ARUSUVAI FOOD PROCESSORS PVT. LTD.,SALEM vs. DCIT, CIRCLE-1(1), SALEM

Several additions were made totaling to ₹32,72,39,122/- and total income of the appellant was assessed at ₹32,72,39,122/- and the AO endorsed his satisfaction to initiate penalty u/s.271(A)(A)(C) of the Act.

5. Pursuant to the Ld.PCIT’s directions, reassessment proceedings under Section 143(3) read with Section 264 were initiated. And notice under Section 142(1) was issued, calling for detailed information and evidence. With respect to cash Sales, the assessee submitted VAT returns, purchase confirmations, ledgers, and exemption details under TNVAT Act for the sale of pulses and grams. In the reassessment proceedings under Section 143(3) read with Section 264, the AO accepted the appellant’s explanations regarding cash sales and dropped the corresponding addition of ₹5,76,74,074/-.

6. Regarding trade advances, the assessee submitted confirmations, ledger accounts, and details of advances received from 36 parties during FY 2016–17. Notices under Section 133(6) were issued to these parties.

32 parties responded with confirmations and ledgers. In 4 cases, either balance was NIL or confirmations were not received. However, in respect of 12 parties, trade advances aggregating to ₹1,70,16,220/- remained unsettled for more than 5 years. Based on the prolonged non-settlement of trade advances received in FY 2016–17, the AO invoked Section 41(1) and treated the amount of ₹1,70,16,220/- as deemed profits chargeable to tax under the head “Profits and Gains of Business or Profession.

7. Pursuant to the directions issued under Section 264, the Assessing Officer completed the reassessment under Section 143(3) read with Section 264 of the Act on 31.03.2022, determining the total assessed income at ₹1,70,77,591/- as against the returned income of ₹61,371/-.

And as noted supra, the ibid assessment order didn’t contain any finding or direction regarding the initiation of penalty proceedings in respect of the additions made, which omission according to the assessee vitiates the impugned penalty levied by the AO, u/s.270A of the Act.

8. According to the Ld.AR, before levying penalty u/s.270A of the Act, the AO ought to have given direction in the course of assessment proceedings that the assessee shall be liable to pay penalty u/s.270A of the Act for having underreported his income which is foundational requirement of law, without which, levy of penalty is legally untenable and relied on the ratio laid down by the Hon’ble Supreme Court decision in the case of PCIT v. Golden Peace Hotel & Resorts reported in [2021] 124 taxmann.com 249 (SC). Hence, assessee pleads that the impugned penalty levied by the AO of ₹1,70,77,591/- need to be deleted. Per contra, the Ld.DR couldn’t controvert the fact that the AO in the assessment order dated 31.03.2022 passed u/s.143(3)/264 of the Act didn’t made any endorsement to the effect showing the AO’s satisfaction to proceed to levy penalty u/s.270A of the Act. However, he pointed out that in the assessment order dated 27.12.2019 u/s.143(3) of the Act, the AO made endorsement to levy penalty u/s.271(A)(A)(C) of the Act and therefore doesn’t want us to interfere.

9. Having heard both parties, we note that the AO while passing the assessment order on 27.12.2019 u/s.143(3) of the Act [in the first round] made an addition of ₹32,72,39,122/- and had given direction in the assessment order to initiate levy of penalty u/s.271(A)(A)(C) of the Act.

However, the Ld.PCIT by order u/s.264 of the Act dated 13.01.2021 deleted partly the additions to the tune of Rs 21,78,65,048/- and thus partly set aside the assessment order dated 27.12.2019 & directed the AO to pass assessment order after verification of addition Rs 10,93,74,074/-; and pursuant to it, the AO passed the assessment order dated 31.03.2022 u/s.143/264 of the Act wherein he accepted the appellant’s explanation and sustained only ₹1,70,77,591/- [trade advance] by invoking Sec.41(1) and treated the amount of ₹1,70,16,220/- as deemed profits chargeable to tax under the head “Profits and Gains of Business or Profession, without giving any direction for levy of penalty u/s.270A of the Act. We find that the AO has not recorded his satisfaction/direction in the course of assessment proceedings or in the assessment order dated 31.03.2022 that he was satisfied that the assessee has underreported his income and therefore, liable to pay penalty in accordance with Section 270A of the Act. Omission to record his satisfaction / direction about assessee having committed the fault as given in clause (a) of sub-section (9) of Sec.270A of the Act vitiates penalty levied on the assessee dated 26.09.2022 u/s.270A(9)(a) of the Act [refer the Hon’ble Supreme Court decision in the case of PCIT v. Golden Peace Hotel & Resorts reported in [2021] 124 taxmann.com 249 (SC), though passed in the context of levy of penalty u/s.271(1)(c) of the Act. But the requirement of law as given in section 271(1) & 270A(1) of the Act is noted to be pari-materia. As far as Section 271(1) is concerned, the AO to record ‘satisfaction’ to levy penalty whereas in section 270A(1), the AO to give ‘direction’ for levy of penalty u/s.270A of the Act.] In this case, the AO has not given any such direction while passing the assessment order on 31.03.2022, pursuant to which, he levied penalty u/s.270A(a)(a) of the Act on 26.09.2022. The Ld.DR’s assertion that the AO while framing the assessment order on 27.12.2019 [in the first round] had made endorsement to initiate penalty, therefore, the non-recording of satisfaction in the second round assessment (post-revision u/s 264), will not vitiate the penalty levied u/s 270A, we don’t agree and note in this regard that the AO has recorded in the first round assessment order that penalty proceedings u/s.271(A)(A)(C) of the Act be initiated, [when AO made total addition of Rs 32 crores, which inter-alia consisted of addition made u/s 68 also]. However, when assessee moved revision application u/s 264, the Ld.PCIT is noted to have granted relief to assessee by deleting ₹21,78,65,048/- and thus, partly had set aside the assessment order for verification of addition made to the extent of ₹10,93,74,074.

