PSB INDUSTRIES (INDIA) PVT. LTD.,NEW DELHI vs. ACIT, NEW DELHI

The main issue permeating through in all the appeals is that, the assessee has leased out its property situated at Khandsa Road, Gurgaon to Punjab National Bank at a lease rent of Rs.1 lakh, vide lease agreement dated 6/8/2001. Based on the assessment proceedings for assessment year 2006-07, the Assessing Officer issued notice under section 148 for impugned assessment years on the ground that assessee has not shown correct rental income in accordance with the law. In response to notice under section 148, assessee in its return of income showed ALV of the property at Rs.65,76,835/-. The assessee was later on asked to furnish the valuation report in respect of ALV of the property, in response to which assessee filed valuation report of the Government Approved Valuer, dated 29/9/2009, as per which ALV of the property was worked out at Rs.76,04,853/-. During the course of assessment proceedings, assessee agreed to offer ALV of the property at Rs.76,04,853/- as its income from house property which was accepted by the Assessing Officer in the order passed u/s 148/143(3). Apart from this addition, claim of brought forward losses of Rs.46,03,784/- under the head “income from house property” was disallowed on the ground that assessee could not furnish any evidence in this regard and in earlier year there was no loss under the head “income from house property”. He further noted that assessee in his revised computation filed on 29/9/2009 has not claimed any such set off and accordingly, the same has been disallowed. The Assessing Officer further noted that assessee had claimed set off of business loss also of Rs.5,39,651/- from its income from business and profession, whereas in the earlier assessment year assessee was having positive business income, therefore, he held that there is no question of allowing any loss to be carried forward. The addition/assessment made was accepted by the assessee.

Based on such finding in the assessment proceedings, penalty proceedings under section 271(1)(c) were initiated by the Assessing Officer under both the limbs of charges, that is, for concealment of income and furnishing of inaccurate particulars of income. In response to the show cause notice, assessee had submitted as under:-

However, the Assessing Officer held that assessee has been showing yearly rent of Rs.1 lakh only when ALV of the property was Rs.76.04 lakhs as per the valuation report of the Govt. Approved Valuer. He also took note of the fact that lessee has given to the assessee a sum of Rs.67 crores as interest free deposit and, therefore, this was a device to suppress the actual rental income towards incidence of tax. Thus, he held that ALV has been suppressed by the assessee and also the claim of set off of losses was an action to evade tax by making false claim. Similar claim for set off of business loss was also not found to be correct and accordingly, he levied penalty of Rs.21,90,063/- being 100% of the tax sought to be evaded.

So far as concealment of ALV is concerned, it seems that AO has calculated the tax between the difference of ALV shown in the return of income in response to notice under section 148 of Rs.65,26,835/- and ALV determined by the Registered Valuer at Rs.76,04,853/-.

The ld. CIT(A) too has confirmed the said penalty as per detailed discussion appearing from paras 2 to 3 of the appellate order. His entire finding for confirming the penalty is on the difference of ALV, which has been added by the Assessing Officer. There is no finding on so far as penalty levied by the Assessing Officer on the claim of set off of carried forward losses under the head “income from house property” and set off of business loss.

We have heard both the parties and also perused the relevant finding given in the impugned order. First of all, it appears to us that the addition/ disallowance, on which Assessing Officer has levied the penalty, are as under:-

The Assessing Officer, however, while determining the amount of income concealed for the purpose of levying the penalty, has taken the amount at Rs.61,34,634/-. On this amount, he has calculated penalty @ 100% of the tax, which comes out to Rs.21,90,063/-.

So far as the difference between the ALV is concerned, the same is on account of difference in the ALV shown by the assessee in the return of income in response to notice u/s 148 and as determined by the approved valuer. It is not clear from the assessment order that the actual rent received by the assessee from Punjab National Bank is not in accordance with section 23. What is to be seen while determining the ALV is the sums for which property might reasonably be expected to let out from year-to-year for which Assessing Officer can make enquiry as to what would be the possible rent that property might fetch. Only when AO finds that actual rent received is less than the fair rent, he can work out the fair market value of the rent. It is not the case of the Assessing Officer here that the notional interest on interest free security deposit can be taken as determinative factor to arrive at the fair rent though there is slight whisper in the penalty order, which has not been taken into a logical conclusion, because ultimately the Assessing Officer has taken the figure of ALV as determined by the approved valuer, which has been accepted by the assessee in its revised computation filed before the Assessing Officer during the course of assessment proceedings. Such an estimate made by the Registered Valuer cannot be held to be correct fair rental value in accordance to the provisions of section 23, because the Assessing Officer has simply accepted the valuation given by the assessee in the revised computation. This does not entail that the assessee has either furnished inaccurate particulars of income or has concealed any income, because no enquiry has been done by the AO to ascertain that actual rent received is less than the fair market value. How the ALV disclosed in return of income filed in response to notice to notice u/s 148 is not correct. Thus, on this addition, no penalty can be levied; especially on the difference between the ALV shown by the assessee in the return of income as well as the value adopted by the Registered Valuer, which again is purely based on estimate.

