2025 (5) TMI 606 - AT - Income Tax

Penalty u/s 271(1) - non specification of clear charge - as argued said notice does not specify the accurate limb in which the penalty is levied on the assessee - HELD THAT - Through the penalty proceedings initiated against the assessee he is put to pecuniary burden therefore it is essential from the aspect of natural justice that he should be made aware of the charges for which penalty is levied against him so that he can be ready with his defense. The bedrock of any judicial system is based on ultimate epitome of natural justice. This cannot be eroded by any process of law until and unless fraud is detected or malafide conduct is detected on the part of the assessee. In the present case before us the ambiguity that is existing in the notice issued u/s.274 r.w.s. 271(1) (c) of the Act hampers the rights of the assessee from the perspective of natural justice. There has been no evidence placed on record by the revenue to suggest any malafide conduct on the part of the assessee. We do concur with the same findings arrived at that before issuance of penalty notice the AO is required to apply his mind to the material on record and specify 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 must be specified in the notice which is sent to the assessee. Since in the present case notice being ambiguous where both the limbs are clubbed together we therefore hold that such notice itself is void ab initio therefore all the subsequent proceedings becomes a nullity in the eyes of law. Accordingly the order of the Ld. CIT(Appeals)/NFAC itself becomes non-est. Appeal of the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

(a) Whether a penalty notice issued under section 274 read with section 271(1)(c) of the Income Tax Act, 1961, which ambiguously refers to both limbs of section 271(1)(c) - concealment of particulars of income and furnishing inaccurate particulars of income - without specifying the exact limb under which penalty proceedings are initiated, is valid?

(b) Whether the ambiguity in the penalty notice, by failing to clearly indicate the specific charge, violates the principles of natural justice and renders the penalty proceedings void ab initio?

(c) Whether the assessment order or other documents can cure the defect of ambiguity in the penalty notice issued under section 274 read with section 271(1)(c) of the Act?

(d) Whether the absence of clear specification of the limb under which penalty is levied affects the validity of the penalty proceedings and the consequent penalty order?

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Validity of Penalty Notice Ambiguously Referring to Both Limbs of Section 271(1)(c)

Relevant legal framework and precedents:

Section 271(1)(c) of the Income Tax Act, 1961, penalizes either concealment of particulars of income or furnishing inaccurate particulars of income. The penalty proceedings are initiated by issuing a notice under section 274 of the Act. The notice must specify the ground on which penalty is proposed to be levied.

The Hon'ble Delhi High Court in Pr. CIT Vs. Gragerious Projects (P) Ltd. (2024) held that the revenue must specify which limb of section 271(1)(c) is being pressed into service and is not permitted to club both charges in the penalty notice. Absence of such specification renders the penalty proceedings invalid.

The Bombay High Court in Pr. CIT Vs. Times Global Broadcasting Ltd. (2025) reiterated that the penalty notice must clearly indicate whether the penalty is for concealment or furnishing inaccurate particulars. The Full Bench emphasized that the penalty proceedings must stand on their own and cannot rely on the assessment order to cure defects in the notice. Ambiguity in the notice violates the penal provision's strict construction and must be resolved in favor of the assessee.

The Delhi High Court in Pr. CIT Vs. Blackrock Securities (P) Ltd. (2023) also held that the notice must clearly specify the limb of section 271(1)(c) under which penalty proceedings are initiated. The Court emphasized that the pecuniary burden on the assessee varies depending on the limb attracted, and natural justice requires the assessee to be clearly informed of the charge to prepare a defense.

Court's interpretation and reasoning:

The Tribunal observed that the ambiguity in the penalty notice, which simultaneously referred to both concealment and furnishing inaccurate particulars without striking off the irrelevant limb, creates uncertainty and violates the principles of natural justice. The assessee is entitled to know the exact charge to be able to defend effectively.

The Tribunal relied on the above judicial pronouncements to conclude that the ambiguous notice is void ab initio and all subsequent penalty proceedings based on such notice are nullities in the eyes of law.

Key evidence and findings:

The penalty notice issued did not specify which limb of section 271(1)(c) was attracted. The assessment order also failed to clarify this point, merely stating that penalty proceedings were initiated for both concealment and furnishing inaccurate particulars.

No evidence was placed on record by the revenue to suggest malafide conduct or fraud by the assessee that could justify dispensing with the requirement of clarity in the notice.

