M/S. STI (INDIA) LTD.,INDORE vs. THE ACIT-5(1), INDORE

आयकर अपील�य अ�धकरण, इ�दौर �यायपीठ, इ�दौर IN THE INCOME TAX APPELLATE TRIBUNAL INDORE BENCH, INDORE

BEFORE SHRI KUL BHARAT, JUDICIAL MEMBER AND SHRI MANISH BORAD, ACCOUNTANT MEMBER

ITA No.42/Ind/2017 Assessment Year: 2005-06 M/s. STI (India) Ltd, ACIT-5(1) C/o S.S. Solanki & Co. बनाम/ 402, Trade House Indore Vs. 16/3, South Tukoganj, Indore (Appellant) (Revenue) PAN: AAECS3348C Appellant by Shri S.S. Solanki, CA Revenue by Shri Ashima Gupta, CIT- DR Date of Hearing: 29.11.2018 Date of Pronouncement: 11.12.2018 आदेश / O R D E R PER MANISH BORAD, A.M: This appeal of Assessee pertaining to A.Y. 2005-06 is directed against the order of Ld. Commissioner of Income Tax(Appeals)-II, Indore, (in short ‘CIT(A)’), dated 18.10.2016 which is arising out of the order u/s 271(1)(c) of the Income Tax Act 1961(hereinafter called as the ‘Act’) framed on

STI(India) Ltd. ITANo.42/Ind/2017 31.03.2011 by ACIT, 5(1) Indore. The assessee has raised following grounds of appeal: “1. That the Learned CIT(A) erred in confirming penalty u/s 271(1)(c) of Rs.7,00,000/- inspite of the fact that there is no satisfaction of the AO as to on which limb he wants to impose the penalty. The penalty so livied being illegal and wrong, the same require to be deleted. Without prejudice to the above 2.1 That the ld. CIT(A) erred in confirming the penalty on disallowance of interest of Rs.14,39,191/- in spite of the fact that there was no concealment of furnishing of inaccurate particulars of income. The penalty so confirmed being illegal and wrong, the same require to be deleted. 2.2 That the Ld. CIT(A) erred in confirming penalty on disallowance of interest of Rs.14,39,191/- in spite of the fact that the AO has made a disallowance of Rs.6,07,15,687/- which was reduced to Rs.14,39,191/-. Since the disallowance made has been substantially reduced by Learned CIT(A), penalty u/s 271(1)(c) cannot be levied. 2.3 Further the AO has made disallowance on different footing whereas the CIT(A) has made disallowance on some other ground. It is a settled law that if CIT(A) has made disallowance on some other grounds than that of AO, then penalty has to be initiated by Ld. CIT(A) separately. The penalty so levied & confirmed without initiated by Ld. CIT(A) is illegal and wrong, the same required to be deleted. 3. That the ld. CIT(A) erred in maintaining penalty on disallowance of interest paid of Rs.16,220/-. The penalty so levied being illegal and wrong, the same require to be deleted. 4. That the Ld. CIT(A) erred in maintaining penalty on prior period expenses of Rs.3,91,610/-. That no penalty can be levied on disallowance of prior period expenses. The penalty so levied being illegal and wrong, the same require to be deleted.”

STI(India) Ltd. ITANo.42/Ind/2017 the judgment of Hon'ble Apex Court in the case of National Thermal Power Co. Ltd. vs. CIT, (1998) 229 ITR 383 (SC) in support of his request for admitting the additional legal ground. 3. We find that the assessee has not raised the legal ground at the time of filing the appeal however in view of the judgment of Hon'ble Apex Court in the case of National Thermal Power Co. Ltd. (supra), we are of the view that the additional legal ground raised before us deserves to be admitted for adjudication as it only involves point of law and does not require any further investigation of facts. It is also clear that the legal issue raised, goes to the root of the jurisdiction of the assessing officer to levy the penalty u/s 271(1)(c) of the Act. Therefore, the same is relevant to determine the liability of the assessee for penalty u/s 271(1)(c) of the Act. We, accordingly admit the additional legal ground for adjudication. 4. Briefly stated facts as culled out from the records are that the assessee is a Limited Company engaged in the business of Textile Manufacturing Unit. Loss of Rs.19,30,73,905/- declared in the income tax return filed on 31.10.2005. Case selected for scrutiny. Notice u/s 143(3) of the Act was framed on 19.12.2007. After making 3

