Facts of the Case

The Revenue filed an appeal under Section 260A of the Income-tax Act challenging the order passed by the Income Tax Appellate Tribunal deleting penalty levied under Section 271(1)(c) for Assessment Year 2008-09. The appeal formed part of a batch of appeals involving similar issues relating to defective penalty notices.

The assessee, Sara SAE Pvt. Ltd., had filed its return of income. During assessment proceedings, certain expenses claimed by the assessee were disallowed by the Assessing Officer on the ground that adequate supporting evidence was not furnished. Consequent to 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 penalty was proposed for concealment of income or for furnishing inaccurate particulars. Penalty was thereafter levied.

The Commissioner (Appeals) upheld the penalty. On further appeal, the ITAT deleted the penalty holding that the notice was vague and that there was no 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 proceedings were initiated, and whether penalty could be levied merely on account of disallowance of expenses without any finding of concealment or furnishing of inaccurate particulars.

Petitioner’s Arguments

The Revenue contended that the ITAT erred in deleting the penalty on a technical ground. It was argued that the assessment order clearly reflected the Assessing Officer’s satisfaction and that the assessee was fully aware of the charge. The Revenue also argued that there is an overlap between concealment of income and furnishing of inaccurate particulars and therefore no prejudice was caused 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 Assessing Officer had merely disallowed a claim without recording any finding that the particulars furnished were incorrect or false, and therefore penalty was not leviable even on merits.

Court Order / Findings

The Delhi High Court examined the statutory scheme of Section 271(1)(c) and noted that concealment of income and furnishing of inaccurate particulars are two distinct and separate charges carrying different legal connotations. The Court held that penalty proceedings are penal in nature and therefore the charge must be unequivocal and clearly specified in the notice issued under Section 274.

The Court relied upon 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 and omnibus notice vitiates penalty proceedings.

The Court further observed that in the present case, the Assessing Officer had merely disallowed the assessee’s claim and had not recorded any finding that the assessee had concealed income or furnished inaccurate particulars. Mere rejection of a claim does not automatically attract 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 a penalty notice under Section 274 must clearly specify the exact charge under Section 271(1)(c). Ambiguity in the notice amounts to non-application of mind and causes prejudice to the assessee. Penalty cannot be imposed merely because a claim made by the assessee is disallowed, in the absence of concealment or furnishing of inaccurate particulars.

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) against Sara SAE Pvt. Ltd., holding that no substantial question of law arose.

Link to download order - https://www.mytaxexpert.co.in/uploads/1769856940_PR.COMMISSIONEROFINCOMETAX7VsSARASAEPVTLTD.pdf

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