Try our new portal www.taxtmi.com for a better experience!
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2025 (6) TMI 652 - AT - Income TaxPenalty levied u/s. 270A - voluntary contribution admitted by the assessee as underreported income - as argued since the AO has accepted the returned income filed by the assessee pursuant to the notice u/s.153A of the Act and didn t make any addition to the income returned the proposed penalty should be dropped - HELD THAT - We find considerable merit in the legal issue and find that the impugned notices doesn t spell out the specific faults for which the assessee has been called upon to defend against the proposed penalty because both the faults as specified u/s. 270A of the Act has been stated therein i.e. underreporting of income / misreporting of income . Hence AR rightly submitted that since these are two distinct faults specified there under with different consequences proper notices specifying the charge/fault is a must to facilitate the assessee to meet the charge alleged against him. Failing which the assessee would not be able to properly defend an ambiguous charge which would vitiate assessee s right to a fair hearing guaranteed by the Constitution of India. AO was duty bound to put the assessee on notice as to which charge/lapse/fault which is alleged against him so that assessee can defend it in accordance to law. According to us the assessee should have been informed in the SCN with certainty and accurately of the exact nature of the fault alleged against it which is absent in this case. Therefore SCN proposing penalty are found to be vague and doesn t satisfy the requirement of law and therefore consequent levy of penalty is fragile in the eyes of law and is held to be ab initio void . Thus assessee s appeal for AY 2018-19 AY 2019-20 are allowed and the penalty imposed for these three (3) appeals are directed to be deleted. Penalty levied u/s. 271AAB - mandation to specify clear charge - HELD THAT - Notice issued prior to imposition of penalty the AO should spell out the specific charge/fault for which the AO intends to levy penalty. Failure to do so would seriously prejudice the assessee to defend the fault/charge which omission is antithetical to fair hearing as guaranteed by section 274 of the Act as well as by the Constitution of India. CIT(A) s attempt to read the impugned notice issued by the AO as if it was under sub-section (1A) of section 271AAB of the Act can t be countenanced because he was called upon to adjudicate and answer the legal issue raised before him that the AO s action of issuing the penalty notice under sub-section (1) of section 271AAB instead of under sub-section (1A) of section 271AAB of the Act is bad in law. Instead of answering the validity of impugned notice he simply has referred to first second para of the impugned notice and states that since the AO in the first para of notice referred to search carried out in AY 2020-21 in second para referred to sub-section (1) of section 271AAB of the Act the AO referred to sub-section (1A) of section 271AAB of the Act is misdirected misconceived and flawed because the assessee was challenging the jurisdiction of the AO to have issued the impugned notice u/s. 271AAB(1) of the Act. Thus we find that the Ld.CIT(A) erred in dismissing the legal ground raised by the assessee challenging the jurisdiction of the AO to have issued notice under subsection (1) of section 271AAB which provision of law was not in force for issuing such a notice in assessee s case as discussed. In this case the AO ought to have been given notice under sub-section 1A of section 271AAB of the Act and also as to whether assessee case falls under sub-clause (a) or (b) so that the assessee is able to defend its case properly. Having failed to issue the jurisdictional notice u/s. 271AAB(1A) either under sub-clause (a) or subclause (b) and instead issued notice u/s. 271AAB(1) which didn t empower the AO to levy penalty in this case we are of the view that the entire penalty proceedings right from issue of notice to imposition of penalty shows total non-application of mind which exposes the arbitrary action of the AO and thus vitiated the impugned action for these reasons as well; and hence we hold the AO s action to be ab initio void. In the present case we are of the view that since section 274 mandates the AO to have given the assessee reasonable opportunity of being heard and it would be meaningless if the assessee is given notice which he was not empowered to issue under the law and therefore such an action strikes at the root of the jurisdiction of the AO to have issued notice u/s. 274 r.w.s.271AAB(1) of the Act which vitiates the entire penalty proceedings and therefore consequent penalty levied is null in the eyes of law and therefore penalty order is quashed. All the appeals filed by the assessee s are allowed.