STI(India) Ltd. ITANo.42/Ind/2017 various disallowances at Rs.6,13,67,779/- income assessed at Rs.13,16,16,126/-. Penalty proceedings u/s 271(1)(c) of the Act were initiated for furnishing of inaccurate particulars of income. 5. During the course of penalty proceedings Ld. Assessing Officer (in short ‘Ld. AO’) after going through the submissions given by the assessee imposed the penalty at Rs.7,00,000/- u/s 271(1)(c) of the Act for concealment of income by furnishing inaccurate particulars of income. 6. Against the levy of penalty, assessee preferred an appeal before the Ld. CIT(A) but failed to succeed. 7. Now the assessee is in appeal before the Tribunal raising legal issue about the defect in the notice issued u/s 274 r.w. section 271(1)(c) of the Act as well as on the merits against the penalty of Rs.7,00,000/- levied u/s 271(1)(c) of the Act. 8. Ld. counsel for the assessee, at the outset submitted that there is a technical defect as in the penalty notice issued u/s 274 r.w. section 271(1)(c) of the Act. The assessing officer has not mentioned the limb for which penalty has been levied. As regards the merits of the case he submitted that the disallowance/additions on which 4

STI(India) Ltd. ITANo.42/Ind/2017 penalty have been levied revenue authorities have not doubted the genuineness of the expenses and the disallowance are mostly made on ad hoc basis and in such situation no penalty should have been levied. He placed reliance on the following judgments: i. Pr. CIT vs. Kulwant Singh Bhatia in ITANo.09 of 2018 (MP High Court) ii. CIT & Anr. Vs. M/s. SSA’s Emerald Meadows in Income- tax Act, 1961. No.380/2015 (Karnataka, High Court) iii. CIT & Anr. Vs. Manjunatha Cotton & Ginning Factory in 83 CCH 0282 (Karnataka High Court) iv. DCIT-1(2)(2) vs. M/s. Pennzoil Quaker State India Ltd. in ITA No.7386/Mum/2014 (I.T.A.T.,Mumbai) v. M/s Orbit Enterprises vs. ITO-15(2)(2) in ITANo.1796 & 1597/Mum/2014 (I.T.A.T., Mumbai) vi. S. Chandrashekar vs. Assistant Commissioner of Income Tax 98 CCH 0398 (Karnataka High Court) vii. CIT vs. Reliance Petroproducts (P) Ltd. in 78 CCH 0283 (SC) viii. M/s. Shree Coal Enterprises (I) vs. ACIT 3(1) in ITANo.516/Ind/2017(I.T.A.T., Indore)

STI(India) Ltd. ITANo.42/Ind/2017 u/s 271(1)(c) of the Act for the following additions made by the assessing officer which stands duly confirmed by ld. CIT(A): i. Addition on account of interest chargeable amount Rs.14,39,191/- ii. Disallowance out of penal interest paid Rs. 16,220/- iii. Disallowance on account of prior year expenses Rs. 3,91,610/- Total Rs. 1847021/-

STI(India) Ltd. ITANo.42/Ind/2017 271(1)(c) of the Act dated 19.12.2007 issued to the assessee by Ld. Assessing officer. “Notice under section 274 read with section 271 of the Income Tax Act, 1961 PAN:AAECS3348C Office of the Assistant Commissioner of income Tax 5(1), Indore To M/s. STI (India) Ltd. Plot No.1, Sonvay Industrial Area, Rau-Pithampur Link Road Indore Whereas in the course of proceedings before me for the assessment year 2005-06 it appears to me that you have concealed the particulars of your income or furnished inaccurate particulars of such income. You are hereby requested to appear before me at 11.00 AM/PM on 15.10.18 and show cause why an order imposing a penalty on you should not be mad under section 271 of the Income Tax Act, 1961. If your do not wish to avail yourself of this opportunity of being heard in person or through authorised representative you may show cause in writing on or before the said date which be considered before any such order is made under section 271. Sincerely Yours, Sd/- (K.C. Selvamani) Assistant Commissioner of Income Tax 5(1), Indore

STI(India) Ltd. ITANo.42/Ind/2017 have been initiated come under which category our limb. In the impugned notice both the charges have been mentioned without any proper specification showing its nexus to the alleged additions/disallowances. There seems no dispute to the fact that Ld. AO failed to issue a proper notice u/s 274 r.w. section 271(1)(c) of the Act. Under such circumstances, whether the penalty proceedings initiated u/s 271(1)(c) of the Act are valid needs to be examined.

STI(India) Ltd. ITANo.42/Ind/2017 the relevant details of the facts and pleading of both the sides.

