Penalty under section 271(1)(c) cannot be imposed without a clear show-cause notice.

(Last Updated On: March 13, 2025)

Penalty under section 271(1)(c) cannot be imposed without a clear show-cause notice.

Penalty Order Quashed; Ambiguous Show Cause Notice Violates Due Process

Issue: Whether a penalty order under Section 271(1)(c) of the Income-tax Act, 1961, is valid when the Assessing Officer (AO) initiated penalty proceedings for “concealment of income” but levied a penalty for “furnishing of inaccurate particulars of income,” without clearly specifying the default in the show cause notice.

Facts:

In penalty proceedings, the AO noted that the assessee had committed the default of deliberately concealing income.
The AO imposed a penalty on the assessee.
The assessee contended that the AO initiated penalty proceedings for “concealment of income” but levied a penalty for “furnishing of inaccurate particulars of income.”
The AO did not clearly and explicitly point out the specific default/defaults in the show cause notice.

Decision:

The court held that since the AO failed to put the assessee to notice regarding the default for which the penalty under Section 271(1)(c) was sought to be imposed, by clearly and explicitly pointing out the specific default/defaults in the show cause notice, it divested the assessee of an opportunity to put forth an explanation that no such penalty was called for.
The court held that the penalty order could not be sustained.

Key Takeaways:

Clear Show Cause Notice: The show cause notice under Section 271(1)(c) must clearly and explicitly specify the specific default for which the penalty is sought to be imposed.
Opportunity to Explain: The assessee must be given a fair opportunity to explain why no penalty should be imposed.
Ambiguity in Notice: An ambiguous show cause notice that does not clearly specify the default violates due process.
Concealment vs. Inaccurate Particulars: “Concealment of income” and “furnishing of inaccurate particulars of income” are distinct defaults, and the notice must specify which one is being alleged.
Invalid Penalty Order: A penalty order based on a show cause notice that does not clearly specify the default is invalid.
The court is reinforcing the need for tax authorities to provide clear and unambiguous show cause notices, and to follow the principles of natural justice.

IN THE ITAT RAIPUR BENCH

Ganesh Prasad Khetan

Deputy Commissioner of Income-tax

Ravish Sood, Judicial Member
and ARUN KHODPIA, Accountant Member

IT Appeal No. 63 (RPR) of 2024
[Assessment Year 2014-15]

MARCH 20, 2024

Sunil Kumar Agrawal, CA for the Appellant. Satya Prakash Sharma, Sr. DR for the Respondent.

ORDER

Arun Khodpia, Accountant Member.- The present appeal filed by the assessee is directed against the order passed by the Commissioner of Income-Tax (Appeals), National Faceless Appeal Center (NFAC), Delhi, dated 30.01.2024, which in turn arises from the order passed by the A.O under Sec. 271(1)(c) of the Income-tax Act, 1961 (in short ‘the Act’) dated 20.09.2022 for the assessment year 2014-15. The assessee has assailed the impugned order on the following grounds of appeal:

“1. “On the facts and circumstances of the case and in law, ld. CIT(A) has erred in sustaining penalty u/s.271(1)(c) of Rs.15,19,710, since, it is initiated for concealment of income as per order u/s.147 as well as SCN dt.26-3-22, while it is levied for furnishing inaccurate particulars of incomes penalty levied u/s.271(1)(c) is invalid and would be liable to be quashed.”

2. “On the facts and circumstances of the case and in law, ld. CIT(A) has erred in sustaining penalty u/s.271(1)(c) of Rs.15,19,710, when order u/s.147 dt.26-3-22 is invalid in the eyes of law as per first proviso to sec. 147; on the basis of such invalid order u/s.147, penalty cannot be imposed and would liable to be quashed.”

3. “On the facts and circumstances of the case and in law, ld. CIT(A) has erred in sustaining penalty u/s.271(1)(c) of Rs.15,19,710, as making of incorrect claim of depreciation/expenses would not amount to concealment of particulars of income; in absence of any concealment of income/furnishing of inaccurate particulars of income while making such claim of depreciation/expenses, no penalty proceedings u/s.271(1)(e) could be initiated; penalty levied is unjustified and is liable to be deleted.

4. “The appellant craves leave, to add, urge, alter, modify or withdraw any grounds before or at the time of hearing.”

2. Brief facts in this case are that the assessee is an individual who had filed his return of income for the A.Y.2014-15 on 29.11.2014 declaring total income of Rs.3,10,21,200/-. The case of the assessee was subsequently reopened u/s. 147 r.w.s. 144B of the Act. Assessment u/s. 147 r.w.s. 144B of the Act was culminated on 26.03.2022, wherein penalty proceedings u/s.271(1)(c) of the Act were separately initiated by the A.O for “concealment of income”.

