MR.BABU MATHEW,COCHIN vs. THE ACIT, COCHIN

Per CHANDRA POOJARI, ACCOUNTANT MEMBER:

These two appeals by the assessee are directed against different orders of

the CIT(A)-I Kochi for the assessment years 2008-09 and 2009-10.

u/s. 271(1)(c) of the I.T. Act.

2 I.T.A. No. 95&96/C/2016 3. The brief facts for the assessment year 2008-09 are that the original return

of income for the assessment year 2008-09 was filed on 28/05/2010 declaring a

total income of Rs.6,01,250/-. A survey under section 133A was conducted at

the business premises of the assessee on 19/03/2011. As a result of the survey

the assessee filed a revised return on 31/08/2010 with a total income of

Rs.1,07,37,350/- which includes the additional income admitted by the assessee

during the survey amounting to Rs.1,01,36,100/-. Subsequently notice under

section 148 was issued and the assessment was completed under section 143(3)

r.w.s. 147 on 23/12/2010. In the assessment order the Assessing Officer made

further additions of Rs.2 lakhs under section 69 and Rs.16,00,740/- on account

of difference in books of accounts. The total income thus assessed was

Rs.1,25,38,090/-. The Assessing Officer initiated penalty proceedings and passed

an order under section 271(1)(c) levying a penalty of Rs.40,70,658/-. The

Assessing Officer has stated that the additional income of Rs.1,01,36,100/-

declared by the assessee was only after the survey operations and therefore it is

clear that had the survey been not conducted and documents revealing

unexplained investments made by the assessee in the landed properties were

impounded, the ass would not have declared the additional income. The

relevant portion of the order is reproduced herein:

“It is undisputed that the return including the additional income declared by the assessee was filed only after the survey operations. Therefore, it is crystal clear that had the survey been not conducted in the assessee’s case and the documents revealing unexplained investments by the assessee in landed

3 I.T.A. No. 95&96/C/2016 properties were impounded, the additional income could not have been got disclosed by the assessee. The undisclosed in this case has come out as a result of survey and thereafter filing return by the assessee to show the undisclosed income could not be said to be a voluntary act on the part of the assessee. In a number of decisions, including that of the Hon’ble Supreme Court, reported in 186 ITR 571, it has been held that revised return does not mitigate the default under section 271(1)(c). The assessee was under a statutory obligation to file the return of income within the time limit provided under section 139(1) providing therein the correct particulars of its income. It has failed to include in the return so filed the correct particulars of its income. It is relevant in this context to mention that an assessee who made a bona fide discovery about having made a previous incorrect return was entitled to make a revised return invoking the enabling provisions of the law. Such a course, however, is not open when the previous return was dishonestly made. This fact is clear in this case, because even though the assessee had filed a return on 28/05/2010, he had done nothing to revise the return till after the date of survey during the course of which the department detected such undisclosed investments. Thus, the act of the assessee was not with any bona fides, it was the assessee who better knows his affairs and could have very well returned the correct particulars of its income rather than waiting the department to probe into the same. It is relevant to mention here that the unexplained investments were detected at the time of survey, in respect of which the assessee admitted additional income and filing return thereafter cannot be said to be on his own volition. The assessee had also not contested the assessment made u/s. 143(3) r.w.s. 147 before appeals. The Hon’ble High Court of Kerala in the case of CIT vs. K. Mahim reported in 15 Taxman 557 has held that mere filing of return would not exonerate assessee from liability to penalty, nor filing of revised return after the departmental investigation would absolve the assessee from penalty.”

28/05/2010 the assessee had declared only Rs.6,01,250/- as its total income and

the additional income was admitted by the assessee only due to survey under

section 133A. Though the assessee has claimed that the additional income was

offered voluntarily during the survey and only to purchase peace with the

department and avoid litigation. However, on perusal of the sworn statement

recorded from the assessee on 19/03/2010 during the survey, it is revealed that

4 I.T.A. No. 95&96/C/2016 the disclosure was not voluntary, rather the assessee has admitted suppression

of profits in the original return filed. The relevant portion of the sworn

statement is reproduced herein:

Q.14 It is seen from the computer printouts taken from the computer in which the amounts of your company are maintained that there is huge profits in M/s. Mathew Sons Agencies (P) Ltd. during the above financial years. Have you paid tax and filed your returns showing this?