“4. Being aggrieved with the penalty, the assesse filed an appeal before the Commissioner of Income Tax (Appeals), Indore. The learned Appellate Authority has passed an order confirming the penalty levied by the Assessing Officer on 30.4.2012. The learned Appellate Authority, while dismissing the appeal has held that the provisions of Section 27(1)(c) together with the Explanation 5A brings him liable for imposition of penalty in respect of the additional income, which has been offered following the search, that to based on unexplained deposits in the various bank accounts and FDR's as well as incriminating transaction. As per seized documents, the learned Appellate Authority dismissed all six appeals and confirmed the penalty levied by the Assessing Officer during the assessment years 2002-03 to 2007-08. 5. The respondent - assessee challenged the said order by filing separate six appeal before the Income Tax Appellate Tribunal, Indore, Bench Indore. The learned Tribunal considering the fact that these six appeals involved a common issue arising out of the same set of facts and heard together and all the six appeals are being disposed of by passing a consolidated order on 11.8.2017. The ground raised before the ITAT, was that the imposition of penalty is illegal in as much as vague and cryptic show-cause notice was issued to the assessee under Section 274 of the Act of 1961, without making him aware of the specific charge levied against him and, therefore, in view of the decision of the Karnataka High Court in the case of CIT V/s. Manjunatha Cotton Ginning Factory, (2013) 359 ITR 565 (Kar), the penalty so imposed by the Assessing Officer deserve to be deleted. 6. The learned Tribunal relying on the decision of the Apex Court in the case of National Thermal Power Co. Ltd. V/s. CIT, (1998) 229 ITR 383 (SC) permitted the assessee to raise the additional ground as there is pure question of law and no 9

STI(India) Ltd. ITANo.42/Ind/2017 further inquiry or investigation on facts is required. It was submitted before the Tribunal that the income shown in the return were offered under Section 132(4) as well as returns filed under Section 153A. These incomes have been accepted in the assessment order without any variation and objection. The blanket penalty proceedings were initiated in all cases under Section 271(1)(c). The penalty notice under Section 274 read with Section 271(1)(c) were issued in the typed format without striking off either of two charges, i.e., which is reproduced as : "* have concealed the particulars of your income or.............or "furnished inaccurate particulars of income". 7. It is submitted that the show-cause notice under Section 274 is not mere empty formality but it has a definite purpose to make the assessee aware of the exact charges against him and the case, which is required to meet out. A clear notice not only a statutory requirement but even for the purpose of principle of 'audi alteram partem' which requires that no one should be condemned unheard, a notice in clear term specifying the clear charges against an assessee is required to be given by an Assessing Officer before imposing a penalty. It was submitted that by not stricking off the inapplicable clause, the learned Assessing Officer has left the matter open for a complete guess work on the part of the appellant for presuming charges levelled against him and in such situation, it cannot be said that an effective opportunity of being heard was given to the appellant as contemplated under Section 274 of the Act of 1961. Thus, the penalty proceedings were initiated without specifying any particulars or specific charge against the assessee in either the assessment order or even the penalty notice. It is important to point out that no charge either of "concealment of income" or "furnishing of inaccurate particulars" was made in the assessment orders in all these cases. The perusal of the assessment order would show that it was stated that penalty proceedings are initiated under Section 271(1)(c) and under Section 271(AAA).

STI(India) Ltd. ITANo.42/Ind/2017 8. In the case of CIT V/s. Manjunatha Cotton Ginning Factory (supra), it was observed by the Karnataka High Court in para 59 that the practice of the Department sending a printed form where all the ground mentioned in Section 271 are mentioned would not satisfy the requirement of law when the consequences of the assessee not rebutting the initiated presumption is serious in nature and he had to pay penalty from 100% to 300% of the tax liability. As the provisions have to be held to be strictly construed, notices issued under Section 274 should satisfy the grounds, which he has to meet specifically. Otherwise, principle of natural justice is offended if the show cause notice is vague. Even in the matter of search case where penalty is levied under Explanation 5A to Section 271(1)(c), it was held by the Karnataka High Court that the show-cause notice under Section 274 was defective as it does not spelled out the ground on which the penalty is sought to be imposed and consequently penalty imposed was cancelled. The decision of CIT V/s. Manjunatha Cotton Ginning Factory (supra) was further followed by the Karnataka High Court in the case of CIT V/s. SSA'S Emerald Meadows, (2016) 73 taxman.com 248 (SC) / dated 23.11.2015 (ITA 380/2015), the High Court has dismissed the appeal of the revenue by observing that the Tribunal has allowed the appeal of the assessee holding that the notice issued by the Assessing Officer under Section 274 read with Section 271(1)(c) of the Act of 1961 was bad-in- law as it did not specify which limb of Section 271(1)(c) of the Act of 1961, the penalty proceedings had been initiated, i.e., whether for concealment of particulars of income or furnishing of inaccurate particulars. The Tribunal while allowing the appeal of the assessee, had relied on the decision of the Division Bench of Karnataka High Court decision in the case of CIT V/s. Manjunatha Cotton Ginning Factory (supra). It is further pointed out that the SLP filed by the Deptt. before the Apex Court on 5.8.2016 in the matter of CIT V/s. SSA'S Emerald Meadows (supra) was dismissed. In the case of CIT V/s. Suresh Chandra Mittal, (2000) 251 ITR 9 (SC), the Apex Court has upheld the decision of M.P. High Court wherein, in similar circumstances, it was held that the initial burden lies on the revenue to establish that the assessee had concealed the income or had furnished 11

