High Court Upholds ITAT Order Quashing Penalty for Defective Section 271(1)(c) Notice

The Revenue filed an appeal under Section 260A of the Income Tax Act, 1961, challenging the ITAT’s order whereby penalties levied under Section 271(1)(c) for AYs 2002-03 to 2004-05 were deleted. Before the High Court, the Revenue its challenge only to AY 2004-05.

The Assessing Officer had made additions on account of unsecured loans for FY 2003-04 and levied a penalty under Section 271(1)(c). The penalty notice issued under Section 274 read with Section 271(1)(c) was in a standard printed format, alleging both “concealment of income” and “furnishing inaccurate particulars of income” without striking off the irrelevant limb or specifying the precise charge. The ITAT deleted the penalty, holding the notice to be vague and invalid, relying on settled judicial precedents.

Question of Law: Whether penalty proceedings under Section 271(1)(c) are sustainable when the statutory notice under Section 274 does not clearly specify whether the penalty is for concealment of income or for furnishing inaccurate particulars of income.

HC’s Ruling: The Hon’ble High Court dismissed the Revenue’s appeal. The Court held that the penalty notice was omnibus in nature, as it contained both charges without specifying the exact ground or striking off the inapplicable portion. Such a notice suffers from vagueness and violates the mandatory requirement of law.

The Court agreed with the ITAT’s reliance on Manjunatha Cotton and Ginning Factory, Mohd. Farhan A. Shaikh, PCIT v. Sahara India Life Insurance Co. Ltd. In the absence of a valid notice, the penalty could not be sustained.

The Court further held that no substantial question of law arose for consideration. Thus, the appeal was also dismissed on the ground of an unexplained delay of 1100 days in re-filing, for which no sufficient cause was shown.

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