2025 (7) TMI 252 - AT - Income Tax

Levy of penalty u/s. 270A - defective notice u/s 274 - non specification of clear charge - what specific ground under which under-reported income which is in consequence of misreporting thereof was invoked ? - HELD THAT - A bare perusal of notice shows that the manner in which charge has been specified u/s. 270A of the Act the AO is himself not clear as to under what charge penalty is to be levied u/s. 270A of the Act. He initiates penalty u/s. 270A(9) of the Act i.e. mis-reporting of income and issues notice mentioning both limbs of section 270A of the Act and finally levies penalty u/s. 270A(9)(c) of the Act on the charge of mis-reporting of income-claim of expenditure not substantiated by any evidence . The manner in which charge has been mentioned in the notice makes the notice vague and ambiguous. Penal provisions cannot be invoked on ambiguous charges. Hence the notice is defective and unsustainable in the eye of law. It is no more res integra that penalty on the basis of defective notice is unsustainable. The subsequent proceedings arising from such defective notice are vitiated and void ab initio. Assessee appeal allowed.

Summary

The core legal questions considered by the Tribunal in this appeal revolve around the validity and correctness of the penalty proceedings initiated and confirmed under section 270A of the Income Tax Act, 1961. Specifically, the issues include:

1. Whether the penalty notice issued under section 274 read with section 270A of the Act is valid, given that it ambiguously refers to both "under-reporting" and "mis-reporting" of income without specifying the exact charge.

2. Whether the Assessing Officer (AO) correctly levied penalty under section 270A(9) of the Act for "mis-reporting of income" without specifying the precise clause under subsection (9) invoked.

3. The legal implications of issuing a penalty notice that is vague or ambiguous in specifying the grounds for penalty under section 270A, and whether such defect vitiates the penalty proceedings.

4. The distinction between "under-reporting" and "mis-reporting" of income under section 270A and the requirement for clarity in penalty notices.

Issue-wise detailed analysis:

Validity of Penalty Notice under Section 274 read with Section 270A of the Act

The legal framework governing penalty proceedings under section 270A of the Income Tax Act distinguishes between "under-reporting" of income (section 270A(2)) and "mis-reporting" of income (section 270A(9)). The former pertains to reporting less income than actual, whereas the latter involves providing incorrect information about the nature, source, or amount of income. Section 270A(9) further enumerates six specific charges constituting mis-reporting, including misrepresentation, suppression of facts, failure to record investments, unsubstantiated expenditure claims, false entries, and failure to report international or specified domestic transactions.

The Tribunal observed that the AO's notice dated 13.05.2021 ambiguously referred to both "under-reporting" and "mis-reporting" of income, stating that the assessee had "under-reported income which is in consequence of misreporting thereof." This conflation of two distinct charges under section 270A created uncertainty as to the precise basis for penalty initiation.

The Court emphasized that these terms have different legal connotations and cannot be used interchangeably. The Legislature's separate classification under subsections (2) and (9) of section 270A underscores the necessity for clear and specific charges in penalty notices. The AO's failure to specify under which clause of section 270A(9) the penalty was being initiated rendered the notice vague and ambiguous.

In applying the law to the facts, the Tribunal noted that the penalty order dated 31.12.2021 imposed penalty under section 270A(9)(c) for "mis-reporting of income - claim of expenditure not substantiated by any evidence." However, this clarity in the penalty order was not reflected in the initial notice, which is a critical procedural document that must inform the assessee of the exact charge to enable a meaningful defense.

The Tribunal relied on established legal principles that penal provisions must be invoked on clear and unambiguous charges. A defective or vague notice undermines the validity of penalty proceedings. The Court held that the defect in the notice dated 13.05.2021 was fundamental and rendered the entire penalty proceeding void ab initio.

Distinction Between Under-Reporting and Mis-Reporting of Income

The Tribunal provided a detailed interpretation of the statutory provisions distinguishing "under-reporting" and "mis-reporting" of income under section 270A. It highlighted that under-reporting involves reporting income lower than the actual income, whereas mis-reporting involves incorrect information regarding the nature or source of income. The Legislature's separate treatment of these offenses in subsections (2) and (9) of section 270A indicates different legal consequences and procedural requirements.

The Court underscored that the AO's notice failed to respect this distinction by simultaneously mentioning both charges without specifying the exact limb under which penalty proceedings were initiated. This failure contributed to the vagueness and ambiguity of the notice.

Legal Consequences of Vague or Ambiguous Penalty Notices

The Tribunal reaffirmed the settled legal position that penalty proceedings initiated on the basis of a defective or vague notice are unsustainable. It stated that such defect goes to the root of the validity of the penalty proceedings and vitiates the entire process. The Court noted that the notice must clearly specify the charge and the relevant statutory provision invoked to enable the assessee to effectively contest the penalty.

In the instant case, the AO's failure to specify the exact clause of section 270A(9) in the notice, despite doing so in the penalty order, was held to be a fatal flaw. The Tribunal concluded that the penalty notice was defective and the subsequent penalty proceedings were void ab initio.

Treatment of Competing Arguments

The assessee argued that the penalty notice was issued mechanically without specifying the precise charge, rendering the notice vague and the penalty proceedings invalid. The Department contended that the penalty order clearly specified the charge under section 270A(9), and hence there was no ambiguity at the time of levy of penalty.

The Tribunal rejected the Department's contention, emphasizing that the validity of penalty proceedings must be judged from the standpoint of the notice, which initiates the proceedings and informs the assessee of the charge. The clarity in the penalty order cannot cure the fundamental defect in the notice. The Tribunal held that the notice's ambiguity rendered the proceedings unsustainable.

Significant holdings:

"Both these expressions carry different connotations and signifies different charges for levy of penalty. 'Under reporting' of income refers to reporting of less income than the actual income. Whereas, 'mis-reporting of income' involves providing of incorrect information about the nature, source or amount of income. These expressions cannot be used interchangeably and are not synonyms for each other."

"The manner in which charge has been mentioned in the notice makes the notice vague and ambiguous. Penal provisions cannot be invoked on ambiguous charges. Hence, the notice dated 13.05.2021 is defective and unsustainable in the eye of law."

"It is no more res integra that penalty on the basis of defective notice is unsustainable. The subsequent proceedings arising from such defective notice are vitiated and void ab initio."

The Tribunal's final determination was to quash the impugned order confirming penalty under section 270A and allow the appeal of the assessee on the ground of invalidity of the penalty notice. This decision underscores the principle that penalty proceedings must be initiated by a clear, specific, and unambiguous notice specifying the exact charge under the relevant statutory provision, failing which the proceedings are liable to be quashed.