Bombay had two conflicting lines on defective penalty notices. Which one won?
The assessee's. A Full Bench held that the grounds must be conveyed through the statutory notice, that an omnibus notice suffers from the vice of vagueness, and that non-striking of the irrelevant portion renders the penalty order bad in law.
Decided by the High Court (Bombay High Court at Goa, Full Bench — Dama Seshadri Naidu, Bharati H. Dangre and M.S. Jawalkar JJ) on 2021-03-11, reported as [2021] 125 taxmann.com 253 (Bom)(FB) / [2021] 280 Taxman 334 (Bom) / [2021] 434 ITR 1 (Bom); Tax Appeal Nos. 51 and 57 of 2012. It bears on section 271(1)(c), section 274, section 153C, section 153A, section 143(3) of the Income Tax Act 1961, in Penalty matters.
A Full Bench settles the question within Bombay, which is where a great many of these appeals sit. It is also the cleanest recent statement of why the notice — not the assessment order — has to carry the charge.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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In July 2006 there was a search and seizure under s.132 at a company's premises at Belgaum and in Goa. The appellant was one of that company's main transporters, so his case was covered by s.153C. He filed a return in November 2008 declaring Rs 39,67,790, was put on notice under s.153A/153C, filed a further return declaring the same income, and then revised it to include Rs 50,00,000 on account of a declaration given during the search which had earlier been offered to tax for assessment year 2007-08 and was, on the Assessing Officer's advice, offered instead for assessment year 2006-07. On 22 December 2008 the Assessing Officer passed an order under s.143 read with s.153C treating the Rs 50 lakh as undisclosed income and initiating penalty under s.271(1)(c). The penalty was imposed, deleted by the Commissioner (Appeals) and restored by the Tribunal. On the appellant's appeals a Division Bench at Goa found a direct conflict between its own decisions — Samson Perinchery, Goa Coastal Resorts, New Era Sova Mine and Goa Dourado Promotions on one side, and the earlier CIT v. Smt. Kaushalya on the other — and by order dated 28 February 2020 referred the matter to a larger Bench under Chapter I, Rule 8 of the Bombay High Court Appellate Side Rules 1960. Three questions were referred: whether, where the assessment order clearly records satisfaction for imposing penalty on one or the other or both grounds in s.271(1)(c), a mere defect in the notice of not striking out the irrelevant words vitiates the penalty proceedings; whether Kaushalya failed to discuss prejudice; and what the effect of the Supreme Court's decision in Dilip N. Shroff is on non-application of mind where irrelevant portions of a printed notice are not struck off.
The Full Bench answered the reference and did no more: its concluding direction was to place the two Tax Appeals before the Division Bench concerned for further adjudication, so it decided no appeal and set aside no penalty. Question 1 was answered 'It does' — a mere defect in the notice, not striking off the irrelevant matter, vitiates the penalty proceedings. The primary burden lies on the revenue; the opinion formed in the assessment translates into action only through the statutory notice under s.271(1)(c) read with s.274; the two sets of proceedings are not composite and neither can cure the other's defect; the assessee must be informed of the grounds of the penalty proceedings only through the statutory notice; and an omnibus notice suffers from the vice of vagueness (para 181). A penal provision, even with civil consequences, must be construed strictly, and ambiguity resolved in the affected assessee's favour (para 182). On that footing the Bench held that Goa Dourado Promotions and the other cases had adopted an approach more in consonance with the statutory scheme, and that Kaushalya does not lay down the correct proposition of law (para 183). Question 2 was answered by holding that Kaushalya did discuss prejudice, and even set aside the penalty for one assessment year on grounds of non-application of mind and prejudice, but that its insistence that the earlier proceedings supply justification and cure the defect in the penalty notice did not meet the Full Bench's acceptance (paras 184 to 186). Question 3 was answered by holding that Dilip N. Shroff treats omnibus show cause notices as betraying non-application of mind and disapproves the practice of issuing notices in printed form without striking off the inapplicable parts (para 191).
