KARL PESTONJI KERAWALLA,MUMBAI vs. ITO 11(2)(4), MUMBAI

O R D E R PER C.N. PRASAD (JM) 1. This appeal is filed by the assessee against the order of the Learned Commissioner of Income Tax (Appeals) – 3, Mumbai dated 22.10.2013 for the Assessment Year 2009-10.

2. On the facts and in the circumstances of the case and in law, the learned C.I.T. (A) erred in dismissing the appeal.

3. On the facts and in the circumstances of the case and in law, the learned C.I.T.(A) erred confirming the penalty levied u/s 271(1)(c) of Rs. 15,00,000/- and that too without giving full and proper opportunity of being heard in the matter.

which are as under: - “1. In the fact and circumstances of the case and in law the order levying penalty U/s. 271(1)(C) of the Act is bad in law as in the notice issued for initiating penalty proceedings under section 271(1)(C) the assessing officer had not specified as to which of the two limbs of section 271(1)(C); i.e. for, concealment of particulars of income or for furnishing inaccurate particulars of income, for which the penalty has been initiated.”

4. Since the additional grounds raised by the assessee are purely legal grounds the same are admitted and disposed off.

5. Ld. Counsel for the assessee, at the outset referring to notice u/s.271(1)(c) of the Act, the Assessing Officer had not specified the charge for which the penalty proceedings were initiated i.e. either for concealment of income or for furnishing of inaccurate particulars of income. He submitted that the irrelevant portion of the charge has not been stricken off in the notice. Ld. Counsel for the assessee also invited

(A.Y: 2009-10) Karl Pestonji Kerawalla our attention to the Assessment Order and submitted that the Assessing Officer mentioned that penalty proceedings are separately initiated in respect of the addition made and it is not specified as to for which charge the penalty is initiated. Learned Counsel for the assessee also invited our attention to the penalty order and submitted that the penalty was levied observing that this is the fit case for imposition of penalty u/s. 271(1)(c) of the Act and Assessing Officer has not specified as to whether the penalty is levied for furnishing inaccurate particulars of income or for concealment of income.

7. Ld. DR vehemently supported the orders of the authorities below.

8. On the other hand, the Ld. DR relies on the decision in CIT v. Smt. Kaushalya & Ors. (1995) 216 ITR 660 (Bom); M/s Maharaj Garage & Co. v. CIT (Income Tax Reference No. 21 of 2008) Order dated 22.08.2017 of the Hon’ble Bombay High Court; Sky Light Hospitality LLP v. ACIT [W.P.(C) 10870/2017 and C.M. No. 44503/2017] dated 02.02.2018 of Hon’ble Delhi High Court ; the order of the ITAT ‘E’ Bench, Mumbai dated 05.02.2014 in Smt. Shantidevi Mahavir Prasad Gupta v. ITO (ITA No. 7733/Mum/2010) and the order of the ITAT ‘A’ Bench, Mumbai dated 28.09.2017 in Ms. Laudres Austin v. ITO (ITA No. 1683/Mum/2009) 9. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. We begin with the decisions relied on by the Ld. DR. In the case of Smt. Kaushalya & Ors. (supra), the Hon’ble Bombay High Court held: “9. We will first take up the show-cause notice dated March 29, 1972, pertaining to the assessment years 1968-69 and 1969-70. The assessment orders were already made and the reasons for issuing the notice under section 274 read with section 271(1)(c) were recorded by the Income-tax Officer. The assessee fully knew in detail the exact charge of the Department against him. In this background, it could not be said that either there was non-application of mind by the Income-tax Officer or the so-called ambiguous wording in the notice impaired or prejudiced the right of the assessee to reasonable opportunity of being heard. After all, 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 (A.Y: 2009-10) Karl Pestonji Kerawalla language used or mere non-striking of the inaccurate portion cannot by itself invalidate the notice. The entire factual background would fall for consideration in the matter and no one aspect would be decisive. In this context, useful reference may be made to the following observation in the case of CIT v. Mithila Motor's (P.) Ltd. [1984] 149 ITR 751 (Patna) (head note): ‘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.’ In M/s Maharaj Garage & Co. (supra), the Hon’ble Bombay High Court at para 15 held: “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 of asking the assessee an explanation in respect of the quantum of penalty proposed to be imposed, as has been urged. The assessee was supplied with the findings recorded in the order of re-assessment, which was passed on the same date on which the notice u/s 271(1)(c) was issued, initiating the proceedings of imposing the penalty. The assessee had sufficient notice of the action of imposing penalty. We, therefore, do not find either any jurisdiction error or unjust exercise of power by the authority.” In Sky Light Hospitality LLP (supra), the assessee (Sky Light Hospitality LLP) who had taken over on 13.05.2016 and acquired rights and liabilities of M/s Sky Light Hospitality Pvt. Ltd. upon conversion under the Limited Liability Partnership Act, 2008, filed a writ petition impugning notice dated 30.03.2017 issued by the AO u/s 147/148 for the AY 2010-11. The contention of the assessee before the Hon’ble High Court was that notice u/s 147/148 of the Act dated 30.03.2017 was addressed and issued to M/s Sky Light Hospitality Pvt. Ltd., PAN No. AALCS3800N, a company which had ceased to exist and was dissolved on 13.05.2016. It was stated that the said notice issued to a dead juristic person is invalid and void in the eyes of law. Also contentions were raised stating that section 292B was inapplicable. The Hon’ble Delhi High Court held as under:

(A.Y: 2009-10) Karl Pestonji Kerawalla “21. Our attention was drawn to Parashuram Pottery Works Co. Ltd. V. ITO, Circle I, Ward A, Rajkot, (1977) 106 ITR 1 (SC) which records that the Assessing Officer entrusted with the task of calculating and realizing tax should familiarize themselves with the relevant provisions and become well versed with the law on the subject. This is a salutary advice. Indeed, there have been lapses and faults resulting in the present litigation. Notice under Section 147/148 of the Act was issued at the end of the limitation period. Noticeably, Assessment Order for the assessment year 2013-2014 was passed on 31.03.2016, one year earlier. Second lapse is also apparent. Despite correctly noting the background, notice under Section 147/148 of the Act was not addressed in the correct name and even the PAN Number mentioned was incorrect. Nevertheless, human errors and mistakes cannot and should not nullify proceedings which are otherwise valid and no prejudice had been caused. This is the effect and mandate of Section 292B of the Act.” In Smt. Shantidevi Mahavir prasad Gupta (supra), the Tribunal held as under: - “10. The question before us is not whether the income is of the nature of “notional income” but the question is whether the assessee has filed inaccurate particulars or concealed the true facts. As stated hereinabove, in our humble opinion, the assessee has concealed the true facts thereby filed inaccurate particulars. Therefore, we do not find any error or infirmity in the findings of the Ld. CIT(A). The penalty u/s. 271(1)(c) is leviable on the facts of the case. The reliance on the decision of the Tribunal is clearly distinguishable on the facts. We, accordingly confirm the levy of penalty u/s. 271(1)(c) of the Act.” In Ms. Laudres Austin (supra), the Tribunal held the following: “In the instant case also we hold that penalty proceedings were initiated properly as there is no defect in the recording of satisfaction by the AO as well there is no defect in the notice issued u/s 271 r.w.s. 274 of the 1961 Act. The decision of Hon’ble Bombay High Court in Samson Perincherry (supra) is concerning the issuance of penalty proceedings under one limb while levying of penalty under another limb of section 271(1)(c) which is no permissible as per ratio of this (A.Y: 2009-10) Karl Pestonji Kerawalla decision. The Hon’ble Supreme Court in SSA’s Emerald Meadows (supra) while dismissing SLP recorded finding that the Hon’ble Lordships did not find any merit in this petition which means ratio of decision of Hon’ble Karnataka High Court in SSA’s Emerald Meadows in of 2015 stood confirmed. The Hon’ble Karnataka High Court in SSA’s Emerald Meadows has affirmed the ratio of judgment of Manjunatha Cotton and Ginning Factory (supra). We have already seen that Hon’ble Karnataka High Court in Manjunatha Cotton and Ginning Factory (supra) has affirmed that alternate charge is possible under both the limbs simultaneously.” 9.1 In the instant case, the AO vide his order u/s 143(3) dated 28.12.2011 has initiated the penalty proceedings u/s 271(1)(c) for furnishing inaccurate particulars of income or concealment of income. In the draft penalty order u/s 271(1)(c) dated 24.03.2014, the AO has imposed penalty of Rs.46,59,047/- for concealment of income. Also we find that there is no provision in the Income Tax Act, 1961 for a draft penalty order u/s 271(1)(c) of the Act. 9.2 It would be apposite to refer here to the decision in Dilip N. Shroff v. JCIT (2007) 210 CTR (SC) 228, wherein it has been held : “83. It is of some significance that in the standard proforma used by the Assessing Officer in issuing a notice despite the fact that the same postulates that inappropriate words and paragraphs were to be deleted, but the same had not been done. Thus, the Assessing Officer himself was not sure as to whether he had proceeded on the basis that the assessee had concealed his income or he had furnished inaccurate particulars. Even before us, the learned Additional Solicitor General while placing the order of assessment laid emphasis that he had dealt with both the situations.

by the revenue on merits before us having been rendered as academic, are thus not being dealt with.”