Issues Presented and Considered
The core legal questions considered by the Tribunal in these appeals revolve around the validity of penalty proceedings initiated under sections 270A and 271AAB of the Income Tax Act, 1961. Specifically, the issues are:
Issue-wise Detailed Analysis 1. Validity of Penalty Notices under Section 270A for AY 2018-19 and 2019-20 Legal Framework and Precedents: Section 270A of the Income Tax Act prescribes penalties for two distinct faults: (i) underreporting of income (subsections 1-7), attracting a penalty of 50% of the tax payable on the underreported income, and (ii) underreporting as a consequence of misreporting of income (subsections 8-10), attracting a penalty of 200%. The law mandates that the AO must specify the precise charge in the show cause notice issued under section 274 to comply with principles of natural justice and fair hearing. Jurisprudence, including decisions of the jurisdictional High Courts and ITAT, holds that failure to specify the exact limb or fault in the penalty notice vitiates the proceedings as it deprives the assessee of a meaningful opportunity to defend the charge. Court's Interpretation and Reasoning: The Tribunal observed that the penalty notices issued to the Educational Trust and Institute of Science & Technology Trust did not specify whether the penalty was proposed for underreporting or misreporting of income. The notices ambiguously referred to "underreporting/misreporting" jointly, which are distinct faults with materially different consequences. The AO also failed to record his satisfaction during the assessment proceedings as to which limb of section 270A was applicable. The Tribunal held that such omnibus and vague notices betray non-application of mind and defeat the purpose of section 274, which requires clear and specific charges to be communicated for a fair hearing. Key Evidence and Findings: The SCNs dated 28.09.2021 and 29.09.2021 for the relevant AYs showed identical language proposing penalty for both faults simultaneously. The AO's assessment orders merely endorsed initiation of penalty proceedings without specifying the fault. The assessee's submissions, supported by judicial precedents, highlighted that such notices are invalid as they do not enable the assessee to mount a proper defense. Application of Law to Facts: The Tribunal applied the settled legal principle that framing of specific charges is sine qua non for valid penalty proceedings. The failure to specify the limb of section 270A in the SCN is a jurisdictional defect and cannot be cured by section 292B of the Act, which deals with curable procedural lapses. The Tribunal rejected the Revenue's argument that the quantum of penalty (50%) clarifies the limb, holding that the notice itself must be clear and unambiguous. Treatment of Competing Arguments: The Revenue contended that the penalty rate of 50% clearly indicated underreporting and that failure to strike out "misreporting" was a minor procedural lapse cured by section 292B. The Tribunal disagreed, emphasizing that the notice must specify the charge to satisfy the requirements of natural justice and that the penalty order cannot be read in conjunction with the assessment or penalty order to cure vagueness in the notice. The assessee's reliance on authoritative decisions was accepted. Conclusion: The Tribunal held the penalty notices under section 270A for AYs 2018-19 and 2019-20 to be invalid and quashed the penalties levied thereunder. 2. Validity of Penalty Notices under Section 271AAB for AY 2020-21 Legal Framework and Precedents: Section 271AAB imposes penalty on undisclosed income detected in search cases. Subsection (1) applies to searches conducted between 01.07.2012 and 14.12.2016, prescribing penalties at 10%, 20%, or 60% depending on conditions. Subsection (1A), introduced later, applies to searches on or after 15.12.2016 with penalty rates of 30% or 60%. Section 274 mandates that no penalty order shall be made without giving the assessee a reasonable opportunity of being heard via a proper show cause notice specifying the charge. Jurisprudence holds that failure to specify the correct statutory provision or limb in the penalty notice vitiates the proceedings. Court's Interpretation and Reasoning: The AO issued SCNs under section 271AAB(1) for the AY 2020-21 search conducted on 07.11.2019, a date post-dating 15.12.2016, when subsection (1A) applies. The penalty order levied penalty at 60%, consistent with section 271AAB(1A)(b), but the notice incorrectly cited section 271AAB(1). The Tribunal held that the AO lacked jurisdiction to issue notice under subsection (1) for a search conducted after 15.12.2016. Further, the notice failed to specify the particular limb or clause under which penalty proceedings were initiated, thereby violating the procedural safeguards