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Income Tax Appellate Tribunal, DELHI BENCH “E”: NEW DELHI
Before: SHRI PRASHANT MAHARISHI & SHRI K.N.CHARY
O R D E R PER PRASHANT MAHARISHI, A. M.
These are the 3 appeals filed by the assessee, for three assessment years against the order of the Commissioner of income tax (appeals) – 25, New Delhi [ The Ld CIT (A)] dated 30/9/2016 confirming the levy of the penalty u/s 271 (1) ( C ) of The Income Tax Act of a. For assessment year 2008-09 of INR 7 897044/–, b. For assessment year 2011 – 12 of INR 9369112/– and c. for assessment year 2012 – 13 of INR 9 377883/–.
The assessee has raised the following grounds of appeal in for the Assessment Year 2008-09:- “1. That the Id. CIT(A] has erred in sustaining the penalty alleging that he appellant did not comply deliberately even though the authorized representative of the assessee specifically requested the Id. CIT(A] that the quantum has been heard and time be given.
2. That the Id. CIT(A) has erred in not following the principles of natural justice by not allowing the appellant a reasonable opportunity of being heard when it was specifically requested.
3. That the Id. CIT(A) has erred in sustaining the penalty of Rs. 78,97,044/-imposed u/s 271(l)(c) of the Act without appreciating the facts of the case and detailed submissions made by the appellant.
4. That the Id. CIT(A) has erred in not adjudicating Ground Nos. 2 & 3 raised before him.
5. That the order imposing penalty is bad in law and void ab initio since in the show cause notice issued u/s 274 read with section 271 the Id. AO has not struck off the irrelevant clause of the notice, meaning thereby the AO has not apprise the assessee about the specific charge, under which assessee has been held guilty of penal action.” 3. The assessee has raised the following grounds of appeal in for the Assessment Year 2011-12:-
“1. That the Id. CIT(A] has erred in sustaining the penalty alleging that he appellant did not comply deliberately even though the authorized representative of the assessee specifically requested the Id. CIT(A] that the quantum has been heard and time be given.
2. That the Id. CIT(A) has erred in not following the principles of natural justice by not allowing the appellant a reasonable opportunity of being heard when it was specifically requested.
That the Id. CIT(A) has erred in sustaining the penalty of Rs. 93,69,112/-imposed u/s 271(l)(c) of the Act without appreciating the facts of the case and detailed submissions made by the appellant.
4. That the Id. CIT(A) has erred in not adjudicating Ground Nos. 2 & 3 raised before him.
That the order imposing penalty is bad in law and void ab initio since in the show cause notice issued u/s 274 read with section 271 the Id. AO has not struck off the irrelevant clause of the notice, meaning thereby the AO has not apprise the assessee about the specific charge, under which assessee has been held guilty of penal action.”
The assessee has raised the following grounds of appeal in Assessment Year 2012-13:- “1. That the Id. CIT(A] has erred in sustaining the penalty alleging that he appellant did not comply deliberately even though the authorized representative of the assessee specifically requested the Id. CIT(A] that the quantum has been heard and time be given.
2. That the Id. CIT(A) has erred in not following the principles of natural justice by not allowing the appellant a reasonable opportunity of being heard when it was specifically requested.
3. That the Id. CIT(A) has erred in sustaining the penalty of Rs. 93,77,883/-imposed u/s 271(l)(c) of the Act without appreciating the facts of the case and detailed submissions made by the appellant.
4. That the Id. CIT(A) has erred in not adjudicating Ground Nos. 2 & 3 raised before him.
5. That the order imposing penalty is bad in law and void ab initio since in the show cause notice issued u/s 274 read with section 271 the Id. AO Page | 2 has not struck off the irrelevant clause of the notice, meaning thereby the AO has not apprise the assessee about the specific charge, under which assessee has been held guilty of penal action.”