Pursuant to it, the AO had sustained only the addition of ₹1,70,77,591/- u/s.41(1) [cessation of liability from four (4) parties and treated it as deemed profit (business income)]. Thus, we note that the AO in the assessment order dated 31.03.2022 passed u/s.143/264 of the Act has not given his direction for levy of penalty u/s.270A of the Act, which order was the foundation on the basis of which penalty was levied u/s.270A of the Act, which omission, according to us, is fatal and vitiates the penalty levied u/s.270A((9)(a) of the Act dated 26.09.2022. Therefore, penalty levied by the AO of ₹1,12,92,726/- is unsustainable by relying on the decision of the Hon’ble Supreme Court in the case of CIT v. Jai Laxmi Rice Mills wherein the Hon’ble Supreme Court while examining the similar contention/levy of penalty albeit u/s.271E held as under:

10. Therefore, penalty levied by the AO of ₹1,12,92,726/- is directed to be deleted.

12. According to the Ld.AR, the AO erred in levy of penalty without specifying in the notice itself the specific clause under sub-section 9 of section 270A and drew our attention to the impugned penalty notice dated 31.03.2022 issued by the AO which notice reads as under:

Whereas in the course of proceedings before me for the Assessment Year 2017-18, it appears to me under-reporting and misreporting of income.

You are hereby requested to appear before me either personally or through a duly authorized representative at 03:59 PM on 27/04/2022 and show cause why an order imposing a penalty on you should not be made under section 270A of the Income Tax Act, 1961.

If you do not wish to avail yourself of this opportunity of being heard in person or through authorized representative, you may show cause in writing on or before the said date which will be considered before any such order is made under section 270A of the Income Tax Act, 1961.

(9) The cases of misreporting of income referred to in sub-section (8) shall be the following, namely:— (a) misrepresentation or suppression of facts; (b) failure to record investments in the books of account; (c) claim of expenditure not substantiated by any evidence; (d) recording of any false entry in the books of account;

(e) failure to record any receipt in books of account having a bearing on total income; and (f) failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply.

14. The Ld.AR submitted that the AO was bound by law to specify in the notice, which clause of sub-section (9) of section 270A has been attracted for levying of the penalty under misreporting of income. According to the Ld.AR, in the present case, it can be seen that the notice issued (supra) before levying penalty u/s.270A is vague, because of which, the assessee was confused and couldn’t comprehend as to what fault assessee committed to attract such a penalty. In other words, the assessee was in the dark and wondered as to what kind of violation/fault, assessee has committed which assessee needs to defend while answering the show- cause notice issued by the AO.

16. According to us, the assessee should be informed in the show-cause notice with certainty and accuracy of the exact nature of the fault alleged against him. In this case, it has been noted that the impugned notice issued by the AO is silent about which limb/clause of sub-section (9) of section 270A of the Act has been attracted in the facts of the case, to deserve levy of penalty and how the ingredient of sub-section (9) of Section 270A is satisfied. Therefore, show-cause notice proposing penalty is found to be vague and doesn’t muster the requirement of law to legally impose penalty and therefore, consequent levy of penalty is fragile in eyes of law and is held to be ab-initio bad in law.

:: 12 :: penalty for both the assessment years for ‘under reporting of income and under reporting as a consequence of misreporting of income’.

