Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, JAIPUR BENCHES,”B” JAIPUR
Before: SHRI VIJAY PAL RAO, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA. No. 730 & 731/JP/2018
आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES,”B” JAIPUR Jh fot; iky jko] U;kf;d lnL; ,oa Jh foØe flag ;kno] ys[kk lnL; ds le{k BEFORE: SHRI VIJAY PAL RAO, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA. No. 730 & 731/JP/2018 fu/kZkj.k o"kZ@Assessment Years : 2009-10 & 2010-11 cuke Vaibhav Global Ltd. The ACIT, Vs. (Earlier known as Vaibhav Gems Ltd.) Circle-5, K-6-B Fateh Tiba, Adarsh Nagar, Jaipur Jaipur. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAACV 4679 F vihykFkhZ@Appellant izR;FkhZ@Respondent fu/kZkfjrh dh vksj ls@ Assessee by : Shri Vijay Mehta (C.A.) & Shri S.R. Sharma (C.A.) jktLo dh vksj ls@ Revenue by : Smt. Roli Agarwal (CIT) lquokbZ dh rkjh[k@ Date of Hearing : 24/09/2018 mn?kks"k.kk dh rkjh[k@Date of Pronouncement : 19/12/2018 vkns'k@ ORDER
PER: VIKRAM SINGH YADAV, A.M. These are two appeals filed by the assessee against the respective orders of ld. CIT(A)-2, Jaipur dated 28.03.2018 for A.Y. 2009-10 & 2010-11 respectively. In both the appeals, the assessee has challenged the levy of penalty U/s 271(1)(c) of the I.T. Act. Since common issues are involved, both the appeals were heard together and are disposed off by this consolidated order.
2 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
For the purpose of present discussions, we take the appeal of the assessee in ITA No. 730/JP/2018 for A.Y. 2009-10 as a lead case with the consent of both the parties. Briefly the facts of the case are that the assessee is engaged in the business of manufacturing and export of coloured gem stones, precious/ semi-precious stones, studded gold jewellery, and diamonds. During the year under consideration, the assessee has provided loans to its Associated Enterprises (AEs) and the said transactions have been benchmarked using comparable uncontrolled price (CUP) as the most appropriate method and arrived at nil consideration as the arm’s length price computed in terms of section 92C of the Income Tax Act.
During the course of assessment proceedings, the matter was referred by the Assessing officer to the Transfer Pricing Officer (TPO) and the TPO has adopted the CUP method for determination of arm’s length price and has proposed an adjustment of Rs. 18,65,77,973/- determined as the value of interest receivable @ 14.88% (SBI PLR plus 300 basis points) on loans given to Associated Enterprises (AEs) during the year and which were outstanding at the year end. Subsequently, the matter was taken up by the assessee before the Dispute Resolution Penal (DRP) which has confirmed the adjustment so proposed by the TPO. Thereafter, the AO passed the final assessment order u/s 143(3) r/w 144C of the Act interalia making the transfer pricing adjustmemt/addition of Rs 18,68,02,513 to the returned income.
On appeal, the Coordinate Bench of this Tribunal has confirmed the adjustment on account of interest receivable on loans to the AEs,
3 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
however restricted the rate of interest to prevailing LIBOR rate plus 2% and the relevant findings of the Coordinate Bench in IT(TP) A No. 01/JP/2014 dated 25.08.2014 is reproduced as under:-
“We have heard the rival contentions and perused the materials available on record. There is no dispute to the fact that loans were advanced in foreign currency. Following benches of ITAT including this Bench of ITAT has held that prevailing LIBOR rate with marginal variation shall be the reasonable TP adjustment. 1. Aurionpro Solutions Ltd. vs. Addl. CIT (2013) 33 taxamn 187 (Mum.K. Tribunal). 2. Tata Autocamp Systems Ltd. vs. ACIT (2012) 21 taxman 6 Mum E Tribunal). 3. M/s Glamour Enterprises (P) Ltd. vs. DCIT (ITA No. 114/JP/2011 dated 08.07.2014. This Bench of ITAT while deciding the similar issue has taken the following decision as under:- “2.6 We have heard the rival contentions and perused the materials available on record. It is a fact that there was international transaction between the assessee and Associate Enterprise during the year under consideration on which no interest has been charged on the loan given to the subsidiary company. The DRP applied 11.40% interest rate on international transaction on the basis of BBB Bond and considering the risk in case of loan given to the Associate Enterprise. The loan given to subsidiary company has a lower risk as the assessee has indirect control on it. Further LIBOR+ nominal adjustment has been
4 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
upheld by various ITAT Benches as reasonable. Therefore, we find that interest rate proposed by the assessee @ 8.90% is reasonable as against 11.40% decided by DRP. Accordingly, the assessee gets the partial relief.”
Thus by respectfully the Tribunal orders including our orders (supra), ends of justice will be made in this case if the adjustment on account of interest free loans in assessee’s case is restricted to prevailing LIBOR rate plus 2% shall be reasonable TP adjustment. Consequently, we direct the TPO to work out the adjustment according. Thus ground no. 3 of the assessee is partly allowed.”
Against the order of the Coordinate Bench, both the Revenue as well as assessee went in appeal before the Hon’ble Rajasthan High Court which has confirmed the transfer pricing adjustment but has restricted the adjustment and has directed to apply the average LIBOR rate of 0.79% as against the LIBOR plus 2% determined by the Coordinate Bench. The quantum proceedings, therefore, have attained finality wherein the adjustment has been finally determined @ 0.79% in respect of loans provided to the AEs during the year under consideration.
Now coming to the penalty proceedings, the same were initiated by the Assessing Officer while completing the assessment proceedings U/s 143(3) r.w.s. 144C of the I.T. Act wherein the AO has made transfer pricing adjustment/addition of Rs. 18,68,02,513/-and has
5 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
stated that penalty U/s 271(1)(c) is leviable in accordance with explanation 7. Then, towards the end of assessment order, it has been stated that penalty proceedings U/s 271(1)(c) of the Act are initiated separately.
In the penalty order dated 30.03.2015, the AO has stated that after giving effect to the order of the Tribunal in quantum proceedings, the assessed loss is finally determined at Rs. 18,43,34,129/- against returned loss of Rs. 23,16,74,228/- and therefore, the reduction in loss of Rs. 4,68,40,099/- clearly comes under the ambit of section 271(1)(c) of the I.T. Act and penalty of Rs 1,59,20,950 has been levied.
In the aforesaid penalty proceedings, a specific show cause notice was issued to the assessee and after taking into consideration the submissions of the assessee, the AO has held that the assessee has furnished inaccurate particulars of income and/or concealment of income to the extent of addition confirmed by the Tribunal of Rs. 4,68,40,099/-. Here, it would be relevant to note the relevant findings of the Assessing Officer while levying the penalty which is reproduced as under:-
“11. The case of the Assessee falls clearly within the ambit of explanation 7 because if the assessee could not satisfied all the assessing authorities i.e. TPO/DRP/AO and Hon’ble Tribunal that the price charged or paid in such transaction as computed in accordance with the provisions contained in section 92C. This view is clearly evidenced because the addition made by the TPO
6 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
has been approved by the DRP which is a collegiums comprising of three Commissioner of Income Tax constituted by the Board. Further, the Hon’ble Tribunal sustained addition only with the direction of computation and there is a difference in the adjustment calculated by the assessee and TPO while giving effect to the order of the Hon’ble Tribunal. If the adjustment had been made by the assessee as per provisions of section 92C then there should not any difference. The revised adjustment of Rs. 4,68,40,099/- in respect of interest free loans of AEs which are as per direction of Hon’ble ITAT for the purposes of imposition of penalty under clause © of this section, is hereby deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income. Because the case of the assessee is comes under the ambit of Explanation 7 deeming provisions of section 271(1)(c) are clearly applicable to the assessee.
