How to tackle the notice issued u/s 271(1)(c)

For invoking the provisions of section 271(1)(c) of the Income Tax Act, satisfaction of the concerned income tax authority is must that any person has:-

Either concealed particulars of his income OR
Furnished inaccurate particulars of such income

and such satisfaction must be arrived at in the course of any proceeding under the Act.

Satisfaction is "Must"

The apex court held this view in the case of CIT vs. Angidi Chettiar 44 ITR 739 while construing the similar provisions of section 28(1)(c) of I.T. Act 1922 (in short ‘1922 Act) and reiterate the same view in the case of D.M. Manasvi 86 ITR 557 (SC) while construing the provisions of section 271(1)(c) of 1961 Act.

Punjab & Haryana High court (Full Bench), in the case of CIT vs. Mohinder Lal 168 ITR 101, also held that “it is the satisfaction of the ITO in the course of assessment proceedings regarding the concealment of income which constitutes the basis and foundation of the proceedings for levy of penalty. Thus, this condition must be satisfied”

Satisfaction of the tax authority is a condition precedent which must be discernible from the order of assessment and such satisfaction must be based on some material on record. Some relevant case laws are as under:-

The Hon'ble Supreme Court in D.M. Manasvi 86 ITR 557 (SC)

Held that satisfaction of the concerned tax authority to the effect that the assessee has either concealed the particulars of income or furnished inaccurate particulars of income is the condition precedent for levy of penalty and such satisfaction must be arrived at in the course of any proceeding under the Act.

CIT vs. Jain Export Private Ltd.(Delhi High Court) ITA No.235/2013

has held that to initiate proceedings u/s 271(1)(c) it requires proper investigation and higher satisfaction of proof, which confirmed the basis for the initiation of necessary proceedings. In absence of it, penalty provision cannot be invoked.

CIT vs. Rucha Engineers Pvt. Ltd (Bombay High Court) 2015-ITRV-HC-MUM-025.

Held that before proceeding to the Explanation below s. 271 and putting the responsibility on the assessee, it is necessary for the AO to first demonstrate that the assessee's explanation or conduct is not reasonable on human probabilities, or that it was in the nature of violating settled legal positions. If the explanation is not fanciful, baseless or unacceptable, penalty cannot be levied.

Rajnder Mohan Lal vs. Principal Commissioner of Income Tax, (Punjab and Haryana High Court ) ITA No. 359 of 2016

Where assessee did not offer any explanation for concealment of income and whatever explanation was offered was not substantiated through any evidence or material on record, explanation 1 to Section 271(1)(c) of the Act was clearly attracted.

Commissioner of Income Tax & ANR vs. Euro Footwear Ltd. & ANR. (Allahabad High Court ) ITA Defective No. 114 of 2012, 799 of 2012

held that In absence of any finding, question of imposing penalty u/s 271(1)(c) on mere making of claim could not arise nor such imposition of penalty would be sustainable in law—Mere making of claim for certain deductions by itself would not amount to furnishing inaccurate particulars regarding income of Assessee.

CIT vs. MWP Ltd. (Karnataka High Court) ITA No.332/2007

phrases like penalty proceedings are being initiated separately (b) penalty proceedings under Section 271(1)(c) are initiated separately do not comply with the meaning of the word direction as contemplated even in the amended provisions of law. The direction should be clear and without any ambiguity.

CIT vs. Dalmia Dyechem Industries (Bombay High Court) ITA No.1396/2013

The rigors of penalty provisions cannot be diluted only because a small number of cases are picked up for scrutiny. No penalty can be levied unless if assessee's conduct is "dishonest, malafide and amounting concealment of facts". The AO must render the "conclusive finding" that there was "active concealment" or "deliberate furnishing of inaccurate particulars"

Modi Rubber Ltd., New Delhi vs Dcit, Circle- 17(1), 14.06.2018 (Delhi ITAT) ITA No.2559/Del./2018

when we examine the assessment order it is prima facie not discernible to make AO prima facie satisfy if the assessee has concealed the particulars of income or furnished inaccurate particulars of such income. AO has merely recorded findings at the fag end of his order in mechanical manner that it is a fit case for imposition of penalty under section 271(1)(c) on all the issue on which addition/disallowances have been made, as discussed in the order. The factum of non- application of mind on the part of the AO get further corroborated from the vague and ambiguous notice issued u/s 274 read with section 271(1)(c) discussed in the preceding paras.

