2025 (5) TMI 1772 - AT - Income Tax

Penalty u/s. 271AAB - period of limitation for initiating penalty proceedings - assessee has failed to disclose the income which was found as a result of search - HELD THAT - Penalty proceedings initiated u/s 271AAB in the order passed u/s.143(3) cannot be left undecided without there being any speaking order passed for imposing or dropping the proceedings so initiated. Thus in the present case as the penalty proceedings were initiated u/s. 271AAB vide order passed u/s. 143(3) of the Act and as such when no order was passed against the initiation of such proceedings said proceedings got time barred by limitation on 30.9.2017 in terms of limitation provided u/s. 275(1)(a) and no order u/s. 271AAB could be passed thereafter. This being so in our considered opinion no penalty order could be levied u/s. 271AAB on the addition of Rs. 1 crore made in the order passed u/s. 143(3) of the Act dated 28.12.2016 in any other penalty order passed consequent to any further re-assessment proceedings. Accordingly penalty so levied to the extent of addition of Rs. 1 crore in the penalty order passed u/s. 271AAB on 30.3.2018 is hereby deleted. Defective notice - AO has not issued a valid notice for initiation penalty proceedings u/s. 271AAB and show cause the assessee that it has concealed the particulars of income or furnished inaccurate particulars of such income though there is no such scope for these offences under the scheme of penalty u/s. 271AAB of the Act and therefore this fatal error makes the notice as defective and invalid and technically not a correct notice in the eye of laws as it intends to penalise the assessee without specifying the offence as prescribed u/s. 271AAB. Appeal of the assessee is allowed.

Summary

The core legal questions considered in this appeal are:

1. Whether the penalty proceedings initiated under section 271AAB of the Income Tax Act, 1961 ("the Act") consequent to the assessment order passed under section 143(3) can be merged or retained with the penalty proceedings initiated under the reassessment order passed under section 147/143(3), or whether these are distinct and separate proceedings requiring independent conclusion.

2. Whether the penalty proceedings initiated under section 271AAB consequent to the assessment order passed under section 143(3) are barred by limitation due to non-conclusion within the prescribed time limit under section 275(1)(a) of the Act.

3. Whether the notice issued for initiation of penalty proceedings under section 271AAB consequent to the reassessment order under section 147/143(3) is valid, particularly whether it sufficiently specifies the nature of the default or offence under the provisions of section 271AAB.

4. Whether the penalty imposed under section 271AAB on the basis of the defective notice is sustainable in law.

Issue 1 & 2: Distinctness of penalty proceedings under assessment and reassessment orders and limitation

The legal framework recognizes that assessment orders under section 143(3) and reassessment orders under section 147/143(3) are separate and independent proceedings. Consequently, penalty proceedings initiated under section 271AAB arising from these orders are also distinct and must be independently concluded. The appellant contended that the Assessing Officer erroneously retained and merged the penalty proceedings initiated under the original assessment order with those initiated under the reassessment order. The appellant argued that since no penalty order was passed or proceedings concluded under the penalty notice issued consequent to the original assessment order, those proceedings have become time-barred under section 275(1)(a), which mandates that penalty proceedings must be completed within six months from the end of the relevant assessment year.

The Tribunal noted the Assessing Officer's own observation in the reassessment order that "the penalty proceedings u/s. 271AAB which were initiated are also retained at the time of this reassessment u/s. 147 of the I.T.Act, 1961." The Tribunal held that such retention or merger is impermissible because these are separate proceedings initiated by two distinct orders. The penalty proceedings initiated under the original assessment order cannot be left undecided or merged without a speaking order either imposing or dropping the penalty. Since no such order was passed within the limitation period, the penalty proceedings arising from the original assessment order stood time-barred as on 30.9.2017.

Therefore, the penalty levied under section 271AAB on the addition of Rs. 1 crore made in the original assessment order was held to be invalid and was deleted. This conclusion is firmly grounded in the statutory scheme of limitation under section 275(1)(a) and the principle that separate assessment orders initiate independent penalty proceedings that must be separately disposed of.