3. In due course of penalty proceedings u/s.271(1)(c) of the Act, the A.O. noted that the assessee had committed a default of deliberately concealed income to the tune of Rs.48,04,380/-. At the same time, it is also mentioned by the A.O that “I am satisfied that the assessee has furnished inaccurate particulars of income to the extent of Rs.48,04,380/-“, therefore, the provisions of Section 271(1)(c) of the Act are triggered and penalty of Rs.15,19,710/- was imposed on the assessee vide order dated 20.09.2022.

4. Aggrieved the assessee carried the matter in appeal before the CIT(Appeals) to challenge the findings of the A.O, wherein the appeal of the assessee was dismissed by the CIT(Appeals) on account of non-compliance during the appellate proceedings.

5. Shri Sunil Kumar Agrawal, Ld. AR for the assessee submitted that though the A.O. while framing the assessment u/s.147 r.w.s. 144B of the Act initiated penalty proceedings u/s.271(1)(c) of the Act for “concealment of income” but levied penalty u/s.271(1)(c) of the Act for “furnishing of inaccurate particulars of income”. Apart from that “Show Cause Notice” (SCN) issued u/s. 274 r.w.s. 271(1)(c) of the Act dated 26.03.2022 reveals that the assessee was called upon to explain why penalty u/s. 271(1)(c) of the Act may not be imposed upon him for having “concealed the particulars of income” which clearly shows that there is ambiguity in the mind of A.O as to apply correct limb, for which, penalty ought to have been imposed, therefore, penalty cannot be levied in the present case. The Ld. AR in support of his aforesaid contention relied on the judgment of the Hon’ble High Court of Gujrat in the case of Pr. Commissioner of Income Tax v. Intas Pharma Ltd.ITR 141 (Gujarat). Referring the said case law, Ld. AR drew our attention to the observations of the Hon’ble Court wherein it has been clarified that what should be the concealment of income, and under which condition the assessee should be under default for furnishing of inaccurate particulars. Hon’ble Court, though have observed that “we do not endorse the version of the tribunal, which seeks to lay down as a broad principle that the case of disallowance of the claim of depreciation cannot give rise to any question of concealment of income since a lot would depend on the facts and circumstances on even case at the best, it can be said that in the given set of facts in the present matter, the tribunal was right in so holding.” Before concluding the order, the observations of the Hon’ble Court qua concealment of income or furnishing of particulars are culled out as under:

10. We could notice that the CIT(A) and Tribunal have considered the disallowance of the claim of depreciation on the part of the authority to hold that the same is not a ground to hold that it is a concealment of income. While so holding, it noticed that the respondent had made a claim of depreciation on the strength of Tax Audit Report, and furthermore, there was a complete disclosure about its claim under s. 80HHC supported by the certification issued by chartered accountant. Therefore, it reached to the conclusion that merely because the claim on merit was not granted, the penalty could not be levied.

11. Its quite clear from the detailed discussion on the issue that assessee had not been alleged of not having disclosed any particulars, which it was required to do under the law. It had made a complete disclosure of the claim, which was also certified by the Chartered Accountant. Necessary declarations as required in the prescribed form were also made, therefore, both CIT(A) and the Tribunal were absolutely right in holding that non-allowance of any claim of the assessee would not make the penalty proceedings sustainable under the law. While so holding, Tribunal relied upon the decision of the Apex Court rendered in the case of CIT v. Reliance Petroproducts (P) Ltd. ITR 158 (C), wherein, the apex Court held that making of incorrect claim would not amount to concealment of particulars. Here also, in absence of any furnishing of inaccurate particulars on the part of the respondent of any concealment on his part while making a claim, no proceedings could be initiated of penalty. It fails to understand that additional depreciation was not available to it under the law if claims before the authority concerned, by disclosing all particulars which, it was require to do and if the claim is disallowed, how could it become either the concealment or furnishing of inaccurate particulars.

12. The Apex Court in the case of Reliance Petroproducts (supra) has clearly held that there has to be a concealment of particulars of the income of the assessee or matter to be covered under s. 271(1)(c). Secondly, it must have furnished inaccurate particulars of his income. In the matter before Apex Court, it was an admitted position that no information given in the written was found to be incorrect or inaccurate. It was not that any statement made or any details supplied it was found to be factually incorrect. The revenue had argued that submitting an incorrect claim in law for the expenditure or interest would amount to be inaccurate particulars of such income. The Court said that such cannot be the interpretation of the concerned words, the words are clean and simple and in order to expose the assessee to the penalty, unless the case is strictly covered by the Proviso. the penalty provision cannot be invoked and by no stage of imagination the incorrect claim in law can tantamount to furnishing of inaccurate particulars.

