Facts of the Case

The assessee, M/s Gragerious Projects Pvt. Ltd., filed its return of income for Assessment Year 2015–16 declaring a substantial loss. During scrutiny assessment under Section 143(3), the Assessing Officer disallowed an amount of ₹5 crores claimed as advance written off in the profit and loss account on the ground that no supporting agreements or evidence were produced. Consequently, the returned loss was reduced and income was assessed after adjustments.

Simultaneously, the Assessing Officer initiated penalty proceedings under Section 271(1)(c) and issued a notice under Section 274 read with Section 271(1)(c). The notice, however, did not strike off the irrelevant portion and did not specify whether penalty was proposed for concealment of income or for furnishing inaccurate particulars of income. A penalty of ₹1,54,50,000/- was ultimately levied.

The CIT(A) upheld the penalty, but the ITAT deleted it holding that the notice was vague and invalid. Aggrieved, the Revenue filed appeal before the Delhi High Court.

Issues Involved

Whether penalty proceedings under Section 271(1)(c) are sustainable where the notice issued under Section 274 does not specify the exact charge, i.e., concealment of income or furnishing of inaccurate particulars of income.

Petitioner’s Arguments (Revenue)

The Revenue argued that the ITAT adopted a hyper-technical approach and that the intention of the Assessing Officer was clear from the assessment order and penalty order read as a whole. It was contended that there is an overlap between concealment and furnishing inaccurate particulars and that no prejudice was caused to the assessee due to non-striking off of the irrelevant limb in the notice.

Respondent’s Arguments (Assessee)

The assessee contended that penalty proceedings are quasi-criminal in nature and strict compliance with statutory requirements is mandatory. It was argued that failure to specify the precise charge in the notice deprived the assessee of a fair opportunity to defend itself and vitiated the entire penalty proceedings. Reliance was placed on binding precedents including Manjunatha Cotton and SSA’s Emerald Meadows.

Court Order / Findings

The Delhi High Court held that concealment of income and furnishing inaccurate particulars of income are two distinct charges carrying different connotations and consequences. The Court observed that when penalty proceedings are initiated, the Assessing Officer must clearly specify the exact limb under which penalty is sought to be imposed.

The Court noted that the notice issued to the assessee was vague and omnibus, as it did not strike off the inapplicable portions. Such a notice reflects non-application of mind and is contrary to the principles of natural justice. The Court relied upon a catena of judgments including CIT v. Manjunatha Cotton and Ginning Factory, CIT v. SSA’s Emerald Meadows, PCIT v. Sahara India Life Insurance Co. Ltd., and the Full Bench decision of the Bombay High Court in Mohd. Farhan A. Shaikh.

The Court rejected the Revenue’s argument that defect in notice could be cured by referring to the assessment order and held that penalty proceedings must stand on their own footing.

Important Clarification

The Court clarified that penalty under Section 271(1)(c) is not automatic on every addition or disallowance. Since the provision entails serious civil consequences, the charge must be unequivocal and clearly communicated through a valid statutory notice.

Final Outcome

All appeals filed by the Revenue were dismissed. The Delhi High Court upheld the order of the ITAT deleting the penalty under Section 271(1)(c) and held that vague notices under Section 274, which do not specify the precise charge, render penalty proceedings invalid in law.

 Link to download the order - https://www.mytaxexpert.co.in/uploads/1769850870_PR.COMMISSIONEROFINCOMETAX04VsMSGRAGERIOUSPROJECTSPVT.LTD..pdf

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