CLC TEXTILE PARK PVT. LTD.,NEW DELHI vs. ITO, NEW DELHI

ORDER PER SUDHANSHU SRIVASTAVA, JM:

This appeal is preferred by the assessee against order dated 05.09.2016 passed by the Learned Commissioner of Income

Tax (Appeals)-35, New Delhi {CIT(A)} for Assessment Year 2009-10, wherein vide the impugned order, the Ld. First Appellate Authority has upheld the imposition of penalty of Rs.15,22,754/- imposed

CLC Textile Park Private Ltd. vs. ITO u/s 271(1)(c) of the Income tax Act, 1961 (hereinafter called ‘the

Act).

2.0 The assessee is a private limited company incorporated on 21.04.2008 and the captioned year is the first year of operations.

During the year, the assessee had undertaken trading in garments and has also earned interest income. The assessee company has also undertaken two infrastructure projects which are in the initial stages of implementation. Return declaring Nil income was filed, which was processed u/s 143(1) of the Act and the case was subsequently selected for scrutiny under CASS. During the course of assessment proceedings, the Assessing Officer noticed that the assessee had earned interest income of Rs.5,91,850/- on FDR with banks and had also debited the Profit & Loss Account with an amount of Rs.47,21,002/-. It was observed by the Assessing Officer that after setting-off of such expenditure against the interest income, a loss of Rs.41,29,152/- was capitalized under the head “Pre-operative Expenses”. The assessee was asked to clarify the setting-off of expenses against the interest income. It was the assessee’s explanation that the earning of interest was linked to the CLC Textile Park Private Ltd. vs. ITO setting-up of the project and, therefore, the same should be allowed to be set-off against capital expenditure. However, the Assessing Officer did not accept the assessee’s contention and held that the interest income had to be taxed separately. Further, the Assessing Officer also noticed that the assessee had declared sale of Garments and the sales and purchase were of the equal amount i.e., Rs.49,28,006/-. The assessee was also required to explain how there was no profit no loss in the trading activity. It was submitted by the assessee before the Assessing Officer that earlier the assessee had decided to enter into trading in fabrics, but later on it was decided to close the trading business in August, 2008 itself and to concentrate on infrastructure projects only and, therefore, the goods purchased earlier were disposed of at cost itself. Accordingly, there was no profit, no loss. The Assessing Officer did not accept this explanation of the assessee and held that the transaction of sale was nothing but a device to introduce unexplained cash in the books of the assessee. Accordingly, an addition of Rs.49,28,006/- was made u/s 68 of the Act as unexplained income. The assessment was completed at an income of Rs.55,19,856/- and CLC Textile Park Private Ltd. vs. ITO penalty proceedings under 271(1)(c) of the Act were also initiated.

2.1 The assessee’s appeal against the quantum addition was dismissed by the Ld. First Appellate Authority. The assessee carried the matter to This tribunal and Tribunal vide its order dated 24.06.2015 in deleted the disallowance on account of interest income but upheld the addition of Rs.49,28,006/- made u/s 68 of the Act.

2.2 Subsequently, the Assessing Officer imposed penalty of Rs.15,22,754/- u/s 271(1)(c) of the Act on the addition made towards unexplained income for furnishing inaccurate particulars of income. The assessee’s appeal before the Ld. CIT (A) challenging the imposition of penalty was dismissed and now the assessee is before this Tribunal challenging the order of the Ld. CIT (A) in confirming the penalty of Rs.15,22,754/- by raising the following grounds of appeal:

“That the CIT (Appeals) erred on facts and in law in confirming the penalty of Rs.15,22,754/- on account of sales consideration of the appellant treated as unexplained income under section 68.

CLC Textile Park Private Ltd. vs. ITO

The appellant craves leave to add, alter, amend or vary from the above grounds of appeal at or before the time of hearing.”

3.0 At the outset, the Ld. Authorized Representative (AR) submitted that the assessee had filed additional ground of appeal which was purely legal in nature. It was submitted that the additional ground be admitted as it went into the very root of the matter challenging the legality of imposition of the penalty. The additional ground reads as under:

“That the Assessing Officer erred on facts and in law in levying penalty of Rs.15,22,754/- on account of sales consideration without specifying the charge whether the or penalty is for inaccurate particular of income concealment of income in the assessment order under section 143(3) wherein the penalty was initiated nor in the show cause notice under section 274 of the Act and consequently the impugned penalty order passed pursuant to defective initiation is without jurisdiction and is bad in law.”

3.1 The Ld. Authorized Representative submitted that the notice issued u/s 274 of the Act was defective in as much as it did not specify the limb under which the penalty was being initiated i.e., whether the penalty was being proposed to be imposed for concealment of income or for furnishing inaccurate particulars of CLC Textile Park Private Ltd. vs. ITO income. He drew our attention to copy of the said notice dated 29.12.2011 and submitted that in the said notice irrelevant portion has not been crossed out and, therefore, in view of the settled law that no penalty could be imposed if the charge was not specific, the subsequent levy of penalty was bad in law and was liable to be deleted.

