ZAKI AHMED FAROOQUI,JAIPUR vs. DCIT, JAIPUR

PER VIJAY PAL RAO, JM :

These two appeals by the assessee are directed against two separate orders of ld. CIT (A)-2, Jaipur both dated 29th August, 2016 arising from penalty orders

passed under section 271(1)(c) of the IT Act for the assessment years 2005-06 &

07-08 respectively. The assessee has raised identical grounds in these appeals

except the quantum of penalty. The grounds for the assessment year 2005-06 are

reproduced as under :-

“ 1. The penalty order passed u/s 271(1)(c) of the Income Tax Act, 1961 by the learned CIT (A) is void ab-initio and deserves to be quashed.

2 ITA Nos. 848 & 849/JP/2016 Shri Zakki Ahmed Farooqui, Jaipur.

submission of the assessee and other evidences filed in support of creditors of Rs. 2,41,500/-.

Appellate Tribunal Rules, 1963 for admission of an additional ground for both the

assessment years. The common additional ground raised by the assessee reads as

under :-

“ In the facts and circumstances of the case the learned Assessing Officer has not recorded his satisfaction for initiation of penalty that the assessee has committed fault for filling of wrong particulars of income or concealment of income. Therefore, the penalty order passed by the learned A.O. is void ab-initio.”

additional ground. The ld. A/R of the assessee has submitted that the additional

ground is purely legal in nature and goes to the root of the matter. Further the

additional ground is arising from the orders passed by the authorities below and

does not require any investigation of new facts but the same can be adjudicated on

the basis of the facts and material on record of the assessment proceedings. Thus

the ld. A/R has submitted that when the relevant material for deciding the issue

raised in the additional ground is readily available on record then there is no legal

bar on admitting the additional ground and deciding the same on merits. In support

of his contention, he has relied upon the decision of Hon’ble Supreme Court in the

case of NTPC vs. CIT, 229 ITR 383 (SC) as well as the decision of Mumbai Bench of

3 ITA Nos. 848 & 849/JP/2016 Shri Zakki Ahmed Farooqui, Jaipur.

the Tribunal in case of Mahindra & Mahindra Ltd. vs. DCIT, 122 TTJ 577 (Mumbai)

(Special Bench). Thus the ld. A/R has pleaded that the additional ground raised by

the assessee may be admitted for adjudication.

3.1. On the other hand, the ld. D/R has vehemently opposed the additional ground

raised by the assessee at this stage and submitted that when the assessee has not

explained the reasons which had prevented the assessee from raising the same

before the authorities below then the assessee cannot be permitted to raise such

issue first time at this stage.

record, we note that the issue raised by the assessee in additional ground is legal in

nature and the adjudication of the same does not require any consideration of fresh

facts or material but it can be decided on the basis of material already available on

the record. Therefore, in view of the decision of Hon’ble Supreme Court in the case

of NTPC vs. CIT (supra), this Tribunal can consider the question of law arising from

the facts which are on record and should allow the parties to raise such a plea, if it is

necessary to consider the question in order to correctly assess the tax liability of the

assessee. Hence we admit the additional ground raised by the assessee for

adjudication on merits.

Adjudication of additional ground on merits :

penalty proceedings by issuing show cause notice under section 274 read with section 271 of the IT Act dated 31st December, 2007. However, the AO has not

specified the limb for levy of the penalty under section 271(1)(c). Similarly, for the

4 ITA Nos. 848 & 849/JP/2016 Shri Zakki Ahmed Farooqui, Jaipur.

assessment year 2007-08 identical notice was issued without specifying the limb

whether it is for concealment of particulars of income or for furnishing of inaccurate

particulars of income. The AO while issuing the notice has to specify the limb for

which the penalty is proposed to be levied under section 271(1)(c) whether it is for

concealment of particulars of income or furnishing inaccurate particulars of income.