As far as provisions of section 271(1)(c) are concerned, it is clear cut case of concealment of income/or furnishing inaccurate particulars. This fact was revealed only during the assessment proceedings. Had the assessment U/s 143(3) not carried out in this case, this fact could not have been brought on record ever. The assessee nowhere in its reply justified that as to how its case does not fall under the purview of Explanation 7 to Section 271(1)(c) of the I.T. Act, 1961.
The provisions of section 271(1)(c) of the Act read with explanation 1 clearly put the onus on the shoulders of the
7 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
assessee to establish that there was no concealment and/or inaccurate furnishing of the particulars of income. However, in the submission the assessee has not brought any (new) evidence on record in support of its contention nor has the assessee put forth any argument whereby the onus cast upon it in respect of its innocence and righteous conduct is established. The assessee has merely reiterated the arguments put forth during the course of assessment proceedings. In other words, the assessee has been unable to discharge the onus cast upon it.
In view of the above, it is established beyond doubt that the assessee has furnished inaccurate and/or concealed particulars of its income to the extent of the addition confirmed by the Hon’ble ITAT, Jaipur Bench, Jaipur of Rs. 4,68,40,099/- relating to TP adjustment.”
On appeal by the assessee, the ld. CIT(A) has stated that Explanation 7 to Section 271(1)(c) of the Act is applicable as the assessee has not been able to prove that good faith and due diligence has been followed and the penalty levied U/s 271(1)(c) was confirmed, however, in view of the order of the Hon’ble High Court, the quantum of penalty was directed to be determined by the AO taking into consideration the order of the Hon’ble High Court.
In the above factual background, the assessee has moved the present appeal. At the outset, the ld. AR requested for permission to raise the following additional ground of appeal which reads as under:-
8 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
“That the Ld. Assessing Officer is wrong and bad in law in as much as the notice issued by the Assessing Officer under section 274 read with section 271(1)(c) of the IT Act, 1961 to be bad in law as it did not specify which limp of section 271(1)(c) of the Act, the penalty proceedings had been initiated i.e. whether for concealment of particulars of income or furnishing of inaccurate particulars of income.”
The ld. AR has submitted that the additional ground is purely a legal ground and it goes to the root of the matter, the same should be admitted in the interest of justice. In support, reliance was placed on the decision of Hon’ble Supreme Court in case of National Thermal Power Corporation Ltd. Vs. CIT 229 ITR 383. After hearing both the parties, the additional ground being a purely legal ground, the same is being admitted for adjudication.
The ld AR submitted that any notice issued under section 274 read with section 271(1)(c) of the Income-tax Act, 1961, should specify under which limb of section 271(1)(c) of the Act, the penalty proceedings had been initiated i.e. whether for concealment of particulars of income or furnishing of inaccurate particulars of income. In the absence of which no penalty should be levied on the assessee as determination of such limb is sine qua non for imposition of penalty under section 271(1)(c).
It was submitted that in the assessment order and notice, Ld. AO has not clearly mentioned the limb, on the basis of which, penalty was proposed to be imposed. Ld. AO in assessment order or penalty notices
9 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
did not specified the limb under which the penalty was initiated and simply issued a pre-printed notice without striking off the unnecessary portions of the notice. If the Ld. AO was of the view that the assessee has concealed the income or furnishing inaccurate particulars of income then he should have deleted or not mentioned the other limb for imposition of penalty i.e. concealing the particulars of income. The above act of the Ld. AO clearly shows that the entire exercise of initiation of penalty proceedings has been done without application of mind.
Our reference was drawn to the penalty show-cause notice and the relevant extract thereof reads as under:
“Whereas in the course of proceedings before me for the A.Y. 2009-10 it appears to me that you have-
271(1)(c) Concealed particulars of income or furnished inaccurate particulars of income.”
Further, our reference was drawn to the penalty order u/s 271(1)(c) passed on 30-03-2015 wherein penalty was imposed on addition of income of Rs. 4,68,40,099/- by holding that the assessee had furnished inaccurate particulars of income and concealed his income. The relevant findings of Ld. AO in last para (No.20) on page 14 of the penalty order is as under:-
“20. In view of the above, it is established beyond doubt that the assessee has furnished inaccurate and/or concealed particulars of its income to the extent of the addition confirmed by the Hon’ble ITAT, Jaipur Bench, Jaipur of Rs. 4,68,40,099/- relating to TP adjustment.”
10 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
It was submitted by the ld AR that as per above facts, it is apparent that the penalty proceedings were initiated without specifying the limb for reasons in the penalty notice to impose the penalty i.e. whether the penalty was initiated for concealment of particulars of income or for furnishing inaccurate particulars of income. Thereafter the penalty was levied by holding that the assessee has furnished inaccurate particulars of income and concealed the income to the extent of Rs. 4,68,40,099/-. Therefore, the initiation and imposing of penalty proceedings is wrong, bad in law, invalid and void ab initio.
It was submitted that it is a settled law position on the issue that the notice u/s 271(1)(c) should be specific on imposing of penalty u/s 271(1)(c) of I.T. Act, 1961 i.e. concealed particulars of income or furnishing inaccurate particulars of income. Reliance was placed on the decision of Hon’ble Karnataka High Court in the case of CIT vs. M/s. SSA’s Emerald Meadows reported in 2015 (11) TMI 1620 wherein Hon’ble High Court has held that:-
Para No. 3 “The Tribunal has allowed the appeal filed by the assessee holding the notice issued by the Assessing Officer u/s 274 read with section 271(1)(c) of the I.T.Act, 1961(for short ‘the Act’) to be bad in law as it did not specify which limb of section 271(1)(c) of the Act, the penalty proceedings had been initiated i.e. whether for concealment of particulars of income or furnishing of inaccurate particulars of income. The Tribunal, while allowing the appeal of the assessee has relied on the decision of the Division Bench of this Court rendered in the case of CIT vs. Manjunatha Cotton and Ginning Factory (2013) 359 ITR 565.
11 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
In our view, since the matter is covered by judgement of the Division Bench of this court, we are of the opinion, no substantial question of law arised in this appeal for determination by this court. The appeal is accordingly dismissed.”.
The department has filed SLP in Hon’ble Supreme Court which has been dismissed. Therefore, Hon’ble Supreme Court has approved the findings made by Hon’ble Karnataka High Court in the case of CIT vs. SSA’s Emerald Meadows and CIT vs. Manjunatha Cotton & Ginning Factory & others (2013) 359 ITR 565.
Hon'ble Karnataka High Court in the case of Manjunatha Cotton & Ginning Factory [2013] 359 ITR 565 (Karnataka) after referring to the decision of Hon'ble Supreme Court in the case of T. Ashok Pai (Supra) held as under: -
“………. 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 Ashok Pai reported in 292 ITR 11 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 MANU ENGINEERING reported in 122 ITR 306 and the Delhi High Court in the case of VIRGO MARKETING reported in 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
12 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
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 the case of M/s. Jyoti Ltd. [2013] taxmann.com 65 (High Court-Guj), the assessing officer in his penalty order noted as under: -
“In view of the above facts, it is clear that the assessee concealed income/furnished inaccurate particulars of income. I, therefore, consider it a fit case for levy of penalty u/s 271 (1) (c)” Hon'ble Gujrat High Court in the above case held that, where the Assessing officer in order of penalty did not come to a clear finding regarding the penalty being imposed on concealment of income or on furnishing inaccurate particulars of income, the Tribunal was justified in setting aside the impugned penalty order. Hon'ble Gujrat High Court followed the ratio laid down in the case of New Sorathia Engg. Co. [2006] 282 ITR 642 (Guj-High Court).