Atlas Cycle (Haryana) Ltd., vs DCIT, Sonepat on 26 April, 2018 1972 (Delhi ITAT) AIR 121, 1972 SCR (1) 127

held that penalty in dispute is not sustainable in the eyes of law, because the AO has not recorded any clear finding whether the assessee was guilty of concealment of income or furnishing of inaccurate particulars of income. Secondly, the notice u/s. 271(1)(c) has been issued to the assessee levying the penalty for furnishing of inaccurate particulars of income/concealment of income, whereas the penalty in dispute has been levied by the AO on account of furnishing of inaccurate particulars.

Indrani Sunil Pillai v. ACIT (Mum)(Trib)

Allowing the appeal of the assessee the Tribunal held that; if the AO has not recorded any satisfaction in absolute terms whether the assessee has concealed particulars of income or has furnished inaccurate particulars of income, the levy of penalty is invalid. The judgement of the Bombay High Court in Maharaj Garage cannot be read out of context or in a manner to mean that there is no need for mentioning the specific limb of section 271(1)(c) of the Act for which the penalty was intended to be imposed, as such issue never came up for consideration before the High Court.

Let's discuss the three situations w.r.t. notice u/s 271(1)(c )-

Situation no.1- Where both the limbs of sec. 271(1)(c ) are mentioned in the notice

As discussed earlier there are two limbs as specified in section 271(1)(c ) “concealed particulars of his income” OR “Furnished inaccurate particulars of such income”. It is incumbent upon the AO to state whether penalty was being levied for concealment of income or for furnishing of inaccurate particulars of income. One limb out of the two must be mentioned by the tax authority in the notice issued by such tax authority, if both the limbs have been mentioned in the notice or one irrelevant limb has not been strike off by the tax authority, this itself ruined the legality of the notice issued and the penalty order issued on this basis would be bad in law. Relevant case laws are as under:-

CIT vs. SSA's Emerald Meadows (SC) I.T.A. NO. 380 OF 2015

The apex court held that omission by the AO to explicitly specify in the penalty notice as to whether penalty proceedings are being initiated for furnishing of inaccurate particulars or for concealment of income makes the penalty order liable for cancellation.

CIT vs. Shri Samson Perinchery (Bombay High Court) ITA No. 1154 dated 05.01.2017

Failure by the AO to specify in the s. 274 notice whether the penalty is being initiated for 'furnishing of inaccurate particulars of income' or for 'concealment of income' is fatal. It reflects non-application of mind and renders the levy of penalty invalid.

Alcatel-Lucent India Ltd. v. ACIT ( ITAT Delhi) ITA No. 4476/Del/2014 dated 26.042018

Delhi ITAT expressed the view that the assessing officer has initiated the penalty for concealment of particulars of income or furnishing of inaccurate particulars, which is contrary to the provisions of law. We are of the view that notice issued by the assessing officer under section 271(1)© read with section 274 of the Act is bad in law as it does not specify which limb of section 271(1)© of the Act, the penalty proceedings had been initiated i.e. whether for concealment of particulars of income or furnishing of inaccurate particulars. Therefore, the penalty in dispute is not sustainable in the eyes of law.

Ipsita Malik, New Delhi vs Acit, New Delhi on 7 February, 2018, ITA No. 5183/Del/2016, dated 07.02.2018

Delhi ITAT expressed his view that the AO has initiated the penalty for concealment of particulars of income or furnishing of inaccurate particulars, which is contrary to the provisions of law. We are of the view that notice issued by the AO u/s. 271(1)© read with Section 274 of the Act is bad in law as it does not specify which limb of section 271(1)© of the Act, the penalty proceedings had been initiated i.e. whether for concealment of particulars of income or furnishing of inaccurate particulars. Therefore, the penalty in dispute is not sustainable in the eyes of law, hence, we cancel the penalty in dispute.

Nayan C. Shah vs. Income Tax Officer (Gujarat High Court ) ITA No.2822/ Ahd/2011

held that While issuing a notice under section 271(1)(c) of the Act, the Assessing Officer is required to specify as to what is the default on the part of the assessee, as to whether the case is one of furnishing inaccurate particulars, or whether it is a case of concealment of income, or both, hence view expressed by CIT(A) to effect that breach in question was technical and venial in nature, requires to be upheld and the impugned order passed by Tribunal upholding levy of penalty on the ground of suppression of particulars, deserves to be set aside.

Autoriders India (P) Ltd. v. ACIT (2018) 191 TTJ 376/ 161 DTR 217 (Mum. )(Trib.)

