D.C.I.T.,CIRCLE-13(1), KOLKATA vs. M/S MAHABHARAT MOTORS MFG. CO. PVT. LTD., HOWRAH

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आयकर अपीलीय अधीकरण, �यायपीठ – “C” कोलकाता, IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH: KOLKATA (सम�)Before �ी जे. सुधाकर रे�ी, लेखा सद�य एवं/and �ी ऐ. टी. वक�, �यायीक सद�य) [Before Shri J. Sudhakar Reddy, AM & Shri A. T. Varkey, JM] I.T.A. No. 90/Kol/2019 Assessment Year: 2014-15 Deputy Commissioner of Income-tax, Vs. M/s. Mahabharat Motors Mfg. Co. Pvt. Circle-13(1), Kolkata. Ltd. (PAN: AAECM5866D) Appellant Respondent

Date of Hearing (Virtual) 13.10.2020 Date of Pronouncement 22.10.2020 For the Appellant Shri Vijay Shankar, CIT, DR For the Respondent Shri A. K. Tulsiyan, FCA

ORDER Per Shri A.T.Varkey, JM

This appeal preferred by the revenue is against the order of Ld. CIT(A)-5, Kolkata dated 01.11.2018 for A Y 2014-15 in cancelling the penalty levied by the AO u/s. 271(1)(c) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”). .

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technical assistance service which the assessee claimed as an intangible capital asset and claimed depreciation as well as the assessee claimed it as expenditure and was debited in the P&L Account for the year ended on 31.03.2014. However, according to the AO, the expenditure in relation to technical assistance was capital in nature and, therefore should not have been debited in the P&L Account. As observed earlier, the AO noted that the assessee had claimed the entire amount of Rs.32,12,40,000/- as deduction in the depreciation table under the Schedule of “Deemed Capital Gains on sale of depreciable” assets in the return of income, and the assessee has claimed Rs.32,12,50,000/- as capital loss and had set it off with its ‘other heads of income’. According to the AO, as per sub-section (3) of section 71 of the Act, when the net result of the computation under the head ‘Capital Gain’ is a loss and the assessee has income assessable under any other head of income, the assessee shall not be entitled to have such loss set off against income under the other head. Therefore, the action of the assessee claiming capital loss to be set off with its income from other heads of income was not allowable and so it was disallowed and accordingly the assessment order was framed and penalty was initiated u/s. 271(1)(c) of the Act for willfully furnishing inaccurate particulars of income to evade tax. Thereafter, the AO issued penalty notice u/s. 271(1)(c) of the Act dated 07.12.2016 for having concealed the particulars of its income or furnishing inaccurate particulars of such income. In the penalty proceedings, after hearing the assessee the penalty was levied for furnishing inaccurate particulars of income to maximize its loss and levied 100% of tax so evaded at Rs.9,92,66,250/-. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) raised grounds on validity of the notice as well as levy of penalty on merits. The Ld. CIT(A) was pleased to allow on both grounds. Aggrieved, the revenue is before us.

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Karnataka High Court in the case of CIT Vs. SSA’s Emerald Meadows, reported in (2016) 73 taxmann.com 241 (Kar) wherein the Hon’ble Karnataka High Court followed its own decision in the case of CIT vs Manjunatha Cotton and Ginning Factory reported in (2013) 359 ITR 565 (Kar) in which it was held that imposing of penalty u/s. 271(1)(c) of the Act is bad in law and invalid for the reason that show cause notice u/s. 271(1)(c) of the Act does not specify the charge/fault against the assessee as to whether it is for concealment of particulars of income or furnishing of inaccurate particulars of income. The Ld. CIT(A) has taken note that as against the decision of the Hon’ble Karnataka High Court, the revenue had preferred SLP (CC No. 11485 of 2016) wherein the Hon’ble Supreme Court was pleased to dismiss the SLP preferred by the Department. The ld. CIT(A) has also taken note of the decision of the Hon’ble Bombay High court in CIT Vs. Shri Samson Perinchery in ITA No. 1154 of 2014 dated 05.01.2017 wherein a similar ratio was laid. The Ld. CIT(A) has also taken note of this decision as well as other decision of the Kolkata Tribunal on this issue and upheld the legal issue and held that initiation of penalty proceeding u/s. 271(1)(c) of the Act without specifying the specific charge/fault by not striking out the inapplicable limb in the show cause notice was bad in law.