5. The fact shows that Assessee Company Jay Polychem (India) Ltd is engaged in the trading of bulk petrochemicals, chemicals, polymers, engineering plastics, bullion, begotten polished diamond et cetera. Certain seizure action u/s 132 of the income tax act was initiated in case of the appellant company on 14/3/2012. During the course of search and seizure operation several credit card statement of various family members of the directors of the company were found and seized. It was detected by the revenue that assessee had concealed the income for the year under consideration. From perusal of the credit card statement it was noted that the expenditure incurred and recorded in the seized credit card statement per towards in various non-business expenditure which were mostly towards luxurious expenses. Such expenses were incurred by the assessee company through credit cards included accommodation and usage of hotel services in the five- star and 7 star hotels in India and abroad, payments towards by tax ladies garments cosmetics perfumes et cetera particularly for international high- end luxury brand, payments to renowned and high-end fashion garment designer, bills of high-end eating joints restaurant in five-star hotels et cetera. The assessee company could not give proper explanation regarding the payments entire additions were made by the learned assessing officer. On appeal before the learned CIT – A above additions were confirmed substantially. Therefore the learned assessing officer imposed penalty u/s 271 (1) (C) amounting to INR 7 897044/– at the rate of hundred percent of the tax short of evaded. The assessee preferred an appeal before the learned CIT – A who confirmed the penalty and therefore assessee is in appeal before us.
6. As per ground number 5 of the appeal of the assessee it has challenged the order imposing penalty as bad in law and void ab initio since in the show cause notice issued under section 274 read with section 271 the learned assessing officer has not struck of the relevant clause of the notice, meaning thereby that the AO has not apprised the issue about the specific charge, under which assessee has been held guilty of an election. Identical ground has been raised for all these 3 years. The learned departmental Page | 3 representative was asked to look at the assessment order as well as the notice u/s 274 read with section 271 of the income tax act dated 31/3/2014 attached in the appeal set.
Despite notice, none appeared before us and therefore the issue is decided on the merits of the case as per information available on record.
The learned departmental representative relied upon the orders of the lower authorities. With respect to the notice issued under section 274 read with section 271 of the income tax act 1961 the learned departmental representative vehemently supported the orders of the lower authorities. It was further stated that it is a non-statutory notice, which cannot be taken cognizance of for deciding the issue on merit. It was further stated that huge addition has been made by the learned assessing officer in passing of 127 pages detailed order, which clearly shows that assessee has concealed the particulars of the income. It can be inferred from the assessment order itself that there is a clear-cut concealment of the income. In such circumstances, it was submitted that it could not be taken cognizance of that whether the learned assessing officer has struck of any of the twin charges or not.
She relied up on following judicial precedents on identical issue of cancellation of penalty on non striking off one of the twin charges:- i. ITAT, 'D' bench, Kolkata, in the course of hearing of appeal of Smt. Ashok Kumar Mondal, for A.Y 2010-11, at the request of the DR, allowed the department to make a written submission, on the issue of whether non marking upon concerned detail in the notice u/s. 274, outlining the type of default would constitute grounds for rejection of satisfaction and levy of penalty u/s.271(1)(c) of the IT. Act. ii. Judgment of the Hon'ble Calcutta High Court in the case Dr.Syamal Baran Mondal Vs. CIT (2011) 244 CTR 631 states that "section 271 nowhere mandates that recording of satisfaction about concealment of assessee's income must be in specific terms and words, satisfaction of AO must reflect from the order either with expressed words recorded by the Assessing Officer himself or by his overt act and action.".
