M/S RAJESH ENTERPRISES ,HUBLI vs. INCOME TAX OFFICER WARD-3(3), HUBLI

O R D E R Per Jason P. Boaz, A.M. This is an appeal by the assessee directed against the order dated 25.10.2018 of CIT(A), Hubli, relating to Assessment Year 2008-09 whereby the CIT(A) confirmed the order of the Assessing Officer (AO) dated 26.03.2018 imposing penalty of Rs.4,79,920/- on the assessee under section 271(1)(c) of the Income Tax Act, 1961 (in short ‘the Act’) for concealment of particulars of its income.

Page 2 of 15 2.1 The assessee firm was engaged in business as retail traders in food articles, essence and colouring items, etc. No return of income was filed for Assessment Year 2008-09 within the specified date i.e., 30.09.2008. Notice under section 142(1) of the Act dated 22.01.2009 was issued to the assessee requiring it to file return of income for this Assessment Year as the Assessing Officer (AO) had information in his possession that the assessee had effected turnover in excess of Rs.40 lakhs from VAT Department. Since there was no response to the many notices issued by the AO, the assessment was completed ex-parte under section 144 of the Act vide order dated 26.11.2010 wherein the assessee’s income was determined at Rs.18,97,038/- and penalty proceedings were simultaneously issued by issue of notice under section 274 r.w.s. 271 of the Act dated 26.10.2010. The assessee’s appeal was dismissed by the CIT(A), Hubli.

2.2 Subsequent thereto, the AO took up the penalty proceedings under section 271(1)(c) of the Act and issued notices to the assessee to which there was no response. In that view of the matter, the AO passed an ex-parte order dated 26.03.2018 levying penalty of Rs.4,79,920/- under section 271(1)(c) of the Act for furnishing of inaccurate particulars of income. The assessee’s appeal was partly allowed by the CIT(A)-Hubli vide order dated 25.10.2018 reducing the levy of penalty under section 271(1)(c) of the Act on the assessee to 100% of the tax sought to be evaded in accordance with decision of the Co-ordinate Bench in the assessee’s own case in dated 25.05.2018 wherein the Tribunal had restricted the estimation of the assessee’s income from 8% to 5% of its turnover.

Page 3 of 15 Aggrieved by the order of CIT(A), Hubli, dated 25.10.2018, 3.1 partly upholding the AO’s action in levying penalty under section 271(1)(c) of the Act for Assessment Year 2008-09, the assessee has filed this appeal wherein it has raised the following grounds:

3.2.1 The assessee has also filed the following additional grounds of appeal on 19.12.2018 accompanied by a prayer seeking their admission for adjudication:-

3.2.2 We have considered the rival contentions in the matter and carefully perused the material on record; including the judicial precedents in this regard. We are of the view that since the additional grounds are purely legal in nature, do not involve the investigation of any facts otherwise than those on the records of the Department and go to the very root of the matter of jurisdiction; the additional grounds are to be admitted for consideration and adjudication. In coming to this finding, we drew support, inter alia, from the decision of the Hon’ble Apex Court in the case of NTPC Ltd., Vs. CIT in (229 ITR 383) (SC).

Page 6 of 15 4. Additional Grounds of Appeal 4.1 In support of these additional grounds (supra) raised before the Tribunal, the learned Counsel for the assessee contended that the CIT(A) failed to follow the binding decision of Hon’ble Karnataka High Court in the case of Manjunatha Cotton & Ginning Factory 359 ITR 565 (Kar). It was submitted that since the notice issued under section 274 r.w.s 271(1)(c) of the Act dated 26.11.2010 for initiating proceedings for imposing penalty under section 271(1)(c) of the Act was not in accordance with law, based on these additional grounds, the order imposing penalty should be quashed. The learned Counsel for the assessee also drew out attention to the show cause notice issued under section 271(1)(c) of the Act for initiating penalty proceedings dated 26.11.2010 and submitted that the said notice does not specify as to whether the assessee is guilty of having “furnished inaccurate particulars of income” or of having “concealed particulars of such income”. He pointed out that in the show cause notice, the AO does not strike out the irrelevant portion viz., “furnished inaccurate particulars of income” or “concealed particulars of such income”. He drew our attention to a decision of the Hon’ble Karnataka High Court in the case of CIT Vs. Manjunatha Cotton & Ginning Factory 359 ITR 565 (Karn); wherein it was held that if the show cause notice under section 271(1)(c) of the Act does not specify as to the exact charge viz., whether the charge is that the assessee has “furnished inaccurate particulars of income” or “concealed particulars of income” by striking out the irrelevant portion of printed show cause notice, then the imposition of penalty on the basis of such invalid show cause notice cannot be sustained.