The above ratio laid down in the case of Manjunatha Cotton & Ginning Factory Supra) has been followed by various High Courts in the below mentioned cases:
a. Shri Samson Perinchery. ITA 1154, 953, 1097, 1226 of 2014 (Order date – 5.01.2017) (Bombay High Court) b. SSA’s Emerald Meadows [2016] 73 taxmann.com 241 (Karnataka High Court) c. Mitsu Industries Ltd. ITA No. 216 of 2004, Gujarat High Court
13 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
Further, our reference was drawn to following decisions of Coordinate Benches:
a. Narayana Heights & Towers, Vs. I.T.O. Ward – 2- 4 Jaipur (ITA No. 1033/JP/2016) has cancelled the penalty by holding that: -
“3.2 We have heard the rival contention, perused the material available on record and gone through the orders of the authorities below. For the sake of clarity the relevant contents of the Assessment order are reproduced as under: -“
“Penalty u/s 271 (1) (c) is separately as assessee has concealed the income.”
Relevant contents of the Penalty Order are reproduced as under: -
“As the assessee had not filed any appeal against order of the AO and it appears that the assessee is satisfied with the order passed by the AO. Therefore, it appears that the assessee has nothing to say and has no objection regarding imposing the penalty us/ 271 (1) (c) of I. T. Act, 1961.
Therefore, I impose a penalty of equal to 100% of tax sought to be evaded on account of the above acts of the assessee of Rs. 34,05,436/- i.e. 100% tax evaded.
In the light of the above, we need to examine whether assessment order and the penalty order comply with the provisions of section 271 (1) (c) of the Act. We find that on page 3 of the assessment order, the assessing officer, AO observed as under: -
14 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
“As the assessee has concealed/furnished the inaccurate particulars of income therefore, penalty u/s 271 (1) (c) is also initiated.”
3.3 As per section 271 (1) (c), the assessing officer is empowered to impose penalty if in the course of any proceedings under this Act is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income. From the above provision it is clear that there has to be a specific satisfaction by the Assessing officer that the assessee is guilty of concealing the particulars of his income or furnishing inaccurate particulars of such incomes.
3.4 From the above, it is clear that the assessing officer should give a specific finding. In the present case, in the assessment order as noted above the assessing officer has stated that the assessee has concealed / furnished the inaccurate particulars of income. Therefore, the penalty under Section 271 (1)(c) was also initiated from this it can not be inferred whether there is specific charge of concealing the particulars of income or furnished the inaccurate particulars of such income Law is well settled that the assessing officer has to come to a definite satisfaction whether the assessee has concealed the income of particulars or furnished the inaccurate particulars of income. The Hon’ble Karnataka High Court in the case of CIT and Another Vs. Manjunatha Cotton and Ginning Factory, 359 ITR 565 (Kar.) has held that the notice u/s 274 of the Act should specifically state as to whether penalty is being proposed for concealment of particulars of income or inaccurate
15 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
particulars of income. In the present case notice under section 274 dated 25/3/2015 enclosed at paper book page 16 reads as under: -
“Penalty Notice Under Section 274. Read with Section 271 of the IT Act, 1961. Whereas in the course of proceedings before me for the Assessment Year 2012-13. It appears to me that you have concealed particulars of income or furnished inaccurate particulars of income.”
Therefore, there is no specific charge by the Assessing officer. Further, it is noted that the Assessing officer in penalty order (as noted hereinabove) has proceeded on the basis of the assumption that the assessee is satisfied with the assessment order. Therefore, it appears that the assessee has nothing to say and has no objection regarding the imposing of the penalty under section 271 (1) (c) of the Act. In our considered view, the assessing officer was not justified in imposing the penalty on this basis the action of the assessing officer is contrary to the provision of law.”
b. The ITAT, Jaipur Bench, Jaipur has also in case of Lal Chand Mittal Vs. DCIT (ITA No. 772/JP/2016 order dated 29-12-2011 and various other cases) decided by it held that on the basis of such notice issued by sending printed where only all the ground of section 271 (1) (c) are mentioned or where show cause notice u/s 271 (1) (c) for imposing of penalty without specifying the limb for reasons to impose penalty whether for concealment of income or furnish inaccurate particulars of income is not as per law and assessing officer did not have any jurisdiction to impose penalty u/s 271(1)(c). In the case(s) of Radha Mohan Maheshwari Vs. DCIT (ITA No.773/JP/2013), Mohd. Sharif Khan
16 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
Vs. DCIT (ITA No.441/JP/2014), Shankar Lal Khandelwal Vs. DCIT (ITA No. 878/JP/2013), Murari Lal Mittal (ITA No.334/JP/2015 order dated 9- 11-2016), and Mridula Agarwal (ITA No. 176/JP/2016), the Bench upheld the same view.
c. In the case of Dilip Kumar Arora. v. ITO ITA No. 658/JP/2017, wherein the ITAT at Para 9 and 10 of its order held as under: -
“9. Taking into consideration the decision of the Andhra Pradesh High Court which virtually considered the subsequent law and the law which was prevailing on the date the decision was rendered on 27.08.2012. In view of the observations made in the said judgment, we are of the opinion that the contention raised by the appellant is required to be accepted and in the finding of Assessing Officer in the assessment order it is held that the AO, has to give a notice as to whether he proposes to levy penalty for concealment of income or furnishing inaccurate particulars. He cannot have both the conditions and if it is so he has to say so in the notice and record a finding in the penalty order.
In that view of the matter, the issue is answered in favour of the assessee and against the Department.
Accordingly, in view of the binding precedent we hold that when the AO has not specifically indicated the grounds for initiation of proceedings for levy of penalty is for concealment particular of income or for furnishing inaccurate particular of income then, the said show cause notice suffers from illegality and consequential
17 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
order passed by the AO u/s 271(1)(c) is not sustainable and liable to be quashed. Accordingly, we set aside the impugned order passed u/s 271(1)(c) and delete the penalty of levied by the AO u/s 271(1)(c) of the Act.
In the result, the appeal filed by the assessee is allowed.”
Further, our reference was drawn to decision of Hon’ble Rajasthan High Court in the case of Shevata Construction Co. Pvt. Ltd. ITA No. 534/2008, wherein the Hon'ble High Court at Para 9 of its order held as under: -
“…… Taking into consideration the decision of the Andhra Pradesh High Court which virtually considered the subsequent law and the law which was prevailing on the date the decision was rendered on 27.08.2012. In view of the observation made in the said judgement, we are of the opinion that the contention raised by the appellant is required to be accepted and in the finding of Assessing officer in the assessment order it is held that the AO has to give a notice as to whether he proposes to levy penalty for concealment of income or furnishing inaccurate particulars. He cannot have both the conditions and if it is so he has to say so in the notice and record a finding in the penalty order ….” (Emphasis Supplied).