“7. As against this, learned Counsel appearing on behalf of the respondent pointed out that the language of s. 271 (l)(c) had to be strictly construed, this being a taxing statute and more particularly the one providing for penalty. It was pointed out that unless the wording directly covered the assessee and the fact situation herein, there could not be any penalty under the Act. It was pointed out that there was no concealment or any inaccurate particulars regarding the income were submitted in the Return. Sec. 271(1)(c) is as under:-

“271(1) If the AO or the CIT(A) or the CIT in the course of any proceedings under this Act, is satisfied that any person-

A glance at this provision would suggest that in order to be covered, there has to be concealment of the particulars of the income of the assessee. Secondly, the assessee must have furnished inaccurate particulars of his income. Present is not the case of concealment of the income. That is not the case of the Revenue either. However, the learned counsel for Revenue suggested that by making incorrect claim for the expenditure on interest, the assessee has furnished inaccurate particulars of the income. As per Law Lexicon, the meaning of the word “particular” is a detail or details (in plural sense); the details of a claim, or the separate items of an account. Therefore, the word “particulars” used in the s. 271(1)(c) would embrace the meaning of the details of the claim made. It is an admitted position in the present case that no information given in the Return was found to be incorrect or inaccurate. It is not as if any statement made or any detail supplied was found to be factually incorrect. Hence, at least, prima facie, the assessee cannot be held guilty of furnishing inaccurate particulars. The learned Counsel argued that “submitting an incorrect claim in law for the expenditure on interest would amount to giving inaccurate particulars of such income”. We do not think that such can be the interpretation of the concerned words. The words are plain and simple. In order to expose the assessee to the penalty unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing inaccurate particulars. In CIT v. Atul Mohan Bindal 2009 (9) SCC 589, where this Court was considering the same provision, the Court observed that the AO has to be satisfied that a person has concealed the particulars of his income or furnished inaccurate particulars of such income. This Court referred to another decision of this Court in Union of India v. Dharamendra Textile Processors 2008 (13) SCC 369, as also, the decision in Union of India v. Rajasthan Spg. & Wvg. Mills 2009 (13) SCC 448 and reiterated in para 13 that:-

“13. It goes without saying that for applicability of s. 271(1)(c), conditions stated therein must exist. ”

8. Therefore, it is obvious that it must be shown that the conditions under s. 271(1)(c) must exist before the penalty is imposed. There can be no dispute that everything would depend upon the Return filed because that is the only document, where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. In Dilip N. Shroffvs. Joint CIT & Anr. 2007 (6) SCC 329, this Court explained the terms “concealment of income” and “furnishing inaccurate particulars”. The Court went on to hold therein that in order to attract the penalty under s. 271(1)(c), mens rea was necessary, as according to the Court, the word “inaccurate” signified a deliberate act or omission on behalf of the assessee. It went on to hold that cl. (iii) of s. 271 (1) provided for a discretionary jurisdiction upon the Assessing Authority, inasmuch as the amount of penalty could not be less than the amount of tax sought to be evaded by reason of such concealment of particulars of income, but it may not exceed three times thereof. It was pointed out that the term “inaccurate particulars” was not defined anywhere in the Act and, therefore, it was held that furnishing of an assessment of the value of the property may not by itself be furnishing inaccurate particulars. It was further held that the assessee must be found to have failed to prove that his explanation is not only not bona fide but all the facts relating to the same and material to the computation of his income were not disclosed by him. It was then held that the explanation must be preceded by a finding as to how and in what manner, the assessee had furnished the particulars of his income. The Court ultimately went on to hold that the element of mens rea was essential. It was only on the point of mens rea that the judgment in Dilip N. Shroffvs. Joint CIT, Mumbai &Anr. was upset. In Union of India v. Dharamendra Textile Processors (cited supra), after quoting from s. 271 extensively and also considering s. 271(1)(c), the Court came to the conclusion that since s. 271 (l)(c) indicated the element of strict liability on the assessee for the concealment or for giving inaccurate particulars while filing Return, there was no necessity of mens rea. The Court went on to hold that the objective behind enactment of s. 271(1)(c) read with Explanations indicated with the said section was for providing remedy for loss of revenue and such a penalty was a civil liability and, therefore, willful concealment is not an essential ingredient for attracting civil liability as was the case in the matter of prosecution under s. 276C of the Act. The basic reason why decision in Dilip N. Shroffvs. Joint CIT & Anr. (cited supra) was overruled by this Court in Union of India v. Dharamendra Textile Processors (cited supra), was that according to this Court the effect and difference between s. 271(1)(c) and s. 276-C of the Act was lost sight of in case of Dilip N. Shroff v. Joint CIT, Mumbai &Anr. (cited supra). However, it must be pointed out that in Union of India v. Dharamendra Textile Processors (cited supra), no fault was found with the reasoning in the decision in Dilip N. Shroff v. Joint CIT, Mumbai & Anr. (cited supra), where the Court explained the meaning of the terms “conceal” and inaccurate”. It was only the ultimate inference in Dilip N. Shroff v. Joint CIT, Mumbai &Anr. (cited supra) to the effect that mens rea was an essential ingredient for the penalty under s. 271(1)(c) that the decision in Dilip N. Shroffvs. Joint CIT &Anr. (cited supra) was overruled.

9. We are not concerned in the present case with the mens rea. However, we have to only see as to whether in this case, as a matter of fact, the assessee has given inaccurate particulars. In Webster’s Dictionary, the word “inaccurate” has been defined as:-

“not accurate, not exact or correct; not according to truth; erroneous; as an inaccurate statement, copy or transcript”.

