Penalty u/s 271(1)(c) Invalid when Notice Fails to Specify Charge and Irrelevant Limb not Struck Off: ITAT [Read Order]

The case arose out of search proceedings under Section 132 of the Income Tax Act, pursuant to which the assessment was completed under Section 153A of the Income Tax Act for Assessment Year 2005-06. The Assessing Officer assessed income at ₹29.86 lakh as against the declared ₹2.21 lakh, making additions on account of trading results and unexplained credits.

Subsequently, penalty proceedings were initiated under Section 271(1)(c) of the Income Tax Act, resulting in a penalty of ₹7,52,866. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld both the quantum addition and the penalty order. The assessee, represented through legal heir Smt. Sunita Gupta, challenged both orders before the Tribunal.

The assessee’s counsel, Anil Jain, CA, and Sarveshwar Singh, Advocate, contended that the notice issued under Section 274 read with Section 271(1)(c) of the Income Tax Act was defective as it did not specify the limb under which the penalty was proposed as to concealment of income or furnishing of inaccurate particulars and the irrelevant portion was not struck off.

They argued that such an omnibus notice violates principles of natural justice and renders the entire penalty proceeding void. Reliance was placed on the Full Bench judgment of the Bombay High Court in Mohd. Farhan A. Shaikh v. ACIT [2021], which held that vague penalty notices betray non-application of mind and suffer from the vice of vagueness.

The Departmental Representative, Rajesh Kumar Dhanesta, Sr. DR, defended the penalty, contending that the assessment order contained sufficient reasoning to justify initiation of penalty proceedings.

The Tribunal Bench of Yogesh Kumar U.S. (Judicial Member) and Avdhesh Kumar Mishra (Accountant Member) examined the notice issued under Section 274 read with Section 271 of the Income Tax Act and found it to be a stereotyped form, where the AO failed to indicate the specific charge and did not strike off the irrelevant portion.

Citing the Mohd. Farhan A. Shaikh (supra) decision, the Bench reiterated that an assessee must be informed of the exact grounds of penalty through a valid statutory notice, and an omnibus notice creates vagueness and violates the statutory mandate. The Full Bench had held that the defect is fatal and cannot be cured by referring to reasoning in the assessment order.

The Tribunal further observed that Section 271(1)(c) of the Income Tax Act, being penal in nature, must be strictly construed and any ambiguity must be resolved in favour of the assessee. Since the notice failed to specify whether the penalty was for “concealment of income” or “furnishing inaccurate particulars,” it was invalid in law.

Accordingly, the ITAT quashed the penalty order dated 31.03.2011 and set aside the CIT(A)’s order confirming the penalty.

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