Defect Notice Caused No Prejudice Since Last 30 Years, Assessee Clearly Understood Purport Of Notice: Bombay High Court

The Bombay High Court has held that even assuming that there was a defect in the notice, it had caused no prejudice to the assessee, and the assessee “clearly understood” what the purport and import of the notice were under Section 274 read with Section 271 of the Income-tax Act, 1961. The principles of natural justice cannot be read in abstract form.

The bench of Justice G. S. Kulkarni and Justice Jitendra Jain has observed that the assessee at no earlier point in time had raised a plea that, on account of a defect in the notice, the assessee was put to any prejudice. The Court observed that a violation will not result in nullifying the orders passed by statutory authorities. If the case of the assessee is that the assessee was prejudiced and principles of natural justice were violated on account of not being able to submit an effective reply, it would be a different matter.

The issue raised was whether an alleged defect in the notice issued to the appellant under Section 271(1)(c) read with Section 274, in regard to which the appellant had never raised an objection from the very inception, that is, since the last 30 years, can now be permitted to be raised, in the absence of any prejudice being caused to the appellant-assessee.

The appellant/assessee filed the appeal under Section 260A of the Income-tax Act, 1961, being aggrieved by the judgment and order passed by the Income-tax Appellate Tribunal (ITAT). The respondent's or department's appeal against the order passed by the Commissioner of Income Tax (Appeals) has been allowed. Earlier, the CIT (A) had set aside the penalty imposed on the appellant or assessee under Section 271(1)(c) of the Income Tax Act.

The assessee has challenged the penalty proceedings in which a penalty was levied and confirmed against the appellant. In the levy of penalty, the procedure as mandated by Section 274 of the Income Tax Act was set into motion as a show cause notice was issued to the assessee as to why the penalty was not imposed on the assessee under the provisions of Section 271(1)(c). The assessee replied to the notice, and after considering the reply, a penalty was imposed on the assessee. It was not the assessee's case that any ambiguity was found in the notice issued to the assessee under Section 271(1)(c) read with 274. It was also not its case that the assessee had not understood the contents of the notice, and more particularly, which of the two limbs of Section 271(1)(c) were pressed into service against the assessee.

The assessee/appellant replied to both limbs falling under Section 271(1)(c). The assessee wholeheartedly participated in penalty proceedings without raising any objection to the nature of the notice. Thus, when the facts are such that the test of prejudice itself was not satisfied by the assessee, would it be permissible for the assessee to contend that without satisfying the test of prejudice, the penalty proceedings ought to be held to be vitiated?

The assessee contended that Section 274 is a mandatory procedural provision. Once the nature of the provision is such, the test of prejudice is not required to be met when there is a violation of a procedural provision of a fundamental nature. It would also apply at any stage of the proceedings, including the third appellate stage, like in the present proceedings, as an appeal on a pure substantial question of law as provided under Section 260A of the Income Tax Act. There is no need to prove prejudice when the notice itself was defective, which, according to her, is a jurisdictional issue.

The department contended that the appellant had never raised any issue of breach of principles of natural justice, much less the appellant's lack of understanding of the notice issued by the department under Section 271(1)(c) of the Income Tax Act.

The court held that the assessee's objection in regard to any defect in the notice could not be entertained in the appeal, as such an objection can never be a question of law in the assessee's case, as it was purely a question of fact. The assessee, at no earlier point in time, had raised a plea that, on account of a defect in the notice, the assessee was put to any prejudice.

Counsel For Petitioner: Aarti Vissanji

Counsel For Respondent: Devvrat Singh

Case Title: Veena Estate Pvt. Ltd. Versus Commissioner of Income-Tax

Case No.: Income-Tax Appeal No. 302 Of 2002

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