Further, our reference was drawn to the decision of the Hon’ble Madhya Pradesh High Court, in case of Pr. CIT vs. Kulwant Singh Bhatia (2018) 304 CTR 103 wherein it was held as under:-
18 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
“Penalty u/s 271(1)(c) validity-Non-specific notice-Penalty notices under section 274 r/w s. 271(1)(c) were issued in the typed format without striking off either of two charges, i.e. “have concealed the particulars of your income, or …. or “furnished inaccurate particulars of income”-Considering the fact that the ground mentioned in show-cause notice would not satisfy the requirement of law, as notice was not specific, the Tribunal has rightly allowed the appeal of the assessee and set aside the order of penalty imposed by the authorities-No substantial question of law arises – CIT vs. Manjunatha Cotton & Ginning Factory (2013) 263 CTR (Kar.) 153: (2013) 92 DTR (Kar) 111: (2013) 359 ITR 565 (Kar) and CIT Vs. SSA’s Emerald Meadows (SLP) No. 11485 of 2016 dt. 5th Augu. 2016) followed.
Conclusion: Considering the fact that the ground mentioned in show cause notice would not satisfy the requirement of law, as notice was not specific, the Tribunal has rightly allowed the appeal of the assessee and set aside the order of penalty”.
In view of the above submitted facts and settled law position, it was submitted by the ld AR that the penalty imposed u/s 271(1)(c) is wrong, unwarranted, bad in law as the concealment of income and furnishing inaccurate particulars of income, are different defaults and they cannot be intermixed.
Now, coming to the other contention of the ld AR. The ld. AR of the assessee has submitted that there is no concealment or reporting of inaccurate particulars of income as per Explanation 7 to section 271(1)(c). It was submitted that the assessee has computed ALP in
19 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
accordance with the provisions contained in section 92C of IT Act and in the manner prescribed under the section, in good faith and with due diligence. It was submitted that Explanation 1 to section 271(1)(c) had been wrongly invoked as the case of the appellant is not covered by the Explanation 1 to section 271(1)(c). It was submitted that the Ld. AO as well as Ld. CIT(A) have erred in not considering the conditions mentioned in Explanation 7 to section 271(1)(c) before invoking the same.
Our attention was drawn to Explanation 7 to section 271(1)(c) which reads as under:
“Explanation 7.—Where in the case of an assessee who has entered into an international transaction or specified domestic transaction defined in section 92B, any amount is added or disallowed in computing the total income under sub-section (4) of section 92C, then, the amount so added or disallowed shall, for the purposes of clause (c) of this sub- section, be deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished, unless the assessee proves to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Principal Commissioner or Commissioner that the price charged or paid in such transaction was computed in accordance with the provisions contained in section 92C and in the manner prescribed under that section, in good faith and with due diligence.”
It was submitted that the scheme of Explanation 7 to section 271(1)(c) of the IT Act is that the onus on the appellant is only to show that the ALP was computed by the appellant in accordance with the
20 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
scheme of section 92C of the ITA in good faith and due diligence. The assessee wishes to state that it has disclosed all the facts in its Form No. 3CEB and has computed the ALP in accordance with section 92C of the IT Act in good faith and due diligence and has brought out the same in its transfer pricing study report.
It was submitted that the Ld. AO has not been able to establish that ‘good faith’ and ‘due diligence’ was not exercised by the appellant and has failed to discharge the onus cast upon him. It was submitted that the Ld. AO, while imposing the penalty, simply relied on the addition/adjustment and did not examine in detail as to whether penalty was imposable on such adjustments or not.
It was submitted that the deeming fiction under Explanation 7 to section 271(1)(c) cannot be invoked since the conditions precedent for invoking Explanation 7 to section 271(1)(c) do not exist and that lack of due diligence in determining the ALP is neither indicated nor inferred by the Ld. AO, thus levying penalty is bad in law.
In support, reliance was placed on the following judicial precedents which have upheld that when conditions to Explanation 7 of section 271(1)(c) are not fulfilled and when the appellant has determined the ALP in good faith and with due diligence, penalty cannot be levied:
� DCIT v. Mastek Ltd. (ITA No. 2785 & 2786/Ahd/2013) � Mastek Ltd v. DCIT [2012] 28 taxmann.com 292 � Mitsui Prime Advanced Composites India (P) Ltd v. DCIT 178 TTJ 490
21 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT � CIT v. RBS Equities India Ltd. 133 ITD 77
It was further submitted that the appellant has disclosed all material facts and provided required information in the Form 3CEB filed by it disclosing provision of loans as an international transaction. Further, the appellant in its transfer pricing study report has substantiated the arm’s length price determined by it at NIL in accordance with transfer pricing regulations. Also, there is no finding that any details supplied by the appellant in its Form 3CEB are found to be incorrect or erroneous or false and thus there is no question of inviting the penalty under section 271(1)(c). It was submitted that a mere making of a claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the appellant. Such a claim made in the return cannot amount to furnishing inaccurate particulars.
It was further submitted that the determination of ALP is a debatable issue and is a subjective matter. Thus, no penalty u/s 271(1)(c) could not be imposed on debatable issues. Further, it is a settled judicial principle that penalty cannot be imposed automatically merely because there was a transfer pricing adjustment and the appellant had not appealed against it.
It was also submitted that merely because the TPO was of a different view on the methodology of determining the ALP than that adopted by the appellant, it could not, ipso facto lead to the conclusion that this was a case of concealment or furnishing inaccurate particulars
22 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
of income. Therefore, the appellant pleads that penalty on account of difference in opinion and being a debatable issue, penalty should not be sustained.
It was further submitted that when an issue is admitted by the High Court on the ground that the same involves substantial question of law then penalty cannot be levied on that issue against the appellant. When the ground is that of question of law the same is debatable and penalty is not justified in such a case.
It was submitted that considering the fact that the Hon’ble Jurisdictional High Court in appellant’s own case has admitted and considered the issue in respect of interest free loan being a substantial question of law, it is an indication that the issue is debatable and levying a penalty is bad in law. In support, reliance was placed on following judicial precedents:
� CIT v. Nayan Builders and Developers 368 ITR 722 (Bom) � CIT v. Liquid Investments and Trading Co. (ITA No. 240/2009) (Delhi High Court)
Per contra, the ld. CIT DR submitted that Explanation 7 to Section 271(1)(c) of the Act is clearly applicable in the instant case as the assessee has not been able to prove that good faith and due diligence has been followed in international transaction entered by it. It was submitted by the ld CIT DR that the arm’s length adjustments have been confirmed by the Hon’ble High Court and the only relief which has been provided is regarding the interest rate which has to be applied
23 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
whereas there is no dispute that interest was chargeable on loans granted to the AEs. It was submitted by ld CIT DR that concept of commercial expediency and real income are not relevant for Transfer pricing and the transaction which was required to be benchmarked in the assessee’s case was the international transaction of extending interest free loans to AEs and not the factors like source of funds, reasons for advancing etc. This fact is established as all the appellate authorities have confirmed the same including the Jurisdictional High Court. It was accordingly held that the ingredients of due diligence and good faith are missing completely and as per the provisions of Section 92B, it is clear that lending or borrowing of money between two associated enterprises comes within the admit of international transaction and whether the same is at arm’s length has to be considered. Further, the adjustment made by the AO was confirmed at various levels i.e. DRP, ITAT and even the Hon’ble High Court with slight variation in the rate of interest to be applied. In view of the above, the penalty was rightly levied U/s 271(1)(c) and confirmed by the ld CIT(A) and there is thus no infirmity in the decision of the ld CIT(A) and the same should be confirmed.
We have heard the rival contentions and perused the material available on record.