Thus the AO at the time of initiation of penalty proceedings has to come to the

conclusion that whether it is a case of concealment or it is a case of furnishing

inaccurate particulars of income. The penalty proceedings are separate and

independent from the assessment proceedings and the jurisdiction under penalty

proceedings can only be limited to the issue of penalty. The imposition of penalty is

not automatic and, therefore, even if the assessee has not challenged the

assessment order, the AO has to take a decision on imposition of penalty after

considering the explanation of the assessee on a specific default or charge. Only

when no explanation was offered or the explanation offered is found to be false or

that the explanation is not bonafide, an order imposing penalty could be passed.

Therefore, the notice under section 274 of the Act should specifically state the

grounds mentioned in section 271(1)(c) that whether it is for concealment of income

or for furnishing of inaccurate particulars of income. In the absence of specifying

the grounds, would result denial of the proper opportunity to the assessee to furnish

the explanation. The assessee should know the ground which he has to meet

specifically otherwise the principles of natural justice are violated. In support of his

contention, he has relied upon the decision of Hon’ble Karnataka High Court in the

case of CIT vs. Manjunatha Cotton & Ginning Factory, 359 ITR 565 (Kar.). The ld.

5 ITA Nos. 848 & 849/JP/2016 Shri Zakki Ahmed Farooqui, Jaipur.

A/R has further submitted that in a subsequent decision the Hon’ble Karnataka High

Court in case of CIT vs. SSA’s Emerald Meadows has followed the decision in the

case of CIT vs. Manjunatha Cotton & Ginning Factory (supra). The SLP filed by the

revenue against the said order has been dismissed by the Hon’ble Supreme Court

reported in 242 Taxman 180 (SC). Hence the ld. A/R has submitted that the

initiation of proceedings for levy of penalty under section 271(1)(c) is not valid and

consequently the penalty order passed by the AO is not in accordance with law.

5.1. On the other hand, the ld. D/R has submitted that once the addition made by

the AO has been confirmed and attained the finality, the default of the assessee was

very well known to the assessee. Further, the AO in the assessment order has

clearly recorded his satisfaction that notice under section 271(1)(c) for concealment

of particulars of income and furnishing of inaccurate particulars of income is issued.

The AO has specified the grounds in the assessment order for initiation of penalty

under section 271(1)(c). He has relied upon the orders of the authorities below.

record. During the assessment proceedings, the AO inter alia made additions on

account of cash credit under section 68 of the Act for both the assessment years,

though there is another addition for the assessment year 2007-08 on account of

unexplained source of addition to the capital account of Rs.70,000/-. For the

assessment year 2005-06, the AO has recorded the satisfaction in the assessment

order as under :-

“ Penalty proceedings initiated separately. Notice under section 271(1)(c) for concealing particulars of income and furnishing of inaccurate particulars of income issued.”

6 ITA Nos. 848 & 849/JP/2016 Shri Zakki Ahmed Farooqui, Jaipur.

For the assessment year 2007-08, the AO has recorded the satisfaction in the

assessment order as under :-

“ Proceedings under section 271(1)(c) for concealment of income/furnishing of inaccurate particulars of income have separately been initiated.”

Therefore, the AO himself has recorded separate grounds for initiation of penalty

under section 271(1)(c) while recording the satisfaction in the assessment orders for

these two assessment years. As regards the notice issued under section 274 read

with section 271 of the Act, an identical printed notice was issued by the AO wherein

the relevant grounds for levy of penalty are as under :-

“ have concealed the particulars of your income or furnished inaccurate particulars of such income”.

It manifest from the record that the AO has given inconsistent grounds for initiation

of penalty in the assessment orders for the two assessment years and further the

grounds given in the show cause notice are also vague without specifying the limb

for which the penalty was proposed to be levied under section 271(1)(c). Further,

the notices were issued in the printed proforma by filling the particulars of assessee.