The Bench worked from the practical difficulty rather than from doctrine alone. It accepted that an assessment order need not contain a specific finding of concealment, because Explanations 1(A) and 1(B) create a legal fiction, so that even a bare direction to initiate penalty proceedings is deemed to constitute the Assessing Officer's satisfaction; the satisfaction spelt out in the assessment order is only prima facie (paras 176 and 177). It followed that whether the assessment order contained grounds for the penalty is in every case a question of inference, which the assessee attacks and the revenue defends, opening litigious floodgates — and that the prima facie opinion in the assessment order does not always translate into penalty proceedings, which begin with the statutory notice (paras 178 and 179). Set against that, the cure — reading the notice with the assessment order — is uncertain, while the prevention takes just a tick mark: prudence demands that prevention is better than cure (para 180). On the law, the Bench held that the two proceedings culminate under different statutory schemes and cannot draw strength from or cure each other, that a penal provision with civil consequences is construed strictly, and that ambiguity goes to the assessee (paras 181 and 182). On prejudice, it accepted the Supreme Court's principle in Sudhir Kumar Singh that infraction of a provision embodying natural justice does not per se invalidate an order except where the provision is mandatory and conceived in the public interest, held s.271(1)(c) to be such a provision, and concluded that infraction of a mandatory procedure leading to penal consequences assumes or implies prejudice (paras 188 to 190).
An omnibus notice suffers from the vice of vagueness.
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Handle my notice → Ask a CA on WhatsAppThe assessee's. A Full Bench held that the grounds must be conveyed through the statutory notice, that an omnibus notice suffers from the vice of vagueness, and that non-striking of the irrelevant portion renders the penalty order bad in law. This was decided by the High Court (Bombay High Court at Goa, Full Bench — Dama Seshadri Naidu, Bharati H. Dangre and M.S. Jawalkar JJ) and bears on section 271(1)(c), section 274, section 153C, section 153A, section 143(3) of the Income Tax Act 1961. It is reported as [2021] 125 taxmann.com 253 (Bom)(FB) / [2021] 280 Taxman 334 (Bom) / [2021] 434 ITR 1 (Bom); Tax Appeal Nos. 51 and 57 of 2012. A Full Bench settles the question within Bombay, which is where a great many of these appeals sit. It is also the cleanest recent statement of why the notice — not the assessment order — has to carry the charge. If it applies to you, the first step is this: In Maharashtra and Goa, cite this rather than Manjunatha Cotton; it is the binding authority there.
In July 2006 there was a search and seizure under s.132 at a company's premises at Belgaum and in Goa. The appellant was one of that company's main transporters, so his case was covered by s.153C. He filed a return in November 2008 declaring Rs 39,67,790, was put on notice under s.153A/153C, filed a further return declaring the same income, and then revised it to include Rs 50,00,000 on account of a declaration given during the search which had earlier been offered to tax for assessment year 2007-08 and was, on the Assessing Officer's advice, offered instead for assessment year 2006-07. On 22 December 2008 the Assessing Officer passed an order under s.143 read with s.153C treating the Rs 50 lakh as undisclosed income and initiating penalty under s.271(1)(c). The penalty was imposed, deleted by the Commissioner (Appeals) and restored by the Tribunal. On the appellant's appeals a Division Bench at Goa found a direct conflict between its own decisions — Samson Perinchery, Goa Coastal Resorts, New Era Sova Mine and Goa Dourado Promotions on one side, and the earlier CIT v. Smt. Kaushalya on the other — and by order dated 28 February 2020 referred the matter to a larger Bench under Chapter I, Rule 8 of the Bombay High Court Appellate Side Rules 1960. Three questions were referred: whether, where the assessment order clearly records satisfaction for imposing penalty on one or the other or both grounds in s.271(1)(c), a mere defect in the notice of not striking out the irrelevant words vitiates the penalty proceedings; whether Kaushalya failed to discuss prejudice; and what the effect of the Supreme Court's decision in Dilip N. Shroff is on non-application of mind where irrelevant portions of a printed notice are not struck off. The matter was decided on 2021-03-11 by the High Court (Bombay High Court at Goa, Full Bench — Dama Seshadri Naidu, Bharati H. Dangre and M.S. Jawalkar JJ). On those facts the High Court held as follows. The Full Bench answered the reference and did no more: its concluding direction was to place the two Tax Appeals before the Division Bench concerned for further adjudication, so it decided no appeal and set aside no penalty. Question 1 was answered 'It does' — a mere defect in the notice, not striking off the irrelevant matter, vitiates the penalty proceedings. The primary burden lies on the revenue; the opinion formed in the assessment translates into action only through the statutory notice under s.271(1)(c) read with s.274; the two sets of proceedings are not composite and neither can cure the other's defect; the assessee must be informed of the grounds of the penalty proceedings only through the statutory notice; and an omnibus notice suffers from the vice of vagueness (para 181). A penal provision, even with civil consequences, must be construed strictly, and ambiguity resolved in the affected assessee's favour (para 182). On that footing the Bench held that Goa Dourado Promotions and the other cases had adopted an approach more in consonance with the statutory scheme, and that Kaushalya does not lay down the correct proposition of law (para 183). Question 2 was answered by holding that Kaushalya did discuss prejudice, and even set aside the penalty for one assessment year on grounds of non-application of mind and prejudice, but that its insistence that the earlier proceedings supply justification and cure the defect in the penalty notice did not meet the Full Bench's acceptance (paras 184 to 186). Question 3 was answered by holding that Dilip N. Shroff treats omnibus show cause notices as betraying non-application of mind and disapproves the practice of issuing notices in printed form without striking off the inapplicable parts (para 191).