Tribunal held that ,omission to strike off the relevant clause in the notice issued under section 271 r/w. section 271(1)(c) is a legal issue hence require to be admitted . The Tribunal also held that no striking of the irrelevant clause in the notice clearly brings out the diffidence on the part of AO and no clear and crystalised charge has been conveyed to the assessee under section 271(1)(c), which has to be met by it. Proceedings suffer from non - compliance with principles of natural justice. Consequently, the penalty imposed under section 271(1)(c) is deleted.

Dy. CIT v. Sujata Bharadwaj (Smt. ) (2018) 191 TTJ 17 (Jodh. )(UO)(Trib.)In the penalty notice the AO has not mentioned the under which limb penalty was initiated therefore the notice has its inception is bad in law the penalty levied was directed to be deleted.

Jeetmal Choraria v. ACIT (kol)(Trib)Tribunal held that when the show cause notice issued in the present case u/s 274 of the Act does not specify the charge against the assessee as to whether it is for concealing particulars of income or furnishing inaccurate particulars of income. The show cause notice u/s 274 of the Act does not strike out the inappropriate words. In these circumstances, we are of the view that imposition of penalty cannot be sustained. The plea of the ld. Counsel for the assessee which is based on the decisions referred to in the earlier part of this order has to be accepted. We therefore hold that imposition of penalty in the present case cannot be sustained and the same is directed to be cancelled.

M. G. Contractors Pvt. Ltd vs. DCIT (ITAT Delhi) ITA Nos. 7034 to7038/Del/2014 

Held that penalty u/s 271(1)(c) cannot be imposed if the AO does not specify whether the penalty is for "concealment of income" or for "furnishing inaccurate particulars". Penalty cannot be imposed in respect of income surrendered by the assessee if the AO does not link the income to incriminating documents.

Deputy Commissioner of Income Tax & ANR vs. Sahara India Life Insurance Co. Ltd. & ANR on 31.10.2018 (Delhi ITAT) ITA No. 3480/Del/2012, A.Y. 2007-08

Held that penalty proceedings was initiated i.e., whether for concealment of particulars of income or furnishing of inaccurate particulars of income. Said notice was in standard pro forma wherein irrelevant clauses were not struck off which indicates AO's nonapplication of mind while issuing such notice. Thus, penalty proceedings initiated by AO are bad in law and deserve to be delete.

PCIT v. Baisetty Revathi (Smt)  (2017) 398 ITR 88 (AP) (HC)

Dismissing the appeal of the  revenue, the Court held that; penalty can be levied only where the charge is unequivocal and unambiguous. The AO must specify whether the charge is of concealment of particulars of income or furnishing of inaccurate particulars thereof and which one of the two is sought to be pressed into service. He is not permitted to club both by interjecting an ‘or' between the two. The ambiguity in the show-cause notice compounded by the confused finding of the AO that he was satisfied that the assessee was guilty of both renders the proceedings void.

Muninaga Reddy v. ACIT (2017) 396 ITR 398 (Karn) (HC)

Allowing the appeal the Court held that; there was a printed notice and no specific ground was mentioned, which may show that the penalty could be imposed on the particular ground for which the notice was issued. Hence the notice and the consequent levy of penalty were not valid.

S. Chandrashekar  v. ACIT (2017) 396 ITR 538 (Karn) (HC)

Allowing the appeal of the assessee the Court held that;  in the notice, there was no clear indication about the concealment of the particulars of the income, nor was there clear indication of furnishing of inaccurate particulars of the income on application of mind. In any case as there was no specific ground, there would be breach of principles of natural justice and ultimately the order imposing penalty even otherwise also could not be sustained.

Orbit Enterprises v. ITO (Mum) (Trib)

Allowing the appeal the Tribunal held that;  Additional ground on jurisdiction issue was admitted . Tribunal held that; concealment of particulars of income" and "furnishing of inaccurate particulars of income" referred to in s. 271 (1) (c) denote two different connotations. It is imperative for the AO to make the assessee aware in the notice issued u/s 274 r.w.s. 271 (1) (c) as to which of the two limbs are being put-up against him. The failure to do so is fatal to the penalty proceedings. The argument that the assessee was made aware of the specific charge during the proceedings is of no avail. S. 292BB does not save the penalty proceedings from being declared void. (ITA NOS. 1596 &1597/MUM/2014, dt. 01.09.2017.

Aditya Chemicals Ltd. v. ITO (Delhi) (Trib)

Allowing the appeal of the assessee, the Tribunal held that ,levy of penalty without specifying a specific charge was held to be valid . The law in Maharaj Garage & Co (Bom) that it is not necessary for the penalty notice to frame a specific charge cannot be followed in the context of whether the notice should specify 'concealment' vs. 'inaccurate particulars' because the judgement does not consider SSA's Emerald Meadows (SC) and is contrary to Samson Perinchery (Bom) (HC) . (ITA No. 5006/Del/2013, dt. 21.11-.2017.)

