2025 (5) TMI 958 - AT - Income Tax

Penalty proceedings initiated u/s 271(1)(c) - defective notice u/s 274 - as there was non-application of mind by the AO for non-striking of the irrelevant limb and whether the same violates the principles of natural justice - HELD THAT - As decided in Mohammad Farhan Shaikh 2021 (3) TMI 608 - BOMBAY HIGH COURT (LB) has held that not striking of the irrelevant limb in the notice is not a mere procedural defect but the same would vitiate the entire penalty proceeding. Hon ble High Court also held that even if the assessment order contains the reason for the initiation of penalty the same cannot be a justification to cure the defect in the penalty proceedings. It was held that non striking of the irrelevant limb is a mandatory condition which when contravened becomes fatal to the revenue. Thus an omnibus show cause notice would tantamount to non-application of mind and resulting in prejudice caused to the assessee. It is held to be in violation of the principles of natural justice which is ultra virus to Article 14 of the Constitution. Here in the present case the revenue has not brought any contradictory facts to disprove that the impugned notice caused prejudice to the assessee. Pertinently the assessment order is also silent as to the reason for the initiation of the penalty though the final penalty order passed u/s. 271(1)(c) specifies that the same is for concealment of particulars of income and therefore the penalty proceeding shall be vitiated for the above said reasons. By respectfully following the decisions relied upon by the ld. AR we hold that the penalty order passed u/s. 271(1)(c) of the Act is bad in law and not sustainable. Allow ground no. 1 raised by the assessee by directing the ld. AO to delete the penalty levied on the assessee Penalty on voluntary disclosure during search action - whether assessee offering additional income post survey action vide revised return would result in levying of penalty for concealment of income or not? - HELD THAT - As in the present case in hand the assessee has offered additional income in all the 3 assessment years post survey and has also not brought anything on record to show that the additional income was not part of bogus transaction as alleged by the department. Further there could be possibilities of error or discrepancy in the return of income filed by the assessee for one year but there cannot be presumption that in all the three impugned years there was error or mistake in the return of income filed by the assessee that to not for any meager amount. We would like to place our reliance on the decision of MAK Data Pvt. Ltd. 2013 (11) TMI 14 - SUPREME COURT which was extensively relied upon by the ld. DR where it was held that surrender of income merely does not absolve the assessee from penalty proceeding unless the assessee has discharged the burden to establish that the concealment was unintentional and not malafide. The explanation 1 to Section 271(1) raises a presumption of concealment where the assessee if fails to offer an explanation or the explanation offered by him is considered to be false or fails to substantiate that the explanation is bonafide to the satisfaction of the ld. AO then it is deemed that the said income has been concealed. In the present case in hand we do not find any justification in holding that the concealment of additional income declared by the assessee in its revised return is unintentional or is merely an error or mistake crept in in the original return of income filed by the assessee. The assessee has also failed to substantiate the same. We are of the considered view that the penalty levied by the ld. AO and upheld by the ld. CIT(A) holds merit and does not require any interference. Appeal filed by the assessee is dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these appeals relate primarily to the validity and legality of penalty proceedings initiated under Section 271(1)(c) of the Income Tax Act, 1961, read with Section 274, for concealment of income or furnishing inaccurate particulars of income. The issues are:

(a) Whether a penalty notice issued under Section 274 read with Section 271(1)(c) of the Act is valid if it does not specify or strike off the irrelevant limb indicating whether the penalty is for concealment of income or furnishing inaccurate particulars of income;

(b) Whether acceptance of revised returns declaring additional income, without the Assessing Officer (AO) finding any cogent material to show concealment, precludes levy of penalty under Section 271(1)(c);

(c) Whether voluntary disclosure of additional income post-survey action exempts the assessee from penalty for concealment of income under Section 271(1)(c);

(d) Whether the penalty levied for concealment of income post-survey action is justified where the additional income relates to bogus transactions;

(e) The procedural and substantive aspects of penalty proceedings, including the application of principles of natural justice and statutory interpretation of penalty provisions;

(f) The effect of delay in filing appeals against penalty orders and condonation of such delay;

These issues arise in the context of three assessment years (1999-2000, 2001-02, and 2002-03) where the assessee declared additional income post-survey and penalty proceedings were initiated.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Validity of Penalty Notice Not Striking Off Irrelevant Limb

Legal Framework and Precedents: Section 271(1)(c) empowers levy of penalty for concealment of income or furnishing inaccurate particulars. Section 274 requires that the penalty notice specify the grounds, striking off irrelevant limbs to clearly inform the assessee whether the penalty is for concealment or furnishing inaccurate particulars. The Full Bench of the Hon'ble Jurisdictional High Court in Mohammad Farhan Shaikh vs. Deputy Commissioner of Income Tax and Omprakash T. Mehta vs. Income Tax Officer held that failure to strike off the irrelevant limb is not a mere procedural lapse but vitiates the entire penalty proceeding. The notice must clearly apprise the assessee of the charge to satisfy principles of natural justice and Article 14 of the Constitution.

