2017 (5) TMI 1799 - AT - Income Tax

Penalty u/s 271(1)(c) - Defective notice u/s 274 - Default of Concealment of particulars of income and Furnishing of inaccurate particulars of income - treatment of business loss as speculation loss - HELD THAT - Applicability of Explanation to Section 73 of the Income Tax Act in the case of assessee in view of the judgments passed in the case of CIT vs. HSBC Securities and Capital Markets India Pvt. Ltd. 2012 (6) TMI 715 - BOMBAY HIGH COURT is a debatable question and even otherwise treatment of business loss as speculation loss by the AO can neither be treated as the particular of income being concealed nor can it be called as furnishing inaccurate particulars of income. Assessee during the assessment or appellate proceedings had not furnished wrong or incorrect particulars of income. Merely based on change of head the AO cannot adduce the concealment or furnishing inaccurate particulars of income by the assessee. Perusal of the notice issued u/s 274 r.w.s. 271 reveals that the AO has not deleted the inappropriate words and parts of the notice whereby it is not clear as to the default committed by the assessee i.e. whether it is concealment of particulars of income or furnishing of inaccurate particulars of income that the penalty under section 271(1)(c) of the Act is sought to be levied. In this regard we find that in the case of M/s Manjunatah Cotton Ginning Factory 2013 (7) TMI 620 - KARNATAKA HIGH COURT relied on by the assessee has held that such a notice as has also been issued in the case on hand is invalid and the consequential penalty proceedings are also not valid. Thus we hold that the notice issued under section 274 r.w.s. 271 for initiating penalty proceedings under section 271(1)(c) of the Act in the case on hand is invalid and consequently the penalty proceedings are also invalid. Therefore the penalty levied by AO and upheld by the Ld. CIT(A) is hereby dropped. Appeal filed by the assessee stands allowed.

Summary

Issues Involved:
1. Validity of penalty levied under Section 271(1)(c) of the Income Tax Act for treating business loss as speculation loss.
2. Applicability of Explanation to Section 73 of the Income Tax Act.
3. Adequacy and clarity of the notice issued under Section 274 read with Section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Validity of Penalty under Section 271(1)(c):
The assessee challenged the penalty levied by the Assessing Officer (AO) under Section 271(1)(c) of the Income Tax Act, arguing that the loss due to the diminution in the value of shares held as stock-in-trade was treated as "Speculation Loss" instead of "Business Loss." The AO imposed a penalty of Rs. 2,26,34,044/- for furnishing 'inadequate particulars of income,' relying on the judgment of the Hon'ble Bombay High Court in Prasad Agents Pvt. Ltd. vs. ITO. The assessee contended that the issue was covered by the decision of the Bombay High Court in CIT vs. HSBC Securities and Capital Markets India Pvt. Ltd., which held that Explanation to Section 73 does not apply to a company whose gross total income consists mainly of income from other sources.

2. Applicability of Explanation to Section 73:
The assessee argued that Explanation to Section 73 was not applicable in their case, citing the decision of the Hon'ble Bombay High Court in CIT vs. HSBC Securities and Capital Markets India Pvt. Ltd. The ITAT Mumbai Bench in Fiduciary Shares and Stock Pvt. Ltd. also held that the amendment to Explanation to Section 73, which excludes companies engaged in trading shares, is retrospective. The assessee maintained that the loss was a business loss and not a speculation loss, and the AO's reclassification did not justify the penalty.

3. Adequacy and Clarity of Notice under Section 274:
The assessee argued that the notices issued under Section 274 read with Section 271(1)(c) were invalid as they did not specify whether the penalty was for concealment of income or furnishing inaccurate particulars. The Hon'ble Karnataka High Court in M/s Manjunatah Cotton & Ginning Factory held that such vague notices offend principles of natural justice. The ITAT found that the AO had issued a standard form notice without striking off irrelevant parts, indicating non-application of mind. This invalidated the penalty proceedings.

Conclusion:
The ITAT concluded that the applicability of Explanation to Section 73 was debatable, and the mere reclassification of business loss as speculation loss did not amount to furnishing inaccurate particulars of income. The assessee had not concealed any particulars or furnished inaccurate details. Furthermore, the penalty notices were invalid due to lack of clarity, as per the precedent set by the Hon'ble Karnataka High Court and the Hon'ble Bombay High Court. Consequently, the penalty levied by the AO and upheld by the CIT(A) was dropped, and the appeal filed by the assessee was allowed.

Order Pronouncement:
The appeal filed by the assessee was allowed, and the order was pronounced in the open court on 8th May 2017.