Non striking of irrelevant limbs in notice u/s 274 vitiates penalty proceedings
Fact and Issue of the case
This appeal by the assessee arises out of the order dated 04-11-2016 passed by the CIT(A)-2, Pune confirming the penalty of Rs.31,42,000/- imposed by the Assessing Officer (AO) under section 271(1)(c) of the Income-tax Act, 1961 (hereinafter also called `the Act’) in relation to the assessment year 2011-12.
Briefly stated, the facts of the case are that the assessee has been the proprietor of M/s. Food Land Agro (India) engaged in the business of processing and sale of milk. The return of income was filed declaring total income of Rs.15,11,719/-. During the course of assessment proceedings, the AO observed that the assessee had entered into an agreement with M/s. Prabhat Diary Pvt. Ltd. For transferring all the assets and liabilities of its business for a total consideration of Rs.1,36,06,044/-. The AO observed that the assessee has transferred the entire proprietary concern to M/s. Prabhat Diary Pvt. Ltd. and did not disclose the capital gains arising therefrom. Thus, invoking section 50B of the Act, he made an addition of Rs.91,43,141/-. Subsequently, a penalty of Rs.31,42,000/- was imposed on this score by the AO u/s.271(1)(c) after issuing notice u/s 274 of the Act. The ld. CIT(A), after elaborately discussing the issue, upheld the penalty. Aggrieved thereby, the assessee has come up in appeal before the Tribunal.
Observation of the Tribunal
The Tribunal has heard the rival submissions through Virtual Court and scanned through the relevant material on record. A copy of the notice issued u/s 274 of the Act has been placed in the appeal folder, from which it is discernible that the AO did not strike off either of the two limbs viz., concealed the particulars of income or furnished inaccurate particulars of such income, albeit it was a case of furnishing of inaccurate particulars of income. The penalty order also came to be passed by holding in para 6.5 that: `the amount added or disallowed in computing the total income of the assessee as a result thereof shall, for the purposes of clause (c) of this sub section (1) of section 271, be deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished.’ Recently, the full Bench of Hon’ble Bombay High Court in Mohd. Farhan A. Shaikh Vs. Dy.CIT (2021) 125 taxmann.com 253 (Bom) has considered this very issue.
Answering the question in affirmative, the Full Bench held that a defect in notice of not striking the relevant words vitiates the penalty even though the AO had properly recorded the satisfaction for imposition of penalty in the order u/s 143(3) of the Act. In another judgment, the Hon’ble Bombay High Court in Pr.CIT Vs. Golden Peace Hotels and Resorts (P.) Ltd. (2021) 124 taxmann.com 248 (Bom) also took similar view that where inapplicable portions were not struck off in the penalty notice, the penalty was vitiated. The SLP of the Department against this judgment has recently been dismissed by the Hon’ble Supreme Court in Pr.CIT Vs. Golden Peace Hotels and Resorts (P.) Ltd. (2021) 124 taxmann.com 249 (SC). In view of the overwhelming position, it is clear that where the charge is not properly set out in the notice u/s 274 viz., both the limbs stand therein without striking off of the inapplicable limb, but the penalty has been, in fact, levied for one of the two, such a penalty order gets vitiated.
Turning to the facts of extant case, we find from the notice u/s 274 of the Act that the AO did not strike out one of the two limbs. Not only that, the penalty was also imposed in the same way by referring to both the limbs in the penalty order. As against that, the penalty was leviable only on one limb, namely, furnishing of inaccurate particulars of income. In such a situation, the penalty order gets vitiated. Respectfully following the Full Bench judgment of the Hon’ble jurisdictional High Court, we overturn the impugned order and direct to delete the penalty.
The tribunal allowed the appeal and directed to delete the penalty.
Read the full order from belowNon-striking-of-irrelevant-limbs-in-notice-us-274-vitiates-penalty-proceedings