A.14 It is true that there are omissions in including the actual profit in my I.T. returns for self, wife and my company. Moreover, the Company has not filed the returns for the last two assessment years i.e. 2008-09 and 2009-10. I am ready to file all the due returns and to revise my companies, my wife’s name and in my name during the assessment years 2007-08, 2008-09 and 2009-10. To compensate the shortage in payment of tax by understatement and non filing of I.T. returns.

Q.15 Based on the various documents found in your business premises have you got anything to disclose before the Income Tax Authority?

A.15 As agreed by me I have committed various errors, omissions and technical mistakes in my accounting for the business run in the name of M/s. Mathew Son Agencies (P) Ltd., my wife’s name and in my name during the assessment years 2007-08, 2008-09 and 2009-10. To compensate the shortage in payment of tax by understatement and non filing of I.T. returns.

assessee dated 19.03.2010 that the actual profits in the business were concealed

as the same were not shown in the original return of income. It means it is only

after getting confronted with evidences found for concealment of income during

the course of survey, the assessee has come out with the disclosure of

5 I.T.A. No. 95&96/C/2016 Rs.1,01,36,100/-. There is no provision as such under section 153A which

provides immunity to the penalty proceedings if the assessee comes out with a

concealed income during the course of survey. It is noteworthy that survey

operations are carried out in order to find out the actual facts and transactions

recorded in the books of account and only after getting confronted with the

same the assessee has come to admit such income. To this extent, the

provisions of section 271(1)(c) becomes applicable as it clearly states that when

a person has concealed the particulars of income or furnished inaccurate

particulars of such income, is liable for penalty. Thus The CIT(A) confirmed the

penalty imposed u/s. 271(1)(c) of the Act.

of the Act does not specify the specific charge against the assessee as to

whether the assessee is guilty of having concealed particulars of income or

having furnished inaccurate particulars of income and to that effect the assessee

has also filed additional ground along with petition for admission of the same.

This is the legal ground and admit the same for adjudication. He submitted that

unless the Assessing Officer specified the charge against the assessee by striking

out the relevant portion of the show cause notice issued u/s. 274 of the Act,

would render the proceeding for imposition of penalty as null and void. He drew

6 I.T.A. No. 95&96/C/2016 our attention to the copy of the notice issued u/s. 274 dated 23/12/2011 for the

assessment year 2008-09 which is placed at pg. 37 of the paper book and also

notice dated 23/12/20111 for the assessment year 2009-10 which is placed at

pg. 42 of the paper book.

opportunity before the authorities and the assessee has participated in the

7 I.T.A. No. 95&96/C/2016 penalty proceedings. Hence, the assessee cannot raise this issue before the

Tribunal. He further submitted that the error in the issuance of notice u/s. 274

could be cured in view of the provisions of sec. 292B and sec. 292BB of the Act.

He submitted that the penalty order which was decided by the CIT(A) on merit

ought to be confirmed.

We have given a careful consideration to the rival submissions. The argument of

the learned counsel for the Assessee was that the show cause notice u/s.274 of

the Act which is in a printed form and the AO has indicated in the said notice as

to whether the penalty is sought to be levied on the assessee for "furnishing

inaccurate particulars of income" or "concealing particulars of such income" by

striking off the irrelevant portion of the printed show cause notice. On this aspect

we find that in the show cause notice u/s.274 of the Act the AO has not struck

out the irrelevant part. It is not spelt out as to whether the penalty proceedings

are sought to be levied for "furnishing inaccurate particulars of income" or

"concealing particulars of such income".

Cotton and Ginning Factory, 359 ITR 565 (Karn), has held that notice u/s. 274 of

the Act should specifically state as to whether penalty is being proposed to be

imposed for concealment of particulars of income or for furnishing inaccurate

particulars of income. The Hon'ble High court has further laid down that certain

8 I.T.A. No. 95&96/C/2016 printed form where all the grounds given in section 271 are given would not

satisfy the requirement of law. The Court has also held that initiating penalty

proceedings on one limb and finding the assessee guilty in another limb is bad in

law. It was submitted that in the present case, the aforesaid decision will

squarely apply and the orders imposing penalty have to be held as bad in law

and liable to be quashed.

Cotton and Ginning Factory (supra) has laid down the following principles to be

followed in the matter of imposing penalty u/s.271(1)(c) of the Act.