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wherein the same plea was raised by the Ld. Revenue’s counsel before the Hon’ble Calcutta High Court in the case of PCIT Vs. Dr. Murari Mohan Kolay ITAT No. 306 of 2017, GA No.2968 of 2017 dated 18.07.2018 wherein the Hon’ble High Court noted as under:

“A penalty proceeding was initiated and notice was served upon the assessee under Section 274 of the Income Tax Act, 1961 primarily in respect of such undisclosed income. The assessing officer also found certain sum which was wrongly claimed as deduction. Subsequently, penalty was imposed for all the five assessment years under Section 271(1)(c) of the Act equivalent to 100% of the tax sought to be evaded. The assessee challenged the penalty order unsuccessfully before the Commissioner of Income Tax (Appeals). Further appeal of the assessee, however, was allowed by the Income Tax Appellate Tribunal, which disposed of all the five appeals pertaining to the five assessment years in a composite order passed on 5th April, 2017. The Tribunal held: "9. As far as the merits of the order of CIT(A) confirming the order of the AO imposing penalty on the Assessee u/s. 271(1)(c) of the Act is concerned, the ld. Counsel for the assessee submitted before us that the show cause notice issued u/s 274 of the Act before imposing penalty does not contain the specific charge against the assessee namely as to whether the assessee was guilty of having concealed particulars of income or having furnished inaccurate particulars of income. Copies of the show cause notice u/s 274 of the Act were filed before us in this regard. Perusal of the same reveals that AO has not struck out the irrelevant portion in the show cause notice and therefore the show cause notice does not specify the charge against the assessee as to whether the charge is of concealment of particulars of income or furnishing of inaccurate particulars of income. 10. The ld. Counsel for the assessee drew our attention to the decision of the Hon'ble Karnataka High Court in the case of CIT vs. SSA's Emerald Meadows in ITA No.380 of 2015 dated 23.11.2015 wherein the Hon'ble Karnataka High Court following its own decision in the case of CIT vs Manjunatha Cotton and Ginning factory (2013) 359 ITR 565 took a view that imposing of penalty u/s. 271(1)(c) of the Act is bad in law and invalid for the reason that the show cause notice u/s 274 of the Act does not specify the charge against the assessee as to whether it is for concealment of particulars of income or furnishing of inaccurate particulars of income. The ld. Counsel further brought to our notice that as against the decision of the Hon'ble Karnataka High Court the revenue preferred an appeal in SLP in CC No.11485 of 2016 and the Hon'ble Supreme Court by its order dated 05.08.2016 dismissed the SLP preferred by the department. The ld. Counsel also brought to our notice the decision of the Hon'ble Bombay High Court in the case of CIT vs Shri Samson Perinchery in ITA No.1154 of 2014 dated 05.01.2017 wherein the Hon'ble Bombay High Court following the decision of the the Hon'ble Karnataka High Court in the case of of CIT vs Manjunatha Cotton and Ginning factory (supra) came to the conclusion that imposition of penalty on defective show cause notice without specifying the charge against the assessee cannot be sustained. Our attention was also drawn to the decision of ITAT in the case of Suvaprasanna Bhattacharya vs ACIT in ITA NO 1303/Kol/2010 dated 06.11.2015 wherein identical proposition has been followed by the Tribunal. The learned DR relied on the order of the CIT(A). 11. We have already observed that the show cause notice issued in the present case u/s 274 of the Act does not specify the charge against the assessee as to whether it is for concealing particulars of income or furnishing inaccurate particulars of income. The show cause notice u/s 274 of the Act does not strike out the inappropriate words. In these circumstances, we are of the view that imposition of penalty cannot be sustained. The plea of the ld. Counsel for the assessee which is based on the decisions referred to in the earlier

