2025 (6) TMI 1688 - AT - Income Tax

Penalty u/s.271(1)(c) - non specification of clear charge - mandation of recording satisfaction - AO specified that the assessee had concealed the particular of income or furnished inaccurate particulars of income and in the assessment order also there was no satisfaction recorded by the AO - HELD THAT - Notice issued by the AO is without specifying the charge on which the penalty was proposed to be levied particularly when there is no satisfaction in the assessment order on which charge the penalty proceedings were initiated. In that scenario the penalty notice issued u/s.271(1)(c) r.w.s.274 of the Act itself is bad in law so also the consequential proceedings including the penalty order. Accordingly we set aside the order of the CIT(A) for both the years under consideration and direct the AO to delete the penalty levied in both the appeals. Appeals of the assessee are allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Appellate Tribunal were:

(a) Whether the penalty imposed under section 271(1)(c) of the Income Tax Act, 1961, amounting to Rs. 3,44,463/-, for furnishing inaccurate particulars of income, was justified and sustainable in law;

(b) Whether the penalty proceedings initiated by the Assessing Officer (AO) were valid, given the absence of recorded satisfaction or clear specification of the charge in the penalty notice;

(c) Whether the addition of Rs. 16,72,154/- to the income of the assessee on account of capital gains was rightly made, and if the penalty could be sustained in view of prior appellate orders dealing with the taxability of such income in earlier assessment years;

(d) Whether mere non-filing of appeal against certain income assessments, based on legal interpretation, amounts to furnishing inaccurate particulars warranting penalty;

(e) Whether the penalty notice issued under section 271(1)(c) read with section 274 of the Act was valid when it was vague, open-ended, and did not strike off irrelevant portions, thereby failing to specify the precise charge.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Validity and Justification of Penalty under Section 271(1)(c)

Relevant legal framework and precedents: Section 271(1)(c) of the Income Tax Act empowers the Assessing Officer to impose penalty where the assessee is found to have concealed particulars of income or furnished inaccurate particulars of income. The initiation of penalty proceedings requires the AO to record satisfaction on the basis of material on record, specifying the charge clearly in the penalty notice, as mandated by judicial precedents emphasizing the need for clear and unambiguous communication of the allegations to the assessee.

Court's interpretation and reasoning: The Tribunal noted that the AO, while issuing the penalty notice dated 05.02.2016 under section 271(1)(c) read with section 274, failed to specify the exact charge on which penalty was proposed. Furthermore, the assessment order dated 16.02.2016 did not record any satisfaction by the AO regarding concealment or furnishing of inaccurate particulars, merely mentioning initiation of penalty proceedings without elaboration. This procedural deficiency rendered the penalty notice and consequential proceedings legally defective.

Key evidence and findings: The penalty notice was vague and did not identify the precise nature of the alleged concealment or inaccuracy. The assessment order lacked a recorded satisfaction or reasoning supporting the penalty. The Tribunal relied on the absence of these essential elements to conclude that the penalty proceedings were invalid.

Application of law to facts: The Tribunal applied the principle that penalty proceedings must be founded on a clear and recorded satisfaction by the AO and that the penalty notice must specify the charge clearly. The failure to do so vitiated the penalty proceedings, making them unsustainable.

Treatment of competing arguments: The Revenue contended that the penalty was justified due to the addition of Rs. 16,72,154/- on account of capital gains, which the assessee allegedly concealed or inaccurately reported. The assessee argued that the penalty notice was vague and the addition was consequent to appellate orders in prior years, negating any mala fide intent. The Tribunal sided with the assessee, emphasizing procedural lapses in penalty initiation.

Conclusions: The penalty proceedings were held to be invalid due to failure to record satisfaction and absence of clear charge in the penalty notice. The penalty imposed under section 271(1)(c) was set aside.

Issue (c): Addition of Rs. 16,72,154/- on Capital Gain and Its Impact on Penalty

Relevant legal framework and precedents: Capital gains are taxable under the Income Tax Act, and additions to income must be based on clear evidence of underreporting or concealment. Prior appellate orders can influence the taxability in subsequent years, especially if appellate decisions re-characterize income recognition.

Court's interpretation and reasoning: The Tribunal noted that the addition of Rs. 16,72,154/- was linked to capital gain arising from sale of property in assessment year 2008-2009. The assessee had shown capital gain of Rs. 27,04,044/-, whereas the AO computed Rs. 43,76,198/-. The addition was consequent to appellate orders for the preceding assessment year 2010-11, which adjudicated the taxability of such income in the current year rather than the prior year.

Key evidence and findings: The Tribunal observed that the addition was not a result of concealment or inaccurate particulars by the assessee but was a consequence of appellate decisions. The assessee had not filed appeal against the income assessed based on legal interpretation, which does not ipso facto amount to furnishing inaccurate particulars.

Application of law to facts: The Tribunal applied the principle that mere non-filing of appeal on legal grounds does not imply concealment or inaccurate particulars unless mala fide or evasive conduct is established. The linkage of the addition to prior appellate orders negated the basis for penalty.

Treatment of competing arguments: The Revenue argued that the addition warranted penalty for furnishing inaccurate particulars. The assessee contended that the addition was based on appellate decisions and no mala fide intent existed. The Tribunal accepted the assessee's argument.

Conclusions: The addition did not justify penalty under section 271(1)(c) as it was not due to concealment or inaccurate particulars but was a result of appellate adjudication.

Issue (d): Non-filing of Appeal and Its Effect on Penalty

Relevant legal framework and precedents: The law distinguishes between bona fide legal interpretation and concealment. Non-filing of appeal against certain income assessments, especially when based on legal interpretation, does not automatically amount to furnishing inaccurate particulars unless there is evidence of mala fide or evasive conduct.

Court's interpretation and reasoning: The Tribunal emphasized that mere non-filing of appeal does not ipso facto justify penalty. The absence of mala fide intent or evasive conduct by the assessee precludes the imposition of penalty under section 271(1)(c).

Key evidence and findings: The assessee had not filed appeal against income assessed based on legal interpretation, which was not indicative of concealment or inaccuracy.

Application of law to facts: The Tribunal applied the principle that penalty requires proof of concealment or furnishing inaccurate particulars with mala fide intent, which was absent here.

Treatment of competing arguments: The Revenue sought to impose penalty despite absence of mala fide. The Tribunal rejected this approach.

Conclusions: Non-filing of appeal on legal grounds does not warrant penalty under section 271(1)(c).

Issue (e): Validity of Penalty Notice under Sections 271(1)(c) and 274

Relevant legal framework and precedents: Penalty notices must be precise, specifying the charge clearly and not be vague or indeterminate. Judicial precedents have held that vague penalty notices violate principles of natural justice and are liable to be quashed.

Court's interpretation and reasoning: The Tribunal found the penalty notice to be vague, open, and indeterminate, failing to strike off irrelevant portions and not specifying the charge clearly. The judgment relied upon by the CIT(A) was distinguishable on facts.

Key evidence and findings: The penalty notice lacked clarity on the charge and did not specify the particulars alleged to be concealed or inaccurately furnished.

Application of law to facts: The Tribunal applied the principle that a vague and indeterminate penalty notice is bad in law and invalidates the penalty proceedings.

Treatment of competing arguments: The Revenue relied on the CIT(A) judgment to uphold the penalty notice validity. The Tribunal distinguished the precedent and held the notice defective.

Conclusions: The