of section 274. Key Evidence and Findings: The penalty notice dated 29.09.2021 explicitly referred to section 271AAB(1) and did not mention subsection (1A) or the relevant clause (a) or (b). The search date and penalty quantum clearly indicated subsection (1A)(b) was applicable, but the AO did not issue the correct notice. The assessee also pointed out double taxation of Rs. 24 lakhs and challenged the quantum of penalty. Application of Law to Facts: The Tribunal applied the principle that jurisdictional facts must be satisfied before penalty proceedings can be validly initiated. Since the search was conducted after 15.12.2016, the AO had no jurisdiction to invoke subsection (1). The failure to issue a valid notice under the correct provision was a jurisdictional defect, rendering the penalty order void ab initio. The Tribunal also emphasized the discretionary nature of penalty under section 271AAB, noting that the AO must exercise discretion based on proper notice and hearing. Treatment of Competing Arguments: The Revenue argued that the incorrect reference was a clerical error cured by section 292B and that the penalty quantum and surrounding facts made the AO's intention clear. The Tribunal rejected this, holding that section 292B does not cure jurisdictional defects or failure to specify the charge. The Revenue's reliance on Supreme Court decisions upholding penalties despite procedural lapses was distinguished on facts, as those cases involved valid notices and participation by the assessee. The assessee's reliance on binding jurisdictional decisions, including the Madras High Court and ITAT precedents, was accepted. Conclusion: The Tribunal quashed the penalty proceedings and orders under section 271AAB for AY 2020-21, holding the notices invalid and the penalty levy unsustainable. 3. Discretionary Nature of Penalty under Section 271AAB The Tribunal noted that the use of the word "may" in section 271AAB(1) indicates discretion in imposing penalty. The AO is not mandated to levy penalty in every case but must exercise discretion judiciously. This supports the requirement of a valid notice specifying the charge to enable the assessee to present a defense and for the AO to make an informed decision. 4. Issues Relating to Computation of Undisclosed Income and Penalty Quantum The assessee challenged the computation of undisclosed income, alleging double taxation of Rs. 24 lakhs and non-application of section 11 exemptions on voluntary contributions. The AO ignored rectification applications filed by the assessee. The Tribunal noted these contentions but primarily focused on the invalidity of the penalty notices. The issue of correct computation and penalty quantum was thus not adjudicated in detail due to the procedural infirmities in the penalty proceedings. 5. Procedural Safeguards under Section 274 The Tribunal emphasized that section 274 mandates issuance of a proper show cause notice specifying the charge or fault and affording reasonable opportunity of hearing before penalty imposition. Vague or omnibus notices that fail to specify the exact charge violate principles of natural justice and are invalid. The Tribunal relied on authoritative decisions underscoring this principle. 6. Burden of Proof The Tribunal clarified that the burden on the assessee to prove misreporting or invalidity of penalty arises only if valid proceedings are initiated. Since the notices were invalid, the question of burden did not arise in these cases. Significant Holdings "Framing of specific charges is sine qua non for levy of penalty since the assessee must be put to allegations for which the penalty was being levied. In the absence of such a specific charge, the penalty would be bad-in-law and the same is not a curable defect u/s 292BB." "An omnibus SCN obviously confuses the assessee and he will not be able to defend the fault/charge which would be ultimately imposed upon him. Therefore, the Hon'ble Courts have held that if the notices are found to be vague, it has to be held as bad in law." "The AO did not have jurisdiction to issue notice under section 271AAB(1) for a search conducted after 15.12.2016. The failure to issue valid notice under the correct provision is a jurisdictional defect which vitiates the penalty proceedings ab initio." "Levy of penalty under section 271AAB is discretionary and not mandatory. The AO must exercise discretion after issuing a proper notice specifying the charge and after giving reasonable opportunity of hearing." "Section 292B does not cure jurisdictional defects or failure to specify the charge in penalty notices. Such defects go to the root of the matter and render penalty proceedings invalid." "The penalty notices issued under sections 270A and 271AAB in the present cases are held to be invalid and the consequent penalties are quashed."
|