In terms of observations in the aforesaid case law it was the submissions of Ld. AR that in the present case which is identical to the Intas Pharma (supra), wherein it is clearly laid down by the Hon’ble High Court that in absence of any furnishing of inaccurate particulars on the part of the assessee or any concealment on his part while making a claim, no proceedings could be initiated of penalty u/s 271(1)(c).

6. As is discernible from the record, though the A.O. while framing the assessment vide his order passed u/s. 147 r.w.s. 144B of the Act dated 26.03.2022 had initiated penalty proceedings u/s.271(1)(c) of the Act in the case of the assessee for “concealment of income”, but in the penalty order passed u/s.271(1)(c) of the Act dated 20.09.2022, at Para 9, he had mentioned that the assessee has “furnished inaccurate particulars of income”. Apart from that, a perusal of the copy of the “Show Cause Notice” (SCN) issued u/s. 274 r.w.s. 271(1)(c) of the Act dated 26.03.2022 reveals that the assessee was called upon to explain why penalty u/s. 271(1)(c) of the Act may not be imposed upon his for having “concealed the particulars of income”.

7. We would now test the validity of the aforesaid “Show Cause” notice dated 26.03.2022, and the jurisdiction emerging therefrom in the backdrop of the judicial pronouncements on the issue under consideration. Admittedly, the A.O. is vested with the power to levy penalty under Sec. 271(1)(c) of the Act if in the course of the proceedings, he is satisfied that the assessee had either ‘concealed his income’ or ‘furnished inaccurate particulars of his income’ or had committed both the defaults w.r.t. the various additions/disallowances made in his hands while framing the assessment. In our considered view as penalty proceedings are like quasi criminal proceedings, therefore, the assessee as a matter of a statutory right is supposed to know the exact charge for which he is being called upon to explain that as to why the same may not be imposed on him. The non-specifying of the charge in the ‘Show cause’ notice not only reflects the non-application of mind by the A.O but defeats the very purpose of giving a reasonable opportunity of being heard to the assessee as envisaged under Sec. 274(1) of the I.T. Act. We find that the fine distinction between the said two defaults contemplated in Sec. 271(1)(c), viz. ‘concealment of income’ and ‘furnishing of inaccurate particulars of income’ had been appreciated at length by the Hon’ble Supreme Court in its judgments passed in the case of Dilip & Shroff v. Jt. CIT (2007) 210 CTR (SC) 228 and T. Ashok Pai v. CIT. The Hon’ble Apex Court in its aforesaid judgments had observed that the two expressions, viz. ‘concealment of particulars of income’ and ‘furnishing of inaccurate particulars of income’ have a different connotations. The Hon’ble Apex Court was of the view that the non-striking off the irrelevant limb in the notice clearly revealed a non-application of mind by the A.O, and had observed as under:-

“83. It is of some significance that in the standard proforma used by the Assessing Officer in issuing a notice despite the fact that the same postulates that inappropriate words and paragraphs were to be deleted, but the same had not been done. Thus, the Assessing Officer himself was not sure as to whether he had proceeded on the basis that the assessee had concealed his income or he has furnished inaccurate particulars. Even before us, the learned Additional Solicitor General while placing reliance on the order of assessment laid emphasis that he had dealt with both the situations.\

84. The impugned order, therefore, suffers from nonapplication of mind. It was also bound to comply with the principles of natural justice [See Malabar Industrial Co. Ltd. v. CIT (2000) 2 SCC 718].

In the present case, we find that though the A.O. in the penalty order passed u/s. 271(1)(c) of the Act dated 20.09.2022 had mentioned both the limbs by stating that the assessee had “furnished inaccurate particulars of income” as well as “concealed the particulars of income”, but the penalty notice issued u/s. 274 r.w.s. 271(1)(c) of the Act dated 26.03.2022 reveals that the assessee was called upon to explain why penalty u/s. 271(1)(c) of the Act may not be imposed upon him for having “concealed the particulars of income”. We are of the considered view that now when as per the settled position of law the two defaults, viz. ‘concealment of income’ and ‘furnishing of inaccurate particulars of income’ are separate and distinct defaults, and not overlapping, therefore, the AO had grossly erred, wherein he vide the SCN, dated 26.03.2022 had on one hand called upon the assessee to explain as to why penalty u/s 271(1)(c) may not be imposed on his for having “concealed the particulars of income”, but thereafter had vide his penalty order u/s. 271(1)(c) of the Act, dated 20.09.2022 visited the assessee for a penalty for both the defaults, viz. “furnished inaccurate particulars of income” as well as “concealed the particulars of income”. The aforesaid approach adopted by the A.O. cannot be merely dubbed as a technical default as the same had divested the assessee of his statutory right of a proper opportunity to be heard and defend his case. The assessee had been saddled with penalty u/s 271(1)(c) without validly putting his to notice about the default for which the same was sought to be imposed.