Issue 3 & 4: Validity of the notice for initiation of penalty proceedings under section 271AAB consequent to reassessment order and sustainability of penalty

The appellant challenged the validity of the penalty notice issued along with the reassessment order dated 31.10.2017, contending that the notice was defective because it failed to specify the exact default or offence under section 271AAB for which penalty was being imposed. The notice broadly asked the assessee to show cause why penalty should not be levied for concealment of particulars of income or furnishing inaccurate particulars of income, which are not offences contemplated under section 271AAB. The appellant relied on judicial precedents holding that a penalty notice must specify the precise limb of section 271AAB invoked and the rate of penalty sought to be levied, failing which the notice is invalid and the penalty proceedings are vitiated.

The Tribunal extensively analyzed relevant judicial precedents, including decisions of coordinate benches of the Income Tax Appellate Tribunal (ITAT) and High Courts. Notably, the Tribunal relied on the ITAT Kolkata decision in Sushil Kumar Paul vs ACIT and ITAT Delhi's Landcraft Developers Pvt Ltd, as well as the Calcutta High Court's ruling in Industrial Safety Products Pvt Ltd. These authorities uniformly held that:

• The notice under section 274 read with section 271AAB must explicitly state the grounds of penalty, i.e., whether penalty is for concealment of income or furnishing inaccurate particulars, and specify the applicable rate of penalty.
• Issuance of a generic or proforma notice that merely mentions section 271AAB without specifying the charge or rate renders the notice vague, defective, and invalid in law.
• The principles of natural justice require that the assessee be clearly informed of the charge to enable a meaningful opportunity of hearing.
• Penalty proceedings are independent of assessment proceedings and cannot be sustained on the basis of a defective notice.

The Tribunal observed that the notice in the present case was issued in a routine manner without specifying the limb of section 271AAB invoked or the rate of penalty sought, and incorrectly referred to concealment or furnishing inaccurate particulars, which are not offences under section 271AAB. This constituted a fatal error rendering the notice invalid and the penalty proceedings void ab initio.

The Tribunal rejected the Revenue's argument that the defect was a mere clerical error and should not vitiate the proceedings. The Tribunal emphasized that such a defect prejudices the assessee's right to a fair hearing and is therefore fatal.

Consequently, the penalty order passed under section 271AAB consequent to the reassessment order was set aside and the penalty was deleted.

Additional observations

The Tribunal did not adjudicate on the substantive merits of the penalty levy since the penalty proceedings were quashed on preliminary legal grounds related to limitation and validity of notice. The grounds challenging the quantum and justification of penalty were held to be rendered academic.

Significant holdings and core principles established:

"The penalty proceedings initiated u/s. 271AAB in the order passed u/s. 143(3) cannot be left undecided without there being any speaking order passed for imposing or dropping the proceedings so initiated. Thus, in the present case as the penalty proceedings were initiated u/s. 271AAB vide order passed u/s. 143(3) of the Act and as such when no order was passed against the initiation of such proceedings, said proceedings got time barred by limitation on 30.9.2017 in terms of limitation provided u/s. 275(1)(a) and no order u/s. 271AAB could be passed thereafter."

"The Assessing Officer without mentioning specific default of the assessee in terms of clause (a) or (b) or (c) of Section 271AAB, the show cause notice issued in routine manner charging the offences prescribed u/s. 271(1)(c) of the Act cannot be considered a valid notice in the eyes of law and accordingly, the levy of penalty on the basis of such defective notice is liable to be held as void abinitio."

"Notice under section 274 of the Act should specifically state the grounds mentioned in section 271(1)(c), i.e., whether it is for concealment of income or for furnishing of incorrect particulars of income. Sending printed form where all the grounds mentioned in section 271 are mentioned would not satisfy the requirement of law; The assessee should know the grounds which he has to meet specifically. Otherwise, the principles of natural justice are offended."

"If none of these preliminary informations are mentioned in the show cause notice, then the show cause notice issued by the Ld. AO becomes completely defective and consequentially fatal and would vitiate the entire penalty proceedings."

The Tribunal's final determinations were:

• The penalty proceedings initiated under section 271AAB consequent to the assessment order dated 28.12.2016 are time-barred and no penalty can be levied thereon.
• The penalty proceedings initiated under section 271AAB consequent to the reassessment order dated 31.10.2017 are based on a defective and invalid notice and are therefore void ab initio.
• Accordingly, the penalty imposed under section 271AAB is deleted in full.
• The appeal is allowed on these legal grounds and other grounds relating to merits of penalty are dismissed as infructuous.