Facts of the Case

The Revenue filed an appeal under Section 260A of the Income-tax Act challenging the order dated 06.03.2020 passed by the Income Tax Appellate Tribunal in respect of Assessment Year 2010-11, whereby the Tribunal allowed the assessee’s appeal against levy of penalty under Section 271(1)(c).

The assessee, Quippo Telecom Infrastructure Pvt. Ltd., filed its return of income for AY 2010-11 declaring a loss under normal provisions as well as book loss under Section 115JB. The return was selected for scrutiny and assessment was completed under Section 143(3) on 15.03.2013. The Assessing Officer disallowed expenditure of ₹2.50 crore claimed towards professional services and further disallowed interest expenditure of ₹223.03 crore under Section 36(1)(iii), resulting in assessed income of ₹20,54,110. Simultaneously, the Assessing Officer initiated penalty proceedings under Section 271(1)(c).

A notice under Section 274 read with Section 271(1)(c) was issued on 15.03.2013. The notice did not specify whether the penalty was proposed for concealment of income or for furnishing inaccurate particulars. Penalty was thereafter levied at ₹1,25,00,00,000.

The assessee’s appeals against both the quantum additions and the penalty were dismissed by the Commissioner of Income Tax (Appeals). On further appeal, the ITAT dismissed the quantum appeal but allowed the appeal against penalty, leading to the present appeal by the Revenue.

Issues Involved

Whether penalty under Section 271(1)(c) could be sustained when the notice issued under Section 274 did not specify the limb under which penalty proceedings were initiated, and whether penalty could be levied where the disallowances arose from a debatable issue.

Petitioner’s Arguments

The Revenue contended that the ITAT erred in deleting the penalty merely on technical grounds relating to the notice. It was argued that the assessee had claimed expenditure despite not carrying on any business activity and therefore had furnished inaccurate particulars of income, justifying levy of penalty.

Respondent’s Arguments

The assessee submitted that the penalty notice was invalid as it failed to specify whether the charge was concealment of income or furnishing of inaccurate particulars, rendering the entire penalty proceedings void. It was further argued that the underlying issue regarding allowability of expenditure was debatable, supported by audited accounts and business objects, and therefore penalty was not leviable even on merits.

Court Order / Findings

The Delhi High Court noted that it was undisputed that the notice issued under Section 274 read with Section 271(1)(c) did not specify the limb under which penalty was sought to be imposed. The Court held that this issue was squarely covered against the Revenue by a series of binding decisions, including the judgments in PCIT vs. Sahara India Life Insurance Company Ltd., CIT vs. Manjunatha Cotton & Ginning Factory, SSA’s Emerald Meadows, and PCIT vs. Unitech Reliable Projects (P) Ltd.

The Court further observed that the ITAT had also examined the matter on merits and found that the issue relating to allowability of expenditure was debatable. The assessee had disclosed all material particulars and supported its claim with evidence, and mere disallowance of a claim could not automatically result in levy of penalty.

In view of the settled legal position, the Court held that no substantial question of law arose for consideration.

Important Clarification

The High Court reiterated that a penalty notice under Section 274 must clearly specify whether penalty proceedings are initiated for concealment of income or for furnishing inaccurate particulars. Absence of such specification vitiates the penalty proceedings. Further, penalty cannot be imposed where the claim made by the assessee involves a debatable issue and all particulars have been duly disclosed.

Final Outcome

The appeal filed by the Revenue was dismissed. The Delhi High Court upheld the order of the Income Tax Appellate Tribunal deleting the penalty levied under Section 271(1)(c) for Assessment Year 2010-11, holding that no substantial question of law arose.

Link to download order https://www.mytaxexpert.co.in/uploads/1769757283_THEPR.COMMISSIONEROFINCOMETAX7VsQUIPPOTELECOMINFRASTRUCTUREPVT.LTD.pdf 

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