M/S CHEMSTAR ORGANICS (INDIA) LTD.,MUMBAI vs. ITO 1 (1)(2), MUMBAI

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ITA 6914/MUM/2019Status: DisposedITAT Mumbai25 October 2021AY 2006-074 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the penalty proceedings are vitiated due to a defective notice issued under Section 274 r.w.s. 271(1)(c), as the Assessing Officer failed to strike off the irrelevant limb. Following the jurisdictional High Court's decision, the penalty order was set aside.

What were the facts?

The Assessing Officer initiated penalty proceedings under Section 271(1)(c) based on additions made during assessment for failure to prove identity, creditworthiness, and genuineness of certain transactions. The penalty was sustained by the CIT(A).

What were the issues?

Whether a penalty under Section 271(1)(c) is bad in law if the notice issued under Section 274 does not strike off the irrelevant limb. Whether the assessee's additional ground regarding the defective notice can be adjudicated.

Which sections of the Income-tax Act were involved?

Section 271(1)(c),Section 274,Section 68

AI-generated summary — verify with the full judgment below

Cases cited in this judgment(1)Show list

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Income Tax Appellate Tribunal, MUMBAI BENCH “C” MUMBAI

Before: SHRI S. RIFAUR RAHMAN & SHRI RAVISH SOOD

For Appellant: Mr. Satish Mody, AR
For Respondent: Ms. Shreekala Pardeshi, DR
Hearing: 24/08/2021Pronounced: 25/10/2021

ORDER PER S. RIFAUR RAHMAN, A.M. The present appeal is filed by the assessee against the order of the Commissioner of Income Tax (Appeals)-2, Mumbai [in short ‘CIT(A)’] for the assessment year 2006-07 dated 03.09.2019 and arises out of penalty levied u/s 271(1)(c) of the Income Tax Act, 1961 (in short the Act).

2.

The brief facts are, the issue arising out of order u/s 271(1)(c) dated 28.03.2014 of the Income Tax Act, 1961 (in short ‘the Act’) passed by the DCIT- 1(1), Baroda for assessment year 2006-07. The Assessing Officer initiated the penalty proceedings based on the additions made in assessment order passed u/s 144 of the Act, as the assessee failed to prove the identity, creditworthiness,

M/s Chemstar Organics (India) Ltd 2 genuineness as required u/s 68 of the Act. Accordingly, the Assessing Officer levied penalty of ₹98,10,000/- u/s 271(1)(c) of the Act.

3.

Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) and Ld. CIT(A) sustained the penalty levied by the Assessing Officer.

4.

Aggrieved assessee is in appeal before us and filed following grounds of appeal and also additional grounds of appeal:

On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in not deleting the levying penalty addition of income ₹29,15,787/- amounting to ₹9,81,454/- u/s 271(1)(c) of the Act without appreciating the facts of the case and explanation provided during the hearing and fresh evidence brought on record during the course of penalty proceedings. Additional ground of appeal On the facts and in the circumstances of the case and in law the initiation of penalty proceedings u/s 271(1)(c) of the Act is bad in law as the Assessing Officer did not strike off irrelevant limb in the notice as a consequence the penalty order is bad in law.

5. It is submitted that being legal ground as the notice issued u/s 274 r.w.s. 271(1)(c) of the Act is defective since the Assessing Officer did not strike off irrelevant limb in the notices as of consequent to the penalty order is bad in law (At the same time the Ld. DR has not objected to the same).

6.

Since the additional ground filed is legal issue involving no further information requirements and all the relevant information is already available on record, we proceed to adjudicate on the additional grounds of appeal.

7.

At the time of hearing, the Ld. AR submitted that the notice issued u/s 274 of the Act is defective and he brought to our notice page 3 and 4 of the Paper Book to indicate that the Assessing Officer has not strike off irrelevant limb in the notice. For that proposition, he relied on jurisdictional High Court decision

M/s Chemstar Organics (India) Ltd 3 in the case of Mohd. Farhan A. Shaikh v. DCIT, Central Circle1, Belgaum [2021] 125 taxmann.com 253 (Bombay). In which the Hon’ble High Court addressed the issue of defective notice in the case of initiation of proceedings u/s 271(1)(c) of the Act and decided the issue in favour of the assessee and upheld the proposition that non-striking off the irrelevant limb in the penalty notice is bad in law.

8.

On the other hand, the Ld. DR relied on the orders passed by lower authorities.

9.

Considered the rival submissions and material on record. We noticed that the issue of notice for non-striking off irrelevant limb in the penalty clause certainly vitiate the penalty proceedings and Hon’ble jurisdictional High Court in the case of Mohd. Farhan A. Shaikh (supra) held in favour of the assessee. The relevant portion of the decision is reproduced below :

“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 the irrelevant matter -- vitiate the penalty proceedings? 181. 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.

M/s Chemstar Organics (India) Ltd 4

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.” 9.1 Respectfully following the above decision we noticed that the notice issued by the Assessing Officer which is placed on record at page 3-4 of the Paper Book clearly indicate that the Assessing Officer failed to strike off the irrelevant limb of the notice and the Hon’ble jurisdictional High Court has decided the issue in favour of the assessee. Accordingly, we deem it fit and appropriate to allow the additional ground raised by the assessee. The other main grounds of appeal are not adjudicated.

Accordingly, the penalty order passed by the Assessing Officer is set aside and grounds raised by the assessee are allowed

10.

In the result, the appeal filed by the assessee is allowed.

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