SHORELINE HOTEL P. LTD.,MUMBAI vs. DY CIT CC-1(2), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES “G”, MUMBAI BEFORE SHRI G. S. PANNU, HON’BLE PRESIDENT AND SHRI SAKTIJIT DEY, HON’BLE JUDICIAL MEMBER Assessment Year: 2008-09 Shoreline Hotel Pvt. Ltd., DCIT, Central Circle- 1(2), 29 Dar-Ul.Habib, Marine Drive, Old CGO Building, 9th Floor, Churchgate, Churchgate, Mumbai - 400020 Vs. Mumbai - 400020 PAN: AABCS1380B (Appellant) (Respondent) Assessee by : Shri Vijay Mehta (AR) Revenue by : Shri Rajneesh Yadav (DR) Date of Hearing : 21/10/2021 Date of Pronouncement: 16/12/2021

O R D E R PER BENCH: This is an appeal by the assessee against order dated 29.10.2020 of learned Commissioner of Income Tax (Appeals)-47, Mumbai confirming the penalty imposed of Rs. 7,24,096/- under section 271(1)(c) of the Income Tax Act, 1961 for the assessment year 2008-09. 2. Briefly the facts are, the assessee is a resident company engaged in hotel business. For the assessment year under dispute, assessee filed its return of income on 29.09.2008 declaring total income of Rs. 2,80,91,813/-. Though, assessment in case of the assessee was originally completed under section 143(3) of the Act, however, based on information received from the Investigation (Wing) of the department that certain purchases shown by the 2 Assessment Year: 2008-09 assessee in the year under consideration are non-genuine, the Assessing Officer (AO) reopened the assessment. Ultimately, the AO completed the assessment under section 143(3) of the Act treating the purchases worth Rs. 1,39,79,631/- as non genuine and added back to the income of the assessee. Assessee contested the aforesaid addition before learned Commissioner (Appeals). After considering the submissions of the assessee, learned Commissioner (Appeals) restricted the disallowance to 17% of the alleged non- genuine purchases. Additionally, he disallowed assessee’s claim of depreciation to the extent of Rs. 1,31,417/-. Thus, the total disallowance sustained by learned Commissioner (Appeals) was to the tune of Rs. 21,30,322/-. Based on the disallowance sustained by learned Commissioner (Appeals), the AO initiated proceeding for imposition of penalty under section 271(1)(c) of the Act alleging furnishing of inaccurate particulars of income and thereby concealing the income. Ultimately, the AO passed an order under section 271(1)(c) of the Act imposing penalty of Rs. 7,24,096/- alleging furnishing of inaccurate particulars of income. The penalty so imposed was also upheld by learned Commissioner (Appeals). 3. Shri Vijay Mehta, learned Counsel for the assessee submitted that the penalty order passed under section 271(1)(c) of the Act is invalid as the AO has not issued valid show cause notice under section 274 r.w.s. 271(1)(c) of the Act. Proceeding further, he drew our attention to the show cause notice placed in the paper book and submitted that the AO has not struck off the unnecessary words to indicate the particular limb for which he intended to impose penalty under section 271(1)(c) of the Act. Thus, he submitted, since

3 Assessment Year: 2008-09 the AO has initiated the penalty proceeding mechanically without recording proper satisfaction and without proper application of mind, the proceeding is vitiated. Hence, the penalty order passed cannot be sustained. In support of such contention, he relied upon the decision of Hon’ble jurisdictional High Court in case of Mohammed Farhan A Shaikh vs DCIT (2021) 200 DTR (Bombay) 65. Further, he also relied upon the decision of the coordinate Bench in case of DCIT vs. Thane District Central Co-operative Bank Ltd. ITA No. 2138/Mum/2020, CO No. 215/Mum/2019 dated 28.06.2021. Without prejudice, learned counsel for the assessee submitted, on merits also the assessee has strong case as no penalty can be imposed based on addition made purely on guess work and estimation. 4. Per contra, the learned Departmental Representative submitted, in the show cause notice the AO has tick marked the specific limb for which he intended to impose penalty. 5. We have considered rival submissions in the light of the decisions relied upon and perused the materials on record. In so far as factual aspect of the issue is considered, there is no dispute that certain purchases claimed to have been made by the assessee during the year were treated as non genuine by the AO and entirely disallowed. However, learned Commissioner (Appeals) restricted the disallowance to 17% of the alleged non-genuine purchases. It is a fact on record that aforesaid decision of learned Commissioner (Appeals) was also upheld by the Tribunal while deciding appeal filed by the revenue and cross objection by the assessee. It is a fact on record that based on addition