Page 9 of 15 "NOTICE UNDER SECTION 274 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 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 farm 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 the 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.

"63. In the light of what is stated above, what emerges is as under: a) Penalty under Section 271(1)(c) is a civil liability. b) Mens rea is not an essential element for imposing penalty for breach of civil obligations or liabilities. c) Willful concealment is not an essential ingredient for attracting civil liability. d) Existence of conditions stipulated in Section 271(1)(c) is a sine qua non for initiation of penalty proceedings under Section 271.

Page 12 of 15 e) The existence of such conditions should be discernible from the Assessment Order or order of the Appellate Authority or Revisional Authority. f) Even if there is no specific finding regarding the existence of the conditions mentioned in Section 271(1)(c), at least the facts set out in Explanation 1(A) & (B) it should be discernible from the said order which would by a legal fiction constitute concealment because of deeming provision. g) Even if these conditions do not exist in the assessment order passed, at least, a direction to initiate proceedings under Section 271(I)(c) is a sine qua non for the Assessment Officer to initiate the proceedings because of the deeming provision contained in Section 1(B). h) The said deeming provisions are not applicable to the orders passed by the Commissioner of Appeals and the Commissioner. i) The imposition of penalty is not automatic. j) Imposition of penalty even if the tax liability is admitted is not automatic. k) Even if the assessee has not challenged the order of assessment levying tax and interest and has paid tax and interest that by itself would not be sufficient for the authorities either to initiate penalty proceedings or impose penalty. unless it is discernible from the assessment order that. it is on account of such unearthing or enquiry concluded by authorities it has resulted in payment of such tax or such tax liability came to be admitted and if not it would have escaped from tax net and as opined by the assessing officer in the assessment order. l) Only when no explanation is offered or the explanation offered is found to be false or when the assessee fails to prove that the explanation offered is not bonafide. an order imposing penalty could be passed.

Page 13 of 15 m) If the explanation offered, even though not substantiated by the assessee. but is found to be bonafide and all facts relating to the same and material to the computation of his total income have been disclosed by him, no penalty could be imposed. n) The direction referred to in Explanation IB to Section 271 of the Act should be clear and without any ambiguity. o) If the Assessing Officer has not recorded any satisfaction or has not issued any direction to initiate penalty proceedings, in appeal. if the appellate authority records satisfaction, then the penalty proceedings have to be initiated by the appellate authority and not the Assessing Authority. p) Notice under Section 274 of the Act should specifically state the grounds mentioned in Section 271(1)(c), i.e., whether it is for concealment of income or for furnishing of incorrect particulars of income. q) Sending printed form where all the ground mentioned in Section 271 are mentioned would not satisfy requirement of law. r) The assessee should know the grounds which he has to meet specifically. Otherwise, principles of natural justice is offended. On the basis of such proceedings, no penalty could be imposed to the assessee. s) Taking up of penalty proceedings on one limb and finding the assessee guilty of another limb is bad in law. t) The penalty proceedings are distinct from the assessment proceedings. The proceedings for imposition of penalty though emanate from proceedings of assessment. it is independent and separate aspect of the proceedings. u) The findings recorded in the assessment proceedings in so far as "concealment of income" and "furnishing of incorrect particulars" would not operate as res judicata in the penalty proceedings. It is open to the assessee to contest the Page 14 of 15 said proceedings on merits. However, the validity of the assessment or reassessment in pursuance of which penalty is levied, cannot be the subject matter of penalty proceedings. The assessment or reassessment cannot be declared as invalid in the penalty proceedings." (emphasis supplied)

Pronounced in the open court on 02nd August, 2019.