In the post-assessment phase, it is a routine practice for the Assessing Officer (AO) to initiate penalty proceedings under Section 271(1)(c) of the Income-tax Act, 1961. However, a critical legal infirmity that frequently vitiates such proceedings is the failure of the AO to specify the precise charge-whether the assessee is being proceeded against for concealment of income or for furnishing of inaccurate particulars of income.
This article highlights the legal necessity of such specification and the significant consequences that follow from its omission, drawing from both established judicial precedent and practical experience before appellate authorities.
I. Statutory Mandate: The Two Distinct Limbs under Section 271(1)(c)
Section 271(1)(c) of the Act authorises the imposition of penalty where the assessee:
- (a) has concealed the particulars of income; or
- (b) has furnished inaccurate particulars of such income.
These two limbs are legally distinct and mutually exclusive:
- The charge of concealment refers to a situation where the assessee fails to disclose a particular income or item in the return of income altogether.
- In contrast, furnishing inaccurate particulars deals with cases where the income is disclosed, but the details provided are false, misleading, or incorrect, such as incorrect claims of deductions or exemptions.
Given the different legal consequences and evidentiary standards applicable to each limb, the Assessing Officer is under a statutory and judicial obligation to clearly and consciously choose the applicable charge. Failure to do so leads to denial of a fair opportunity to the assessee and renders the entire penalty proceedings invalid.
II. Practical Deficiency in Departmental Practice
It is often seen that AOs issue notices under Section 271(1)(c) in a mechanical manner, retaining both the phrases-"concealed the particulars of income or furnished inaccurate particulars of income"-without selecting the applicable charge. The final penalty orders also replicate this ambiguity.
Such imprecision is not a curable procedural irregularity. Rather, it constitutes a jurisdictional error, as the assessee is deprived of adequate notice and an opportunity to meet the specific charge. The courts have consistently held that the assessee must be informed with certainty regarding the allegation faced, failing which the entire foundation of the penalty proceeding collapses.
III. Appeal Outcome Supporting the Legal Position
In one such matter handled by our office, this legal defect was expressly raised in the appeal as a primary ground. It was contended that the penalty notice and order did not specify which limb of Section 271(1)(c) was being invoked. Instead, both limbs were cited indiscriminately, indicating a mechanical and mindless initiation of proceedings.
The appellate authority, upon appreciation of the facts and legal submissions, accepted this ground and allowed the appeal, holding that such vagueness in the charge amounts to non-application of mind by the Assessing Officer. The penalty imposed was consequently set aside in full.
This experience underscores the importance of carefully scrutinising procedural compliance in penalty cases. It also validates the legal proposition that penalty proceedings must stand on a foundation of clearly established and communicated charges.
IV. Judicial Precedents Confirming Legal Position
This position is now well-settled in law through multiple authoritative decisions, including:
1. PCIT vs. Minu Bakshi 222 (7) TMI 1370 - Delhi
21. Penalty proceedings entail civil consequences for the assessee. The AO is required to apply his mind to the material particulars, and indicate clearly, as to what is being put against the respondent/assessee when triggering the penalty proceedings.
In case the AO concludes, that a case is made out under Section 271(1)(c) of the Act, he needs to indicate, clearly, as to which limb of the said provision is attracted. The reason we say so is, that apart from anything else, the pecuniary burden may vary, depending on the infraction(s) committed by the respondent/assessee. In a given case, where concealment has taken place, a heavier burden may be imposed, than in a situation where an assessee is involved in furnishing inaccurate particulars.
23. Therefore, it is necessary for the AO to indicate, broadly, as to the provision/limb under which penalty proceedings are triggered against the assessee.
2. M/s. Singh Consultancy Pvt. Ltd. vs. ITO, New Delhi on 9 April, 2021 (ITA No. 3061/Del/2017 - ITAT Delhi)
"Respectfully following the decisions cited above, we hold that since, the particular limb under which the penalty has been levied is not coming out from the notice as well as the assessment order and penalty order, therefore, such levy of penalty under these facts and circumstances is not justified. Accordingly, we set aside the order of the CIT(A) and direct the Assessing Officer to delete the penalty so levied. These decisions uniformly hold that ambiguity in charge results in invalid penalty, regardless of the merits of the quantum addition.
3. PCIT v. Sahara India Life Insurance Co. Ltd. (2021) 432 ITR 84 (Del)
Held that a penalty notice under Section 271(1)(c) is invalid if it fails to specify whether the penalty is for concealment of income or furnishing inaccurate particulars.
4. CIT v. SSA's Emerald Meadows [(2016) 73 taxmann.com 248 (SC)]
Upheld the principle that failure to strike off the inapplicable limb in the penalty notice renders the notice defective and the consequent penalty order unsustainable.
5. Manisha Jain v. ITO (ITAT Delhi)
Quashed a penalty where the notice failed to specify the exact charge, emphasizing the necessity for clarity and specificity
V. Strategic Considerations for Assessees and Professionals
Wherever such a defect is observed, the assessee must raise it as a specific ground of appeal, both at the level of the Commissioner of Income-tax (Appeals) and before the ITAT. This procedural ground-if properly articulated and backed by judicial authority-can independently result in deletion of the penalty.
Professionals must ensure that the exact language of the penalty notice and the final order is carefully examined for this defect, and the legal argument is constructed accordingly.
VI. Previous Article
I have also authored an article on a related ground concerning penalty proceedings, which may be useful for assessees and professionals. The article is titled: 'Penalty Proceedings Deferred must be During Quantum Appeal: Legal Framework & Judicial Insights'
VII. Conclusion
The requirement to distinctly specify whether the charge is for concealment or furnishing of inaccurate particulars is not a mere formality is a fundamental legal safeguard. Any penalty initiated or imposed without adherence to this mandate is legally untenable and liable to be quashed.
In our professional practice, this ground has proven to be highly effective in appellate forums, and we strongly recommend that assessees and tax advisors remain vigilant and raise this issue wherever applicable.
The author can also be reached at varunmukeshgupta96@gmail.com
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