Penalty Proceedings Fail Due to Non-Specific Notices, Debatable PF Disallowances and Genuine R&D Deduction Claim

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has deleted penalties levied on automobile component manufacturer Subros Ltd. for Assessment Years 2015-16 to 2017-18, holding that the Assessing Officer failed to specify the exact charge while initiating penalty proceedings and that the additions involved either debatable issues or bona fide claims supported by full disclosure of facts.

The dispute related to penalties imposed under Sections 271(1)(c) and 270A of the Income Tax Act after certain additions and disallowances were sustained during assessment proceedings. These included disallowance of CSR expenditure, delayed deposit of employees’ PF contributions, delayed TDS payments and an excess claim of weighted deduction under Section 35(2AB).

For AY 2015-16, the Tribunal noted that while issuing notices under Section 274 read with Section 271(1)(c), the Assessing Officer failed to specify whether the penalty was being initiated for “concealment of income” or for “furnishing inaccurate particulars of income.” The standard notice retained both charges without striking off the inapplicable portion. Relying on the decisions in SSA’s Emerald Meadows and Manjunatha Cotton & Ginning Factory, the Tribunal held that such omnibus notices reflect non-application of mind and violate the principles of natural justice. Consequently, the penalty was quashed.

For AY 2016-17, the Tribunal observed that the principal disallowance related to delayed deposit of employees’ PF contributions. It held that the issue was highly debatable during the relevant period, with several High Courts taking views favourable to taxpayers before the Supreme Court settled the controversy in Checkmate Services Ltd. The Tribunal emphasized that merely because a claim is ultimately disallowed does not mean the assessee concealed income or furnished inaccurate particulars. It further noted that the expenditure was genuine and that the additions did not establish any deliberate attempt to evade tax. Accordingly, the penalty was deleted.

With respect to AY 2017-18, the Tribunal dealt with a penalty imposed under Section 270A on account of an excess weighted deduction claimed under Section 35(2AB). Subros had claimed the deduction based on expenditure incurred on its in-house R&D facility, while the approval from the Department of Scientific and Industrial Research (DSIR) restricting the eligible amount was received only after the return had already been filed.

The Tribunal held that the assessee had disclosed all material facts and that the excess claim arose because the DSIR approval was unavailable at the time of filing the return. Therefore, the claim could not be treated as under-reporting or misreporting of income.

The Tribunal also found a serious defect in the Section 270A proceedings. Neither the assessment order nor the penalty notice specified which clause of Section 270A(2) was allegedly attracted. According to the Tribunal, failure to identify and communicate the precise statutory basis for the charge deprived the assessee of an effective opportunity to defend itself and rendered the entire penalty proceeding invalid. Relying on the Delhi High Court’s decision in Schneider Electric South East Asia (HQ) Pte Ltd., the Tribunal held that such proceedings cannot survive judicial scrutiny.

Thus, the ITAT allowed all three appeals and deleted the penalties levied for AYs 2015-16, 2016-17 and 2017-18.