4.0 Per contra, the Ld. Sr. Department Representative (DR) opposed the admission of additional ground. He submitted that a mere technical error in having failed to cross out the irrelevant portion does not make the levy of penalty illegal. The Ld. Sr. DR argued that even the Tribunal had upheld the quantum addition made u/s 68 of the Act and, therefore, the penalty had been rightly imposed. The Ld. Sr. DR argued that the assessee should be directed to argue on the merits of the levy of penalty rather than taking shelter behind a mere technical error. The Ld. Sr. DR placed heavy reliance on the current findings of both the Lower Authorities as well as the order of the ITAT and reiterated that the penalty had been rightly imposed.

CLC Textile Park Private Ltd. vs. ITO 5.0 We have head the rival submissions and perused the material on record. We have also considered the assessee’s plea for admitting the additional ground of appeal and it is our considered opinion that since the additional ground raises an important legal issue which challenges the very foundation of the initiation of penalty proceedings, the same deserves to be admitted. Accordingly, we admit the additional ground and proceed to adjudicate the same.

5.1 It is evident from the notice u/s 274 r.w.s. 271 of the Act for the impugned year that the Assessing Officer has not specifically mentioned as to under which limb of Section 271(l)(c) of the Act the penalty proceedings had been initiated by him, i.e., whether for concealment of particulars of income or for furnishing of inaccurate particulars of income. The Hon’ble High Court of Karnataka in the case of CIT vs. Manjunatha Cotton & Ginning Factor, reported in 359 ITR 565 (Kar) has, under identical facts, held as under -

"(p) Notice under section 274 of the Act should specifically state the grounds mentioned in Section 271(l)(c), i.e., whether it is for CLC Textile Park Private Ltd. vs. ITO concealment of income or for furnishing of inaccurate particulars of income. (q) Sending printed form where all the ground mentioned in Section 271 are mentioned would not satisfy requirement of law."

5.2 The said above-said judgment of the Hon’ble High Court of Karnataka in the case of CIT vs. Manjunatha Cotton & Ginning Factor (supra) has been followed by the Hon’ble High Court of Karnataka in the case of Commissioner of Income Tax vs. SSA’s Emerald Meadows, reported in (2016) 73 taxmann.com 241 (Kar) and the relevant paragraphs of the said judgment read as under-

"2. This appeal has been filed raising the following substantial questions of law, Whether, omission if assessing officer to explicitly mention that penalty proceedings are being initiated for furnishing of inaccurate particulars or that for concealment of income makes the penalty order liable for cancellation even when it has been proved beyond reasonable doubt that the assessee had concealed income in the facts and circumstances of the case? Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the penalty notice under Section 274 r.w.s. 271(i)(c) is bad in law and invalid despite the amendment of Section 271 (1 B) with retrospective effect and by virtue of the amendment, the assessing officer has initiated the penalty by properly recording the satisfaction for the same ?

CLC Textile Park Private Ltd. vs. ITO (3) Whether on the facts and in the circumstances of the case, the Tribunal was justified in deciding the appeals against the Revenue on the basis of notice issued under Section 274 without taking into consideration the assessment order when the assessing officer has specified that the 'assessee has concealed particulars of income?’ 3. The Tribunal has allowed the appeal filed by the assessee holding the notice issued by the Assessing Officer under Section 274 read with Section 271(l)(c) of the Income Tax Act. 1961 for short 'the Act') to be bad in law as it did not specify which limb of Section 271 (l)(c) of the Act: the penalty proceedings had been initiated i.e., whether for concealment of particulars of income or furnishing of inaccurate particulars of income The Tribunal, while allowing the appeal of the assessee, has relied on the decision of the Division Bench of this Court rendered, in the case of CIT v. Manjunatha Cotton & Ginning Factory [2013] 359ITR 565/218 Taxman 423/35 taxmann.com 250 (Kar.).

5.3 Further, the SLP filed by the Revenue against the judgment of the Karnataka High Court in the case of Commissioner of Income Tax vs. SSA’s Emerald Meadows (supra) was dismissed by the Hon’ble Supreme Court of India. Therefore, respectfully following the judgment of the Hon’ble Karnataka High Court as above-mentioned we are CLC Textile Park Private Ltd. vs. ITO of the considered view that the Assessing Officer is required to specify which limb of Section 271 (1)(c) of the Act, the penalty proceedings had been initiated, i.e., whether for concealment of particulars of income or for furnishing of inaccurate particulars of income. From the perusal of the notices, it is clear that the Assessing Officer has not specified as to under which limb of the section the penalty was imposable. The notices, in fact, are in the standard pro forma wherein the irrelevant clauses have not been struck off. This indicates non application of mind on the part of the Assessing Officer while issuing the penalty notices.

Thus, in the circumstances and facts of the case, the penalty proceedings initiated by the Assessing Officer are bad in law and deserve to be deleted. Accordingly, the impugned order is set aside and the AO is directed to delete the penalty.

CLC Textile Park Private Ltd. vs. ITO 6.0 In the final result, the appeal of the assessee stands allowed.

Order pronounced on 12/06/2020.