9. The Coordinate Bench in the case of M/s. Pennzoil Quaker State India Ltd. (supra) also considered similar situation and following the decision of the Coordinate Bench in the case of Orbit Enterprises v. Income Tax Officer [60 ITR (Trib.) 252] held that notice issued by the Assessing Officer u/s. 271 r.w.s 274 of the Act is issued without application of mind and specific charge is not mentioned in the notice for which penalty is levied and therefore the penalty order is bad in law. While holding so it has been observed as under: - “5. We have heard the rival submissions, perused the orders of the authorities below, the notice issued u/s. 274 r.w.s. 271(1)(c) of the Act, Assessment Order and the penalty orders. On a perusal of the notice issued u/s. 271(1)(c) of the Act for initiation of proceedings we find that the Assessing Officer did not strike off and specify the charge/limb for which he is proposing to initiate penalty proceedings. However, in the Assessment Order, Assessing Officer records that the penalty proceedings are initiated for furnishing inaccurate particulars of income.

6. An identical situation has been considered by the Coordinate Bench in Meherjee Cassinath Holdings v. ACIT in ITA.No. 2555/Mum/2012 dated 28.04.2017 as to whether the action of the Assessing Officer in initiating

(A.Y: 2009-10) Karl Pestonji Kerawalla penalty proceedings u/s.271(1)(c) of the Act without striking off one of the limbs and without specifying the specific charge in the notice initiating penalty proceedings for inaccurate particulars of income in the Assessment Order and the Coordinate Bench considering the decision of the Hon'ble Jurisdictional High Court in the case of CIT v. Samson Perinchery [392 ITR 4] and also various decisions held that action of the Assessing Officer in non- striking off relevant clause in the notice shows that the charge being made against the assessee is not firm therefore proceedings suffer from non- compliance with principles of natural justice in as much as the Assessing Officer himself is not sure of the charge and the assessee is not made aware as to which of the two limbs of section u/s. 271(1)(c) of the Act he has to respond. While holding so the Coordinate Bench observed as under: -

8. We have carefully considered the rival submissions. Sec. 271(1)(c) of the Act empowers the Assessing Officer to impose penalty to the extent specified if, in the course of any proceedings under the Act, he is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income. In other words, what Sec. 271(1)(c) of the Act postulates is that the penalty can be levied on the existence of any of the two situations, namely, for concealing the particulars of income or for furnishing inaccurate particulars of income. Therefore, it is obvious from the phraseology of Sec. 271(1)(c) of the Act that the imposition of penalty is invited only when the conditions prescribed u/s 271(1)(c) of the Act exist. It is also a well-accepted proposition that ‘concealment of the particulars of income’ and ‘furnishing of inaccurate particulars of income’ referred to in Sec. 271(1)(c) of the Act denote different connotations. In fact, this distinction has been appreciated even at the level of Hon'ble Supreme Court not only in the case of Dilip N. Shroff (supra) but also in the case of T.Ashok Pai, 292 ITR 11 (SC). Therefore, if the two expressions, namely ‘concealment of the particulars of income’ and ‘furnishing of inaccurate particulars of income’ have different connotations, it is imperative for the assessee to be made aware as to which of the two is being put against him for the purpose of levy of penalty u/s 271(1)(c) of the Act, so that the assessee can defend accordingly. It is in this background that one has to appreciate the preliminary plea of assessee, which is based on the manner in which the notice u/s 274 r.w.s. 271(1)(c) of the Act dated 10.12.2010 has been issued to the assessee company. A copy of the said notice has been placed on record and the learned representative canvassed that the same has been issued by the Assessing Officer in a standard proforma, without striking out the irrelevant clause. In other words, the notice refers to both the limbs of Sec. 271(1)(c) of the Act, namely concealment of the particulars of income as well as furnishing of inaccurate particulars of income. Quite clearly, non-striking-off of the irrelevant limb in the said notice does not convey to the assessee as to which of the two charges it has to respond. The aforesaid infirmity in the notice has been sought to be demonstrated as a reflection of non-application of mind by the Assessing Officer, and in support, reference has been made to the following specific discussion in the order of Hon'ble Supreme Court in the case of Dilip N. Shroff (supra):-

“83. It is of some significance that in the standard proforma used by the Assessing Officer in issuing a notice despite the fact that the same postulates that inappropriate words and paragraphs

(A.Y: 2009-10) Karl Pestonji Kerawalla were to be deleted, but the same had not been done. Thus, the Assessing Officer himself was not sure as to whether he had proceeded on the basis that the assessee had concealed his income or he had furnished inaccurate particulars. Even before us, the learned Additional Solicitor General while placing the order of assessment laid emphasis that he had dealt with both the situations.