Firstly, regarding the contention of the ld. AR that in the absence of any specific charge against the assessee in the penalty notice and subsequently in the penalty order, consequent penalty imposed by AO is illegal and bad in law, we have recently examined this issue in case of
24 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
Smt. Shipra Jain and Ors. vs. ACIT (ITA No. 922/JP/2018 & others dated 31.10.2018) wherein we have examined the issue at length in context of Explanation 5A to section 271(1)(c) and in light of various judicial authorities (including those which have been relied in the instant case by the ld AR) and our findings are contained at para 4.2 to 4.5 which are reproduced as under:-
“4.2 Now coming to the first contention so raised by the ld. AR that in the absence of any specific charge against the assessee in the penalty notice and subsequently in the penalty order, consequent penalty imposed by AO is illegal and bad in law. We find that Explanation 5A to section 271(1)(c) is a deeming provision and subject to fulfilling the requisite conditions, it deems the assessee to have concealed the particulars of his income or furnished inaccurate particulars of such income similar to what has been provided in clause (c) to section 271(1) of the Act. In search cases as well, the legislature has thus envisaged applicability of one or both of these charges. It is settled position now as held by catena of judicial pronouncements that the notice initiating the penalty proceedings should specify the charge against the assessee and even where the charge is uncertain at the time of initiation of penalty proceedings, subsequently during the penalty proceedings, the AO must get decisive, which should be reflected in the penalty order, as to whether the assessee is guilty of 'concealment of particulars of income' or 'furnishing of inaccurate particulars of such income'.
25 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
4.3 In this regard, useful reference can be drawn to the decision of the Coordinate Bench in case of HPCL Mittal Energy vs Add. CIT reported in 96 Taxman.com 3 where the matter was referred to the Third Member to decide on the issue as to "Whether, in case where the satisfaction of the AO while initiating penalty proceedings u/s. 271(l)(c) of the Income-tax Act, 1961 is with regard to alleged concealment of income by the assessee, whereas the imposition of the penalty is for 'concealment/furnishing inaccurate particulars of income', the levy of penalty is not sustainable?".
After analyzing catena of judicial pronouncements including the decisions which have been cited by the ld AR, the Coordinate Bench speaking through the Third Member has held as under: “9. On an analysis of the factual matrix narrated above, it is manifested that the AO recorded satisfaction qua the three items of disallowance/additions leading to penalty, as 'concealment of income' in all the assessment orders; initiated penalty in all the four cases by treating them as covered under the expression 'concealment of particulars of income'; and then finally passed penalty orders on the assessees finding them guilty of 'concealment of particulars of income/furnishing inaccurate particulars of such income'. As against that, the actual position is that all the three items of disallowance/additions fall only under the category of 'furnishing of inaccurate particulars of income'. Now the question arises if the penalty is sustainable in such circumstances?
26 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
At this juncture, it is pertinent to note that penalty proceedings are distinct from the assessment proceedings. Merely because an addition has been made or confirmed in the assessment, does not, per se, lead to imposition of penalty u/s. 271(l)(c). Penalty proceedings are separately initiated on conclusion of the assessment, in which the assessee is given an opportunity to explain his position qua the imposition of penalty on the additions/disallowances made in the assessment. The AO considers the explanation of the assessee and then decides if the penalty is imposable or not. Further, the opinion of the AO as to concealment of particulars of income or furnishing of inaccurate particulars of such income has to be seen with reference to the day on which he initiates/imposes penalty. Later events, like confirmation or deletion of additions/disallowances in quantum appeals, are irrelevant in this context.
It transpires from the above discussion that, insofar as the issue before me is concerned, there are broadly two different stages having bearing on the imposition of penalty, namely, assessment and penalty. At the assessment stage, the AO has to record a satisfaction in the assessment order as to whether the additions/disallowances, on which penalty is likely to be imposed, represent concealment of particulars of income or furnishing of inaccurate particulars of income. There can be two sub-stages in penalty proceedings requiring the AO to record such satisfaction, viz., at the time of initiating the penalty proceedings and at the
27 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
time of passing the penalty order. I will deal with such two stages in the present context.
(a) Recording of satisfaction at the assessment stage.
It has been noticed hereinabove that the first stage of imposition of penalty is recording of satisfaction by the AO in the assessment order as to whether the assessee concealed the particulars of income or furnished inaccurate particulars of income. There was a lot of litigation on this point. The assessees were contending before the appellate courts that the AO had not recorded proper satisfaction in the assessment order and hence the penalty should be deleted. On the other hand, the Department was contending that the satisfaction was properly recorded. Considering the magnitude of litigation on the point, the Finance Act, 2008, inserted sub-section (1B) to section 271, w.r.e.f. 1.4.1989, which runs as under: — 'Where any amount is added or disallowed in computing the total income or loss of an assessee in any order of assessment or reassessment and the said order contains a direction for initiation of penalty proceedings under clause (c) of sub-section (1), such an order of assessment or reassessment shall be deemed to constitute satisfaction of the Assessing Officer for initiation of the penalty proceedings under the said clause (c).'
The effect of this insertion is that when an amount is added or disallowed in an assessment and the order contains a direction
28 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
for initiation of penalty proceedings u/s. 271(l)(c), it shall be deemed to constitute satisfaction of the AO for initiation of the penalty proceedings. Crux of the new provision is that a mere direction in the assessment order to initiate penalty proceedings under clause (c) is sufficient to conclude that the AO recorded proper satisfaction as to whether the additions/disallowances are 'concealment of particulars of income' or 'furnishing of inaccurate particulars of income' or both. It is incorrect to argue that even after the insertion of sub-section (1B), the AO still needs to specifically record as to whether each item of addition/disallowance is a case of concealment of particulars of income or furnishing of inaccurate particulars of income. Deeming 'satisfaction' under clause (c) in terms of sub-section (1B) means deeming 'proper satisfaction' and 'proper satisfaction' means getting satisfied as to whether it is a case of concealment of particulars of income or furnishing of inaccurate particulars of such income. It cannot be conceived that a direction to initiate penalty proceedings in the assessment order is only 'satisfaction' and not 'proper satisfaction'. This contention, if taken to a logical conclusion, would mean that after such a direction in the assessment order constituting his satisfaction, the AO should once again specifically record satisfaction with reference to each addition or disallowance as to whether it is a case of concealment or furnishing of inaccurate particulars. It is obviously an absurd proposition and goes against the unambiguous language of the provision. Thus, it is overt that after insertion of sub-section (1B) to section 271, invariably, the AO should be deemed to have
29 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
recorded proper satisfaction with reference to each addition/disallowance as to concealment or furnishing of inaccurate particulars, once a direction is contained in the assessment order to initiate penalty u/s. 271(l)(c) of the Act. Requiring the recording of separate satisfaction, once again, by the AO would militate against the deeming provision contained in sub-section (1B). Admittedly, in all the four appeals under consideration, the AO directed to initiate penalty u/s. 271(l)(c) of the Act in the assessment orders. Thus, the Revenue can be safely considered to have successfully passed out the first stage.
(b) Recording of satisfaction at the penalty stage
It has been noted above that penalty proceedings are separate from assessment proceedings, which get kicked with the issue of notice u/s. 274 and culminate in the penalty order u/s. 271(l)(c) of the Act. Many a times, penalty initiated in the assessment order on one or more counts by means of notice u/s. 274, is not eventually imposed by the AO on getting satisfied with the explanation tendered by the assessee in the penalty proceedings. In any case, confronting the assessee with the charge against him is sine qua non for any valid penalty proceedings. It is only when the assessee is made aware of such a charge against him that he can present his side. Thus prescribing the charge in the penalty notice and penalty order is must. Absence of a charge in the penalty notice or not finding the
30 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
assessee guilty of a clear offence in the penalty order, vitiates the penalty order.
