report Accordingly, the decisions of the H'ble Apex Court in the case of CIT vs SSA'S Emerald Meadows (2016) 73 Taxmann 248 (SC) and that of the jurisdictional Delhi High Court decision in the case of Pr.CIT vs M/s Sahara India Life Insurance Company Ltd are not applicable to the instant case of the appellant.”
9.2 The above view of the Ld. CIT(A) has been carefully considered but not found to be acceptable. In this regard, on perusal of the Assessment Order dated 24.03.2022, the AO had initiated the penalty u/s 271(1)(b) of the Act in para no.7.2 as under: - “….Further, penalty u/s.271B of the I.T. Act is hereby initiated for non-maintenance of accounts and get audited.”
ITA No.- 5654/Del/2024 Krishna Enterprises 9.3. Further, the AO had issued the notice u/s 271B of the Act by notice dated 24.03.2022, wherein the first paragraph of the penalty notice reads as under: “Whereas in the course of proceedings before me for the Assessment Year 2013-14, it appears to me that you have failed to get accounts audited or failed to furnish a report of such audit as required under section 44AB of the Income Tax Act, 1961.” 9.4 Thus, it is seen that the AO in the assessment order states that he had initiated penalty proceedings for non-maintenance of accounts and getting it audited whereas in the penalty notice u/s 271B of the Act, the AO states that he had initiated the penalty proceedings for the failure of the assessee in getting its account audited or its failure to furnish a report of such audit as required u/s 44AB of the Act. Therefore, in the impugned penalty notice it is not clear as to for which default the AO was initiating the penalty notice u/s 271B of the Act, whereas there is a semblance of clarity, found while initiating the penalty proceedings u/s 271B of the Act, in the assessment order where it was mentioned as further, penalty u/s 271B of the I.T. Act is hereby initiated for non-maintenance of account and get audited. The default of the assessee in not getting its account audited and its failure to ITA No.- 5654/Del/2024 Krishna Enterprises furnish a report of such audit as required u/s 44AB of the Act, are two different and distinct defaults. The failure of the assessee is not getting its accounts audited indicates that the assessee had maintained its books of account which he did not get it audited whereas the failure to furnish a report of such audit as required u/s 44AB of the Act indicates that assessee failed to submit the Audit Report of such books of accounts maintained by the assessee, whereas the assessee did not maintain any books of accounts as admitted by the assessee in this case.
In this regard, the Hon’ble Delhi High Court in the case of 9.5 Pr. CIT-04 vs M/s Gragerious Projects Pvt. Ltd. & Ors (2025) 303 Taxman 14 / 475 ITR 546 (Delhi HC) has agreed with the decision of Hon’ble Bombay High Court (Full Bench at Goa) in Mr. Mohd. Farhan A. Shaikh v. 2021 Hon'ble Supreme Court OnLine Bom 345 which held that such an action of the AO was not sustainable. The relevant discussion in the order of the Hon’ble Delhi High Court in the above-mentioned case is reproduced as under: -
An identical issue came up for consideration before the Bombay High Court (Full Bench at Goa) in Mr. Mohd. Farhan ITA No.- 5654/Del/2024 Krishna Enterprises A. Shaikh v. 2021 SCC OnLine Bom 345, wherein, the Court while dealing with the aspect of prejudice ruled as under:- "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? 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(l)(c), read with section 274 of Income-tax 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”? 184. Indeed, Kaushalya did discuss the aspect of prejudice. As we have already noted, Kaushaiya noted that the assessment orders already contained the reasons why penalty should be initiated. So, the ITA No.- 5654/Del/2024 Krishna Enterprises 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.”
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 the facts, has felt that the assessing officer himself was not sure ITA No.- 5654/Del/2024 Krishna Enterprises 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 [2006] 287 ITR 91 (SC); (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, the 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.
ITA No.- 5654/Del/2024 Krishna Enterprises 191. 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."
Following the decision of the Karnataka High Court in the case of CIT v. Manjunath Cotton and Ginning Factory (supra) and the other decisions of different High Courts, the ITAT rightly held that the levy of penalty under Section 271(1)(c) of the Act in the case of the assessee was not valid.
We are unable to find any error having been committed by the ITAT. No substantial question of law arises.
The appeals are accordingly dismissed.” (Emphasis supplied) 9.6 As seen from the above discussion, that in the impugned penalty notice dated 24.03.2022, there is a lack of clarity for which failure, the AO had initiated the said penalty proceedings i.e. whether it was for the failure of the assessee in getting its accounts audited or its failure to furnish a report of such audit as required u/s 44AB of the Act. The view of the Ld. CIT(A), (as referred in para no. 5.2.17 of his order as reproduced earlier in this order), that the penalty proceedings u/s 271B of the Act, are procedural penalty and the same are mandatorily leviable if there ITA No.- 5654/Del/2024 Krishna Enterprises was a procedural lapse as stipulated by law and hence, there was no any necessity to strike down any portion of the penalty notice is not acceptable, in view of the above decision of the Hon’ble Delhi High Court, as there cannot be any distinction between penalty being levied on an issue on the merits of the quantum addition or in respect of any procedural lapse as is the case in the present case, because prejudice will be caused to the assessee in both the situations, with civil consequence by way of tax demand or penalty demand. In the present case, it is seen that a penalty of Rs. 1,50,000/- has been levied upon the assessee by the AO vide his order u/s 271B of the Act dated 23.09.2022 and thus a prejudice is caused to the assessee. Therefore, as held by the Hon’ble Delhi High Court in above cited case that ambiguity if any, in the penalty notice must be resolved in the affected assessee’s favour. 9.7 Therefore, in view of the above facts, following the decision of the Hon’ble Delhi High Court in the case of M/s Gragerious Projects Pvt. Ltd. & Ors(supra), we are of the considered view that the penalty notice u/s 271B of the Act dated 24.03.2022 is ITA No.- 5654/Del/2024 Krishna Enterprises ambiguous and, therefore, the penalty of Rs. 1,50,000/- levied by the AO under section 271B of the Act and confirmed by the Ld. CIT(A) is not sustainable in this case. Accordingly, the same is deleted. Ground no. 1 of the appeal is allowed.
In view of the facts, that the ground no. 1 of the appeal of the assessee has been allowed, ground no. 2 of the appeal becomes academic and is kept open in this case.
In the result, appeal of the assessee is allowed. Order pronounced in the open court on 19th September, 2025.