8. At this stage, it would be relevant to point out that the A.O. at the stage of imposing penalty was not clear as to whether the same was being levied for “furnishing inaccurate particulars of income” or “concealment of particulars of income”. The aforesaid facts can safely be gathered from Para 9 of the penalty order, wherein the A.O had referred both the defaults, i.e. “furnished inaccurate particulars of income” as well as “concealed the particulars of income”, but while quantifying the amount of penalty had confined himself only to “furnishing of inaccurate particulars of income”.

9. Be that as it may, as the A.O. had grossly erred in the law and facts of the case by calling upon the assessee to show cause as to why penalty u/s. 271(1)(c) of the Act may not be imposed upon his for “concealment of particulars of income”, but had thereafter, imposed the same for “furnishing of inaccurate particulars”, therefore, the order so passed by him cannot be sustained and is liable to be struck down on the said count itself.

10. We find that the Hon’ble High Court of Karnataka in the case of CIT v. SSA’s Emerald Meadows (Karnataka) )(Kar) following its earlier order in the case of CIT v. Manjunatha Cotton and Ginning Factory (Karnataka), had held that where the notice issued by the A.O under Sec. 274 r.w Sec. 271(1)(c) does not specify the limb of Sec. 271(1)(c) for which the penalty proceedings were initiated, i.e. whether for ‘concealment of particulars of income’ or ‘furnishing of inaccurate particulars’, then, the same has to be held as bad in law. The ‘Special Leave Petition’ (for short ‘SLP’) filed by the revenue against the aforesaid order of the Hon’ble High Court of Karnataka had been dismissed by the Hon’ble Supreme Court in CIT v. SSA’s Emerald Meadows (SC). Apart from that, we find that a similar view had been taken by the Hon’ble High Court of Bombay in the case of CIT v. Samson Perinchery (ITA No. 1154 of 2014; Dt. 05.01.2017)(Bom). The Hon’ble High Court relying on the judgment of the Hon’ble High Court of Karnataka in the case of Manjunathja Cotton and Ginning Factory (supra), which in turn had relied on the judgment of the Hon’ble Apex Court in T. Ashok Pai v. CIT,had approved the order of the Tribunal that had deleted the penalty u/s 271(1)(c) imposed by the A.O and had, inter alia, observed, that the failure of the AO to strike-off the irrelevant default in the notice issued under Sec. 274 of the Act which is in a standard proforma clearly indicates a non-application of mind by the A.O while issuing the notice. Further, we find that the Hon’ble High Court of Bombay in the case of Pr. CIT (Central), Bengaluru v. Golden Peace Hotels & Resorts (P) Ltd. (2021) 124 tamnn.com 249 (SC), by drawing support from its earlier order in the case of CIT v. Shri Samson PerincheryITR 4 (Bombay)and PCIT v. New Era Sova Mine420 ITR 376 (Bombay), had observed that AO while issuing show-cause should clearly indicate that as per him the case of the assessee involves concealment of particulars of income; or there is furnishing of inaccurate particulars. It was further observed, that if the notice is issued in the printed form, then, the necessary portions which are not applicable are required to be struck-off, so as to indicate with clarity the nature of the satisfaction recorded. The High Court observed that as in the case before them the AO had failed to strike-off the irrelevant default in the body of the SCN issued under Sec. 274 of the Act, therefore, the penalty imposed by the AO u/s 271(1)(c) of the Act was liable to be vacated. For the sake of clarity the observations of the Hon’ble High Court of Bombay in its aforesaid order are culled out as under:

“4. We have carefully examined the record as well as duly considered the rival contentions. Both the Commissioner (Appeals) as well as the ITAT have categorically held that in the present case, there is no record of satisfaction by the Assessing Officer that there was any concealment of income or that any well as in New Era Soya Mine (supra) has held that the notice which is inaccurate particulars were furnished by the assessee. This being a sine qua non for initiation of penalty proceedings, in the absence of such satisfaction, the two authorities have quite correctly ordered the dropping of penalty proceedings against the assessee.

6. Besides, we note that the Division Bench of this Court in Samson (supra) as applicable are required to be struck off, so as to indicate with clarity the nature of the satisfaction recorded. In both Samson Perinchery and New Era Soya furnishing of inaccurate particulars of income or both, with clarity. If the notice is issued in the printed form, then, the necessary portions which are not applicable are required to be struck off, so as to indicate clarity the nature of satisfaction recorded. In both Samson Perinchery and New Era Sova Mine (supra), the notices issued had not struck off the portion which were inapplicable. From this, the Division Bench concluded that there was no proper record of satisfaction or proper application of mind in matter of initiation of penalty proceedings.

7. In the present case, as well if the notice dated 30/09/16 (at page 32) is perused, it is apparent that the inapplicable portions have not been struck off. This coupled with the fact adverted to in paragraph (5) of this order, leaves no ground for interference with the impugned order. The impugned order is quite consistent with the law laid down in the case of Samson Perinchery and New Era Soya Mine (supra) and therefore, warrants no interference.”

