In a significant and much-needed relief to taxpayers, the Pune Bench of the Income Tax Appellate Tribunal (ITAT) has struck down a penalty of ₹13,44,580 imposed under Section 271(1)(c) of the Income Tax Act, 1961, due to a defective penalty notice. The tribunal emphasized that a vague or ambiguous notice, which does not clearly specify whether the penalty is for concealment of income or furnishing of inaccurate particulars, cannot be the foundation for a valid penalty.

This judgment underscores the importance of procedural fairness in tax administration and highlights that even the government must adhere strictly to statutory requirements.

Background of the Case

  • The assessee, Vikas Jayram Bhukan, is an individual involved in the business of trading land and real estate.

  • He filed his Income Tax Return (ITR) for Assessment Year (AY) 2012–13, declaring a total income of ₹9,49,160.

  • During assessment, the Assessing Officer (AO) noted discrepancies in sales:

    • Declared Sales: ₹86,03,600

    • Actual Receipts: ₹1,29,58,000

    • Difference: ₹43,51,400

  • The assessee explained that the difference represented repayments to partners, and not part of his income.

  • The AO rejected this explanation and treated the amount as unexplained income, increasing the assessed income to ₹53,00,560.

  • Based on this, a penalty of ₹13,44,580 was imposed under Section 271(1)(c) for alleged concealment or furnishing inaccurate particulars.

First Appeal Before CIT(A)

  • The assessee challenged the AO’s decision before the Commissioner of Income Tax (Appeals) [CIT(A)].

  • However, the CIT(A) upheld the order, stating that the assessee had failed to provide satisfactory evidence to justify the exclusion of ₹43.51 lakh.

  • Still aggrieved, the assessee approached the Income Tax Appellate Tribunal (ITAT).

Arguments Before the ITAT

The main contention of the assessee before ITAT was procedural. His legal counsel argued that:

  • The penalty notice issued under Section 274 read with Section 271(1)(c) was defective.

  • It did not mention clearly whether the penalty was being levied for:

    • “concealment of income”, or

    • “furnishing of inaccurate particulars”.

  • Due to this lack of clarity, the assessee was not adequately informed of the exact charge he had to respond to.

ITAT’s Key Observations

A two-member bench consisting of Shri Manish Borad (Accountant Member) and Shri Vinay Bhamore (Judicial Member) made the following important findings:

  • The notice failed to strike out the inapplicable part of the show-cause—an issue repeatedly flagged in past judgments.

  • This defect violated the principle of natural justice, where a person must be given a reasonable opportunity to defend against specific charges.

  • The bench cited the judgment in Times Global Broadcasting Co. Ltd. (Bombay High Court) where it was held that ambiguous penalty notices are not sustainable in law.

  • Since the AO had not made it clear which part of Section 271(1)(c) applied, the penalty was liable to be quashed.

Final Verdict

The ITAT held that:

“A penalty notice that does not specify whether it is for concealment of income or furnishing of inaccurate particulars is defective and invalid.”

  • The entire penalty of ₹13,44,580 was deleted.

  • The appeal was allowed in favour of the assessee.

FAQs

Q1: What is Section 271(1)(c) of the Income Tax Act?
Section 271(1)(c) provides for penalty if a person has either concealed income or furnished inaccurate particulars of income.

Q2: Why was the penalty deleted in this case?
Because the penalty notice was vague—it didn’t clearly mention the specific charge (concealment or inaccuracy). This procedural flaw invalidated the penalty.

Q3: Is it mandatory for a penalty notice to specify the exact nature of violation?
Yes. The Supreme Court and various High Courts have held that exact grounds must be communicated to the taxpayer to ensure fairness and proper defense.

Q4: Can a taxpayer challenge a defective penalty notice even if the tax demand is valid?
Yes. A defective notice violates procedural law, and penalty proceedings can be quashed independently of the tax liability.

Q5: What should I do if I receive a similar vague penalty notice?
You should consult a tax professional and consider filing an appeal, as such notices may not stand legal scrutiny.

Conclusion

This ruling by the Pune ITAT sends a clear message: procedural lapses in tax administration can’t be ignored, and taxpayers have the right to be clearly informed of the nature of charges against them.

While tax compliance is essential, penalties must follow due process. In this case, the income tax department’s failure to specify the charge in the notice led to the penalty’s cancellation.

This judgment not only benefits the individual taxpayer but sets a precedent for similar cases where procedural ambiguity exists in penalty notices. Taxpayers and professionals alike should ensure that every notice issued under tax law complies with the fundamental principles of natural justice and clarity.