The moot question is that what should be the nature of specification of a charge by the AO at the stage of initiation of penalty proceedings and at the time of passing the penalty order. Is the AO required to specify in the penalty notice/order as to whether it is a case of 'concealment of particulars of income'; or 'furnishing of inaccurate particulars of income'; or both of them, which can be expressed by using the word 'and' between the two expressions. When the AO is satisfied that it is a clear-cut case of concealment of particulars of income, he must specify it so in the notice at the time of initiation of penalty proceedings and also in the penalty order. The AO cannot initiate penalty on the charge of 'concealment of particulars of income', but ultimately find the assessee guilty in the penalty order of 'furnishing inaccurate particulars of income'. In the same manner, he cannot be uncertain in the penalty order as to concealment or furnishing of inaccurate particulars of income by using slash between the two expressions. When the AO is satisfied that it is a clear-cut case of 'furnishing of inaccurate particulars of income', he must again specify it so in the notice at the time of initiation of penalty proceedings and also in the penalty order. After initiating penalty on the charge of 'furnishing of inaccurate particulars of income', he cannot impose penalty by finding the assessee guilty of 'concealment of particulars of income'. Again, he cannot be uncertain in the penalty order as to concealment or furnishing of
31 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
inaccurate particulars of income by using slash between the two expressions. When the AO is satisfied that it is a clear-cut case of imposition of penalty u/s. 271(l)(c) of the Act on two or more additions/disallowances, one or more falling under the expression 'concealment of particulars of income' and the other under the 'furnishing of inaccurate particulars of income', he must specify it so by using the word 'and' between the two expressions in the notice at the time of initiation of penalty proceedings. If he remains convinced in the penalty proceedings that the penalty was rightly initiated on such counts and imposes penalty accordingly, he must specifically find the assessee guilty of 'concealment of particulars of income' and also 'furnishing of inaccurate particulars of income' in the penalty order. If the charge is not levied in the above manner in all the three clear-cut situations discussed above in the penalty notice and also in the penalty order, the penalty order becomes unsustainable in law.
The Hon'ble Karnataka High Court in CIT v. Manjunatha Cotton and Ginning Factory [2013] 359 ITR 565/218 Taxman 423/35 taxmann.com 250 has held that a person who is accused of the conditions mentioned in section 271 should be made known about the grounds on which they intend imposing penalty on him as section 274 makes it clear that assessee has a right to contest such proceedings and should have full opportunity to meet the case of the Department and show that the conditions stipulated in section 271(l)(c) do not exist as such he is not liable to pay penalty. The Hon'ble High Court went on to hold that:
32 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
'Clause (c) deals with two specific offences, that is to say, concealing particulars of income or furnishing inaccurate particulars of income.... 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….. 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'. 17. In Manu Engg. Works (supra) penalty was imposed by noting: 'that the assessee had concealed its income and/or that it had furnished inaccurate particulars of such income'. Striking down the penalty, the Hon'ble High Court held that: 'it was incumbent upon the IAC to come to a positive finding as to whether there was concealment of income by the assessee or whether any inaccurate particulars of such income had been furnished by the assessee. No such clear-cut finding was reached by the IAC and, on that ground alone, the order of penalty passed by the IAC was liable to be struck down.'
In Padma Ram Bharali (supra), the Hon'ble High Court did not sustain penalty levied u/s. 271(l)(c) when: 'the initiation of the penalty proceeding was for concealment of the particulars of income. But the Tribunal finally held that the assessee would be deemed to have concealed the particulars of income or to have furnished inaccurate particulars of such income.'
33 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
Thus it is evident that when the AO is satisfied at the stage of initiation of penalty proceedings of a clear-cut charge against the assessee in any of the three situations discussed above (say, concealment of particulars of income), but imposes penalty by holding the assessee as guilty of the other charge (say, furnishing of inaccurate particulars of income) or an uncertain charge (concealment of particulars of income/furnishing of inaccurate particulars of income), the penalty cannot be sustained.
Another crucial factor to be kept in mind is that the satisfaction of the AO as to a clear-cut charge leveled by him in the penalty notice or the penalty order must concur with the actual default. If the clear-cut charge in the penalty notice or the penalty order is that of 'concealment of particulars of income', but it turns out to be a case of 'furnishing of inaccurate particulars of such income' or vice-versa, then also the penalty order cannot legally stand.
Apart from the above three situations in which the AO has clear-cut satisfaction, there can be another fourth situation as well. It may be when it is definitely a case of under-reporting of income by the assessee for which an addition/disallowance has been made, but the AO is not sure at the stage of initiation of penalty proceedings of the precise charge as to 'concealment of particulars of income' or "furnishing of inaccurate particulars of income'. In such circumstances, he may use slash between the
34 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
two expressions at the time of initiation of penalty proceedings. However, during the penalty proceedings, he must get decisive, which should be reflected in the penalty order, as to whether the assessee is guilty of 'concealment of particulars of income' or 'furnishing of inaccurate particulars of such income'. Uncertain charge at the time of initiation of penalty, must necessarily be substituted with a conclusive default at the time of passing the penalty order. If the penalty is initiated with doubt and also concluded with a doubt as to the concealment of particulars of income or furnishing of inaccurate particulars of such income etc., the penalty order is vitiated. If on the other hand, if the penalty is initiated with an uncertain charge of 'concealment of particulars of income/furnishing of inaccurate particulars of income' etc., but the assessee is ultimately found to be guilty of a specific charge of either 'concealment of particulars of income' or 'furnishing of inaccurate particulars of income', then no fault can be found in the penalty order.
In Manu Engineering Works (supra), the Hon'ble Gujarat High Court noticed that the charge at the stage of initiation of penalty proceedings as well in the penalty order was uncertain and the expression used at both the stages was concealment of particulars of income and/or furnishing of inaccurate particulars of such income. It struck down the penalty by holding that the assessee must have been found to be guilty of a certain charge in the penalty order. It, however, did not find anything amiss with
35 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
the initiation of penalty on such uncertain charge, which is vivid from the following observations : — 'We find from the order of the IAC, in the penalty proceedings, that is, the final conclusion as expressed in para. 4 of the order: "I am of the opinion that it will have to be said that the assessee had concealed its income and/or that it had finished inaccurate particulars of such income". Now, the language of "and/or" may be proper in issuing a notice as to penalty order or framing of charge in a criminal case or a quasi-criminal case, but it was incumbent upon the IAC to come to a positive finding as to whether there was concealment of income by the assessee or whether any inaccurate particulars of such income had been furnished by the assessee.'
It is thus evident that uncertain charge at the stage of initiation of penalty proceedings can be made good with a clear- cut charge in the penalty order. In any case, existence of a clear- cut charge in penalty order is a must so as to validate any penalty order.”
4.4 In the instant case, the Assessing officer has recorded his satisfaction in respect of the five items of disallowance/additions including undisclosed investment on construction of house amounting to Rs 938,800 leading to penalty, as 'concealment of income' in the assessment order passed under section 143(3) r/w 153A, thereafter initiated penalty by issuance of notice u/s 274 r/w 271 dated 21.30.2014 in respect of all the five items of disallowance/additions by
36 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
treating them as covered under the expression “concealment particulars of income or furnished inaccurate particulars of income” and then finally passed the impunged penalty order u/s 271(1)(c) in respect of undisclosed investment on construction of house amounting to Rs 134,025 (to the extent sustained by the ld CIT(A) out of Rs 938,800) and levied penalty u/s 271(1)(c) amounting to Rs 45,555 by stating as under: “6. In view of above stated facts and legal position, the assessee under consideration is, clearly liable for penalty u/s 271(1)(c) of the Act is imposed upon him as per following computation:-
Total undisclosed/concealed income liable to penalty Rs. 1,34,025 u/s 271(1)(c) Penalty imposable (100% of tax sought to evaded) Rs. 45,555/- Penalty imposable (300% of tax sought to evaded) Rs. 1,36,665/- Penalty levied (100% of the tax sought to evaded Rs. 45,555/-
In view of the above, a penalty of Rs. 45,555/- is hereby levied u/s 271(1)(c) of the Income-tax Act, 1961. Issued demand notice.”