4 Assessment Year: 2008-09 sustained by learned Commissioner (Appeals), the AO has imposed penalty under section 271(1)(c) of the Act. 6. While recording satisfaction for initiating penalty proceedings in the assessment order, the AO has observed that the assessee had furnished inaccurate particulars of income and thereby concealed the income. Whereas, in the order passed imposing penalty under section 271(1)(c) of the Act, the AO has alleged furnishing of inaccurate particulars of income. On a perusal of the show cause notice dated 25.03.2015 issued under section 274 r.w.s. 271(1)(c) of the Act in a printed format, it is noticed that the AO has not struck off or deleted the unnecessary words to specify the exact limb for which he intended to impose penalty under section 271(1)(c) of the Act. This is the uncontroverted factual position emerging from record. Thus, the issue which requires examination is, whether the penalty proceeding has been validly initiated with proper application of mind. 7. In our view, the issue is no more res integra in view of the decision of the Hon’ble jurisdictional High Court in case of Mohammed Farhan A Shaikh vs DCIT (supra). In fact, while dealing with identical issue, the coordinate Bench in case of DCIT vs. Thane District Central Co-operative Bank Ltd. (supra) has followed the aforesaid decision of the Hon’ble jurisdictional High Court and has held as under:- “9. We have considered rival submissions and perused materials on record. Undisputedly, the assessee has challenged the validity of the penalty order passed under section 271(1)(c of the Act because of the defective show cause notice issued by the assessing officer under section 274 r.w.s. 271(1)(c) of the Act. Pertinently, a perusal of the show cause notice dated 14-03-2017 issued under 274 r.w.s.

5 Assessment Year: 2008-09 271(1)(c) of the Act, a copy of which is at page 46 of the paper book, makes it clear that the assessing officer has not mentioned the specific limb of section 271(1)(c) of the Act applicable to assessee, by striking off the inapplicable words. In fact, the assessing officer had again issued a notice dated 19-06-2017 to the assessee requiring to show cause why penalty under section 271(1)(c) of the Act should not be levied. However, a reference to the said notice, a copy of which is at page 47 of the paper book, would reveal that, though, the assessing officer has referred to his earlier show cause notice issued in the printed form; however, in the subsequent notice also he has not mentioned the specific limb of section 271(1)(c) of the Act for which he intended to impose penalty. Whereas, a perusal of the assessment order passed for the impugned assessment year clearly reveals that the assessing officer has initiated proceeding for imposition of penalty under section 271(1)(c) of the Act alleging furnishing of accurate particulars of income. 10. Further, a careful perusal of the impugned penalty order also reveals that the assessing officer has ultimately levied penalty under section 271(1)(c) of the Act on the charge of furnishing of inaccurate particulars of income. This fact is clearly evident from the observations of the assessing officer at paragraph 8 and 9 of the penalty order. Thus, a conjoint reading of the assessment order and penalty order would reveal that the assessing officer, from the very beginning, intended to levy penalty under section 271(1)(c) of the Act for furnishing of inaccurate particulars of income. Whereas, in the show cause notice issued under section 274 r.w.s. 271(1)(c) of the Act on 14-03-2013, the assessing officer has mentioned both the limbs of section 271(1)(c) of the Act without striking off the words “concealed the particulars of your income”. Even, in the subsequent show cause notice issued on 09-06-2017, though, not in a printed form, the assessing officer has still not disclosed the exact offence for which he intended to levy penalty. 11. Further, the following observations of the assessing officer in the remand report furnished to learned Commissioner (Appeals), as reproduced in the impugned order of learned Commissioner (Appeals), would set at rest the factual position regarding the specific limb for which penalty proceeding was initiated:- “As would be seen, the assessing office has observed as under:- “(b) In the quantum order, after due deliberations, it is clearly indicated by the AO that the penalty proceeding is initiated for furnishing inaccurate particulars which shows due application of 6 Assessment Year: 2008-09 mind qua penalty proceedings. However, while notice u/s 274 r.w.s. 271(1)(c) was issued for initiation of penalty proceedings striking off the irrelevant point was not done inadvertently.” Thus, there is a clear admission by the assessing officer that the show cause notice issued under section 274 r.w.s. 271(1)(c) of the Act is an omnibus/generic notice. 12. Keeping in view the aforesaid factual position, let us deal with the submissions of learned Departmental Representative. In this regard, the following submissions would be relevant:- “The penalty notice has charged the assessee with both the limbs of concealment and furnishing of inaccurate particulars. The assessee has in fact met this charge in its reply at S no 2,4,7,9, and 10 reproduced at para 5 of the penalty order. The penalty order accordingly levied penalty u/s 271(1) (c] due to both the limbs of concealment and furnishing of inaccurate particulars being established.” As could be seen from the above quoted portion, learned Departmental Representative has tried to make out a case that the assessing officer had intended to levy penalty under both the limbs of section 271(1)(c) of the Act. This submission of learned Departmental Representative is contrary to the facts on record. When the assessing officer has unequivocally accepted that penalty proceeding was initiated for the offence of furnishing inaccurate particulars of income, we are afraid, at this stage learned Departmental Representative cannot improve upon the admitted factual position. 