13. The fact with regard to seizure of huge unaccounted cash during the course of search on 6-12-1018 was not disputed. It is also an admitted fact that the assessee company has offered additional income of Rs.16.39 Crs. & Rs.23.62 Crs. towards disallowance of estimated marketing expenses @ 1/3rd of total expenses incurred under the head ‘marketing expenses’ for both the assessment years. The cash seized during the course of search was telescoped against additional income offered by the assessee towards estimated disallowance of marketing expenses. The assessee has filed return of income in response to notice u/s.153A of the Act, for both the assessment years and offered additional income admitted during the course of search in respect of disallowance of marketing expenses and paid taxes. The AO has also accepted return of income filed by the assessee in response to notice u/s.153A of the Act, without any further addition and also recorded a clear finding in the assessment order that after going through the circumstances in its entirety, the income offered by the assessee, including estimated disallowance of portion of marketing expenses, is found to be in order and accepted. In other words, there is no separate addition towards marketing expenses, but the assessment has been completed by accepting additional income offered by the assessee towards estimated disallowance of marketing expenses for both the assessment years.

:: 13 :: or furnishing of inaccurate particulars of income. Provisions of Sec.271(1)(c) of the Act, was also having two limbs or two charges i.e. i) for concealment of particular of income and ii) furnishing of inaccurate particulars of income. If you go by provisions of Sec. 271(1)(c) of the Act & Sec.270A of the Act, and wordings therein both provisions are similar and para materia to each other. Although, the term ‘tax evasion’ has been redefined by way of ‘under reporting of income and under reporting as a consequence of misreporting of income’ but it is synonymous to concealment of particular of income or furnishing of inaccurate particulars of income. Therefore, it is necessary to examine whether penalty proceedings u/s.270A of the Act, is mandatory in nature and further, such penalty can be invoked without providing an opportunity to the assessee as required u/s.274 of the Act.

15. The order imposing penalty u/s.270A of the Act, is an appealable order u/s.246A of the Act before the First Appellate Authority. If penalty u/s.270A of the Act, has been mandatory, there have not been any provision of appeal u/s.246A of the Act. Since, the order imposing penalty Sec.270A of the Act, is an appealable order, then, it cannot be said that penalty u/s.270A of the Act, is not mandatory in nature. Since, penalty u/s.270A of the Act, is not mandatory in nature, the AO is required to give an opportunity to the assessee to show cause ‘as to why’ penalty should not be levied in terms of sec.274 of the Act. Admittedly, the AO issued notice u/s.274 r.w.s.270A of the Act. Sec.274 of the Act deals with the procedure for levy of penalty, wherein, it directs that no order imposing penalty shall be made unless the assessee has been heard or has been given a reasonable opportunity of hearing. Thus, it is evident that the penalty u/s.270A of the Act, cannot be imposed unless the assessee has given a reasonable opportunity and the assessee is being heard. Once, the AO is bound to act to hear the assessee and give reasonable opportunity to explain its case, then, there is no mandatory requirement of imposing penalty, because the opportunity of hearing is not a mere formality, but it is to adhere to the principle of natural justice. Therefore, in our considered view, the penalty u/s.270A of the Act, is not mandatory and it is based on the facts and merits placed before the AO.

absence of proper notice, which is mandatory, the AO cannot impose penalty, because, it is a clear violation of principles of natural justice, because, issuing a vague notice without specifying the charge under which limb the proposed penalty proceedings is initiated, would vitiate the entire proceedings, because, the assessee was not given an opportunity to explain its case on specific charge. Therefore, in our considered view, penalty levied on the basis of invalid or vague notice is invalid and void ab initio.