Sachin Arora v. ITO (Agra) (Trib), Das Cold Storage (P) Ltd v. Dy. CIT (Agra) (Trib), Pravesh Agarwal (Smt) v. ITO (Agra) (Trib), Late Shri Trilok Singh Kalra v. DCIT (Agra) (Trib), Late (Smt) Shanta Balani Through L/H Ramesh Chand Balani v. ITO (Agra) (Trib), Shankuntala Devi (Smt) v. ACIT (Agra) (Trib), Econ Antri Ltd v. JCIT (Agra) (Trib), Shanti Vrat & Sons (P) Ltd v. ACIT (Agra) (Trib), Kamaljit kalra (Smt) v. Dy.CIT (Agra) (Trib), Shri Hukum Chand Sharma v. ITO (Agra) (Trib), Shri Nand Kishore Goyal v. ITO (Agra) (Trib), Bandejiya & Brothers  v. DCIT  (Agra) (Trib), Seema Gupta (Smt)  v DCIT  (Agra) (Trib), Bhawna Gupta (Smt) v.DCIT (Agra) (Trib), Shashi Kant Agarwal v ITO (Agra) (Trib),  Shree Giriraj Education v. ITO  (Agra) (Trib), M.L.Housing Pvt Ltd v. ACIT (Agra) (Trib)

Allowing the appeal of the assessee, the Tribunal held that, notice should specify the specific charge. Concealment of income and furnishing of inaccurate particulars are distinct and separate charges. A nebulous notice which contains both charges is null and void ab initio . (ITA No. 118/Agra/2015, dt. 19.09.2017)

ACIT v. Usha Wadhwa  (Smt.)  (2017) 57 ITR  85 (Chd.)  (Trib)

Dismissing the appeal of the revenue, the Tribunal held that; the mere making of claim which is not sustainable in law, by itself will not amount to furnishing inaccurate particulars regarding income of the assessee. Further theAssessing Officer was not sure as to which offence the assessee had committed forlevy of the penalty, whether concealment of income or for filing inaccurate particulars of income. Merely because the commission expenses had been disallowed in the assessment year under appeal and confirmed by the appellate authority that was no ground to levy the penalty under section 271 (1) (c) against the assessee.

Vidyanath Urban Co-Operative Bank Ltd. v. ACIT (2017) 55 ITR  61 (SN) (Pune) (Trib.)

Held that while recording satisfaction of penalty, AO was not sure about the charge for levy of penalty. In the notice issued u/s 274, AO had mentioned both the charges for levy of penalty i.e. furnishing inaccurate particulars of income and concealment of income. Thus, notice did not clearly specify the charge for levy of penalty. Therefore notice issued u/s. 274 rws 271 (1) (c) was bad in law and penalty proceedings were therefrom were vitiated. Therefore, penalty be dropped. Further, penalty on similar additions were dropped in earlier years. Hence, penalty be dropped.

Prince Consultancy P. Ltd v. DCIT (2017) 54 ITR 334 (Mum) (Trib.)

Allowing the appeal the Tribunal held that the AO not certain whether he has to proceed on basis that assessee has concealed his income or had furnished inaccurate particulars of its income. Assessing Officer failed to apply his mind at time of issuing penalty notice to assessee. Levy of penalty was held to be invalid.

Jehangir HC Jehangir v. ACIT (Mum.) (Trib)

Allowing the appeal of the assessee the Tribunal held that ;Furnishing of inaccurate particulars of income' and 'concealment of particulars of income' have different connotations. The failure by the AO to specify in the s. 274 notice which of the two charges is applicable reflects non-application of mind and is in breach of natural justice as it deprives the assessee of an opportunity to contest. The penalty proceedings have to be quashed. (ITA No. 1261/Mum/2011, dt. 17.05.2017)

M. G. Contractors Pvt. Ltd. v. DCIT (Delhi)(Trib)

Allowing the appeal of assessee the Tribunal held that ; penalty cannot be imposed if the AO does not specify whether the penalty is for "concealment of income" or for "furnishing inaccurate particulars". Penalty cannot be imposed in respect of income surrendered by the assessee if the AO does not link the income to incriminating documents.( ITA No. 7034 to 7038/Del/2014, dt. 19.09.2016)

Situation no. 2- Where different limbs has been mentioned in the assessment order and the notice issued u/s 271(1)(c )

