Defect in Notice u/s 271(1)(c) of IT Act issued in 1993 cannot be raised, even in absence of prejudice to Assessee: Bombay HC [Read Order]

In a significant case, the Bombay High Court held that defect in notice under Section 271(1)(C) of the Income Tax Act 1961 issued in 1993 could not be raised, even in the absence of prejudice to the assessee.

Appellant/assessee Veena Estate Pvt. Ltd fled the appeal by challenging the penalty proceedings as initiated against the appellant/assessee under section 271(1)(c) of the I.T. Act.

The appellant is a company registered under the Companies Act, 1956. It was dealing with real estate and construction. A partnership in the name of M/s. Nirmal Enterprises was formed between the appellant and six others. The assessee revalued the land at Rs.1,04,53,500/-, being the market value as on 19 September, 1983, and introduced the same into the firm as its capital.

In respect of assessment year 1984-85, the assessee filed its return of income on 29 September, 1984 declaring “Nil” income. Thereafter the AO received information from IAC and the Assessing Officer proceeded to complete the assessment. Then conclude that No profit or capital gain was assessed in respect of the capital contribution of the assessee into Nirmal Enterprises.

Thereafter the CIT issued revision proceedings and accordingly AO mae fresh assessment order.In that fresh assessment order AO held that “assessee had not only transferred the stock-in-trade at the market value, but had also withdrawn the profits arising therefrom, which were not disclosed and that the events were so arranged that the assessee had the enjoyment and benefits of the monies though the tax due thereon was not paid“.

Aggrieved by the order, the appellant  filed an appeal before CIT(A) who allowed the appeal and deleted the addition made by the assessing officer. Aggrieved by the order passed by the CIT(A), the department approached the Tribunal. The Tribunal accordingly allowed the department’s appeal and restored the addition. In regard to the penalty proceedings for concealment of income and for furnishing inaccurate particulars of income as initiated by the Assessing Officer under section 271(1)(c) of theIncome Tax  Act appellant replied that appellant case was  covered by the principles laid down in case Hind Construction and that it did not fall within the ratio of either Sunil Siddharthbai case or ALA firm case .

The appellant  also contend that ”the partnership firm Nirmal Enterprises was genuinely constituted, that it did carry on business; that the other partners were men of business and not related to the assessee; that they actually carried out the firm's business and also contributed to the capital of the firm and brought in loans from relatives and friends; that the assessee withdrew money from its capital account only to pay off its liabilities as per the terms of the deed of partnership and that too only after receipt of advances from buyers of the units; that the withdrawal of the capital was to make the capital proportionate to the respective profit-sharing ratios; that all these facts were furnished to the Assessing Officer.”

Assessing officer, after considering the assessee’s reply, held that the assessee had attempted to avoid tax by adopting a device and therefore, penalty was exigible.In these circumstances assessee filed appeal before the CIT(A) who allowed the appeal of the assessee. Thereafter the respondent/revenue filed another appeal against the order. The tribunal held that the penalty was rightly imposed and the CIT(A) was not justified in cancelling the same.

Accordingly in the assessment year 1998-1999 enclosing reconstituted Deed of partnership filed return of income and financial showing appellant as an erstwhile partner. Petitioner’s case was that she continued to be a partner in the said Firm. In light of this, the assessee filed the contested appeal.

P.J. Pardiwalla counsel for the petitioner argued that the proceedings would stand covered by the decision of a co-ordinate Bench of this Court in Ventura Textiles Ltd. That is as the Assessing Officer failed to tick mark in the show cause notice the relevant limb of Section 271(1)(c) of Income Tax Act whether in the facts of the case, the penalty proceedings would stand vitiated.

Further argued that Section 274 is a mandatory procedural provision and once the nature of the provision is such, the test of prejudice is not required to be met, when there is a violation of procedural provision of a fundamental nature. She submits that there is no need to prove prejudice when the notice itself was defective which is a jurisdictional issue.

Counsel for appellant also argued that Section 271(1)(c) is attracted in two situations, namely, the assessee having concealed the particulars of income or having furnished inaccurate particulars of such income. Thus, an assessee having not been clearly informed of any of such two limbs.Hence once the notice itself was defective, such defect could not have been cured.

Devvrat Singh, counsel for the respondent argued that appellant had never raised any issue on breach of principles of natural justice, much less on the appellant’s lack of understanding of the notice issued by the revenue under Section 271(1)(c) of the IT Act.

Further argued that order admitting the present appeal itself is very clear that the case of the assessee was never of any defect in the notice issued by the Assessing Officer under Section 271(1)(c) of the IT Act or not even remotely, a complaint of breach of principles of natural justice on that count as urged by the assessee. Thus It would not be permissible for the assessee to raise such an issue after almost 20 years of the admission of the appeal.

The court observed that after more than 20 years of the order being passed by the Tribunal accepted the contention as urged on behalf of the assessee that in these circumstances, the Court should accept that the notice was issued to the assessee under Section 274 of I.T. Act was defective, and hence the proceedings would stand covered by the decision of the coordinate Bench of this Court in Ventura Textiles Ltd.

Further the court observed that concealment of particulars of income was not the charge against the appellant and the charge was of furnishing inaccurate particulars of income. It was hence observed that it was trite that penalty cannot be imposed for alleged breach of one limb of Section 271(1)(c) of the IT Act, while penalty proceedings were initiated for breach of the other limb of Section 271(1)(c) and for such reason the order of penalty stood vitiated.

After analyzing the facts and arguments of both parties, a division bench of Justice G. S. Kulkarni and Justice Jitendra Jain held that a defect in notice under Section 271(1)(C) of the Income Tax Act  1961 issued in 1993 could not be raised ,even in the absence of prejudice to the assessee.

To Read the full text of the Order CLICK HERE

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