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part of this order has to be accepted. We therefore hold that imposition of penalty in the present case cannot be sustained and the same is directed to be cancelled. " Mr. Chowdhury in course of argument has urged us to remand the matter before the assessing officer. According to him, this was a technical flaw, which the Revenue must be given a chance to cure. The reason why the penalty order was not sustained by the Tribunal appears from the passages of the decision of the Tribunal quoted earlier in this judgement. We find that there was no specific charge against the assessee in the notice. Revenue has missed out their opportunity to subject the assessee to the penalty proceeding by not issuing a proper notice. No specific case has been made out by the Revenue as to why the matter should be remanded except that the assessee had not participated properly in the assessment proceedings but for that reason best judgment assessment has been made and the income, which had escaped assessment has been added to the income of the assessee. It was incumbent upon the Revenue to make out a specific case for imposition of penalty, on which count the Revenue has failed. Under such circumstances, we do not find any reason to interfere with the Tribunal's order. The Tribunal's order does not suffer from any error of law. No substantial question of law is involved in this appeal. Hence, the same is dismissed. Hence, stay petition is also dismissed.” (emphasis given by us) 5. We note from the aforesaid decision of the Hon’ble jurisdictional High Court wherein a similar case wherein this Tribunal was pleased to cancel the penalty imposed u/s. 271(1)(c) of the Act since in the penalty notice, the AO has not struck out the relevant portion in the show cause notice and, therefore, it was held that the show cause notice is invalid for not specifying the charge/fault against the assessee as to whether the assessee was at fault for concealing the particulars of income or whether the assessee had furnished inaccurate particulars of income. The Hon’ble Calcutta High Court in Dr. Murari Mohan Kolay (supra) has noted that the Ld. Counsel for the revenue Mr. Choudhury had requested to remand the matter before the AO since it was a technical flaw (not striking of relevant fault in the penalty notice) so the revenue must be given a chance to cure the defect. The Hon’ble High Court has noted that since there was no specific charge against the assessee in the notice, therefore, the revenue has missed out their opportunity to subject the assessee to the penalty proceeding by not issuing a proper notice. Therefore, the Hon’ble Calcutta High Court dismissed the appeal of the revenue. So, the Ld. CIT, DR’s contention of again giving an opportunity to AO is not accepted.

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Rs.32,12,50,000/- as capital loss and did not file any appeal against the said decision before the Ld. CIT(A) and so, the Ld. CIT(A) erred in cancelling the penalty levied on the assessee. It should be kept in mind that the assessment proceedings and the penalty proceedings are different proceedings and even if certain additions are made by the AO which is confirmed by the higher authorities, still when penalty has to be levied it has to be made/adjudicated on its own merits and even if the assessee accepts certain additions in the assessment proceedings that ipso facto cannot be the ground to automatically levy/justify the penalty u/s. 271(1)(c) of the Act. Moreover, from the perusal of the penalty order of the AO it is taken note that the whole case of the AO was that assessee has made a wrong claim of capital loss which was not allowable and which finding of the AO has been accepted by the assessee and no further appeal has been preferred by the assessee. Making a claim cannot by itself be a ground for imposing penalty u/s. 271(1)(c) of the Act. For this proposition, we rely on the decision of the Hon’ble Supreme Court in CIT Vs. Reliance Petro Products 322 ITR 158 wherein the Hon’ble Supreme Court has held taking a claim which is not sustainable in law, by itself will not amount to furnishing inaccurate particulars regarding income of the assessee. Be that as it may be, we are not expressing our opinion on the deletion of penalty on merits and it is left open.