It is pertinent to note that the addition in the assessment orders for both the years

7 ITA Nos. 848 & 849/JP/2016 Shri Zakki Ahmed Farooqui, Jaipur.

were made on account of unexplained cash credit and for the assessment year

2007-08 another addition on account of unexplained source to the capital account

was made. These additions were made by the AO by rejecting the claim of the

assessee. Therefore, it is not a case of suppression of particulars of income or

details of the income but the claim of the assessee showing the cash credit in the

books as well as the capital inclusion was disallowed by the AO in the assessment

proceedings. All the particulars of these claims were duly recorded in the books of

account and, therefore, it cannot be a case of suppression of particulars of income

or any income out of the books which was detected by the AO during his

investigation or enquiry. Hence the case of the assessee would not fall in the

category of concealment of particulars of income and the initiation of penalty can be

only on the ground of furnishing inaccurate particulars of income. The AO himself

was not sure about the charge for which the penalty was proposed to be levied at

the time of recording satisfaction in the assessment order and further while issuing

the show cause notice under section 274 read with section 271(1)(c) of the Act.

Therefore, once the assessee was not made known about the specific default/charge

for which the penalty was proposed to be levied, then the initiation of penalty was

not in accordance with law. Further, the assessee was also deprived of the proper

opportunity to meet the grounds on which the penalty was proposed to be levied.

Even in the penalty order passed under section 271(1)(c), the AO has given the

finding that the assessee has concealed the income and filed inaccurate particulars

of income, therefore liable to be penalized under section 271(1)(c) of the Act. This

finding of the AO in the penalty order passed under section 271(1)(c) is contrary to

8 ITA Nos. 848 & 849/JP/2016 Shri Zakki Ahmed Farooqui, Jaipur.

the facts as it is not the case of suppression of particulars of income but the

additions were made by the AO by disallowing the claim of cash credits introduced in

the books of accounts and for want of satisfactory explanation on behalf of the

assessee. Hence when the AO himself was not sure about the charge for which the

penalty was proposed to be levied, then the initiation of penalty as well as

consequent orders passed under section 271(1)(c) are not valid and liable to be

quashed. The Hon’ble Karnataka High Court in the case of CIT vs. Manjunatha

Cotton & Ginning Factory (supra) has discussed this issue elaborately and the

concluding part of the decision in para 60 to 66 are as under :- “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

9 ITA Nos. 848 & 849/JP/2016 Shri Zakki Ahmed Farooqui, Jaipur.

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. INDEPENDENT PROCEEDING 62. The penalty proceedings are distinct from assessment proceedings, and independent therefrom. The assessment proceedings are taxing proceedings. The proceedings for imposition of penalty though emanating from proceedings of assessment are independent and separate aspects of the proceeding. Separate provision is made for the imposition of penalty and separate notices of demand are made for recovery of tax and amount of penalty. Also separate appeal is provided against order of imposition of penalty. Above all, normally, assessment proceedings must precede penalty proceedings. Assessee is entitled to submit fresh evidence in the course of penalty proceedings. It is because penalty proceedings are independent proceedings. The assessee cannot question the assessment jurisdiction in penalty proceedings. Jurisdiction under penalty proceedings can only be limited to the issue of penalty, so that validity of the assessment or reassessment in pursuance of which penalty is levied, cannot be the subject matter in penalty proceedings. It is not possible to give a finding that the reassessment is invalid in such penalty proceedings. Clearly, there is no identity between the assessment proceedings and the penalty proceedings. The latter are separate proceedings that may, in some cases, follow as a consequence of the assessment proceedings. Though it is usual for the Assessing Officer to record in the assessment order that penalty proceedings are being initiated, this is more a matter of convenience than of legal requirement. All that the law requires, so far as the penalty proceedings are concerned, is that they should be initiated in the course of the proceedings for assessment. It is sufficient, if there is some record somewhere, even apart from the assessment order itself, that the Assessing Officer has recorded his satisfaction that the assessee is guilty of concealment or other default for which penalty action is called for. Indeed, in certain cases, it is possible for the Assessing Officer to issue a penalty notice or initiate penalty proceedings even long before the assessment is completed. There is no statutory requirement that the penalty order should precede or be simultaneous with the assessment order. In point of fact, having regard to the mode of computation of penalty outlined in the statute, the actual penalty order cannot be passed until the assessment is finalised. CONCLUSION 63. In the light of what is stated above, what emerges is as under:

10 ITA Nos. 848 & 849/JP/2016 Shri Zakki Ahmed Farooqui, Jaipur.

(a) Penalty under Section 271(l)(c) is a civil liability. (b) Mens rea is not an essential element for imposing penalty for breach of civil obligations or liabilities. (c) Wilful concealment is not an essential ingredient for attracting civil liability. (d) Existence of conditions stipulated in Section 271(l)(c) is a sine qua non for initiation of penalty proceedings under Section 271. (e) The existence of such conditions should be discernible from the Assessment Order or order of the Appellate Authority or Revisional Authority. (f) Even if there is no specific finding regarding the existence of the conditions mentioned in Section 271(l)(c), at least the facts set out in Explanation 1(A) & (B) it should be discernible from the said order which would by a legal fiction constitute concealment because of deeming provision. (g) Even if these conditions do not exist in the assessment order passed, at least, a direction to initiate proceedings under Section 271(l)(c) is a sine qua non for the Assessment Officer to initiate the proceedings because of the deeming provision contained in Section 1(B). (h) The said deeming provisions are not applicable to the orders passed by the Commissioner of Appeals and the Commissioner. (i) The imposition of penalty is not automatic. (j) Imposition of penalty even if the tax liability is admitted is not automatic. (k) Even if the assessee has not challenged the order of assessment levying tax and interest and has paid tax and interest that by itself would not be sufficient for the authorities either to initiate penalty proceedings or impose penalty, unless it is discernible from the assessment order that, it is on account of such unearthing or enquiry concluded by authorities it has resulted in payment of such tax or such tax liability came to be admitted and if not it would have escaped from tax net and as opined by the Assessing Officer in the assessment order. (l) Only when no explanation is offered or the explanation offered is found to be false or when the assessee fails to prove that the explanation offered is not bonafide, an order imposing penalty could be passed. (m) If the explanation offered, even though not substantiated by the assessee, but is found to be bonafide and all facts relating to the same and material to the computation of his total income have been disclosed by him, no penalty could be imposed. (n) The direction referred to in Explanation IB to Section 271 of the Act should be clear and without any ambiguity. (o) If the Assessing Officer has not recorded any satisfaction or has not issued any direction to initiate penalty proceedings, in appeal, if the appellate authority records

11 ITA Nos. 848 & 849/JP/2016 Shri Zakki Ahmed Farooqui, Jaipur.

satisfaction, then the penalty proceedings have to be initiated by the appellate authority and not the Assessing Authority. (p) Notice under Section 274 of the Act should specifically state the grounds mentioned in Section 271(l)(c), i.e., whether it is for concealment of income or for furnishing of incorrect particulars of income (q) Sending printed form where all the ground mentioned in Section 271 are mentioned would not satisfy requirement of law. (r) The assessee should know the grounds which he has to meet specifically. Otherwise, principles of natural justice is offended. On the basis of such proceedings, no penalty could be imposed to the assessee. (s) Taking up of penalty proceedings on one limb and finding the assessee guilty of another limb is bad in law. (t) The penalty proceedings are distinct from the assessment proceedings. The proceedings for imposition of penalty though emanate from proceedings of assessment, it is independent and separate aspect of the proceedings. (u) The findings recorded in the assessment proceedings insofar as "concealment of income" and "furnishing of incorrect particulars" would not operate as res judicata in the penalty proceedings. It is open to the assessee to contest the said proceedings on merits. However, the validity of the assessment or reassessment in pursuance of which penalty is levied, cannot be the subject matter of penalty proceedings. The assessment or reassessment cannot be declared as invalid in the penalty proceedings.