iii. The Ld. ITAT Mumbai in its order the case of Trishul Enterprises Vs. DCIT (ITA Nos.384 & 385/Mum/2014 for A.Yrs.2006-07 & 2007-08), Dt.10-02-2017 dismissed the contention of the assessee regarding failure of the AO to strike off the relevant part of the notice u/s.274 for initiating proceedings u/s.271(1)(c). The ITAT relied upon the judgment of the Hon'ble Bombay High Court in the case of CIT Vs. Smt.Kaushalya (1992) wherein it was held that "mere not striking off specific limb cannot by itself invalidate notice issued u/ s.274 of the Act. The language of the section does not speak about the issuance of notice. All that is required that the assessee be given an opportunity of show cause.... " iv. The Hon'ble Bombay High Court (Nagpur Bench) in the case of M/s. Maharaj Garage & Company Vs. CIT in its judgment Dt.22-08-2017, has also held that "15. The requirement of Section 274 of the Income Tax Act for granting reasonable opportunity of being heard in the matter cannot be stretched to the extent of framing a specific charge or asking the assessee an explanation in respect of the quantum of penalty proposed to be imposed, as has been urged " It further observed that: "16. It is not in dispute that a reasonable opportunity of being heard in the matter, as required by Section 274 of the said Act was given to the assessee before imposing the penalty by the Income Tax Officer." v. Mumbai E Bench in the case of Earthmoving Equipment Service Corporation vs DCIT 22(2), Mumbai (2017) 84 taxmann.com 51 looked into the issue very closely and opined that after perusing the ratio of the judgment rendered in Manjunatha Cotton and Ginning Factory we find that the assesses appeal was allowed by the Honble High Court after considering the multiple factors and not solely on the basis of defect in notice u/s 274. Therefore, we are of the opinion that Page | 5 the penalty could not be deleted merely based on defect pointed by the Ld AR in the notice and therefore the legal grounds raised are rejected. vi. The Mumbai bench of !TAT in a recent decision in the case of Mahesh M Gandhi vs ACIT [TS-5465-ITAT- 2017(MUMBAI)-Ol also dealt with this aspect. The taxpayer had not offered Director's fees and income from short-term capital gains to tax in the return of income. During the course of assessment proceedings when these incomes were picked up by the tax officer, the taxpayer admitted earning of the incomes and filed a revised computation of income. Based on this finding, the tax officer mentioned in the assessment order that penalty proceedings under section 271(1)(c) of the Act will be initiated for furnishing of inaccurate particulars of income. Subsequently the tax officer issued a notice under section 274 read with section 271(1)(c) of the Act wherein the reason for penalty was not mentioned. The taxpayer filed an appeal before the CIT(A), which ruled in favour of the revenue. The CIT(A) placed reliance on the decision of the Honourable Karnataka High court in the case of CIT vs Manjunatha Cotton and Ginning Factory (supra), the CIT(A) ruled in favour of the revenue. Aggrieved the taxpayer preferred an appeal before the ITAT. The ITAT after observing the facts of the case held that the tax officer had recorded satisfaction in the assessment order in relation to invoking penalty provisions. The tax officer had applied his mind while detailing the reasons for initiation of penalty proceedings in the assessment order. Accordingly, not mentioning the reasons in the penalty notice cannot invalidate the penalty proceedings. vii. Hon'ble Mumbai High Court in the case of Dhanraj Mills (P) Ltd vs ACIT{OSD) Central Range-r, Mumbai on 21. March 2017 has stated As there is no declaration of law which may be governed by Article 1A1 of the Constitution of India in the case of CIT Versus SSA'S Emerald Meadows dismissed by Hon'ble Apex Court, vide SLP (CC No. 11485/2016) on 05/08/2016. The judgment of Hon'ble Jurisdictional High Court in CIT Vs Kaushalya (supra) is still having a binding force on us. Thus, with utmost regards to the judgment of Karnataka High Court in CIT Vs Manjunatha Cotton & Ginning Factory (supra) we are bound to follow the judgment of jurisdictional High Court in CIT Vs Kaushalya (supra). Our view also find support from a decision of the Mumbai Bench of the Tribunal in the case of Dhawal K. Jain vs Income Tax Officer (ITA NO.996/Mum/2014) order dated 30/09/2016. With these observations, the argument of Id. counsel of the assessee on the legal/technical ground is rejected. Thus, all these four appeals are, therefore, dismissed and the stand of the Ld. Commissioner of Income Tax (Appeal) is affirmed.
She further submitted that that issuance of notice 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. Mere mistake in the language used or mere non-striking of the inaccurate portion cannot by itself invalidate the notice. She submitted that on facts, it could be safely concluded that even assuming that there was defect in the notice, it had caused no prejudice to the assessee and the assessee clearly understood what was the purport and import of notice issued under Section 274 r/w. Section 271 of the Act. Therefore, principles of natural justice cannot be read in abstract and the assessee, being a limited company, having huge business, should definitely be precluded from raising such a plea at this belated stage. Therefore, it was submitted that service of notice u/s.274 for initiating penalty proceedings u/s.271(1)(c) of the LT. Act, would constitute valid initiation of penalty proceedings and the case may be heard on merits.