Court's Interpretation and Reasoning: The Tribunal observed that the impugned penalty notices in the appeals for AY 1999-2000 and 2002-03 did not strike off the irrelevant limb, thus failing to inform the assessee whether the penalty was for concealment or furnishing inaccurate particulars. This non-application of mind was held to violate natural justice and statutory requirements. The Tribunal relied on the Full Bench decisions to hold such penalty notices as invalid and the penalty orders as bad in law.

Key Evidence and Findings: The penalty notices themselves and the assessment orders were silent or ambiguous on the reason for penalty initiation. The penalty order specified concealment but the notice did not. The revenue failed to show any prejudice or contradictory facts to justify the defect.

Application of Law to Facts: The Tribunal applied the strict construction principle for penalty provisions and held that ambiguity in the notice must be resolved in favour of the assessee. The statutory requirement of striking off irrelevant limbs is mandatory and non-compliance renders penalty proceedings invalid.

Treatment of Competing Arguments: The Department argued no prejudice was caused and that assessment orders clarified the reason. The Tribunal rejected this, holding that the assessment order cannot cure defects in penalty notice and that prejudice is presumed from non-application of mind.

Conclusion: The penalty proceedings for AY 1999-2000 and 2002-03 were quashed for failure to strike off irrelevant limbs in penalty notices.

Issue (b) & (c): Effect of Acceptance of Revised Return and Voluntary Disclosure on Penalty Levy

Legal Framework and Precedents: Section 271(1)(c) penalizes concealment or furnishing inaccurate particulars. Explanation 1 to Section 271(1)(c) creates a presumption of concealment when assessed income exceeds returned income, shifting burden to assessee to prove otherwise. The Hon'ble Apex Court in MAK Data Pvt. Ltd. vs. CIT held that voluntary disclosure post-survey or search does not absolve the assessee from penalty unless concealment was unintentional and not mala fide. High Courts have held that mere surrender of income to avoid litigation or buy peace is not recognized defense under Explanation 1. The Hon'ble Bombay High Court in Richardson and Cruddas Ltd. and Delhi High Court in SAS Pharmaceuticals have held that bona fide mistakes or inadvertent omissions may not attract penalty, but intentional concealment does.

Court's Interpretation and Reasoning: For AY 2001-02, the Tribunal examined whether the additional income declared post-survey was voluntary and bona fide or constituted concealment. It noted the assessee declared substantial additional income in revised returns after survey actions, which related to bogus transactions. The Tribunal relied on MAK Data Pvt. Ltd. to hold that such surrender is not voluntary in the true sense but compelled by detection. The Tribunal emphasized that the assessee failed to discharge burden of proving absence of concealment or mala fide intent.

Key Evidence and Findings: The survey under Section 133A unearthed documents indicating bogus purchases. The assessee declared additional income only post-survey. The assessee did not provide credible explanation or evidence to negate concealment. The Tribunal noted that error or oversight across three years involving large sums was improbable.

Application of Law to Facts: The Tribunal applied the presumption of concealment under Explanation 1 and found it unrebutted. The surrender of income post-survey was held not to be voluntary disclosure exempting penalty. The penalty was thus upheld for AY 2001-02.

Treatment of Competing Arguments: The assessee argued voluntary disclosure and absence of concealment; the Department argued concealment evidenced by survey and bogus transactions. The Tribunal sided with the Department, finding the disclosure not voluntary in the statutory sense.

Conclusion: Penalty for concealment under Section 271(1)(c) was justified and upheld for AY 2001-02.

Issue (d): Merits of Penalty Levy Where Additional Income Relates to Bogus Transactions

Legal Framework and Precedents: The law mandates penalty for concealment of income, especially where income arises from bogus or accommodation entries. The Hon'ble Calcutta High Court in CIT Balarampur Chini Milks Ltd. upheld penalty in similar facts. The Apex Court's decision in MAK Data Pvt. Ltd. clarified that voluntary disclosure post-survey/search does not negate penalty unless concealment is shown to be unintentional.