13. Having dealt with the factual aspect, at this stage, it would be relevant to examine the Full Bench decision of the hon’ble jurisdictional High Court in case of Mohammed Farhan A Shaikh vs DCIT (supra). After conspectus of a catena of decisions on the impact of non striking off of inappropriate words in the show cause notice issued under section 274 qua the validity of the penalty proceeding, the hon’ble jurisdictional High Court has observed as under:- “179. Besides, the prima facie opinion in the assessment order need not always translate into actual penalty proceedings. These proceedings, in fact, commence with the statutory notice under s. 271(l)(c) r/w s. 274. Again, whether this prima facie opinion is sufficient to inform the assessee about the precise charge for the penalty is a matter of inference and, thus, a matter of litigation and arising out of uncertainty. 180, One course of action before us is curing a defect in the notice by the referring to the assessment order, which may or may not contain

7 Assessment Year: 2008-09 reasons for the penalty proceedings. The other course of action is the prevention of defect in the notice — and that prevention takes just a tick mark. Prudence demands prevention is better than cure. Answers : Question No. 1 : If the assessment order clearly records satisfaction for posing penalty on one or the other, or both grounds mentioned in s. 271(2)(c), does a mere defect in the .notice — not striking off the irrelevant matter — vitiate the penalty proceedings? 81. It does. The primary burden lies on the Revenue. In the assessment proceedings, it forms an opinion, prima facie or otherwise, to launch penalty proceedings against the assessee. But that translates into action only through the statutory notice under s. 271(1)(c) r/w.s. 274 of IT Act. True, the assessment proceedings form the basis for the penalty proceedings, but they are not composite proceedings to draw strength from each other. Nor can each cure the other's defect. A penalty proceeding is a corollary; nevertheless, it must stand on its own. These proceedings culminate under a different statutory scheme that remains distinct from the assessment proceedings. Therefore, the assessee must be informed of the grounds of the penalty proceedings only through statutory notice. An omnibus notice suffers from the vice of vagueness. 182. More particularly, a penal provision, even with civil consequences, must be construed strictly. And ambiguity, if any, must be resolved in the affected assessee’s favour. 183. Therefore, we answer the first question to the effect that Goa Dourado Promotions and other cases have adopted an approach more in consonance with the statutory scheme. That means we must hold that Kaushalya does not lay down the coireet proposition of law. Question No. 2 : Has Kaushalya failed to discuss the aspect of 'prejudice'? 184. Indeed, Kaushalya did discuss the aspect of prejudice. As we have already noted, Kaushalya noted that the assessment orders already contained the reasons why penalty should be initiated. So, the assessee, stresses Kaushalya, "fully knew in detail the exact charge of the Revenue against him". For Kaushalya, the statutory notice suffered from neither non-application of mind nor any prejudice. According to it, "the so-called ambiguous wording in the notice (has not) impaired or prejudiced the right of the assessee to a reasonable opportunity of being heard". It went onto observe that for sustaining the plea of natural justice on the ground of absence of opportunity, "it has to be established that prejudice is caused to the concerned person by the procedure followed". Kaushalya closes the discussion by 8 Assessment Year: 2008-09 observing that the notice issuing "is an administrative device for informing the assessee about the proposal to levy penalty in order to enable him to explain as to why it should not be done". 185. No doubt, there can exist a case where vagueness and ambiguity in the notice can demonstrate non-application of mind by the authority and/or ultimate prejudice to the right of opportunity of hearing contemplated under s. 274. So asserts Kaushalya. In fact, for one assessment year, it set aside the penalty proceedings on the grounds of non-application of mind and prejudice. 186. That said, regarding the other assessment year, it reasons that the assessment order, containing the reasons or justification, avoids prejudice to the assessee. That is where, we reckon, the reasoning suffers. Kaushalya's insistence that the previous proceedings supply justification and cure the defect in penalty proceedings has not met our acceptance. Question No. 3 : What is the effect of the Supreme Court's decision in Dilip N. Shroff on the issue of non-application of mind when the irrelevant portions of the printed notices are not struck off ? 