STI(India) Ltd. ITANo.42/Ind/2017 inaccurate particulars of such income. In the present case, in show-cause notice the Assessing Officer has not specified specifically charges, there was no such mention. 9. Considering the aforesaid, the Tribunal has held that the penalty levied under Section 271(1)(c) of the Act of 1961 is not sustainable in law, as no specific charge was levied in penalty show-cause notices and allowed the appeal No.ITA (Appeal) 414/Ind/2012 and other five appeals. 10. It is submitted that the provision of Section 271(1)(c) together with Explanation 5(A) brings the assessee liable for imposition of penalty in respect of additional income, which has been offered following the search and the Assessing Officer is satisfied that it is a fit case for initiation of penalty proceedings under Section 271(1)(c) and 271(AA) of the Act of 1961. The learned Tribunal has committed an error in allowing the appeal and setting aside the well reasoned order of penalty. She also submits that the ITAT erred in not considered the satisfaction recorded by the Assessing Officer. She during the course of the arguments very specifically admitted that tax effect in this case is only Rs.2,84,090/- for the assessment year 2002-03. The total amount of penalty for the assessment year in all these appeals for the assessment years 2002-03 to 2007-08 is Rs.24,39,753 and the learned ITAT has decided all these appeals by composite order dated 11.8.2017. It is covered in para 5 of the Circular No.21 of 2015 dated 10.12.2015 and, therefore, the present appeals have been filed. 11. On due consideration of the arguments of the learned counsel for the appellant, so also considering the fact that the ground mentioned in show-cause notice would not satisfy the requirement of law, as notice was not specific, we are of the view that the learned Tribunal has rightly relying on the decision of CIT V/s. Manjunatha Cotton Ginning Factory (supra) and CIT V/s. SSA'S Emerald Meadows (supra) rightly allowed the appeal of the assessee and set aside the order of penalty imposed by the authorities. No substantial question of law is arising in these appeals. ITA.No(s).9/2018, 10/2018, 11/2018,

STI(India) Ltd. ITANo.42/Ind/2017 12/2018, 13/2018 and 14/2018, filed by the appellant have no merit and are hereby dismissed.” 16. After examining the facts of the instant appeal in the light of the above judgment, we are of the considered view that the legal issue raised through additional ground by Ld. counsel for the assessee needs to be allowed as the penalty proceedings initiated by way of issuance of notice u/s 274 r.w. section 271(1)(c) of the Act suffers from a fatal error and non-application of mind by the assessing officer as he failed to strike off one of the limb as provided in section 271(1)(c) of the Act thereby not leveling any specific charge against the assessee. Ld. AO should have appreciated the fact that merely issuing notice in general pro-forma will negate the purpose of natural justice as held by Hon'ble Apex Court in the case of Dilip Shroff 161 taxmann.com 28 that “the quasi criminal proceedings u/s 271(1)(c) of the Act ought to comply with the principles of natural justice”. 17. We, therefore, respectfully following the judgment of Hon'ble Jurisdiction High Court as well as in the given facts and circumstances of the case, are of the considered view that the alleged notice u/s 274 dated 19.12.2007 is invalid, untenable and suffers from the infirmity of non- application of mind by the assessing officer. We, therefore,

STI(India) Ltd. ITANo.42/Ind/2017 direct to delete the penalty of Rs.7,00,000/- levied u/s 271(1)(c) of the Act on this legal ground itself. 18. Since, the penalty u/s 271(1)(c) has already been dealt by us on the primary point of the assessee raising legal ground which has been allowed by us, the merits of the case for levy of penalty need not to be dealt as the same are rendered to be academic in nature. 19. In the result, the appeal of the assessee is allowed.

Order was pronounced in the open court on 11 .12.2018.

Sd/- Sd/- (KUL BHARAT) (MANISH BORAD) JUDICIAL MEMBER ACCOUNTANT MEMBER Indore; �दनांक Dated : 11/12/2018 ctàxÄ? P.S/.�न.स.

Copy to: Assessee/AO/Pr. CIT/ CIT (A)/ITAT (DR)/Guard file.

By order Assistant Registrar