Sri K. Natarajan, Prop Natarajan Metal Stores V. The Deputy Commissioner of Income Tax, Central Circle 2(2)

ITA/176/2009

AI Insights

The case involves appeals filed by Sri K. Natarajan against the order of the Income Tax Appellate Tribunal (ITAT), which upheld the penalty levied on him for discrepancies between the income declared in his original return and the return filed under Section 153A of the Income Tax Act, 1961. The primary legal contention was the validity of the show-cause notice issued for the penalty, which was argued to be vague and non-specific regarding the exact nature of the alleged default—whether it pertained to concealment of income or furnishing inaccurate particulars of income. The High Court referenced a previous judgment (Commissioner of Income-Tax vs. Manjunatha Cotton and Ginning Factory) to emphasize that such notices must clearly specify the grounds for penalty to uphold the principles of natural justice.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 794105 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 17-11-2014
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income-Tax and another vs. Manjunatha Cotton and Ginning Factory and others [2013] 359 ITR 565 (Karn)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: K V ARAVIND
• Assessee Lawyers: A SHANKAR; M LAVA
• Keywords: Concealment of income; Inaccurate particulars of income; Natural Justice; Penalty; Show cause notice
• Section: 271(1)(c); 153A; 274; 260A; 292B

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 17TH DAY OF NOVEMBER, 2014 :PRESENT: THE HON’BLE MR. JUSTICE N.KUMAR AND THE HON’BLE MR. JUSTICE B.MANOHAR ITA NOs.176-181/2009 BETWEEN: SRI K.NATARAJAN, PROP NATARAJAN METAL STORES, NO.4, PVR ROAD, RANASINGHPET, BANGALORE. ...APPELLANT (BY SRI A.SHANKAR & SRI M.LAVA, ADVS.) AND: THE DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 2(2), C.R.BUILDING,QUEENS ROAD, BANGALORE- 560 001. ...RESPONDENT (BY SRI K.V.ARAVIND, ADV.) . . . . THESE ITAs ARE FILED UNDER SECTION 260A OF THE INCOME TAX ACT, 1961 ARISING OUT OF ORDER DATED 1.12.2008 PASSED IN ITA NO.595 TO 600/BNG/2008, FOR THE ASSESSMENT YEARS 1999-2000 TO 2004-05, PRAYING TO (I) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW 2 STATED THEREIN (II) ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT BANGALORE IN ITA NO.595 TO 600/BNG/2008, DATED 01.12.2008, IN THE INTEREST OF JUSTICE AND EQUITY. THESE ITAs COMING ON FOR FINAL HEARING THIS DAY, N.KUMAR J., DELIVERED THE FOLLOWING: J U D G M E N T Assessee has preferred these appeals against the order of the Tribunal regarding levying penalty on difference of income declared in return under Section 153A and original return. 2. Learned Counsel for the assesee relying upon the judgment of this Court in the case of Commissioner of Income-Tax and another vs. Manjunatha Cotton and Ginning Factory and others reported in [2013] 359 ITR 565 (Karn) has contended that, the notice issued for levying penalty is improper and is not in accordance with law and therefore, the entire proceedings based on notice is liable to be set aside. He further submits that, in Para No. 5.1, the Tribunal has 3 made an observation with regard to the show-cause notice as under: “It is true that the show-cause notice does not contain the specific allegation i.e. whether it is in respect of concealment of income or furnishing of inaccurate particulars of income. The notice is to be read along with the assessment order during the course of which proceedings has been initiated. The proceedings have been initiated for concealment of income. The assessee in his reply has understood the spirit in which notice has been issued. In his reply, it has been mentioned that he has offered additional income to buy peace and to have an end to the proceedings. If the notice is in substance and effect is in conformity with or according to the intent and purpose of the act, then such notice cannot be held as invalid as per Section 292B of the I.T. Act. The purpose of issuing the show-cause notice is to give the assesee an adequate opportunity in respect of default, which is detected and alleged against him. From the nature of the assessment proceedings 4 and the fact mentioned in the assessment order, it is clear was a specific charge of concealment of income and the assessee got adequate opportunity in rebutting such charge. Hence, it cannot be said that penalty proceedings are invalid because the Assessing Officer has not struck-off the column for which the assessee was not required to give reply. Hence, on this ground, penalty proceedings cannot be cancelled”. 