Vague Notice With Inaccurate Particulars Of Income Vitiates Penalty Proceedings: ITAT

The Ahmedabad Bench of Income Tax Appellate Tribunal (ITAT) has held that the AO failed to specify whether the penalty was for concealment or inaccurate particulars in the notice issued under Section 274 and Section 271(1)(c) of the Income Tax Act.

The bench of Suchitra Kamble (Judicial Member) and Makarand V. Mahadeokar (Accountant Member) has observed that the penalty notice must clearly specify whether it is for concealment of income or furnishing inaccurate particulars. A vague notice vitiates the penalty proceedings.

The appellant/assessee is a cooperative bank stated to be in liquidation. The Reserve Bank of India (RBI) had issued directions imposing some restrictions. As per the restrictions, the bank, without prior approval in writing from the RBI, was not allowed to grant or renew loans and advances, make any investments, or incur any liability, including borrowing of funds, acceptance of fresh deposits, etc.

The RBI cancelled the license granted to the bank to carry on banking business in India. The assessee filed its Income Tax Return for AY 2010-11, declaring income under the heading of “income from business or profession." After claiming set off of brought forward business loss of AY 2003-04 to the extent of income available, the gross total income was worked out at Rs. NIL.

The case was selected for scrutiny by issuing notice under Section 143(2) of the Income Tax Act. The notices were issued, and the assessee filed replies to the notices. During the course of assessment proceedings, the AO observed that the assessee has not filed a return of income for the period from A.Y. 2003-04 to A.Y. 2008-09. The AO asked to furnish the proof of filing of return of income, but the assessee could not submit the same except for the A.Y. 2003-04.

The assessee was given the opportunity to show cause as to why the claim of setoff of brought forward losses should not be rejected. In reply, the assessee stated that the business of the bank is not closed, but it is under liquidation, and its cooperative status is not lost. The bank is winding up and earning interest on advances due, and therefore unabsorbed losses and depreciation should not be rejected.

The AO, not being satisfied with the reply of the assessee, passed an order rejecting the claim for setoff of the brought forward business loss of AY 2003-04 against the income. The AO also initiated the penalty proceedings for furnishing inaccurate particulars and concealment of income.

The assessee filed an appeal before the CIT(A) against the order passed, which confirmed the disallowance of set off against the brought forward losses. The assessee filed an appeal before the Tribunal. The Tribunal dismissed the appeal due to non-prosecution.

The AO, not considering the submission of the assessee acceptable, levied the 100% penalty of tax sought to be evaded.

The assessee preferred an appeal before the CIT(A) against the penalty order. During the appellate proceedings, the assessee stated that the deduction should have been allowed by the CIT(A) in the quantum appeal, when all the interest details were provided.

The CIT(A) dismissed the appeal of the assessee after confirming the penalty and concluding that the assessee has wrongly claimed set off of unabsorbed brought forward losses of A.Y. 2003-04 when no returns of income were filed for the A.Y. 2004-05 to A.Y. 2008-09.

The assessee contended that the interest income under consideration is earned by the liquidator on the fixed deposits placed out of recovery made from the borrowers. The bank has received money from DICGCI as settlement of claim, and as per the term of settlement of claim, more specifically in terms of Section 21(2) of the DICGC, Act 1961, the liquidator was required to repay to the corporation as soon as the amount is realized in his hand. There was an overriding title on its income in favor of DICGC, and hence, to that extent, it is not the income of the assessee. The assessee placed a copy of the Claim Settlement letter from DICGC to support its claim.

The department contended that the assessee has made a false claim of set-off of brought-forward losses when it had not filed its return of income for subsequent years, and therefore, to the extent of income not disclosed, it's a case of concealment of income. He placed reliance on the orders of lower authorities.

The tribunal, while allowing the appeal, held that the penalty levied under Section 271(1)(c) of the Income Tax Act is not justified. The assessee has disclosed all material facts, and there was no intention to conceal income or furnish inaccurate particulars.

Counsel For Appellant: Ashish Kanabar

Counsel For Respondent: Ashok Natha Bhalekar

Case Title: Swaminarayan Co-op. Bank Ltd. Versus ACIT

Case No.: ITA No.1411/Ahd/2019

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