Delhi High Court Sets Aside Income Tax Penalty For Furnishing Inaccurate Income Particulars Over Defective Notice

The Delhi High Court has held that a penalty imposed under Section 271(1)(c) of the Income Tax Act, 1961, cannot be sustained if the notice issued to the assessee fails to specify the particular limb under which the penalty proceedings are proposed.

The division bench of Justices Dinesh Mehta and Rajneesh Kumar Gupta rejected the Revenue's appeal against an ITAT order which had set aside the penalty imposed on Vitasta Estates.

It noted that Section 271(1)(c) contemplates two distinct grounds for levy of penalty— concealment of particulars of income or furnishing inaccurate particulars of income.

Since the legislature has used the word “or”, the two contingencies are independent alternatives, the Court said.

“Unless the AO puts the assessee to notice as to which part of Clause (c) he seeks to invoke against the assessee, the assessee cannot be expected to defend his cause,” it observed.

The Court further stressed that the issuance of notice cannot be reduced to an empty formality and though the two limbs may ultimately lead to the same consequence, they involve different means and may require different explanations from the assessee.

The case concerned penalty proceedings initiated against the Respondent-assessee for AY 2008-09.

During scrutiny assessment, the Assessing Officer found that the assessee had wrongly claimed a loss arising from the sale of land as a revenue loss. Though the assessee subsequently filed a revised return claiming that the loss was capital in nature, the revised return was not accepted.

The Assessing Officer recorded that the assessee had “furnished inaccurate particulars thereby concealing the particulars of income”.

Subsequently, the AO issued notice to the assessee asking to show cause why proceedings should not be initiated for having “concealed the particulars of your income or furnished inaccurate particulars of such income”.

Revenue argued that the AO's intention could be gathered from the assessment order and that failure to strike off one of the alternatives in the notice was merely a procedural irregularity.

Rejecting the contention, the High Court held that although the Assessing Officer had recorded satisfaction regarding initiation of penalty proceedings, he was not clear about which limb of Section 271(1)(c) was attracted or the precise breach for which the assessee was proposed to be penalised.

The Court also noted that earlier decisions of the Delhi High Court on the issue, including PCIT v. Unitech Reliable Projects (P) Ltd., had been affirmed by the Supreme Court.

As such, the Court rejected Revenue's appeal and upheld ITAT decision setting aside the penalty.

For Appellant: Advocates Sunil Agarwal, SSC with Monica Benjamin and Gibran Naushad, JSCs, Adeeb Ahmad and Harshita Sharma and Laiba Arif,

For Respondent: Advocates Arvind Kumar