Facts of the Case

The Revenue filed an appeal under Section 260A of the Income-tax Act against the order passed by the Income Tax Appellate Tribunal deleting penalty levied under Section 271(1)(c) for Assessment Year 2001-02. The appeal was heard along with connected matters involving similar issues.

The assessee, Virtual Software and Training Pvt. Ltd., filed its return declaring loss. During assessment proceedings, the Assessing Officer disallowed certain expenses on the ground that they were unsupported or not allowable. Based on the additions, penalty proceedings under Section 271(1)(c) were initiated.

A notice under Section 274 read with Section 271(1)(c) was issued in a standard printed format, without striking off the inapplicable portion and without specifying whether the penalty was proposed for concealment of income or for furnishing inaccurate particulars. Penalty was thereafter levied.

The Commissioner (Appeals) confirmed the penalty. On further appeal, the ITAT deleted the penalty holding that the notice was vague and that the Assessing Officer had not recorded clear satisfaction regarding the specific charge. Aggrieved, the Revenue preferred an appeal before the High Court.

Issues Involved

Whether penalty under Section 271(1)(c) could be sustained when the notice issued under Section 274 did not specify the exact limb under which penalty was initiated, and whether penalty could be imposed merely on account of disallowance of a claim without any finding of concealment or furnishing of inaccurate particulars.

Petitioner’s Arguments

The Revenue contended that the Assessing Officer had recorded satisfaction in the assessment order and that the substance of the proceedings made it clear that the penalty was for furnishing inaccurate particulars. It was argued that the defect in the notice was merely technical and did not cause prejudice to the assessee.

Respondent’s Arguments

The assessee argued that the penalty notice was invalid as it did not specify whether the charge was concealment of income or furnishing of inaccurate particulars. It was further contended that the assessment order merely disallowed a claim without recording any finding that the particulars furnished were false or incorrect, and therefore penalty was not leviable even on merits.

Court Order / Findings

The Delhi High Court examined the record and noted that the penalty notice issued under Section 274 was vague and omnibus, as the Assessing Officer had not struck off the irrelevant portion or specified the exact charge. The Court held that concealment of income and furnishing of inaccurate particulars are two distinct charges carrying different connotations, and the assessee must be clearly informed of the precise allegation to enable an effective defence.

The Court relied on binding precedents including CIT v. Manjunatha Cotton and Ginning Factory, SSA’s Emerald Meadows, PCIT v. Sahara India Life Insurance Co. Ltd., and the Supreme Court decision in CIT v. Reliance Petroproducts Pvt. Ltd. to hold that a vague notice vitiates the penalty proceedings.

The Court further observed that the Assessing Officer had merely disallowed an expense and had not recorded any finding that the assessee had furnished inaccurate particulars or concealed income. Mere rejection of a claim does not automatically justify levy of penalty.

Accordingly, the Court held that the ITAT had rightly deleted the penalty and that no substantial question of law arose for consideration.

Important Clarification

The High Court clarified that penalty proceedings are penal in nature and must strictly comply with statutory requirements. A notice under Section 274 must clearly specify the exact charge under Section 271(1)(c). Failure to do so renders the entire penalty proceedings invalid, irrespective of the merits of the quantum addition.

Final Outcome

The appeal filed by the Revenue was dismissed. The Delhi High Court upheld the order of the ITAT deleting the penalty levied under Section 271(1)(c) against Virtual Software and Training Pvt. Ltd., holding that the penalty notice was defective and that no substantial question of law arose.

Link to download order - https://www.mytaxexpert.co.in/uploads/1769856828_PR.COMMISSIONEROFINCOMETAXDELHI7VsVIRTUALSOFTWAREANDTRAININGPVT.LTD..pdf

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