The Special Leave Petition (SLP) filed by the revenue against the aforesaid order had thereafter been dismissed by the Hon’ble Apex Court in Pr. CIT (Central) v. Golden Peace Hotels and Resorts (P) Ltd.. Also, the “Full bench” of the Hon’ble High Court of Bombay in the case of Mohd. Farhan A. Shaikh v. DCIT, Central Circle-1, Bengaluru

(Bombay), had observed that where the assessment order clearly records a satisfaction for imposing penalty on one or other; or both grounds mentioned in Sec. 271(1)(c), but there is a defect in the SCN, wherein the AO had failed to strike-off the irrelevant default, then, the same would vitiate the penalty proceedings. The Hon’ble High Court while concluding as hereinabove had held as under:

” 173. We, however, accept that the Revenue, often, adopts a pernicious practice of sending an omnibus, catch-all, printed notice. It contains both relevant and irrelevant information. It assumes, perhaps unjustifiably, that whoever pays tax is or must be well-versed in the nuances of taxlaw. So it sends a notice without specifying what the assessee, facing penalty proceedings, must meet. In justification of what it omits to do, it will ask, rather expect, the assessee to look into previous proceedings for justification of its action in the later proceedings, which are, undeniably, independent. It forgets that a stitch in time saves nine. Its one cross or tick mark clears the cloud, enables the assessee to mount an effective defence, and, in the end, its diligence avoids a load of litigation. Is not prejudice writ large on the face of the mechanical methods the Revenue adopts in sending a statutory notice to the assessee under section 271 (1) (c) read with section 274 of the Act? Pragmatically speaking, Kaushalya casts an extra burden on the assessee and assumes expertise on his part. It wants the assessee to make up for the Revenue’s lapses.

Ex Post and Ex Ante Approaches of Adjudication:

174. In ex-post adjudication, the Court looks back at a disaster or other event after it has occurred and decides what to do about it or how to remedy it. In an ex-ante adjudication, the Court looks forward, after an event or incident, and asks what effects the decision about this case will have in the future—on parties who are entering similar situations and have not yet decided what to do, and whose choices may be influenced by the consequences the law says will follow from them. The first perspective also might be called static since it accepts the parties’ positions as given and fixed; the second perspective is dynamic since it assumes their behaviour may change in response to what others do, including judges. (for a detailed discussion, see Ward Farnsworth’s Legal Analyst: A Toolkit for Thinking about the Law)[72].

175. Kaushalya has adopted an ex-post approach to the issue resolution; Goa Dourado Promotions, an ex-ante approach. Kaushalya saves one single case from further litigation. It asks the assessee to look back and gather answers from whatever source he may find, say, the assessment order. On the other hand, Goa Dourado Promotions saves every other case from litigation. It compels the Revenue to be clear and certain. To be more specific, we may note that if we adopt Kaushalya’s approach to the issue, it requires the assessee to look for the precise charge in the penalty proceedings not only from the statutory note but from every other source of information, such as the assessment proceedings. That said, first, penalty proceedings may originate from the assessment proceedings, but they are independent; they do not depend on the assessment proceeding for their outcome. Assessment proceedings hardly influence the penalty proceedings, for assessment does not automatically lead to a penalty

176. Second, not always do we find the assessment proceedings revealing the grounds of penalty proceedings. Assessment order need not contain a specific, explicit finding of whether the conditions mentioned in section 271(1)(c) exist in the case. It is because Explanations 1(A) and 1(B), as the deeming provisions, create a legal fiction as to the grounds for penalty proceedings. Indeed, the Apex Court in CIT v. Atul Mohan Bindal [73], has explained the scope of section 271(1)(c) thus:

“[Explanation 1, appended to section 27(1) provides that if that person fails to offer an explanation or the explanation offered by such person is found to be false, or the explanation offered by him is not substantiated, and he fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, for the purposes of section 271(1)(c), the amount added or disallowed in computing the total income is deemed to represent the concealed income.”

177. That is, even if the assessment order does not contain a specific finding that the assessee has concealed income or he is deemed to have concealed income because of the existence of facts which are set out in Explanation 1, if a mere direction to initiate penalty proceedings under clause (c) of sub-section (1) is found in the said order, by legal fiction, it shall be deemed to constitute satisfaction of the Assessing Officer for initiation of penalty proceedings under the said clause (c). In other words, the Assessing Officer’s satisfaction as to be spelt out in the assessment order is only prima facie. Even if the assessment order gives no reason, a mere direction for penalty proceedings triggers the legal fiction as contained in the Explanation (1).

178. Therefore, in every instance, it is a question of inference whether the assessment order contained any grounds for initiating the penalty proceedings. Then, whenever the notice is vague or imprecise, the assessee assails it as bad; the Revenue defends it by saying that the assessment order contains the precise charge. Thus, it becomes a matter of adjudication, opening litigious floodgates. The solution is a tick mark in the printed notice the Revenue is used to serving on the assessees.

