MR SURESH HENRY THOMAS ,MUMBAI vs. INCOME TAX OFFICER-9(2)(3), MUMBAI

The assessee by filing the present appeals sought to set aside the impugned orders both dated 31.10.2019 passed by the Commissioner of Income Tax (Appeals) (hereinafter referred to as the Ld. CIT(A)] confirming the penalty levied by the Assessing Officer (AO) to the tune of Rs.18,92,513/- and Rs.13,20,370/- for A.Y. 2008-09 & 2011-12 respectively under section 271(1)(c) of the Income Tax Act, 1961 (for short ‘the Act’) by raising identically worded grounds except the difference in the penalty amount (grounds of A.Y. 2008-09 are taken for the sake of brevity) inter-alia that: “1) The Id. A.O as well as Ld CIT(A) is erred in confirming Penalty of Rs.18,92,513/-. 2) The appellant Prays to delete the Penalty levied on this account. 3) The appellant craves to add, alter or omit any or all of the above grounds of appeal with prior permission of your honor.”

We have heard the Ld. Authorised Representatives of the parties to the appeal, perused the orders passed by the Ld. Lower Revenue Authorities and documents available on record in the light of the facts and circumstances of the case and law applicable thereto.

Undisputedly after the decision of the Tribunal on quantum appeals the assessee has accepted the addition on the basis of which penalty has been levied. It is also not in dispute that the assessee had paid the taxes along with interest on the additions made on the basis of which penalty has been levied.

In the backdrop of the aforesaid facts and circumstances of the case, order passed by the Ld. Lower Authorities and argument addressed by the authorized representative of the parties to the appeals the sole question arises for determination in this case is: & 384/M/2021 5 Mr. Suresh Henry Thomas

The Ld. A.R. for the assessee contended that at the time of framing assessment the AO has failed to apply his mind by recording valid satisfaction as to which of the limb of section 271(1)(c) of the Act i.e. for concealing particulars of income or furnishing inaccurate particulars of such income penalty proceedings are being initiated rather vague and ambiguous satisfaction which is invalid under the law has been recorded. In A.Y. 2008-09 the AO has also wrongly levied the penalty on the amount of Rs.12,50,000/- on account of excess salary claimed by the assessee as the same has been allowed by the Ld. CIT(A) by directing the AO to allow the same after due verification of the payment.

However, on the other hand, the Ld. D.R. for the Revenue by relying upon the penalty order passed by the AO and confirmed by the Ld. CIT(A) contended that during the assessment proceedings it is duly proved that the assessee has furnished inaccurate particulars of income and as such penalty has been rightly levied and confirmed and relied upon the decision rendered by the Hon’ble Supreme Court in case of Sundaram Finance Ltd. vs. Dy.CIT (2018) 99 taxmann.com 152(SC) and the decision rendered by the Hon’ble Madras High Court in case of Gangotri Textiles Ltd. vs. Dy.CIT (2020) 121 taxmann.com 171 (Madras).

We have heard the Ld. Authorised Representatives of the parties to the appeal, perused the orders passed by the Ld. Lower Revenue Authorities and documents available on record in the light & 384/M/2021 6 Mr. Suresh Henry Thomas of the facts and circumstances of the case and law applicable thereto.

So far as first contention raised by the Ld. A.R. for the assessee that the AO has not applied his mind while recording his satisfaction to initiate the penalty proceedings under section 271(1)(c) of the Act is concerned, we have perused the order passed by the AO for A.Y. 2008-09 wherein in case of addition of sundry creditors AO has recorded his satisfaction that “penalty proceedings under section 271(1)(c) of the Act are initiated separately by issue of notice under section 274 of the Act”; addition made in case of closing stock again the AO recorded his satisfaction that “penalty proceedings under section 271(1)(c) of the Act are initiated separately by issue of notice under section 274 of the Act”.

Further, in case of addition on account of claim of excess salary by the assessee the AO again recorded the satisfaction that “penalty proceedings under section 271(1)(c) of the Act are initiated separately by issue of notice under section 274 of the Act”. Similarly in case of addition on account of cash deposits the AO recorded the satisfaction that “he is satisfied that the assessee had concealed the particulars of income and furnished inaccurate particulars of such income, therefore, penalty proceedings under section 271(1)(c) of the Act are initiated separately by issue of notice under section 274 of the Act.”