On careful perusal of the assessment order passed by the learned assessing officer on 31/3/2014 under section 153A read with section 144 of the income tax act 1961 the learned assessing officer has made the addition however it was mentioned that penalty proceedings u/s 271 (1) (C ) of the income tax act are initiated separately. Along with the appeal said the notice issued under section 274 read with section 271 of the income tax act dated 31/3/2014 is also attached where it is apparent that the learned assessing officer has not strike of any of the twin charges i.e. concealed the particulars of income or furnishing inaccurate particulars of such income,. We find that the notice dated 31/3/2014 issued u/s 274 r.w.s 271 of the Act, copy of the same is on record, does not specify the charge of offence committed by the assessee viz whether had concealed the particulars of income or had furnished inaccurate particulars of income. Hence, the said notice is to be held as defective. In the present case, there is no murmur in the order of assessment on this aspect. Further In the case of Mahesh M.Gandhi (supra) the Mumbai ITAT the ITAT held that the decision of the Hon'ble Karnataka High Court in the case Manjunatha Cotton & Ginning (supra) will not be applicable to the facts of that case because the AO in the assessment order while initiating penalty proceedings has held that the Assessee had concealed particulars of income and merely because in the show cause notice u/s.274 of the Act, there is no mention whether the proceedings are for furnishing inaccurate particulars or concealing particulars of income, that will not vitiate the penalty proceedings. In the present case, there is no murmur in the order of assessment on this aspect. We have pointed out this aspect in the earlier part of this order. Hence, this decision will not be of any assistance to the plea of the revenue before us. N the case of sundaram Finance Limited V ACIT it was held that , “This issue can never be a question of law in the assessees case, as it is purely a question of fact. Apart from that, the assessee had at no earlier point of time raised the plea that on account of a defect in the notice, they were put to prejudice. Not all violations will result in nullifying the orders passed by statutory authorities. If the case of the assessee is that they have been put to prejudice and principles of natural justice were violated on account of not being able to submit an effective reply, it would be a different matter.”
In present case, the issue is raised before the CIT A) as well as before ITAT. Main plan of the assessee is that there was no occasion for it to respond to the specific charge as it was absent in notice as well as in the assessment order. Further, in case of sundaram Finance Limited ld AO himself was convinced that both of the twin charges are satisfied therein, which is Page | 8 mentioned in para no 12 of the order of the Honourable High court. Further none of the decision relied up on by revenue lay down a proposition that the defect in the show cause notice will stand cured if the intention of the charge u/s.271(1) (c ) is discernible from a reading of the Assessment order in which the penalty was initiated.
Bare perusal of the notice issued u/s 274 read with section 271(1)(c) of the Act, extracted above, in order to initiate the penalty proceedings against the assessee goes to prove that the AO himself was not aware / sure as to whether he is issuing notice to initiate the penalty proceedings either for "concealment of particulars of income" or "furnishing of inaccurate particulars of such income" by the assessee rather issued vague and ambiguous notice by incorporating both the limbs of section 271(1)(c). When the charge is to be framed against any person to move the penal provisions against him/her, he/she is required to be specifically made aware of the charges to be leveled against him/her. Hon'ble High Court of Karnataka in case of CIT vs. Manjunatha Cotton and Ginning Factory (supra) while deciding the identical issue held that when the AO has failed to issue a specific show-cause notice to the assessee as required u/s 274 read with section 271(l)(c), penalty levied is not sustainable. The operative part of the judgment is reproduced as under:- "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 Page | 9 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 form 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 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 cause notice is vague. On the basis of such proceedings, no penalty could be imposed on the assessee.
Clause (c) deals with two specific offences, that is to say, concealing particulars of income or furnishing inaccurate particulars of income. No doubt, the facts of some cases may attract both the offences and in some cases there may be overlapping of the two offences but in such cases the initiation of the penalty proceedings also must be for both the offences. But drawing up penalty proceedings for one offence and finding the assessee guilty of another offence or finding him guilty for either the one or the other cannot be sustained in law. It is needless to point out satisfaction of the existence of the grounds mentioned in Section 271(1)(c) when it is a sine qua non for initiation or Page | 10 proceedings, the penalty proceedings should be confined only to those grounds and the said grounds have to be specifically stated so that the assessee would have the opportunity to meet those grounds. After, he places his version and tries to substantiate his claim, if at all, penalty is to be imposed, it should be imposed only on the grounds on which he is called upon to answer. It is not open to the authority, at the time of imposing penalty to impose penalty on the grounds other than what assessee was called upon to meet. Otherwise though the initiation of penalty proceedings may be valid and legal, the final order imposing penalty would offend principles of natural justice and cannot be sustained. Thus once the proceedings are initiated on one ground, the penalty should also be imposed on the same ground. Where the basis of the initiation of penalty proceedings is not identical with the ground on which the penalty was imposed, the imposition of penalty is not valid. The validity of the order of penalty must be determined with reference to the information, facts and materials in the hands of the authority imposing the penalty at the time the order was passed and further discovery of facts subsequent to the imposition of penalty cannot validate the order of penalty which, when passed, was not sustainable.