187. In Dilip N. Shroff, for the Supreme Court, it is of "some significance that in the standard Pro-forma used by the AO in issuing a notice despite the fact that the same postulates that inappropriate words and paragraphs were to be deleted, but the same had not been done". Then, Dilip N. Shroff, on facts, has felt that the AO himself was not sure whether he had proceeded on the basis that the assessee had concealed his income or he had furnished inaccurate particulars. 188. We may, in this context, respectfully observe that a contravention of a mandatory condition or requirement for a communication to be valid communication is fatal, with no further proof. That said, even if the notice contains no caveat that the inapplicable portion be deleted, it is in the interest of fairness and justice that the notice must be precise. It should give no room for any ambiguity. Therefore, Dilip N. Shroff disapproves of the routine, ritualistic practice of issuing omnibus show-cause notices. That practice certainly betrays non- application of mind. And, therefore, the infraction of a mandatory procedure leading to penal consequences assumes or implies prejudice. 189. In Sudhir Kumar Singh, the Supreme Court has encapsulated the principles of prejudice. One of the principles is that "where procedural and /or substantive provisions of law embody the principles of natural justice, their infraction per se does not lead to invalidity of the 9 Assessment Year: 2008-09 orders passed. Here again, prejudice must be caused to the litigant, "except in the case of a mandatory provision of law which is conceived not only in individual interest but also in the public interest". 190. Here, s. 271(l)(c) is one such provision. With calamitous, albeit the commercial, consequences, the provision is mandatory and brooks no trifling with or dilution. For a further precedential prop, we may that refer to Rqjesh Kumar & Ors. vs. CIT (2006) 206 CTR (SC) 175 : (2007) 2 SCC 181, in which the apex Court has quoted with approval its earlier judgment in State of Orissa us. Dr. Binapani Dei AIR 1967 SC 1269. According to it, when by reason of action on the part of a statutory authority, civil or evil consequences ensue, principles of natural justice must be followed. In such an event, although no express provision is laid down on this behalf, compliance with principles of natural justice would be implicit. If a statue contravenes the principles of natural justice, it may also be held ultra vires Art. 14 of the Constitution. 191. As a result, we hold that Dilip N. Shroff treats omnibus show- cause notices as betraying non- application of mind and disapproves of the practice, to be particular, of issuing notices in printed form without deleting or striking off the inapplicable parts of that generic notice.” 14. A careful reading of the aforesaid observations/finding would make it amply clear that not only the hon’ble High Court has held that the earlier decision in case of Smt. Kaushalya & Others (1995) 216 ITR 260 does not lay down the correct proposition of law, but they have also very clearly and categorically held that the defect in the show cause notice by not striking off the irrelevant matter vitiates the penalty proceedings. This is so because the assessee must be informed of the grounds of the penalty proceedings only through the statutory notice. The hon’ble Court has observed that an omnibus notice suffers from the vice of vagueness. Proceeding further, the hon’ble Court has held that a penalty provision even for civil consequences, must be construed strictly and ambiguity, if any, must be resolved in assessee’s favour. While coming to such conclusion, the hon’ble jurisdictional High Court has also referred to the decision of the hon’ble Supreme Court in case of Dilip N Shrfoff (supra), wherein, the hon’ble Supreme Court disapproved the routine ritualistic practice of omnibus show cause notice issued in printed form without deleting or striking off the inapplicable part, which betrays non application of mind. Therefore, the infraction of a mandatory procedure leading to penal consequences assumes or implies prejudice.

10 Assessment Year: 2008-09 15. Therefore, if we apply the ratio laid down in the aforesaid Full Bench decision of the hon’ble jurisdictional High Court to the facts of the present appeal, it can be seen that the assessing officer has issued a generic show cause notice in a printed form without mentioning the specific charge by striking off the inapplicable words. Thus, the show cause notice issued under section 274 r.w.s section 271(1)(c) is a vague and omnibus notice revealing complete nonapplication of mind by the assessing officer. Thus, viewed in the light of the ratio laid down by the Full Bench of the hon’ble jurisdictional High Court (supra), the penalty order passed under section 271(1)(c) of the Act, has to be declared as invalid. In fact, the Division Bench decision of the hon’ble jurisdictional High Court in case of Ventura Textiles Ltd vs CIT (supra) (also taken note of by the hon’ble Full Bench) also propounded similar legal principles.”