Court's Interpretation and Reasoning: The Tribunal found that the additional income declared was linked to bogus purchases, as unearthed during survey. The assessee's failure to explain or substantiate the bona fide nature of transactions led to the conclusion that concealment was deliberate.

Key Evidence and Findings: Survey records, impounded documents, and the pattern of revised returns across multiple years supported the conclusion of deliberate concealment.

Application of Law to Facts: The Tribunal applied the statutory presumption and case law to uphold penalty for concealment related to bogus transactions.

Treatment of Competing Arguments: The assessee's contention of bona fide error was rejected on facts and law.

Conclusion: Penalty was rightly levied and sustained on merits for concealment linked to bogus transactions.

Issue (e): Procedural and Substantive Aspects of Penalty Proceedings and Natural Justice

Legal Framework and Precedents: Principles of natural justice require clear communication of charges. The penalty provisions are penal in nature and must be strictly construed. The Full Bench decision emphasized the mandatory nature of striking off irrelevant limbs in notices. The Apex Court has held that AO's satisfaction for penalty initiation need not be in writing but must be based on material.

Court's Interpretation and Reasoning: The Tribunal emphasized that failure to specify grounds in penalty notice violates natural justice and Article 14. The penalty provisions are civil consequences but attract strict construction. The AO's initiation of penalty must be based on cogent material and clear notice.

Key Evidence and Findings: The penalty notices in two appeals failed on procedural grounds; in the third, procedural compliance was not challenged due to absence of notice copy.

Application of Law to Facts: Procedural defect led to quashing of penalty in two appeals; substantive merit led to upholding penalty in the third.

Treatment of Competing Arguments: Department's plea of no prejudice was rejected; procedural safeguards were upheld.

Conclusion: Procedural compliance is mandatory; substantive penalty requires cogent material and proper notice.

Issue (f): Delay in Filing Appeals and Condonation

Legal Framework and Precedents: Delay condonation is discretionary and requires sufficient cause. The Hon'ble High Court granted condonation in the present case for the appeal against penalty order for AY 2001-02.

Court's Interpretation and Reasoning: The Tribunal declined to entertain the legal ground on penalty notice validity for AY 2001-02 due to non-availability of notice copy but proceeded to decide on merits after condonation of delay.

Key Evidence and Findings: Delay of over 8 years in filing appeal was condoned by High Court.

Application of Law to Facts: The Tribunal respected the High Court's condonation order and proceeded to adjudicate on merits.

Treatment of Competing Arguments: No contest on condonation recorded.

Conclusion: Delay condoned; appeal heard on merits.

3. SIGNIFICANT HOLDINGS

"Not striking of the irrelevant limb in the notice is not a mere procedural defect but the same would vitiate the entire penalty proceeding. The statutory notice u/s. 271(1)(c) r.w.s. 274 of the Act must be in such a way that the assessee is given notice as to the grounds of the penalty proceedings. Further, it held that the penalty provisions even if it is in the nature of civil consequences should be construed strictly without any ambiguity and in case of ambiguity, the same has to be resolved in favour of the assessee."

"Even if the assessment order contains the reason for the initiation of penalty, the same cannot be a justification to cure the defect in the penalty proceedings. Non striking of the irrelevant limb is a mandatory condition which when contravened becomes fatal to the revenue."

"Voluntary disclosure does not release the Appellant-assessee from the mischief of penal proceedings. The law does not provide that when an assessee makes a voluntary disclosure of his concealed income, he had to be absolved from penalty."

"The surrender of income in this case is not voluntary in the sense that the offer of surrender was made in view of detection made by the AO in the search conducted... It is the statutory duty of the assessee to record all its transactions in the books of account, to explain the source of payments made by it and to declare its true income in the return of income filed by it from year to year."

"Explanation 1 to Section 271(1) raises a presumption of concealment, where the assessee if fails to offer an explanation or the explanation offered by him is considered to be false or fails to substantiate that the explanation is bonafide, to the satisfaction of the ld. AO, then it is deemed that the said income has been concealed."

Final determinations:

- Penalty notices for AY 1999-2000 and 2002-03 were invalid due to failure to strike off irrelevant limbs and thus penalty orders were quashed.

- Penalty for AY 2001-02 was upheld on merits as concealment of income was established despite revised returns post-survey.

- Voluntary disclosure post-survey does not absolve penalty unless concealment is shown to be unintentional and bona fide.

- Procedural safeguards in penalty proceedings are mandatory and non-compliance violates natural justice.