84. The impugned order, therefore, suffers from non-application of mind. It was also bound to comply with the principles of natural justice. (See Malabar Industrial Co. Ltd. v. CIT [2000] 2 SCC 718]”

10. In fact, at the time of hearing, the ld. CIT-DR has not disputed the factual matrix, but sought to point out that there is due application of mind by the Assessing Officer which can be demonstrated from the discussion in the assessment order, wherein after discussing the reasons for the disallowance, he has recorded a satisfaction that penalty proceedings are initiated u/s 271(1)(c) of the Act for furnishing of inaccurate particulars of income. In our considered opinion, the attempt of the ld. CIT-DR to demonstrate application of mind by the Assessing Officer is no defence inasmuch as the Hon'ble Supreme Court has approved the factum of non-striking off of the irrelevant clause in the notice as reflective of non- application of mind by the Assessing Officer. Since the factual matrix in the present case conforms to the proposition laid down by the Hon'ble Supreme Court, we proceed to reject the arguments advanced by the ld. CIT-DR based on the observations of the Assessing Officer in the assessment order. Further, it is also noticeable that such proposition has been considered by the Hon'ble Bombay High Court also in the case of Shri Samson Perinchery, 953, 1097 & 1126 of 2014 dated 5.1.2017 (supra) and the decision of the Tribunal holding levy of penalty in such circumstances being bad, has been approved.

11. Apart from the aforesaid, the ld. CIT-DR made an argument based on the decision of the Hon'ble Bombay High Court in the case of Smt. Kaushalya & Others, 216 ITR 660 (Bom.) to canvass support for his plea that non-striking off of the irrelevant portion of notice would not invalidate the imposition of penalty u/s 271(1)(c) of the Act. We have carefully considered the said argument set-up by the ld. CIT-DR and find that a similar issue had come up before our coordinate Bench in the case of Dr. Sarita Milind Davare (supra). Our coordinate Bench, after considering the judgment of the Hon'ble Bombay High Court in the case of Smt. Kaushalya & Ors., (supra) as also the judgments of the Hon'ble Supreme Court in the case of Dilip N. Shroff (supra) and Dharmendra Textile Processors, 306 ITR 277 (SC) deduced as under :-

(A.Y: 2009-10) Karl Pestonji Kerawalla “12. A combined reading of the decision rendered by Hon’ble Bombay High Court in the case of Smt. B Kaushalya and Others (supra) and the decision rendered by Hon’ble Supreme Court in the case of Dilip N Shroff (supra) would make it clear that there should be application of mind on the part of the AO at the time of issuing notice. In the case of Lakhdir Lalji (supra), the AO issued notice u/s 274 for concealment of particulars of income but levied penalty for furnishing inaccurate particulars of income. The Hon’ble Gujarat High Court quashed the penalty since the basis for the penalty proceedings disappeared when it was held that there was no suppression of income. The Hon’ble Kerala High Court has struck down the penalty imposed in the case of N.N.Subramania Iyer Vs. Union of India (supra), when there is no indication in the notice for what contravention the petitioner was called upon to show cause why a penalty should not be imposed. In the instant case, the AO did not specify the charge for which penalty proceedings were initiated and further he has issued a notice meant for calling the assessee to furnish the return of income. Hence, in the instant case, the assessing officer did not specify the charge for which the penalty proceedings were initiated and also issued an incorrect notice. Both the acts of the AO, in our view, clearly show that the AO did not apply his mind when he issued notice to the assessee and he was not sure as to what purpose the notice was issued. The Hon’ble Bombay High Court has discussed about non-application of mind in the case of Kaushalya (supra) and observed as under:-

“....The notice clearly demonstrated non-application of mind on the part of the Inspecting Assistant Commissioner. The vagueness and ambiguity in the notice had also prejudiced the right of reasonable opportunity of the assessee since he did not know what exact charge he had to face. In this back ground, quashing of the penalty proceedings for the assessment year 1967-68 seems to be fully justified.”

In the instant case also, we are of the view that the AO has issued a notice, that too incorrect one, in a routine manner. Further the notice did not specify the charge for which the penalty notice was issued. Hence, in our view, the AO has failed to apply his mind at the time of issuing penalty notice to the assessee.”

(A.Y: 2009-10) Karl Pestonji Kerawalla order is bad in law on the preliminary point the other grounds/arguments raised by the Ld. Counsel for the assessee are not being dealt with.

Order pronounced in the open court on the 10th August, 2018