4.5 It is thus a case where the AO has recorded the satisfaction in the assessment order stating that the assessee has concealed his particulars of income whereby the assessee has not disclosed his investment in construction of the house to the extent of expenditure incurred during the previous year relevant to impunged assessment year. Therefore, the notice initiating the penalty proceedings is uncertain where he uses the expression “concealment particulars of
37 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
income or furnished inaccurate particulars of income”. However, during the penalty proceedings, he has given a decisive finding as reflected in the penalty order that the assessee is guilty of 'concealment of particulars of income' by not disclosing the investment in the construction of his house. As held by the Coordinate Bench (supra), the uncertain charge at the time of initiation of penalty has been made good and substituted with a conclusive default at the time of passing the penalty order and that in such a case, no fault can be found in the penalty order.” In such a case, we donot see any infirmity in the penalty order so passed by the Assessing officer and the contentions so raised by the ld AR in this regard are not accepted.”
In the instant case, Explanation 7 to Section 271(1)(c) has been invoked by the AO and subject to fulfilling the requisite conditions, it deems the assessee to have concealed the particulars of his income or furnished inaccurate particulars of such income similar to what has been provided in clause (c) to section 271(1) of the Act. In cases involving international transactions entered into by the assessee, any transfer pricing adjustments where any amount is added or disallowed in computing the total income, the legislature has thus envisaged applicability of one or both of these charges. Deeming fiction so provided doesn’t mean in all cases where the transfer pricing adjustment is made and finally upheld, it’s a case of automatic levy of penalty. Even in such cases, the AO has to bring out a specific charge in terms of either concealing the income or furnishing inaccurate particulars of income in relation to a particular international transaction or a group of such international transactions. It is now a settled
38 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
position as held by catena of judicial authorities, as we have noted above, that the notice initiating the penalty proceedings should specify the charge against the assessee and even where the charge is uncertain at the time of initiation of penalty proceedings, subsequently during the penalty proceedings, the AO must get decisive, which should be reflected in the penalty order, as to whether the assessee is guilty of 'concealment of particulars of income' or 'furnishing of inaccurate particulars of such income'. In Sheveta Constructions (supra), the Hon’ble Rajasthan High Court has held that “the AO has to give a notice as to whether he proposes to levy penalty for concealment of income or furnishing inaccurate particulars. He cannot have both the conditions and if it is so he has to say so in the notice and record a finding in the penalty order.”
In the instant case, we find that the notice initiating the penalty proceedings is uncertain where the AO uses the expression “concealment of particulars of income or furnished inaccurate particulars of income”. Even, during the penalty proceedings, the AO has not given a decisive and clear finding as reflected in the penalty order where he says throughout the body of the order that it is a case of concealment and/or furnishing inaccurate particulars of income and provisions of explanation 7 to section 271(1)(c) are applicable. As we have stated above, even where the AO is invoking the deeming provisions of explanation 7, the AO has to get decisive at the time of passing the penalty order as to whether it is a case of deemed concealment of income or deemed furnishing inaccurate particulars of its income. However, in the instant case, even while concluding the
39 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
penalty proceedings, in para 20 of the penalty order as reproduced below where the AO gave his conclusive findings, the said findings doesn’t bring out a clear-cut charge against the assessee in terms of concealment or furnishing inaccurate particulars of income: “20. In view of the above, it is established beyond doubt that the assessee has furnished inaccurate and/or concealed particulars of its income to the extent of the addition confirmed by the Hon’ble ITAT, Jaipur Bench, Jaipur of Rs. 4,68,40,099/- relating to TP adjustment.”
Therefore, following the legal proposition as discussed above and in light of facts and circumstances of the case, we agree with the contention of the ld AR that in the absence of any specific charge against the assessee in the penalty notice and subsequently in the penalty order, consequent penalty imposed by AO is illegal and bad in law.
Now, coming to merits of the case, in the context of Explanation 7 to section 271(1)(c), what needs to be examined is whether the ALP of the international transactions was computed by the assessee in accordance with the provisions contained in section 92C and in the manner prescribed under that section, in good faith and with due diligence and accordingly, falls under the exception carved out in the said explanation for non-imposition of penalty u/s 271(1)(c) of the Act. That is, whether the assessee has acted honestly and its action is done with as much care as any prudent person would do in similar circumstances to ensure that the ALP was determined in accordance with the scheme of section 92C and in the manner prescribed in the
40 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
Rules and if the answer to the same is in affirmative, deeming fiction under Explanation 7 cannot be invoked.
In the present case, the assessee applied CUP method as per clause (a) of Section 92C(1) which was not disturbed or rejected by the TPO. Thus, it is clear that the assessee’s application of CUP method in respect of the subject international transaction of advancing loans to its AEs is “in accordance with the provisions contained in section 92C of the Act. The only dispute relates to determination of appropriate ALP (rate of interest) which the assessee would have earned on advancing loans to its AEs.
In the transfer pricing report so submitted by the assessee before the TPO, it has been stated that “the arm’s length nature of these kind of transactions could be benchmarked either comparing the external or internal comparable transactions. The external comparable transactions are difficult to identify, as the circumstances in assessee’s case are unique and therefore, are not comparable. Further, we have been given to understand that, the company has not provided any loans or interest free loans to non associate enterprises. Therefore, strictly speaking, the internal comparables are also not available for determining the arm's length nature of the loan transaction. It is pertinent to note that, the company has provided the loans to all four associated enterprises, free of interest and hence, this can to a limited extent be considered as internal comparable transaction. Therefore, based on the above, CUP method would be considered as most appropriate method. VGL is however, advised to keep all its records in place relating to loan transactions to justify forwarding of loans free of interest. In the
41 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
present case, the loans that have been given to associated enterprises were out of the proceeds received by VGL in the previous years from GDR issue and private placement of shares. Thus, there is no cost associated to the funding of the said loans. Secondly the said loans have been provided to meet the long term working capital requirements, capacity expansion as well as starting of new business lines i.e., retail stores and TV shopping channels of the subsidiaries. Such providing of loans was in the nature of quasi-equity and towards the furtherance of business of subsidiaries/associates in turn has benefited VGL as VGL is one of the important sourcing point for group requirements of product at its TV shopping channels & retail stores. Therefore, based on the facts and circumstances of the case explained above, the transactions of providing loans without charging any interest is said to be at arm’s length.”
However, as per the TPO, “it is very difficult to get other tax payers in the similar circumstance. So, the interest rate that would have been charged in similar circumstances or the interest rate that the tax payer could have got by lending such money to private persons in India or interest rate the company could have got from independent third party in India by lending such surplus money under comparable circumstances i.e. without any security and margin money is considered. The basic principle, to be followed, is that the currency in which the loan has originated must be considered along with the country of origin for e.g., if the Indian parent is lending to another party, important consideration would be the interest rate expected by the lender, which would be the interest prevalent in India or opportunity cost of such funds if they were invested either in the
42 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
business, or other forms of investment. Thus, one needs to find a CUP rate based on cost of funds or opportunity cost of funds blocked in such intra-group loans. If any Indian entity had invested such sums in India with Banks, then the deposit rate would be that from India. If the same were invested in any other investment e.g. stocks, mutual funds or real estate, the return would still be with reference to interest rates in India. If the Indian entity did not have sufficient surplus funds to lend, it may borrow such funds from banks or others, then cost of borrowings in India would also be relevant. Also if the surplus funds were to be invested in existing business or expansion into new businesses, the return also would be linked with domestic interest rates. So, the entire cost to the Indian entity or opportunity cost to the Indian entity will always be with reference to the interest rates prevailing in India. The CUP therefore being used is the prime lending rate of SBI to which 300 basis points is being added to take into account the various factors/risks as already discussed above.”