“7. The learned DR submitted that the Hon’ble Calcutta High Court in the case of Dr.Syamal Baran Mondal Vs. CIT (2011) 244 CTR 631 (Cal) has taken a view that Sec.271 does not mandate that the recording of satisfaction about concealment of income must be in specific terms and words and that satisfaction of AO must reflect from the order either with expressed words recorded by the AO or by his overt act and action. In our view this decision is on the question of recording satisfaction and not in the context of specific charge in the mandatory show cause notice u/s.274 of the Act. Therefore reference to this decision, in our view is not of any help to the plea of the Revenue before us. 8. The learned DR relied on three decisions of Mumbai ITAT viz., (i) Dhanraj Mills Pvt. Ltd. Vs. ACIT ITA No.3830 & 3833/Mum/2009 dated 21.3.2017; (ii) Earthmoving Equipment Service Corporation Vs. DCIT 22(2), Mumbai, (2017) 84 taxmann.com 51 (iii) Mahesh M.Gandhi Vs. ACIT Vs. ACIT ITA No.2976/Mum/2016 dated 27.2.2017. Reliance was placed on two decisions of the Hon’ble Bombay High Court viz., (i) CIT Vs. Kaushalya 216 ITR 660(Bom) and (ii) M/S.Maharaj Garage & Co. Vs. CIT dated 22.8.2017. This decision was

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referred to in the written note given by the learned DR. This is an unreported decision and a copy of the same was not furnished. However a gist of the ratio laid down in the decision has been given in the written note filed before us. 9. In the case of CIT Vs. Kaushalya (supra), the Hon’ble Bombay High Court held that section 274 or any other provision in the Act or the Rules, does not either mandate the giving of notice or its issuance in a particular form. Penalty proceedings are quasi-criminal in nature. Section 274 contains the principle of natural justice of the assessee being heard before levying penalty. Rules of natural justice cannot be imprisoned in any straight-jacket formula. For sustaining a complaint of failure of the Principles 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. The 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. The ITAT Mumbai Bench in the case of Dhanraj Mills Pvt.Ltd. (supra) followed the decision rendered by the Jurisdictional Hon’ble Bombay High court in the case of Kaushalya (supra) and chose not to follow decision of Hon’ble Karnataka High Court in the case of Manjunatha Cotton & Ginning Factory (supra). Reliance was also placed by the ITAT Mumbai in this decision on the decision of Hon’ble Patna High court in the case of CIT v. Mithila Motor's (P.) Ltd. [1984] 149 ITR 751 (Patna) wherein it was held that under section 274 of the Income-tax Act, 1961, all that is required is that the assessee should be given an opportunity to show cause. No statutory notice has been prescribed in this behalf. Hence, it is sufficient if the assessee was aware of the charges he had to meet and was given an opportunity of being heard. A mistake in the notice would not invalidate penalty proceedings. 10. In the case of Earthmoving Equipment Service Corporation (supra), the ITAT Mumbai did not follow the decision rendered in the case of Manjunatha Cotton & Ginning Factory (supra) for the reason that penalty in that case was deleted for so many reasons and not solely on the basis of defect in show cause notice u/s.274 of the Act. This is not factually correct. One of the parties before the group of Assessees before the Karnataka High Court in the case of Manjunatha Cotton & Ginning (supra) was an Assessee by name M/s.Veerabhadrappa Sangappa & Co., in ITA NO.5020 OF 2009 which was an appeal by the revenue. The Tribunal held that on perusal of the notice issued under Section 271(1)(c) of the Act, it is clear that it is a standard proforma used by the Assessing Authority. Before issuing the notice the inappropriate words and paragraphs were neither struck off nor deleted. The Assessing Authority was not sure as to whether she had proceeded on the basis that the assessee had either concealed its income or has furnished inaccurate details. The notice is not in compliance with the requirement of the particular section and therefore it is a vague notice, which is attributable to a patent non application of mind on the part of the Assessing authority. Further, it held that the Assessing Officer had made additions under Section 69 of the Act being undisclosed investment. In the appeal, the said finding was set-aside. But addition was sustained on a new ground, that is under valuation of closing stock. Since the Assessing Authority had initiated penalty proceedings based on the additions made under Section 69 of the Act, which was struck down by the Appellate Authority, the initiated penal proceedings, no longer exists. If the Appellate Authority had initiated penal proceedings on the basis of the addition sustained under a new ground it has a legal sanctum. This was not so in this case and therefore, on both the grounds the impugned order passed by the Appellate Authority as well as the Assessing Authority was set-aside by its order dated 9th April, 2009. Aggrieved by the said order, the revenue filed appeal before High Court. The Hon’ble High Court framed the following question of law in the said appeal viz., 1. Whether the notice issued under Section 271(1)(c) in the printed form without specifically mentioning whether the proceedings are initiated on the ground of concealment of income or on account of furnishing of inaccurate particulars is valid and legal? 2. Whether the proceedings initiated by the Assessing Authority was legal and valid? The Hon’ble Karnataka High Court held in the