"NOTICE UNDER SECTION 274 59. As the provision stands, the penalty proceedings can be initiated on various ground set out therein. If the order passed by the Authority categorically records a finding regarding the existence of any said grounds mentioned therein and then penalty proceedings is initiated, in the notice to be issued under Section 274, they could conveniently refer to the said order which contains the satisfaction of the authority which has passed the order. However, if the existence of the conditions could not be discerned from the said order and if it is a case of relying on deeming provision contained in Explanation-1 or in Explanation-1(B), then though penalty proceedings are in the nature of civil liability, in fact, it is penal in nature. In either event, the 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 the 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(1)(c) do not exist as such he is not liable to pay penalty. The practice of the Department sending a printed farm where all the ground mentioned in Section 271 are mentioned would not satisfy requirement of law when the consequences of the assessee not rebutting the initial presumption is serious in nature and he had to pay penalty from 100% to 300% of the tax liability. As the said provisions have to be held to be strictly construed, notice issued under Section 274 should satisfy the grounds which he has to meet specifically. Otherwise, principles of natural justice is offended if the show

9 I.T.A. No. 95&96/C/2016 cause notice is vague. On the basis of such proceedings, no penalty could be imposed on the assessee.

10 I.T.A. No. 95&96/C/2016 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 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."

The final conclusion of the Hon'ble Court was as follows:-

"63. In the light of what is stated above, what emerges is as under: a) Penalty under Section 271(1)(c) is a civil liability. b) Mens rea is not an essential element for imposing penalty for breach of civil obligations or liabilities.

c) Willful concealment is not an essential ingredient for attracting civil liability.

d) Existence of conditions stipulated in Section 271(1)(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(1)(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.

11 I.T.A. No. 95&96/C/2016 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 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(1)(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.

12 I.T.A. No. 95&96/C/2016 The findings recorded in the assessment proceedings in so far 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."

that the show cause notice u/s. 274 of the Act is defective as it does not spell

out the grounds on which the penalty is sought to be imposed. Following the

decision of the Hon'ble Karnataka High Court, we hold that the orders imposing

penalty in all the assessment years have to be held as invalid and consequently

penalty imposed is cancelled.

the basic defect in assumption of jurisdiction and only cure the mistake, defect or

omission in return of income, assessment, notice or the proceeding is in

substance and effect in conformity with or according to intent and purpose of the

Act. As we have already seen that the Hon'ble Karnataka High Court in the

decision referred to earlier view the show cause notice and the reasons

mentioned in the show cause notice are part of the process of the natural justice

and the defect in such notice cannot be overlooked. In view of the aforesaid

13 I.T.A. No. 95&96/C/2016 decision we do not find any infirmity in the arguments advanced by the learned

AR before us.

penalty proceedings and hence the error, if any that has occurred would be

cured in view of the provisions of sec. 292B/292BB of the Act. Opposing the said

contention, reliance was placed on the decision rendered by the Bangalore Bench

of the Tribunal in the case of Shri K. Prakash Shetty vs. ACIT (ITA Nos. 265 to

267/Bang/2014 dt. 05/06/2014) wherein it was held that the provisions of

sec.292BB would not come to the rescue of the revenue, when the notice was

not in substance and effect in conformity with or according to the intent and

purpose of the Act. In our view, the notice issued by the Assessing Officer was

not in substance, and effect in conformity with or according to the intent and

purpose of the Act, since the Assessing Officer did not specify the charge for

which penalty proceedings were initiated and further there was non-application

of mind on the part of the Assessing Officer.

case cannot be sustained. We therefore cancel the orders imposing penalty on

the Assessee and allow the appeals by the Assessee.

No. 96/Coch/2016, we apply the same ratio for the appeal in I.T.A.

14 I.T.A. No. 95&96/C/2016 No.96/Coch.2016 also. Therefore, we are inclined to delete the penalty levied

u/s. 274 of the Act and cancel the penalty proceedings against the assessee.

sd/- sd/- ( GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER

Place: Kochi Dated: 19th January, 2018 GJ Copy to: 1. Shri Babu Mathew, 36/2554, Mattamana House,Mathewsons building, Kaloor, Kochi-682 017. 2. The Assistant Commissioner of Income-tax, Circle-1(2), Kochi. 3. The Commissioner of Income-tax(Appeals)-I, Kochi 4. The Pr. Commissioner of Income-tax, Kochi. 5. D.R., I.T.A.T., Cochin Bench, Cochin. 6. Guard File. By Order

(ASSISTANT REGISTRAR) I.T.A.T., Cochin