179. Besides, the prima facie opinion in the assessment order need not always translate into actual penalty proceedings. These proceedings, in fact, commence with the statutory notice under section 271(1)(c) read with section 274. Again, whether this prima facie opinion is sufficient to inform the assessee about the precise charge for the penalty is a matter of inference and, thus, a matter of litigation and adjudication. The solution, again, is a tick mark; it avoids litigation arising out of uncertainty.

180. One course of action before us is curing a defect in the notice by referring to the assessment order, which may or may not contain reasons for the penalty proceedings. The other course of action is the prevention of defect in the notice— and that prevention takes just a tick mark. Prudence demands prevention is better than cure.

Answers: Question No.1: If the assessment order clearly records satisfaction for imposing penalty on one or the other, or both grounds mentioned in Section 271(l)(c), does a mere defect in the notice—not striking off the irrelevant matter— vitiate the penalty proceedings?

181. It does. The primary burden lies on the Revenue. In the assessment proceedings, it forms an opinion, prima facie or otherwise, to launch penalty proceedings against the assessee. But that translates into action only through the statutory notice under section 271(1)(c), read with section 274 of IT Act. True, the assessment proceedings form the basis for the penalty proceedings, but they are not composite proceedings to draw strength from each other. Nor can each cure the other’s defect. A penalty proceeding is a corollary; nevertheless, it must stand on its own. These proceedings culminate under a different statutory scheme that remains distinct from the assessment proceedings. Therefore, the assessee must be informed of the grounds of the penalty proceedings only through statutory notice. An omnibus notice suffers from the vice of vagueness.

182. More particularly, a penal provision, even with civil consequences, must be construed strictly. And ambiguity, if any, must be resolved in the affected assessee’s favour.

183. Therefore, we answer the first question to the effect that Goa Dourado Promotions and other cases have adopted an approach more in consonance with the statutory scheme. That means we must hold that Kaushalya does not lay down the correct proposition of law.

Question No.2: Has Kaushalya failed to discuss the aspect of ‘prejudice’?

184. Indeed, Kaushalya did discuss the aspect of prejudice. As we have already noted, Kaushalya noted that the assessment orders already contained the reasons why penalty should be initiated. So, the assessee, stresses Kaushalya, “fully knew in detail the exact charge of the Revenue against him”. For Kaushalya, the statutory notice suffered from neither non-application of mind nor any prejudice. According to it, “the so-called ambiguous wording in the notice [has not] impaired or prejudiced the right of the assessee to a reasonable opportunity of being heard”. It went onto observe that for sustaining the plea of natural justice on the ground of absence of opportunity, “it has to be established that prejudice is caused to the concerned person by the procedure followed”. Kaushalya closes the discussion by observing that the notice issuing “is an administrative device for informing the assessee about the proposal to levy penalty in order to enable him to explain as to why it should not be done”.

185 No doubt, there can exist a case where vagueness and ambiguity in the notice can demonstrate non-application of mind by the authority and/or ultimate prejudice to the right of opportunity of hearing contemplated under section 274. So asserts Kaushalya. In fact, for one assessment year, it set aside the penalty proceedings on the grounds of non-application of mind and prejudice.

186. That said, regarding the other assessment year, it reasons that the assessment order, containing the reasons or justification, avoids prejudice to the assessee. That is where, we reckon, the reasoning suffers. Kaushalya’s insistence that the previous proceedings supply justification and cure the defect in penalty proceedings has not met our acceptance.

Question No.3: What is the effect of the Supreme Court’s decision in Dilip N. Shroff on the issue of non-application of mind when the irrelevant portions of the printed notices are not struck off ?

187. In Dilip N. Shroff, for the Supreme Court, it is of “some significance that in the standard Pro-forma used by the assessing officer in issuing a notice despite the fact that the same postulates that inappropriate words and paragraphs were to be deleted, but the same had not been done”. Then, Dilip N. Shroff, on facts, has felt that the assessing officer himself was not sure whether he had proceeded on the basis that the assessee had concealed his income or he had furnished inaccurate particulars.

188. We may, in this context, respectfully observe that a contravention of a mandatory condition or requirement for a communication to be valid communication is fatal, with no further proof. That said, even if the notice contains no caveat that the inapplicable portion be deleted, it is in the interest of fairness and justice that the notice must be precise. It should give no room for ambiguity. Therefore, Dilip N. Shroff disapproves of the routine, ritualistic practice of issuing omnibus show-cause notices. That practice certainly betrays nonapplication of mind. And, therefore, the infraction of a mandatory procedure leading to penal consequences assumes or implies prejudice.

189. In Sudhir Kumar Singh, the Supreme Court has encapsulated the principles of prejudice. One of the principles is that “where procedural and/or substantive provisions of law embody the principles of natural justice, their infraction per se does not lead to invalidity of the orders passed. Here again, prejudice must be caused to the litigant, “except in the case of a mandatory provision of law which is conceived not only in individual interest but also in the public interest”.

