ITAT Bangalore on Email Notices and Penalty: Relief under Section 271(1)(b) for Small Trader

The Bangalore Bench of the Income Tax Appellate Tribunal in Thimanna Nagaraj Vs ITO (ITAT Bangalore) examined whether a statutory notice, though validly served through email as per the income-tax e-filing portal, can automatically trigger penalty under Section 271(1)(b) when the assessee, due to limited education and financial constraints, is practically unable to access or act on such communication. The Tribunal concluded that in the peculiar facts of the case, the assessee had a reasonable cause for non-compliance and therefore set aside the penalty of ₹20,000.

This decision underscores the distinction between technical service of notice and the realistic ability of an assessee—especially a small trader with limited resources—to comply with the electronic notice regime.

Background of the Case

Non-filing and Cash Deposits Trigger Reassessment

For Assessment Year 2015-16, Mr. Thimanna Nagaraj, an individual, did not file a return of income. On the Department’s Insight Portal, data reflected cash deposits aggregating to ₹68.80 lakh (₹6,880,000) in his savings bank account with State Bank of India during the relevant period.

Key developments:

  • The assessee was flagged as a non-filer under the Non-Filer Management System.
  • Based on the information regarding cash deposits, the Assessing Officer (AO) initiated proceedings under the reassessment framework.
  • An order under Section 148A(d) was passed, followed by issuance of notice under Section 148.
  • The assessee did not respond to these proceedings.

Ultimately, on 21 February 2023, the AO completed the assessment under Section 147 read with Sections 144 and 144B, determining the total income at ₹68.80 lakh by treating the entire sum of cash deposits as unexplained money under Section 69A.

Statutory Notices under Section 142(1)

During the reassessment process, the Department issued two statutory notices under Section 142(1):

  • First notice dated 17 October 2022
  • Second notice dated 30 December 2022

According to the assessment records:

  • Both notices were sent to, and shown as delivered at, the email address recorded for the assessee on the income-tax portal.
  • No submission or reply was filed by the assessee in response to either of these notices.

Initiation of Penalty Proceedings

Given the assessee’s failure to comply with the Section 142(1) notices, the AO initiated penalty proceedings under Section 271(1)(b) for non-compliance with statutory notices.

  • A show-cause notice under Section 271(1)(b) was issued.
  • The assessee again did not respond.
  • By order dated 21 August 2023, the AO levied a penalty of ₹10,000 per default, aggregating to ₹20,000 (for the two instances of non-compliance).

Appeal before CIT(A) and NFAC Order

The assessee carried the matter to the CIT(A), National Faceless Appeal Centre, Delhi.

Delay Condonation but Penalty Sustained

  • There was a delay of 608 days in filing the appeal.
  • The CIT(A) condoned this delay, allowing the appeal to be heard on merits.
  • However, on substantive issues, the CIT(A) upheld the penalty of ₹20,000 under Section 271(1)(b).

The assessee, being aggrieved, preferred a further appeal before the ITAT Bangalore.

Submissions before the Tribunal

Profile and Circumstances of the Assessee

Before the Tribunal, the assessee was represented by his accountant, Ms. Girija.