3. This Court had an occasion to consider the said question in the aforesaid judgment, has held as under: “59. As the provision stands, the penalty proceedings can be initiated on various ground set out therein. If the order passed by the Authority categorically records a finding regarding the existence of any said grounds mentioned therein and then penalty proceedings is initiated, in the notice to be issued under Section 274, they could conveniently refer to the said order which contains the satisfaction of the authority which 5 has passed the order. However, if the existence of the conditions could not be discerned from the said order and if it is a case of relying on deeming provision contained in Explanation-1 or in Explanation-1(B), then though penalty proceedings are in the nature of civil liability, in fact, it is penal in nature. In either event, the person who is accused of the conditions mentioned in Section 271 should be made known about the grounds on which they intend imposing penalty on him as the Section 274 makes it clear that the assessee has a right to contest such proceedings and should have full opportunity to meet the case of the Department and show that the conditions stipulated in Section 271(1)(c) do not exist as such he is not liable to pay penalty. The practice of the Department sending a printed form where all the ground mentioned in Section 271 are mentioned would not satisfy the requirement of law when the consequences of the assessee not rebutting the initial presumption is serious in nature and he had to pay penalty from 100% to 300% of the tax liability. As the said provisions have to be held 6 to be strictly construed, notice issued under Section 274 should satisfy the grounds which he has to meet specifically. Otherwise, principles of natural justice is offended if the show-cause notice is vague. On the basis of such proceedings, no penalty could be imposed on the assessee. 60. Clause (c) deals with two specific offences, that is to say, concealing particulars of income or furnishing inaccurate particulars of income. No doubt, the facts of some cases may attract both the offences and in some cases there may be overlapping of the two offences but in such cases the initiation of the penalty proceedings also must be for both the offences. But drawing up penalty proceedings for one offence and finding the assessee guilty of another offence or finding him guilty for either the one or the other cannot be sustained in law. It is needless to point out the satisfaction of the existence of the grounds mentioned in Section 271(1)(c) when it is a sine qua non for initiation or proceedings, the penalty proceedings should be confined only to 7 those grounds and the said grounds have to be specifically stated so that the assessee would have the opportunity to meet those grounds. After, he places his version and tries to substantiate his claim, if at all, penalty is to be imposed, it should be imposed only on the grounds on which he is called upon to answer. It is not open to the authority, at the time of imposing penalty to impose penalty on the grounds other than what the assessee was called upon to meet. Otherwise though the initiation of penalty proceedings may be valid and legal, the final order imposing penalty would offend the principles of natural justice and cannot be sustained. Thus once the proceedings are initiated on one ground, the penalty should also be imposed on the same ground. Where the basis of the initiation of penalty proceedings is not identical with the ground on which the penalty was imposed, the imposition of penalty is not valid. The validity of the order of penalty must be determined with reference to the information, facts and materials in the hands of the authority imposing the penalty at the time the order was 8 passed and further discovery of facts subsequent to the imposition of penalty cannot validate the order of penalty which, when passed, was not sustainable”. 4. From the aforesaid judgment, it is clear that the reasons adopted by the Tribunal runs counter to the law laid down by this Court. The defective notice resulted in principles of natural justice being suffered and based on such proceedings, no penalty could be imposed on the assessee. Therefore, the entire proceedings initiated would become without jurisdiction. Consequently, the order passed would become invalid and is liable to be set aside. Therefore, as the notice issued in the instant case initiating penalty proceedings is not in accordance with law, order passed in such proceedings is void. The other contentions are left open. Accordingly, the impugned order is liable to be set aside. Hence, we pass the following: 9 O R D E R Substantial question of law insofar as notice is concerned is held in favour of the assessee and against the revenue. As we are setting aside the impugned notice, the question of going to the other substantial questions of law would not arise for consideration, therefore, it is not answered. In the result, the appeals are allowed. The impugned order is set aside. In the event of this order being set aside by the Apex Court on the appeals be preferred by revenue, it is open to the Assessee to seek for revival of these appeals to urge other ground challenging the impugned order. Sd/- JUDGE Sd/- JUDGE KSR "