The ALP has thus been determined by the TPO @ 14.88% (SBI prime lending rate plus 300 basis point) which was found reasonable and applied by the TPO and as against that, the Coordinate Bench has upheld the ALP at LIBOR +2% and thereafter, the Hon’ble High Court has further restricted the ALP to average LIBOR rate which comes to 0.79%. Therefore, we find that at each appellate level, the reasonability of rate of interest has been debated and finally, the Hon’ble High Court has upheld rate of interest of 0.79% as against NIL ALP determined by the assessee. It is therefore an honest difference of opinion regarding what should be the reasonable rate of interest between the assessee and the Revenue and such minor ALP differences of even less than 1%
43 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
can never be a basis for levy of penalty, and lack of good faith and due diligence therefore cannot be inferred on part of the assessee.
Further, mere fact that the addition has been confirmed in the quantum proceedings doesn’t automatically lead to imposition of penalty and the said contentions of the Revenue cannot be accepted. The Coordinate Bench in case of Mitsui Prime Advanced Composites (supra) has held as under (head notes):
“The mere fact that an addition has been made or confirmed does not per se leads to imposition of penalty u/s 271(1)(c). It is simple and plain that both the assessment and penalty proceedings are distinct from each other. If the contention of the ld. DR that the acceptance of addition or confirmation of addition in quantum proceedings would automatically justify imposition of penalty is taken to a logical conclusion, then, there was no need to have separate penalty proceedings. The very fact that the legislature has not made penalty automatic of the addition or its confirmation in the appellate proceedings and has created separate penalty proceedings during which the assessee is given due opportunity to put forth his point of view for non-imposition of penalty notwithstanding the sustenance of addition, amply goes to show that penalty is not automatic of addition. Necessary criteria for imposition or non-imposition of penalty is not the surrender or non-surrender of income, acceptance or non-acceptance of addition, and confirmation or deletion of addition in quantum proceedings. In fact, it is the evaluation of the circumstances leading to the surrender/addition or confirmation of addition, which decides the fate of penalty. Where a surrender or an addition is made due to absence of
44 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
bona fide in the conduct of the assessee, it may be a good case for imposition of penalty. On the other hand, if a surrender or an addition is made due to failure of the assessee to establish his case to the satisfaction of the AO despite the genuineness of the explanation, it will not call for imposition of penalty, notwithstanding such an addition having been confirmed in appeals. Further, an honest difference of opinion between the assessee and the Revenue can never be a cause for imposition of penalty. Under such circumstances, the contention of the ld. DR that the factum of the assessee not assailing the addition in quantum proceedings should be considered as fatal, in our considered opinion, is devoid of merits. If the contention of the Department Representative that addition on account of TP adjustment invariably means absence of good faith and due diligence, then, each and every case involving TP adjustment would call for imposition of penalty u/s 271(1)(c). The proposition so propounded on behalf of the Revenue is too wide and clearly unacceptable inasmuch as the intention of the legislature is to impose penalty due to addition on account of transfer pricing adjustment only when good faith and due diligence are lacking and not because of a genuine and valid difference of opinion in the determination of ALP of an international transaction. In view of the foregoing discussion, the assessee has satisfied all the requisite conditions as stipulated in the exception crafted in Explan. 7 granting immunity and hence, it cannot be visited with penalty u/s 271(1)(c) of the Act. Ex consequenti, the impugned order is set aside and the penalty is deleted.”
45 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
In the present case, the assessee has disclosed all material facts and provided requisite information in Form 3CEB disclosing the international transactions relating to advancing loans to its AEs and has submitted detailed transfer pricing study report prepared by external experts through which it has substantiated the arm’s length price determined by it at NIL in accordance with transfer pricing regulations which again reiterates the bonafide and due diligence on part of the assessee. The Coordinate Bench in case of Mastek Ltd (supra) has held as under:
““7. …….There is hardly any dispute by now that the assessee had duly placed on record all factual particulars in the course of quantum assessment in its transfer pricing report i.e. Form 3 CEB. The Revenue further fails to rebut the fact that it’s a transfer pricing adjustment and not a case of furnishing of inaccurate particulars since the transfer pricing authority had to compute arms length price of the impugned loan transactions. We observe in these peculiar facts that once the assessee has included all the relevant particulars, the mere fact that it did not benchmark its loan transactions at arm’s length resulting in the impugned upward adjustment would not form the sole ground to invoke the impugned penalty provision in absence of any exercise by the lower authorities in quantum proceedings finding the same to be inaccurate. We thus find no reason to interfere in the CIT(A)’s finding under challenge as extracted in preceding paragraphs. This later substantive ground in both appeals is also declined accordingly.”
In the entirety of facts and circumstances of the case, we are of the considered view that there is no basis for levy of penalty under
46 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
section 271(1)(c) read with Explanation 7 thereof and the same is hereby directed to be deleted.
In the result, the appeal of the assessee is allowed.
ITA No. 731/JP/18
At the outset, the ld. AR requested for permission to raise the following additional ground of appeal which reads as under:- “That the Ld. Assessing Officer is wrong and bad in law in as much as the notice issued by the Assessing Officer under section 274 read with section 271(1)(c) of the IT Act, 1961 to be bad in law as it did not specify which limp of section 271(1)(c) of the Act, the penalty proceedings had been initiated i.e. whether for concealment of particulars of income or furnishing of inaccurate particulars of income.”
The ld. AR has submitted that the additional ground is purely a legal ground and it goes to the root of the matter, the same should be admitted in the interest of justice. In support, reliance was placed on the decision of Hon’ble Supreme Court in case of National Thermal Power Corporation Ltd. Vs. CIT 229 ITR 383. After hearing both the parties, the additional ground being a purely legal ground, the same is being admitted for adjudication.
Undisputedly, the facts and circumstances of the case are exactly identical as in ITA No. 730/JP/18 and similar contentions have been raised by both the parties. Therefore, our findings and directions contained in ITA No. 730/JP/18 shall apply mutatis mutandis to this appeal as well.
47 ITA No. 730 & 731 /JP/2018 Vaibhav Global Ltd. vs. ACIT
In the result, the penalty is directed to be deleted and appeal of the assessee is allowed.
In the result, both the appeals filed by the assessee are allowed.
Order pronounced in the open Court on 19/12/2018.
Sd/- Sd/- ¼fot; iky jko½ ¼foØe flag ;kno½ (Vijay Pal Rao) (Vikram Singh Yadav) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member Tk;iqj@Jaipur fnukad@Dated:- 19/12/2018. *Santosh आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. vihykFkhZ@The Appellant- Vaibhav Global Ltd., Jaipur. 2. izR;FkhZ@ The Respondent- ACIT, Circle-5, Jaipur. 3. vk;dj vk;qDr@ CIT 4. vk;dj vk;qDr@ CIT(A) 5. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत. 6. xkMZ QkbZy@ Guard File { ITA No. 730 & 731/JP/2018} vkns'kkuqlkj@ By order,
सहायक पंजीकार@Aेेज. त्महपेजतंत.