Show cause notice for penalty u/s 270A not specifying limb bad in law – High Court

Show cause notice for penalty u/s 270A not specifying limb i.e. mis-reporting or under-reporting was bad in law – High Court

In a recent judgment, the Hon’ble Delhi High Court has held that show cause notice for penalty u/s 270A not specifying limb i.e. mis-reporting or under-reporting was bad in law and quashed the same.

ABCAUS Case Law Citation:
ABCAUS 4072 (2024) (06) HC

In the instant case, the assessee by way of a Writ Petition, challenged the order passed by the Assessing Officer (AO) under Section 270AA(4) of the Income Tax Act, 1961 (the Act) rejecting application of the Petitioner for immunity from imposition of penalty u/s 270A of the Act. The Petitioner additionally challenged the show cause notices for levy of penalty under Section 270A of the Act.

During the assessment proceedings, the AO believed that the receipts of the petitioner were liable to be taxed as royalty in terms of Section 9(1)(vi) of the Act read along with Article 12 of the India-USA Double Taxation Avoidance Agreement (DTAA). The AO accordingly brought the said receipts to tax by passing the assessment order.

By the time the aforesaid assessment order came to be framed, the Hon’ble Supreme Court pronounced its verdict favouring the assessee. However, the aforesaid decision was sought to be distinguished with the AO observing that the process by which the Solution was provided by the petitioner constitutes an Intellectual Property Right and that the usage of such IPR would attract royalty.

As a result, the AO framed consequential directions for initiation of penalty proceedings under Section 270A of the Act.

In order to avoid protracted litigation, the petitioner accepted the assessment order but moved an application to avail of the statutory remedy of immunity from penalty under Section 270AA of the Act. However, application was rejected by the AO holding that mere payment of the demand would not “ipso facto” entitle the assessee to protection against any claims or allegations of misreporting as envisaged by Section 270A(9) of the Act.

Before the Hon’ble High Court the petitioner submitted that once it had complied with the conditions of section 270AA, the AO was bound to process the applications for immunity in accordance with Section 270AA(3) of the Act.

The Petitioner stated that the show cause notice issued seeking to initiate action under Section 270A itself was illegal as the AO failed to indicate the limb of Section 270A. That the same was founded upon an allegation that the petitioners had indulged in “under-reporting/misreporting of income”.

It was submitted that it was incumbent upon the AO to categorically indicate whether the petitioner was being charged with underreporting or misreporting. The attention of the Hon’ble High Court was drawn that the aforesaid imperatives which must inform a SCN is an aspect which stands settled in light of the judgment rendered by the Hon’ble Court in the context of Section 271(1)(c) of the Act.

The Hon’ble High Court observed that the Division Bench of the Court had re-emphasized the principle of an assessee being apprised of the charge specifically and with due clarity in a decision rendered with reference to Section 270A of the Act.

The Revenue contended that while it was true that the SCNs’ referable to Section 270A had referred to both under-reporting/misreporting, the assessment orders had with adequate clarity identified the case against the petitioner as being liable to be viewed as that of misreporting. In view of the aforesaid, the petitioner had been placed on due notice of the charge which stood raised against it. Thus, the aforesaid facets of this particular case would be sufficient to negate

the challenge which stands raised to the action under Section 270A of the Act.

The Hon’ble High Court observed that a bare reading of the provisions of section 270A makes it evident that both under-reporting as well as misreporting are viewed as separate and distinct misdemeanors.

The Hon’ble High Court observed that however, the assessment order carried no findings which may be viewed as indicative of the misreporting of income as spelt out in clauses (a) to (f) of Section 270A(9) being attracted.

The Hon’ble High Court opined that in the absence of the AO having specified the transgression of the petitioner and which could be shown to fall within the ambit of sub-section (9) of Section 270A, proceedings for imposition of penalty could not have been mechanically commenced

Further, the Hon’ble High Court opined that the SCNs’ which came to be issued for initiation of penalty under Section 270A was vague and unclear. It failed to specify whether the petitioner was being charged with under-reporting or misreporting of income. The aforesaid aspect assumes added significance bearing in mind the indisputable position that a prayer for immunity could have been denied in terms of Section 270AA(3) only if it were a case of misreporting. The SCNs’ failed to indicate the specific charge which was sought to be laid against the petitioner. This, since they sought to invoke both sub-sections (2) as well as sub-section (9) of Section 270A. There was thus an abject failure on the part of the AO to indicate the branch of Section 270A which was sought to be invoked. The SCNs’ would thus clearly fall foul of the principles which had been enunciated by the Division Bench.

Further, the Hon’ble High Court noted that sub-section (3) of section 270AA requires the AO to confer consideration on three aspects, (a) Whether the conditions precedent specified in sub-section (1) of Section 270AA have been complied with? (b) the period for filing an appeal under Section 249(2)(b) having passed. (c) the subject matter of penalty not falling within the ambit of Section 270A (9). Since an application for grant of immunity cannot possibly be pursued unless the assessee complies with clauses (a) and (b) of Section 270AA (1), the observation of the AO that mere payment of demand would not lead to a prayer for immunity being pursued was wholly unsustainable.

The Hon’ble High Court also opined that while examining an application for immunity, it was incumbent upon the AO to ascertain whether the provisions of Section 270A stood attracted either on the anvil of under-reporting or misreporting. This since the AO becomes enabled to reject such an application only if it be found that the imposition of penalty is founded on a charge which was referable to Section 270A(9).

The Hon’ble High Court held that since there was a clear and apparent failure on the part of the respondents to base the impugned proceedings on a contravention relatable to Section 270A (9), the application for immunity could not have been rejected. Neither the AO nor the impugned SCNs’ laid an allegation which could be said to be reflective of the petitioner having been found to have violated Section 270A(9). In fact, the notices themselves sought to take a wholly ambivalent stance while alleging that the petitioner had indulged in “under-reporting/misreporting”. Thus, the impugned SCN was rendered unsustainable on this short ground alone.

The Hon’ble High Court further observed that even the assessment orders failed to base the direction for initiation of proceedings under Section 270A on any considered finding of the conduct of the petitioner being liable to be placed within the sweep of sub-section (9) of that provision. The order of assessment as well as the SCNs’ clearly fail to meet the test of “specific limb”. A case of misreporting, in any case, cannot possibly be said to have been made out bearing in mind the fact that the petitioner had questioned the taxability of income asserting that the same would not constitute royalty. The issue as raised was based on an understanding of the legal regime which prevailed. The contentions addressed on that score can neither be said to be baseless nor specious.

In fact, that stand as taken by the petitioner was based on a judgment rendered by the jurisdictional High Court which was indisputably binding upon the AO who, for reasons unfathomable, thought it fit to base its decision on a judgment rendered by the Karnataka High Court. The AO, it would be pertinent to recall, chose to distinguish the judgment of the Supreme Court itself. In any event, the position which the petitioner sought to assert and canvass clearly stood redeemed in light of the decision rendered by the Supreme Court.

Undisputedly, the petitioner had duly complied with the statutory pre-conditions set out in Section 270AA(1). It was thus incumbent upon the respondent to have come to the firm conclusion that the case of the petitioner fell in the category of misreporting since that alone would have warranted a rejection of its application for immunity. Therefore, impugned orders would not sustain.

Accordingly, the Hon’ble High Court allowed the writ petition and quashed the impugned orders rejecting the application for immunity under Section 270AA of the Act , Also the Show cause notice was also quashed. 

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