TRAVANCORE JEWELS AND DIAMONDS,RAICHUR vs. INCOME TAX OFFICER, WARD-4, RAICHUR

The brief facts of the case are that the assessee is a firm and filed their return of income on 12/10/2016 declaring a loss of Rs. 23,23,282/-. The return was processed u/s. 143(1) of the Act. Based on the survey conducted on 11/02/2016, the case was selected for manual scrutiny and notice u/s. 143(2) was issued. Subsequently, notice u/s. 142(1) was issued. The assessee submitted the details and thereafter the AO sought for the explanation about the stock discrepancy. The assessee also explained the difference. The AO not accepted the explanations and treated the excess stock as undisclosed investment. The AO also estimated the income based on the deficit stock found on the date of survey as unaccounted sales. The AO also disallowed the claim of expenditure u/s. 40A(3) of the Act for the reason that the assessee had made payments exceeding Rs. 20,000/- by cash. In the said order, the AO had also stated that penalty u/s. 271(1)(c) would be initiated separately for inaccurate particulars and concealment of income.

The AO subsequently issued a notice on 29/12/2018 proposing to impose penalty u/s. 271(1)(c) of the Act on the ground that the assessee had furnished inaccurate particulars of income. The assessee submitted their reply that they had accepted the estimations to buy peace with the Department and prayed not to levy penalty. The assessee once again reiterated his submissions on merits. The AO has confirmed the levy of penalty after observing that the assessee had accepted the additions during the survey. The AO also observed in the order that the assessee had concealed the income.

As against the said order, the assessee filed an appeal before the Ld.CIT(A). The Ld.CIT(A) dismissed the appeal as the explanations fall short under Explanation 1 to section 271(1)(c) of the Act.

The assessee filed the present appeal before this Tribunal, challenging the order of the Ld.CIT(A).

At the time of hearing, the Ld.AR submitted that the stock discrepancy could not be treated as the actual investment or sales and the assessee, to buy peace with the Department, had admitted the same and therefore the penalty u/s. 271(1)(c) could not be levied. The Ld.AR further submitted that the AO in the SCN stated that the assessee had furnished inaccurate particulars of income whereas in the penalty order, the AO had given a finding that the assessee had concealed the income and therefore the order confirmed on the another limb than the one mentioned in the penalty notice is liable to be set aside. The Ld.AR also submitted that the acceptance is not a ground to impose penalty u/s. 271(1)(c) of the Act. The Ld.AR also filed a paper book and enclosed the copies of the Hon’ble Jurisdictional High Court in support of his contentions.

The Ld.DR submitted that the unexplained investment and sales were found out at the time of survey and also accepted by the assessee and therefore the AO rightly invoked section 271(1)(c) of the Act and prayed to dismiss the appeal.

We have heard the arguments of both sides and perused the materials available on record.

The addition has been made based on the stock discrepancy and on that basis, penalty has been imposed u/s. 271(1)(c) of the Act. The AO had alleged that the assessee had accepted the addition whereas the assessee had stated that to buy peace with the Department, the assessee had admitted.

In section 271(1)(c) of the Act, there are two limbs to attract the levy of penalty. The first limb is the furnishing of inaccurate particulars. The second limb is the concealment of income.

In the present case, the AO had issued the penalty notice on the ground that the assessee had furnished inaccurate particulars whereas while imposing penalty, the AO changed the limb and alleged that the assessee had concealed the income. Therefore, the notice was issued under the limb inaccurate particulars whereas the penalty order made on the limb that there is a concealment. It amounts to not giving any proper opportunity to the assessee to rebut the reasons given in the order.

We have considered the Hon’ble Jurisdictional High Court judgment reported in (2013) 359 ITR 565 (Kar) in the case of CIT vs. Manjunatha Cotton & Ginning Factory, wherein the Hon’ble High Court had given the following findings: “60. Clause (c) deals with two specific offences, that is to say, concealing particulars of income or furnishing inaccurate particulars of income. No doubt, the facts of some cases may attract both the offences and in some cases there may be overlapping of the two offences but in such cases the initiation of the penalty proceedings also must be for both the offences. But drawing up penalty proceedings for one offence and finding the assessee guilty of another offence or finding him guilty for either the one or the other cannot be sustained in law. It is needless to point out satisfaction of the existence of the grounds mentioned in Section 271(l)(c) when it is a sine qua non for initiation or proceedings, the penalty proceedings should be confined only to those grounds and the said grounds have to be specifically stated so that the assessee would have the opportunity to meet those grounds. After, he places his version and tries to substantiate his claim, if at all, penalty is to be imposed, it should be imposed only on the grounds on which he is called upon to answer. It is not open to the authority, at the time of imposing penalty to impose penalty on the grounds other than what assessee was called upon to meet. Otherwise though the initiation of penalty proceedings may be valid and legal, the final order imposing penalty would offend principles of natural justice and cannot be sustained. Thus once the proceedings are initiated on one ground, the penalty should also be imposed on the same ground. Where the basis of the initiation of penalty proceedings is not identical with the ground on which the penalty was imposed, the imposition of penalty is not valid. The validity of the order of penalty must be determined with reference to the information, facts and materials in the hands of the authority imposing the penalty at the time the order was passed and further discovery of facts subsequent to the imposition of penalty cannot validate the order of penalty which, when passed, was not sustainable. 61. The Assessing Officer is empowered under the Act to initiate penalty proceedings once he is satisfied in the course of any proceedings that there is concealment of income or furnishing of inaccurate particulars of total income under clause (c). Concealment, furnishing inaccurate particulars of income are different. Thus the Assessing Officer while issuing notice has to come to the conclusion that whether is it a case of concealment of income or is it a case of furnishing of inaccurate particulars. The Apex Court in the case of T. Ashok Pai v. CIT [2007] 292 ITR 11/161 Taxman 340 at page 19 has held that concealment of income and furnishing inaccurate particulars of income carry different connotations. The Gujarat High Court in the case of CIT v. Manu Engg. [1980] 122 ITR 306 and the Delhi High Court in the case of CIT v. Virgo Marketing (P.) Ltd. [2008] 171 Taxman 156, has held that levy of penalty has to be clear as to the limb for which it is levied and the position being unclear penalty is not sustainable. Therefore, when the Assessing Officer proposes to invoke the first limb being concealment, then the notice has to be appropriately marked. Similar is the case for furnishing inaccurate particulars of income. The standard proforma without striking of the relevant clauses will lead to an inference as to non-application of mind.”

In another judgment, the Hon’ble Jurisdictional High Court followed the above mentioned judgment and dismissed the appeal filed by the Revenue, which is reported in (2016) 73 taxmann.com 241 (Kar) in the case of CIT vs. SSA’s Emerald Meadows which was subsequently affirmed by the Hon’ble Supreme Court in the judgment reported in (2016) 73 taxmann.com 248 (SC).

In the above judgments, the Hon’ble High Court had set aside the penalties since the limb under which penalty u/s. 271(1)(c) has been imposed was not mentioned. In the present case also, one limb mentioned in the notice and another limb relied on while imposing the penalty which is against the principles laid down by the Hon’ble Karnataka High Court. Further, no satisfaction has been recorded before imposing the penalty.

Respectfully following the above judgments, we also set aside the penalty imposed u/s. 271(1)(c) of the Act.

In the result, the appeal filed by the assessee is allowed.