When the assessee has disguised or provided false information about their income, they are subject to the penalty provisions of section 271(1)(c) of the Income-tax Act of 1961. The notion that the two limbs of section 271(1)(c) of the Act have various interpretations is widely acknowledged. Therefore, it is essential that the Assessing Officer define the pertinent limb in order to inform the Assessee of the allegation leveled against him and provide him with the opportunity to reply appropriately.

It was held that the AO had failed to identify the specific limb for which the penalty procedures had been started when issuing the notice under section 274 read with section 271(1)(c) of the Act. The warning had been provided in an unthinking, stereotypical manner that violated the law and could not be regarded as a proper notice adequate to impose a penalty. This ruling should not be interpreted as a prohibition against starting penalty proceedings from scratch in line with the law, if necessary, should the addition need to be made again in the future. The punishment was to be eliminated.(AY.2011-12)