Recently, the division bench of the ITAT Mumbai quashed the penalty proceedings under section 271(1)(a) of the Income Tax Act alleging concealment of income on the part of the assessee and held that such proceedings are not sustainable when there was non-application of mind by the AO while issuing notice.
The assessee, in the instant case, is a medical practitioner. In consequent to a search conducted in the residence of the assessee’s relative, the Department recovered undisclosed income, which was admitted by the assessee. Consequently, the AO initiated assessment proceedings under section 153C of the Income Tax Act. Penalty was also levied on the assessee on ground of concealment of income. The addition and penalty were confirmed by the first appellate authority with slight modifications.
The assessee contended that the assessing officer has not issued a proper notice to the assessee by specifying the charge u/s 271(1)(c) of the Act. It was submitted that the notice issued by the AO is normally issued to call for a return of income from the assessee and the AO has simply added a paragraph in that notice by stating that why an order imposing a penalty u/s 271(1)(c) of the Act should not be imposed on the assessee.It was therefore, submitted that the imposition of penalty is liable to be quashed on ground of non-application of mind.
The bench noted that the contents of the notice are primarily meant to ask the assessee to furnish a return of income. However, the assessing officer appears to have modified the last paragraph by show causing the assessee to explain as to why an order imposing a penalty should not be made u/s 271(1)(c) of the Act. In the opinion of the bench, there should not be any doubt that the provisions of section 271(1)(c) prescribes two types of charge viz., (a) concealment of particulars of income and (b) furnishing of inaccurate particulars of income. However, in the above impugned notice, the AO did not specify the type of charge for which the penalty proceedings have been initiated.
The bench noticed the decisions of the apex Court in the case of Dilip N Shroff, in which it was held that the AO, while issuing a notice should apply his mind and make it clear as to whether he had proceeded on the basis that the assessee had concealed his income or he had furnished inaccurate particulars of income.
“Hence, we are of the view that the application of mind on the part of the assessing officer at the time of issuing notice for initiation of penalty is a mandatory requirement and the non application of mind would vitiate the penalty proceedings. We notice that the Hon’ble Bombay High Court has also expressed identical view in the case of Smt. Kaushalya and Others (supra), on which the revenue has placed heavy reliance. In that case also, it was contended that the AO has not indicated the appropriate charge for which the penalty proceedings were initiated.” The bench said.
Read the full text of the order below.