Similarly in case of assessment year 2011-12 qua addition on account of cessation of liability, the AO recorded the satisfaction that penalty proceedings under section 271(1)(c) of the Act are initiated separately for furnishing inaccurate particulars of & 384/M/2021 7 Mr. Suresh Henry Thomas income/concealment of income. Similarly in case of adhoc addition by disallowing the expenditure incurred under the head “salary and wages” @ 20% the AO recorded the satisfaction that penalty proceedings under section 271(1)(c) of the Act are initiated separately for furnishing inaccurate particulars of income.

When we examine the satisfaction recorded by the AO to initiated the penalty proceedings under section 271(1)(c) of the Act in the light of the settled principle of law that in order to invoke the provisions contained under section 271(1)(c) of the Act i.e. as to whether the assessee has furnished inaccurate particulars of income or concealed particulars of income need to be invoked specifically but in the instant case the AO has failed to apply his mind at the time of recording his satisfaction at the time of framing assessment to initiate the penalty proceedings under section 271(1)(c) of the Act as to under which limb of section 271(1)(c) of the Act, the penalty proceedings are being initiated, rather vague and ambiguous satisfaction has been recorded as discussed in the preceding paras. This is a mechanical satisfaction recorded by the AO which shows that the AO was himself not aware as to whether the assessee has concealed the particulars of income or furnished inaccurate particulars of such income.

Not only this, when we examine penalty levied on account of salary disallowance in A.Y. 2011-12 to the tune of Rs.3,99,535/- the AO has merely made adhoc addition by way of guess work and the AO has not arrived at a definite decision that the assessee has made wrong claim qua the expenditure on account of salary and wages. It is also settled principle of law that on the basis of any & 384/M/2021 8 Mr. Suresh Henry Thomas adhoc addition penalty proceedings under section 271(1)(c) of the Act cannot be levied.

Similarly when we examine the penalty order passed by the AO and confirmed by the Ld. CIT(A) for A.Y. 2008-09 on account of disallowance of excess salary to the tune of Rs.12,50,000/-, this addition has been deleted by the Ld. CIT(A) subject to the verification of the figures by the AO but the AO proceeded to levy the penalty on this amount also which shows that the entire process of initiating penalty proceedings were mechanical, without any application of mind.

So far as reliance by the Ld. D.R. on the decision rendered by Hon’ble Madras High Court and confirmed by the Hon’ble Supreme Court in case of Sundaram Finance (Supra) is concerned, we have perused the judgment passed by the Hon’ble Madras High Court and confirmed by the Hon’ble Supreme Court which is not applicable to the facts and circumstances of the case at hand. The AO has failed not only to make himself satisfied at the time of making disallowance/additions in assessment order if the assessee has furnished inaccurate particulars of income or has concealed particulars of his income rather he has to be on the safer side invoked both the limbs of section 271(1)(c) of the Act. It is not only the case of invalid satisfaction rather the AO has levied the penalty in case of the addition as discussed in the preceding para which have been deleted or made on adhoc basis. So the decisions relied upon by the Ld. D.R. for the Revenue are not applicable to the facts and circumstances of the case. & 384/M/2021 9 Mr. Suresh Henry Thomas

The Ld. D.R. for the Revenue further relied upon the decision rendered by the Hon’ble Supreme Court in case of Gangotri Textile (supra). We have persued the judgment rendered by the Hon’ble Supreme Court which is not applicable to the facts and circumstances of the case, because in the case at hand when very initiation of the penalty proceedings is not sustainable in the eyes of law for want of valid satisfaction recorded by the AO further proceedings by way of issuance of notice under section 274 read with section 271(1)(c) of the Act are not to be looked into.

In view of what has been discussed above, penalty levied by the AO and confirmed by the Ld. CIT(A) under section 271(1)(c) of the Act for A.Y. 2008-09 and 2011-12 is not sustainable in the eyes of law, hence ordered to be deleted.

Resultantly, both the appeals filed by the assessee are allowed.