Application of law to facts:

Given the established legal position that the penalty notice must clearly specify the limb under which penalty is levied, the Tribunal found the notice in the present case defective and ambiguous. This defect infringed upon the assessee's right to natural justice and rendered the penalty proceedings invalid.

Treatment of competing arguments:

The revenue authorities and their counsel conceded the ambiguity in the penalty notice but sought to uphold the penalty based on the assessment order and other proceedings. The Tribunal rejected this argument, holding that penalty proceedings are distinct from assessment proceedings and must stand on their own. The assessment order cannot cure the defect in the penalty notice.

Conclusions:

The Tribunal concluded that the penalty notice being ambiguous and not specifying the limb of section 271(1)(c) attracted is void ab initio. Consequently, all penalty proceedings and orders based on such notice are invalid.

Issue (c): Whether Assessment Order Can Cure Defect in Penalty Notice

Relevant legal framework and precedents:

The Full Bench of the Bombay High Court in Pr. CIT Vs. Times Global Broadcasting Ltd. (2025) emphasized that penalty proceedings must stand on their own and cannot be cured by referring to the assessment order. The penalty notice under section 274 read with section 271(1)(c) must independently specify the grounds of penalty.

The Delhi High Court in Pr. CIT Vs. Blackrock Securities (P) Ltd. (2023) and other cases also held that the assessment order does not substitute for a clear and unambiguous penalty notice.

Court's interpretation and reasoning:

The Tribunal followed these precedents and held that the assessment order cannot cure the defect of ambiguity in the penalty notice. The penalty proceedings are separate and distinct from assessment proceedings and must be initiated by a valid notice specifying the charge.

Application of law to facts:

In the present case, the assessment order did not specify the limb under which penalty was initiated, and the penalty notice was ambiguous. Therefore, the defect could not be cured by the assessment order.

Conclusions:

The Tribunal held that the defect in the penalty notice cannot be cured by the assessment order, and the penalty proceedings based on such defective notice are invalid.

Issue (d): Effect of Absence of Clear Specification of Limb on Validity of Penalty Proceedings

Relevant legal framework and precedents:

The judicial pronouncements cited above uniformly hold that a penal provision must be strictly construed and ambiguity resolved in favor of the assessee. The absence of clear specification of the limb under section 271(1)(c) in the penalty notice violates the principles of natural justice and renders the penalty proceedings void.

Court's interpretation and reasoning:

The Tribunal emphasized that the pecuniary burden on the assessee may vary depending on whether concealment or furnishing inaccurate particulars is involved. Therefore, clarity in the notice is essential for the assessee to understand the charge and prepare a defense.

Application of law to facts:

The ambiguous notice in this case failed to inform the assessee of the exact charge, thereby violating natural justice and invalidating the penalty proceedings.

Conclusions:

The Tribunal held that the absence of clear specification of the limb attracted under section 271(1)(c) invalidates the penalty proceedings and the consequent penalty order.

3. SIGNIFICANT HOLDINGS

The Tribunal, relying on authoritative judicial pronouncements, held:

"Where the charges are either concealment of particulars of income or furnishing of inaccurate particulars thereof, the revenue must specify as to which one of two limb is sought to be pressed into service and therefore, the revenue is not permitted to club both the charges."

"In absence of specific charge for initiation of penalty proceedings, the levy of penalty u/s. 271(1)(c) of the Act in the case of the assessee was not valid."

"The penalty proceedings must stand on their own. These proceedings culminate under a different statutory scheme that remains distinct from the assessment proceedings. Therefore, the assessee must be informed of the grounds of the penalty proceedings only through statutory notice. An omnibus notice suffers from the vice of vagueness."

"A penal provision, even with civil consequences, must be construed strictly. And ambiguity, if any, must be resolved in the affected assessee's favour."

"Penalty proceedings entail civil consequences for the assessee. The AO is required to apply his mind to the material particulars, and indicate clearly, as to what is being put against the respondent/assessee when triggering the penalty proceedings."

"In the given case notice being ambiguous where both the limbs are clubbed together, we therefore hold that such notice itself is void ab initio, therefore, all the subsequent proceedings becomes a nullity in the eyes of law."

"The bedrock of any judicial system is based on ultimate epitome of natural justice. This cannot be eroded by any process of law until and unless fraud is detected or malafide conduct is detected on the part of the assessee."

Accordingly, the Tribunal declined to interfere with the impugned order and dismissed the appeal on the ground that the penalty notice was ambiguous and defective, rendering the penalty proceedings invalid without going into the merits of the case.