The Bench worked from the practical difficulty rather than from doctrine alone. It accepted that an assessment order need not contain a specific finding of concealment, because Explanations 1(A) and 1(B) create a legal fiction, so that even a bare direction to initiate penalty proceedings is deemed to constitute the Assessing Officer's satisfaction; the satisfaction spelt out in the assessment order is only prima facie (paras 176 and 177). It followed that whether the assessment order contained grounds for the penalty is in every case a question of inference, which the assessee attacks and the revenue defends, opening litigious floodgates — and that the prima facie opinion in the assessment order does not always translate into penalty proceedings, which begin with the statutory notice (paras 178 and 179). Set against that, the cure — reading the notice with the assessment order — is uncertain, while the prevention takes just a tick mark: prudence demands that prevention is better than cure (para 180). On the law, the Bench held that the two proceedings culminate under different statutory schemes and cannot draw strength from or cure each other, that a penal provision with civil consequences is construed strictly, and that ambiguity goes to the assessee (paras 181 and 182). On prejudice, it accepted the Supreme Court's principle in Sudhir Kumar Singh that infraction of a provision embodying natural justice does not per se invalidate an order except where the provision is mandatory and conceived in the public interest, held s.271(1)(c) to be such a provision, and concluded that infraction of a mandatory procedure leading to penal consequences assumes or implies prejudice (paras 188 to 190). In the words reproduced by the source cited on this page: "An omnibus notice suffers from the vice of vagueness." The decision followed or applied CIT v. Samson Perinchery [2017] 88 taxmann.com 413 / 392 ITR 4 (Bom); Pr. CIT v. Goa Coastal Resorts & Recreation (P.) Ltd. [2020] 113 taxmann.com 574 / 272 Taxman 157 (Bom); Pr. CIT v. New Era Sova Mine [Tax Appeal No. 70 of 2019, 18.06.2019] / [2021] 433 ITR 249 (Bom); Pr. CIT v. Goa Dourado Promotions (P.) Ltd. [Tax Appeal No. 18 of 2019, 26.11.2019] / [2021] 433 ITR 268 (Bom).
It was decided by the High Court on 2021-03-11 and is reported as [2021] 125 taxmann.com 253 (Bom)(FB) / [2021] 280 Taxman 334 (Bom) / [2021] 434 ITR 1 (Bom); Tax Appeal Nos. 51 and 57 of 2012. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 271(1)(c), section 274, section 153C, section 153A, section 143(3), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Full Bench answered the reference and did no more: its concluding direction was to place the two Tax Appeals before the Division Bench concerned for further adjudication, so it decided no appeal and set aside no penalty. Question 1 was answered 'It does' — a mere defect in the notice, not striking off the irrelevant matter, vitiates the penalty proceedings. The primary burden lies on the revenue; the opinion formed in the assessment translates into action only through the statutory notice under s.271(1)(c) read with s.274; the two sets of proceedings are not composite and neither can cure the other's defect; the assessee must be informed of the grounds of the penalty proceedings only through the statutory notice; and an omnibus notice suffers from the vice of vagueness (para 181). A penal provision, even with civil consequences, must be construed strictly, and ambiguity resolved in the affected assessee's favour (para 182). On that footing the Bench held that Goa Dourado Promotions and the other cases had adopted an approach more in consonance with the statutory scheme, and that Kaushalya does not lay down the correct proposition of law (para 183). Question 2 was answered by holding that Kaushalya did discuss prejudice, and even set aside the penalty for one assessment year on grounds of non-application of mind and prejudice, but that its insistence that the earlier proceedings supply justification and cure the defect in the penalty notice did not meet the Full Bench's acceptance (paras 184 to 186). Question 3 was answered by holding that Dilip N. Shroff treats omnibus show cause notices as betraying non-application of mind and disapproves the practice of issuing notices in printed form without striking off the inapplicable parts (para 191). It arises in Penalty matters, on section 271(1)(c), section 274, section 153C, section 153A, section 143(3) of the Income Tax Act 1961, and was decided by Bombay High Court at Goa, Full Bench — Dama Seshadri Naidu, Bharati H. Dangre and M.S. Jawalkar JJ. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Quote the notice verbatim in your ground of appeal so the vagueness is visible on the face of the record. Elsewhere, check whether your High Court follows this line or the Sundaram Finance no-prejudice line.