The Assessing Officer is empowered under the Act to initiate penalty proceedings once he is satisfied in the course of any proceedings that there is concealment of income or furnishing of inaccurate particulars of total income under clause (c). Concealment, furnishing inaccurate particulars of income are different. Thus the Assessing Officer while issuing notice has to come to the conclusion that whether is it a case of concealment Page | 11 of income or is it a case of furnishing of inaccurate particulars. The Apex Court in the case of T Ashok Poi v. CIT [2007] 292 ITR 11 /161 Taxman 340 at page 19 has held that concealment of income and furnishing inaccurate particulars of income carry different connotations. The Gujarat High Court in the case of CIT v. Manu Engg. [1980] 122 ITR 306 and the Delhi High Court in the case of CIT v. Virgo Marketing (P) Ltd. [2008] 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. "
Hon'ble Apex Court in case of CIT vs. SSA's Emerald Meadows - (2016) 73 taxmann.com 248 (SC) while dismissing the SLP filed by the Revenue quashing the penalty by the Tribunal as well as Hon'ble High Court on ground of unspecified notice has held as under:- "Section 274, read with section 271(1)(c), of the Income-tax Act, 1961 - Penalty - Procedure for imposition of (Conditions precedent) - Assessment year 2009-10 - Tribunal, relying on decision of Division Bench of Karnataka High Court rendered in case of CIT v. Manjunatha Cotton & Ginning Factory [2013] 359 1TR 565/218 Taxman 423/35 taxmann.com 250, allowed appeal of assessee holding that notice issued by Assessing Officer under section 274 read with section 271 (1 )(c) was bad in law, as it did not specify under which limb of section 271 (1 )(c) penalty proceedings had been initiated, i.e., whether for concealment of particulars of income or furnishing of inaccurate particulars of income - High Court held that matter was covered Page | 12 by aforesaid decision of Division Bench and, therefore, there was no substantial question of law arising for determination - Whether since there was no merit in SLP filed by revenue, same was liable to be dismissed - Held, yes [Para 2] [In favour of assessee]"
Hon'ble Delhi High Court in case of Pr. CIT vs. Sahara India Life Insurance Company Ltd. (supra) while deciding the identical issue held as under :- "21. The Respondent had challenged the upholding of the penalty imposed under Section 271 (1) (c) of the Act, which was accepted by the ITAT. It followed the decision of the Karnataka High Court in CIT v. Manjunatha Cotton & Ginning Factory 359 ITR 565 (Kar) and observed that the notice issued by the AO would be bad in law if it did not specify which limb of Section 271(1) (c) the penalty proceedings had been initiated under i.e. whether for concealment of particulars of income or for furnishing of inaccurate particulars of income. The Karnataka High Court had followed the above judgment in the subsequent order in Commissioner of Income Tax v. SSA's Emerald Meadows (2016) 73 Taxman.com 241 (Kar) , the appeal against which was dismissed by the Supreme Court of India in SLP No. 11485 of 2016 by order dated 5th August, 2016."
Following the decisions rendered in the cases of CIT vs. Manjunatha Cotton and Ginning Factory, CIT vs. SSA's Emerald Meadows and Pr. CIT vs. Sahara India Life Insurance Company Ltd. (supra), we are of the considered view that when the notice issued by the AO is bad in law being vague and ambiguous having not specified under which limb of section 271(1)(c) of the Act, the penalty proceedings initiated u/s 271(1)(c) are not sustainable. Therefore, initiating penalty proceedings based on vague and ambiguous notice is bad in law and as such not sustainable. Hence, on this issue only, without going in to the merits of the penalty, we cancel the penalty levied u/s 271 (1) © of the act.
Facts for all these three years are identical so far as the non striking off the twin charges in penalty notice issued u/s 274 rws 271 of the act is Page | 13 concerned. Therefore, for the reason given herein above we cancel the penalty-levied u/s 271 (1) (c) of the act for all the three years. Consequently, penalty levied by the AO and confirmed by the ld. CIT (A) is deleted and all the three appeal filed by the assessee are hereby allowed.
Order pronounced in the open court on 20/11/2019.