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negative and against the revenue on both the questions. Therefore the decision rendered by the ITAT Mumbai in the case of Earthmoving Equipment Service Corporation (supra) is of no assistance to the plea of the revenue before us. 11. In the case of M/S.Maharaj Garage & Co. Vs. CIT dated 22.8.2017 referred to in the written note given by the learned DR, which is an unreported decision and a copy of the same was not furnished, the same proposition as was laid down by the Hon’ble Bombay High Court in the case of Smt.Kaushalya (supra) appears to have been reiterated, as is evident from the extracts furnished in the written note furnished by the learned DR before us. 12. In the case of Trishul Enterprises ITA No.384 & 385/Mum/2014, the Mumbai Bench of ITAT followed the decision of the Hon’ble Bombay High Court in the case of Smt.Kaushalya (supra). 13. 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 whisper 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. Even otherwise this decision does not follow the ratio laid down by the Hon’ble Karnataka High Court in the case of Manjunatha Cotton & Ginning (supra) in as much as the ratio laid down in the said case was only with reference to show cause notice u/s.274 of the Act. The Hon’ble Court did not 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. 14. From the aforesaid discussion it can be seen that the line of reasoning of the Hon’ble Bombay High Court and the Hon’ble Patna High Court is 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. The Tribunal Benches at Mumbai and Patna being subordinate to the Hon’ble Bombay High Court and Patna High Court are bound to follow the aforesaid view. The Tribunal Benchs at Bangalore have to follow the decision of the Hon’ble Karnataka High Court. As far as benches of Tribunal in other jurisdictions are concerned, there are two views on the issue, one in favour of the Assessee rendered by the Hon’ble Karnataka High Court in the case of Manjunatha Cotton & Ginning (supra) and other of the Hon’ble Bombay High Court in the case of Smt.Kaushalya. It is settled legal position that where two views are available on an issue, the view favourable to the Assessee has to be followed. We therefore prefer to follow the view expressed by the Hon’ble Karnataka High Court in the case of Manjunatha Cotton & Ginning (supra). 15. We have already observed that the show cause notice issued in the present case u/s 274 of the Act does not specify the charge against the assessee as to whether it is for concealing particulars of income or furnishing inaccurate particulars of income. The show cause notice u/s 274 of the Act does not strike out the inappropriate words. In these circumstances, we are of the view that imposition of penalty cannot be sustained. The plea of the ld. Counsel for the assessee which is based on the decisions referred to in the earlier part of this order has to be accepted. We therefore hold that imposition of penalty in the present case cannot be sustained and the same is directed to be cancelled.”

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Order is pronounced in the open court on 22nd October, 2020.

Sd/- (J. Sudhakar Reddy) Sd/- (A. T. Varkey) Accountant Member Judicial Member Dated: 22nd October, 2020 Jd.(Sr.P.S.) Copy of the order forwarded to: 1. Appellant – DCIT, Circle-13(1), Kolkata. 2 Respondent – M/s. Mahabharat Motors Mfg. Co. Pvt. Ltd., Vichitra, C/o Kolkata West International City, Salap Junction, Howrah Amta Road & Bombay Road (NH-6) Crossing, Howrah-711403. 3. The CIT(A)-5, Kolkata (sent through e-mail)