190. Here, section 271(1)(c) is one such provision. With calamitous, albeit commercial, consequences, the provision is mandatory and brooks no trifling with or dilution. For a further precedential prop, we may refer to Rajesh Kumar v. CIT [74], in which the Apex Court has quoted with approval its earlier judgment in State of Orissa v. Dr. Binapani Dei[75]. According to it, when by reason of action on the part of a statutory authority, civil or evil consequences ensue, principles of natural justice must be followed. In such an event, although no express provision is laid down on this behalf, compliance with principles of natural justice would be implicit. If a statue contravenes the principles of natural justice, it may also be held ultra vires Article 14 of the Constitution.

191. As a result, we hold that Dilip N. Shroff treats omnibus show cause notices as betraying non-application of mind and disapproves of the practice, to be particular, of issuing notices in printed form without deleting or striking off the inapplicable parts of that generic notice.

Conclusion: We have, thus, answered the reference as required by us; so we direct the Registry to place these two Tax Appeals before the Division Bench concerned for further adjudication.”

Also, the Hon’ble High Court of Bombay in the case of Pr. CIT (Central) Bengaluru v. Goa Coastal Resorts and Recreation Pvt. Ltd. had observed that where there was no recording of satisfaction by the AO about any concealment of income or furnishing of inaccurate particulars by the assessee in the notice issued for initiation of such proceedings, then, the Tribunal had in absence of said statutory requirement rightly vacated the penalty proceedings. Also, the Hon’ble High Court of Bombay in the case of PCIT, Panaji v. Goa Dourdo Promotions (P) Ltd.[2021] 433 ITR 268 (Bombay) relying upon its earlier orders in the case of, viz.(i). Goa Coastal Resorts & Recreation P. Ltd. (supra); (ii). Samson Perinchery (supra); and (iii). New Era Sova Mine (supra), had observed that recording of satisfaction by AO in relation to any concealment of income or furnishing of inaccurate particulars by the assessee in notice issued u/s 271(1)(c) is the sine qua non for initiation of such proceedings. Further, we find that the ITAT, Pune in Ashok Sahahakari Sakhar Karkhana Ltd. v. ACIT (2018) (Pune), had held that where in a notice issued u/s 274 of the Act the AO had used conjunction “or” to mention both limbs, i.e, concealment of income or furnishing inaccurate particulars of income and charge for levy of penalty was not explicitly clear from notice, then, the same was to be held as bad in law and penalty was liable to be set-aside. On a similar footing was the view taken by the ITAT, Mumbai “B” Bench in ACIT v. Bhushan Kamanayan Vora /[2017] 60 ITR(T) 82 (Mumbai). It was observed by the Tribunal that where the AO was not sure about the charge, i.e whether it was for concealment of income or furnishing of inaccurate particulars of income, the penalty imposed by him u/s 271(1)(c) could not be sustained.

11. We have given thoughtful consideration to the issue before us, and after deliberating on the facts, are of the considered view, that as the A.O in the SCN called upon the assessee to explain why he may not be subjected to penalty u/s 271(1)(c) for having “concealed the particulars of income” but thereafter vide a vague order had saddled him with a penalty for both the defaults, i.e. “concealed the particulars of income” and “furnished inaccurate particulars of income”; which thereafter was confined by him to “furnishing of inaccurate particulars” [while quantifying the amount of penalty in order u/s 271(1)(c)]. As the A.O. had in the SCN, dated 26.03.2022 called upon the assessee to explain why he may not be subjected to penalty u/s 271(1)(c) for having “concealed the particulars of income” but thereafter vide a vague order had saddled his with a penalty for both the defaults, i.e. “concealed the particulars of income” and “furnished inaccurate particulars of income”; which thereafter was restricted to “furnishing of inaccurate particulars” [while quantifying the amount of penalty in order u/s 271(1)(c)]; therefore, the order so passed by him cannot be sustained and is liable to be struck down on the said count itself. Alternatively, the failure on the part of the A.O. to put the assessee to notice as regards the default for which penalty under Sec. 271(1)(c) was sought to be imposed on his by clearly and explicitly pointing out the specific default/defaults in the SCN, dated 26.03.2022, had thus, divested his of an opportunity to put forth an explanation before the A.O that no such penalty was called for in his case. We, thus, in the backdrop of our aforesaid observations are of a firm conviction that as the A.O had failed to discharge his statutory obligation of fairly putting the assessee to notice as regards the default for which he was being proceeded against, therefore, the penalty under Sec. 271(1)(c) of Rs.15,19,710/-imposed by him being in clear violation of the mandate of Sec. 274(1) of the Act cannot be sustained. We, thus, for the aforesaid reasons not being able to persuade ourselves to subscribe to the imposition of penalty by the A.O, therefore, set-aside the order of the CIT(A) who had upheld the same. The penalty of Rs.15,19,710/-imposed by the A.O under Sec.271(1)(c) is quashed in terms of our aforesaid observations. The Grounds of appeal raised by the assessee are allowed in terms of our aforesaid observations.

12. In the result, appeal of the assessee is allowed in terms of our aforesaid observations.