In ITA Nos. 2564 & 2565/2005 64. In the light of what we have stated above, it is clear that merely because the assessee agreed for addition and accordingly assessment order was passed on the basis of this addition and when the assessee has paid the tax and the interest thereon in the absence of any material on record to show the concealment of income, it cannot be inferred that the said addition is on account of concealment. Moreover, the assessee has offered the explanation. The said explanation is not found to be false. On the contrary, it is held to be bonafide. In fact in the assessment proceedings there is no whisper about these concealment. Under these circumstances, the entry found in the rough cash book could have been reflected in the accounts for the said financial year in which the survey took place as the last date for closing the account was still not over. The very fact that the assessee agreed to pay tax and did not challenge the assessment order, it is clear the conduct of the assessee cannot be construed as malafide. Therefore, the Tribunal was justified in setting aside the orders passed by the Appellate Authority as well as the Assessing Authority. 65. Insofar as the imposition of penalty is concerned, it is not in accordance with law. No fault could be found with the Tribunal for deleting the penalty. Thus, we answer the substantial question of law in favour of the assessee and against the Revenue.

12 ITA Nos. 848 & 849/JP/2016 Shri Zakki Ahmed Farooqui, Jaipur.

In ITA No. 5020/2009 66. In view of the aforesaid law, we are of the view that the Tribunal was justified in holding that the entire proceedings are vitiated as the notice issued is not in accordance with law and accordingly justified in interfering with the order passed by the Appellate Authority as well as the Assessing Authority and in setting aside the same. Hence, we answer the substantial questions of law framed in this case in favour of the assessee and against the Revenue.”

Hence in view of the above facts and circumstances of the case and following the

decision of Hon’ble Karnataka High Court, which was subsequently challenged by the

revenue before the Hon’ble Supreme Court in case of CIT vs. SSA’s Emerald

Meadows (supra) but the Hon’ble Supreme Court has dismissed the SLP filed by the

revenue, we hold that the initiation of penalty proceedings and consequential orders

passed under section 271(1)(c) of the Act are bad in law and accordingly the same

are quashed.

On merits levy of penalty :

material on record. The addition was made by the AO on account of unexplained

cash credit which were claimed by the assessee as loan taken from various parties.

The assessee though filed the confirmations and affidavits of the creditors and,

therefore, the identity and existence of the creditors was prima facie proved by the

assessee which was not contradicted by the AO by bringing any contrary facts or

material on record. The AO disallowed the claim of the assessee on the ground that

the assessee failed to produce the creditors in person for examination by the AO. It

may be a case of unsatisfactory explanation by the assessee leading to addition but

when the assessee furnished the explanation along with affidavits in all the cases of

13 ITA Nos. 848 & 849/JP/2016 Shri Zakki Ahmed Farooqui, Jaipur.

cash creditors and also furnished the evidence of repayment of the amount in part of

the loan creditors then the said explanation of the assessee cannot be turned down

without considering the bonafideness. Therefore, even if the assessee failed to

substantiate his explanation but if it is found to be bonafide as per the clause-B of

Explanation-2 to section 271(1)(c), then the penalty in such case is not warranted.

In view of the facts and circumstances of the case where the additions were made

by the AO solely on the ground that the assessee has failed to produce the creditors

for examination but the AO has not contradicted the evidences which were produced

by the assessee in support of the claim, we find that the explanation of the assessee

though may not be accepted for want of substantiation but the same cannot be

regarded as malafide and hence the benefit of the bonafideness of the explanation

as per Explanation-2 to section 271(1)(c) of the Act should be allowed to the

assessee. Accordingly, the penalty levied by the AO is not sustainable and the same

is deleted.

Order is pronounced in the open court on 14/08/2018.

Sd/- Sd/- (foØe flag ;kno) (fot; iky jkWo ½ (VIKRAM SINGH YADAV ) (VIJAY PAL RAO) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member

Jaipur Dated:- 14/08/2018. Das/

14 ITA Nos. 848 & 849/JP/2016 Shri Zakki Ahmed Farooqui, Jaipur.

आदेश की प्रतिलिपि अग्रेषित@ब्वचल वf जीम वतकमत वितूंतकमक जवरू

सहायक पंजीकार@ Aेेपेजंदज. त्महपेजतंत

15 ITA Nos. 848 & 849/JP/2016 Shri Zakki Ahmed Farooqui, Jaipur.