Same limb must be mentioned in assessment order passed and the notice issued u/s 271(1)(c). If different limb has been mentioned this proves that the tax authority has not been satisfied with regard to any of the two breaches under section 271 (1) (c) of the Act and even not applied his mind. This can also ruin the legality of the notice issued and the penalty order issued on this basis would be bad in law. Some relevant case laws are as under:-

CIT v. Samson Perinchery (2017) 392 ITR 4 (Bom.) (HC)

Dismissing the appeal of the revenue, the Court held that; the satisfaction of the Assessing Officer with regard to only one of the two breaches under section 271 (1) (c) of the Act, for initiation of penalty proceedings would not permit penalty being imposed for the other breach. Thus, the order imposing penalty was to be made only on the ground on which the penalty proceedings were initiated and it could not be on a fresh ground of which the assessee had no notice. The Tribunal rightly deleted the penalty.

Ashok Sahakari Sakhar Karkhana Ltd. v. ACIT (2017) 59 ITR 171 (Pune) (Trib.)

The Tribunal held that the satisfaction recorded for initiating penalty proceedings, the reasons for the levy of penalty u/s. 271 (1) (c) were not coherent. The reasons for initiating penalty proceedings and the notice for levy of penalty showed vagueness and ambiguity in the mind of the A.O. with respect to charge for the levy of penalty. The AO. was not consistent in specifying the limb under which penalty was to be levied. While recording satisfaction the AO. had used the conjunction “and” to mention both the limbs for initiating penalty proceeding, i.e. concealment of income or furnishing inaccurate particulars of income, whereas in the notice issue under section 274 the A.O. has used conjunction “or”. There was ambiguity in recording of satisfaction and notice issued for the levy of penalty u/s. 274 read with section 271 (1) (c). Since the change for levy of penalty was not explicitly clear from the notice, the penalty was bad in law and hence, the penalty proceedings were liable to be set aside.

Multivision Infotech P. Ltd .v. ACIT (2017) 56 ITR 278 (Ahd) (Trib)

On appeal, the Tribunal held that that at the time of issuing notice u/s. 274 the AO was not certain as to whether it was for furnishing of inaccurate particulars of income or concealment of particulars of income. While commonly for all the four years, in the assessment order under section 153C read with section 153A (1) (b) read with section 144 penalty was initiated for furnishing inaccurate particulars of income, in the penalty order, it was alleged that the assessee had concealed its particulars of income. Therefore for all the four years i.e. 2001-02 to 2004-05, the show-cause notice issued under section 274 read with section 271 was defective as it did not speak about the grounds on which the penalty had been imposed. The orders imposing penalty for all the four assessment years were invalid and consequently penalty imposed was cancelled.

Kanjaiyalal D. Jain v. ACIT (2016) 48 CCH 469 /(2017) 150 DTR 1 /185 TTJ 553 (Pune) (Trib.)

Allowing the appeal of the assessee, the Tribunal that; where concealment of income and furnishing of inaccurate particulars of income were two different connotations, then as per provisions of the Act, satisfaction had to be recorded by AO before initiating penalty proceedings as to under which limb case of assessee falls. In absence of same, it causes prejudice to right of reasonable opportunity to be allowed to assessee before levy of penalty u/s 271 (1) (c). It was further held that in cases where penalty proceedings had been initiated on different footing and CIT (A) reversed same, there is change in opinion and basis for levy of penalty for concealment varies. In such circumstances, there is no merit in levy of penalty under section 271 (1) (c) of the Act Accordingly, court allowed the claim of assessee.

Meherjee Cassinath Holding Pvt. Ltd. v. ACIT (2017) 155 DTR 143/187 TTJ 722 (Mum.) (Trib.)

Allowing the appeal of the assessee, the Tribunal held that ;penalty proceedings are "quasicriminal" and ought to comply with the principles of natural justice. The non-striking of the irrelevant portion in the show-cause notice means that the AO is not firm about the charge against the assessee and the assessee is not made aware as to which of the two limbs of s. 271 (1) (c) he has to respond. The fact that the assessment order is clear about the charge against the assessee is irrelevant, levy of penalty was deleted .

Situation no.3- Where the same & correct limb has been mentioned in the assessment order and the notice issued u/s 271(1)(c )

In such case where the tax authority has been satisfied and applied his mind and such satisfaction has been arrived at in the course of any proceeding and the correct & same  limb has been mentioned in the assessment order passed and the notice of demand issued then reply of the penalty notice has to be prepared on the basis of the facts of the case an accordingly favourable judgements has to be quoted in the reply.

The author can also be reached at cagauravherbola@gmail.com, info@harbolaassociates.com