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2025 (5) TMI 444 - HC - Income TaxPenalty levied u/s 271 (1) (c) - allegation of defective notice - AO disallowed the Assessee s claim for expenditure for availing professional services and further disallowance on account of interest claimed by the Assessee u/s 36 (1) (iii) - HELD THAT - Revenue did not controvert that the notice issued to the Assessee did not specify under which limb of Section 271 (1) (c) of the Act the penalty was proposed to be levied. Concededly the question whether penalty proceedings initiated pursuant to such a notice is sustainable is squarely covered against the Revenue by several decisions of this court. As adverted to in the Unitech Reliable Projects Pvt. Ltd. 2023 (6) TMI 1219 - DELHI HIGH COURT case the imposition of a penalty entails several consequences. The AO is required to apply his mind to the material and indicate clearly to the assessee what is being put against him. In other words which limb of Section 271(1)(c) of the Act is attracted in the given facts and circumstances of the case. Notice issued by the AO u/s 274 read with Section 271 (1) (c) 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 - Decided in favour of assessee.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Court in this appeal under Section 260A of the Income Tax Act, 1961, were:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of Penalty Notice under Section 274 read with Section 271(1)(c) when the notice does not specify the limb of penalty Relevant Legal Framework and Precedents: Section 271(1)(c) of the Income Tax Act empowers the tax authorities to levy penalty either for furnishing inaccurate particulars of income or for concealment of income. The initiation of penalty proceedings under Section 274 requires issuance of a notice specifying the grounds for penalty. Judicial precedents including the Division Bench judgment of the Karnataka High Court in CIT v. Manjunatha Cotton & Ginning Factory (2013) 359 ITR 565 and the Supreme Court's dismissal of the SLP against the Karnataka High Court's ruling in SSA's Emerald Meadows (2016) 73 Taxmann.com 248 have established that failure to specify the limb under which penalty proceedings are initiated renders the notice invalid and the penalty proceedings unsustainable. This principle was reiterated by the Delhi High Court in Pr. Commissioner of Income Tax v. M/s Sahara India Life Insurance Company Ltd. (2021) 432 ITR 84 (Del) and in Principal Commissioner of Income-tax v. Unitech Reliable Projects (P) Ltd. [2023] 153 taxmann.com 495 (Del). Court's Interpretation and Reasoning: The Court noted that the notice dated 15.03.2013 issued to the Assessee under Section 274 read with Section 271(1)(c) did not specify whether the penalty was proposed for concealment of income or furnishing inaccurate particulars. The Court relied on the binding precedents cited above and held that such a notice is bad in law. The Court emphasized that the consistent judicial view is that the omission to specify the limb under which penalty is imposed vitiates the penalty proceedings. Key Evidence and Findings: The record showed that the notice initiating penalty proceedings was silent on the limb of Section 271(1)(c). The Assessee's counsel did not dispute this fact. The Tribunal and the lower authorities had also noted this deficiency. Application of Law to Facts: Applying the settled legal principle, the Court found that the penalty proceedings initiated on such a defective notice could not be sustained. Treatment of Competing Arguments: The Revenue did not contest the non-specification of the limb in the penalty notice. The Court accordingly rejected the Revenue's appeal on this ground. Conclusion: The penalty notice was invalid for non-specification of the limb under Section 271(1)(c), rendering the penalty proceedings unsustainable. Issue 2: Whether penalty under Section 271(1)(c) is sustainable where the issue involved is debatable Relevant Legal Framework and Precedents: It is well-settled that penalty under Section 271(1)(c) cannot be imposed if the issue is debatable or there is a bona fide difference of opinion. The Delhi High Court in Sahara India Life Insurance Company Ltd. held that mere disallowance of a claim on merits, without any mala fide or concealment, does not justify penalty. The principle that penalty is not leviable where the claim is supported by evidence and the issue is arguable has been consistently followed. Court's Interpretation and Reasoning: The Tribunal, as affirmed by the Court, found that the Assessee's claim of carrying on business of sale and purchase of securities was supported by audited accounts, memorandum of association, share purchase agreements, and scheme of demerger. Although the Assessing Officer disallowed the claim on the ground that the transactions were not at arm's length, the Court held that the issue was debatable and therefore penalty was not warranted. Key Evidence and Findings: The Assessee had furnished all particulars and supporting documents. None of the evidence was found to be incorrect or fabricated. The disallowance was based on the AO's view of market price and arm's length pricing, which was a matter of fact and opinion. Application of Law to Facts: Since the issue was debatable and the Assessee had furnished full particulars, the imposition of penalty was not justified. The Court referred to the principle that penalty cannot be levied merely because the claim is ultimately disallowed. Treatment of Competing Arguments: The Revenue argued for sustaining the penalty on the basis of concealment and inaccurate particulars. The Court rejected this, relying on the factual matrix and precedents that penal liability does not arise in cases of bona fide disputes. Conclusion: The penalty was rightly set aside on merits as the issue was debatable and the Assessee had disclosed all particulars. Issue 3: Whether any substantial question of law arises for consideration Relevant Legal Framework and Precedents: The Court noted that the issues raised in the appeal were squarely covered by binding precedents of the Delhi High Court and the Supreme Court, including judgments in Sahara India Life Insurance Company Ltd., Manjunatha Cotton & Ginning Factory, and SSA's Emerald Meadows. Court's Interpretation and Reasoning: Since the legal position was well-settled that penalty notices must specify the limb under Section 271(1)(c) and that penalty cannot be levied on debatable issues, the Court found no substantial question of law requiring adjudication. Key Evidence and Findings: The Court relied on the earlier decisions and the facts of the present case, which did not present any novel question. Application of Law to Facts: The appeal was dismissed as no substantial question of law arose. Treatment of Competing Arguments: The Revenue's appeal was rejected due to the binding nature of precedents and absence of any new legal issue. Conclusion: No substantial question of law arose; appeal dismissed. 3. SIGNIFICANT HOLDINGS The Court preserved the following crucial legal reasoning verbatim from the impugned order: "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 furnishing of inaccurate particulars of income. The Karnataka High Court had followed the above judgment in the subsequent order in Commissioner of Income Tax v. SSA's Emerald Meadows (2016) 73 Taxman.com 241 (Kar), the appeal against which was dismissed by Supreme Court of India in SLP No.11485 of 2016 by order dated 5th August, 2016." "26. Even otherwise, the claim of the assessee is that assessee is carrying on business of sale and purchase of securities. Such claim assessee tried to substantiate with the annual audited accounts of the assessee. It also supported the same with the other objects mentioned in the memorandum of Association along with share purchase agreements and the relevant scheme of demerger... Therefore, it is apparent that that the claim of the assessee though ultimately not accepted by the concurrent authorities but it cannot be denied that issue raised is not debatable. Further, when the issue itself is debatable, it cannot result into penalty." "27. Further, the assessee has furnished all the particulars related to its claim. None of the evidences filed by the assessee was incorrect... merely because the issue is decided against the assessee confirming the disallowance it cannot result into levy of penalty for furnishing of inaccurate particulars... the penalty cannot be sustained." Core principles established include:
Final determinations on each issue:
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