Still good law. No appeal, stay or contrary Supreme Court ruling was found, and as a Full Bench it settles the Kaushalya conflict within Bombay. But it has been materially confined by a later Division Bench: in Veena Estate (P.) Ltd. v. CIT [2024] 158 taxmann.com 341 / [2024] 461 ITR 483 (Bom), decided 11 January 2024, the Court held that this Full Bench 'cannot be read to mean that it does not recognize the principles of law as laid down by the Supreme Court that in accepting any plea of breach of principles of natural justice, such plea would be required to be tested on the aspect of prejudice', that it 'does not lay down that the test of prejudice is not attracted', that it does not decide whether the plea can be raised for the first time after decades, and that it 'only questions the correctness of Kaushalya when it says that the assessment orders would provide sufficient reasons so as to substitute the defective notice' (paras 62 and 65). On that reading Veena Estate refused to let an assessee who had answered both limbs of the notice and participated throughout raise the defect for the first time in a s.260A appeal 23 years later. Section 271 is inoperative for assessment year 2017-18 onwards, so the notice jurisprudence applies to earlier years and pending proceedings. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Two things about the scope of this decision. It answered a reference and expressly directed the Registry to place the two Tax Appeals before the Division Bench for further adjudication — it decided no appeal, so it is authority on the questions and not on any outcome. And it holds that CIT v. Smt. Kaushalya does not lay down the correct proposition of law (para 183), which is a stronger treatment than distinguishing. Contrary to what the digests suggest, the judgment does discuss Manjunatha Cotton at length — the referring Bench recorded that the pro-assessee line stood persuaded by it and the Karnataka decision was taken up in detail — and SSA's Emerald Meadows features in the discussion of New Era Sova Mine. The ITR citation is 434 ITR 1 (Bom). Before relying on it, read Veena Estate (P.) Ltd. v. CIT [2024] 461 ITR 483 (Bom), which holds that the Full Bench did not displace the Supreme Court's test of prejudice and did not decide whether the plea can be raised belatedly. What the Division Bench ultimately did with Tax Appeals Nos. 51 and 57 of 2012 after the reference was answered was not established. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Full Bench answered the reference and did no more: its concluding direction was to place the two Tax Appeals before the Division Bench concerned for further adjudication, so it decided no appeal and set aside no penalty. Question 1 was answered 'It does' — a mere defect in the notice, not striking off the irrelevant matter, vitiates the penalty proceedings. The primary burden lies on the revenue; the opinion formed in the assessment translates into action only through the statutory notice under s.271(1)(c) read with s.274; the two sets of proceedings are not composite and neither can cure the other's defect; the assessee must be informed of the grounds of the penalty proceedings only through the statutory notice; and an omnibus notice suffers from the vice of vagueness (para 181). A penal provision, even with civil consequences, must be construed strictly, and ambiguity resolved in the affected assessee's favour (para 182). On that footing the Bench held that Goa Dourado Promotions and the other cases had adopted an approach more in consonance with the statutory scheme, and that Kaushalya does not lay down the correct proposition of law (para 183). Question 2 was answered by holding that Kaushalya did discuss prejudice, and even set aside the penalty for one assessment year on grounds of non-application of mind and prejudice, but that its insistence that the earlier proceedings supply justification and cure the defect in the penalty notice did not meet the Full Bench's acceptance (paras 184 to 186). Question 3 was answered by holding that Dilip N. Shroff treats omnibus show cause notices as betraying non-application of mind and disapproves the practice of issuing notices in printed form without striking off the inapplicable parts (para 191).
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
We charge fees for our public utility work. Does that cost us charitable status under s.2(15)?
My return was only processed under 143(1). Does that stop the department reopening it later?
Valuables were found at my premises and I say they are not mine. Who has to prove ownership?
Is penalty under s.271(1)(c) criminal, quasi-criminal or civil?