17. The concepts of ‘under reporting of income’ and ‘misreporting of income’ are two different charges with very clear boundaries. As we have already discussed in earlier part of this order, sub-section 2 to 6 of sec Sec.270A of the Act, deals with concept of ‘under reporting of income’ and for this, separate rate of penalty is provided. Sub-sec.9 deals with concept of ‘misreporting of income’ and for this, separate rate of penalty is provided. Therefore, ‘under reporting of income’ and ‘misreporting of income’ shall not be used interchangeably nor are they synonymous, but each operates under strict definition and do not overlap each other. Since, ‘under reporting of income’ and ‘misreporting of income’ are two concepts and separate charges, the AO before initiating penalty proceedings should specifically arrive at a satisfaction to the effect that, for which charge, he has initiated penalty Sec.270A of the Act. In the present case, if you go by the assessment order passed by the AO, there is no satisfaction in respect of initiation of penalty proceedings u/s.270A of the Act, whether it is for ‘under reporting of income and under reporting as a consequence of misreporting of income’ thereof which is clearly evident from the assessment order passed by the AO, where, the AO simply referred to initiation of penalty proceedings u/s.270A of the Act. Further, said lapse is even continued while issuing show cause notice u/s.274 r.w.s.270A of the Act, where, the AO simply specified ‘under reporting of income and under reporting as a consequence of misreporting of income’, without specifying for which charge the assessee is directed to pay penalty u/s.270A of the Act. There is no whisper as to which limb of Sec.270A of the Act, is attracted and how the ingredients of sub-sec.9 of Sec.270A of the Act are specified. In absence of such particulars, the mere reference to the word ‘misreporting of income’ in the assessment order or in the show cause notice makes the impugned order manifestly arbitrarily. Therefore, we are of the considered view that show cause notice issued by the AO u/s.274 r.w.s.270A of the Act, without specifying the charge under which penalty is proposed u/s.270A of the Act, is a clear case of non- application of mind at the time of issuing show cause notice and thus, in absence of specific charge against the assessee, the assessee is not in a position to counter the show cause notice issued by the AO as well as cogent reply to the show cause notice. In view of vague notice without any whisper as to which limb of section 270A of the Act is attracted and how ingredients of sub-section 9 is specified, initiation of penalty u/s.270A of the Act for ‘misreporting of income’ is not only erroneous, but also arbitrary and thus, penalty proceedings cannot be sustained. This legal position is strengthened by the decision of the Hon’ble Delhi High Court in the case of Prem Brothers Infrastructure LLP (supra), where the Hon’ble Delhi High Court by following :: 15 ::

the earlier decision in the case of Schneider Electric South East Asia (HQ) Pte Ltd. v. ACIT, International Taxation in WP (C) No.5111 of 2022 dated 28.03.2022, held that in view of vague notice without any whisper as to which limb of section 270A of the Act is attracted and how ingredients of sub- section 9 is specified, initiation of penalty u/s.270A of the Act for ‘misreporting of income’ is not only erroneous, but also arbitrary and bereft of any reason and consequently, penalty order passed by the AO, cannot be sustained. The relevant findings of the Hon’ble Delhi High Court are as under:

“6. Having perused the impugned order dated 9th March, 2022, this Court is of the view that the Respondents’ action of denying the benefit of immunity on the ground that the penalty was initiated under Section 270A of the Act for misreporting of income is not only erroneous but also arbitrary and bereft of any W.P.(C) 7092/2022 Page 4 of 6 reason as in the penalty notice the Respondents have failed to specify the limb - "underreporting" or "misreporting" of income, under which the penalty proceedings had been initiated.

8. This Court is of the opinion that the entire edifice of the assessment order framed by Respondent No.1 was actually voluntary computation of income filed by the Petitioner to buy peace and avoid litigation, which fact has been duly noted and accepted in the assessment order as well and consequently, there is no question of any misreporting.

9. This Court is further of the view that the impugned action of Respondent No.1 is contrary to the avowed Legislative intent of Section 270AA of the Act to encourage/incentivize a taxpayer to (i) fast-track settlement of issue, (ii) recover tax demand; and (iii) reduce protracted litigation.

7. This Court is of the opinion that the only addition in the assessment order framed by Respondent No.1 is in respect of disallowance under section 14A of the Act. The Petitioner has made a disallowance of Rs.3,20,14,010/- which was recomputed by the Assessing Officer at Rs.6,82,45,759/-. Thus, this is a case where the amount of underreporting of income is consequent to increase in the disallowance voluntarily estimated by the assessee. This court is conscious of the fact that there can be cases where underreporting of income may result in misreporting of income, however, in peculiar facts of the present case, the underreporting allegedly done by the assessee cannot amount to :: 16 ::

misreporting as the assessee had furnished all the details of the transactions relating to disallowance made under Section 14A of the Act and the AO as well as assessee has used the same details to arrive at different conclusions i.e. differing quantum of disallowances under Section 14A of the Act. This by no stretch of imagination can be held to be ‘misreporting’.

19. In this view of the matter and by following the ratio laid down by the Hon’ble Supreme Court and various High Courts referred to hereinabove, we are of the considered view that show cause notice issued by the AO u/s.274 r.w.s.270A of the Act, is vague, non specific to charge (AY 2017-18) Arusuvai Food Processors Pvt. Ltd. and thus, is illegal and liable to be quashed. Thus, we quash the order passed by the AO imposing penalty u/s.270A(9) of the Act. 18. Respectfully following the decision of the co-ordinate bench in the case of Enrica Enterprises Pvt. Ltd.(supra), we hold that show cause notice issued by the AO u/s.274 r.w.s.270A of the Act is vague, doesn’t spell out the specific charge and thus, is illegal and liable to be quashed.

Thus, we quash the penalty order passed by the AO u/s.270A(9) of the Act for AY 2017-18.