So far as levy of penalty on disallowance of claim of set off of loss both under the head “income from house property” and “business income”, as observed by us, there is no finding by the ld. CIT(A) on this point. However, in the assessment order, Assessing Officer has noted that assessee itself has filed a revised computation of its income on 29/9/2009 wherein such a claim was withdrawn or was not claimed which has been accepted by the Assessing Officer also. After accepting assessee’s claim, the Assessing Officer has nowhere recorded his satisfaction or has stated, as to whether the assessee has furnished any inaccurate particulars of income, albeit at the end of the assessment order, he frames a charge both under concealment of income as well as furnishing of inaccurate particulars of income which, in our opinion is not correct, because the Assessing Officer has to specify the charge while initiating penalty proceedings under section 271(1)(c) qua each addition as to on which limb of section 271(1)(c) he is initiating penalty proceedings. We find that while levying penalty, he has again held that penalty is to be imposed under both the charges which is evident from para 12 of the impugned penalty order.

Section 271(1) (c) envisages the levy of penalty on two distinct limbs, that is, when the Assessing Officer in the course of any proceedings is satisfied that any person has “concealed the particulars of income” or has “furnished inaccurate particulars of such income”. The charges under both the limbs are distinct from each other and operate in two different situations; for example, concealment of particulars of income include cases like, false deduction or exemption claimed by the assessee in the return of income or any income not disclosed in the return of income. The concealment involves knowledge on part of the assessee of the real income while giving or disclosing the particulars of income. The furnishing of inaccurate particulars of income on the other hand includes cases where an item which has been though shown in the return of income but is not correct or has been wrongly shown in different head or the claim made is not found to be correct. The Assessing Officer when issues the notice to the assessee for initiation of penalty under this section, then he must disclose to the assessee about the charge on which he proposes to initiate or levy the penalty, because this charge flows from his satisfaction arrived by him during the course of the assessment proceedings. Therefore, the show cause notice issued should be without any ambiguity and the charge has to be very specific so that assessee can adduce evidence or give explanation that he is not guilty of any of the charge framed. Consequence of not rebutting the charge can entail heavy penalty to the assessee upto 300% of the tax, therefore, AO has to be very specific about the charge in his notice. Section 271(1) read with section 274 envisages that, firstly, the person who is accused by the AO on the charges mentioned in clause (c), must be made known by the AO under which limb of the clause (c) he is been charged; and secondly, assessee has the right to rebut the charges by giving his explanation or by adducing evidence in support of his claim or explanation and has right to contest the proceedings for which opportunity has to be given by the AO. Penalty under this section can be imposed only on the ground or charge upon which assessee has been called upon to answer or has been confronted and not on vague and unspecified ground in the notice. The Hon’ble Karnataka High Court in the case of CIT vs. Manjunath Cotton Ginning Factory reported in (2013) 359 ITR 565 (Kar) have discussed the entire law on this point in detail. The relevant observation of the Hon'ble Tribunal in this regard reads as under:-

Clause (c) deals with two specific offences, that is 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 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 guilty for either the one or the other cannot he sustained in It is needless to point out satisfaction of the existence of the grounds mentioned in Section 271(l)(c) when it is a sine qua non for initiation or proceedings, the penalty proceedings should be confined only to those grounds and the said grounds have to be specifically staled 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 on 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 of income or is it a case of furnishing of inaccurate particulars. The Apex Court in the case of Ashok Pai vs. CIT in Appeal (civil) 2747 of 2007 held that inaccurate particulars of income carry different connotations. The Gujarat High Court in the case of MANU ENGINEERING reported in 122 ITR 306 and the Delhi High Court in the case of VIRGO MARKETING reported in 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

This judgment of the Hon’ble Karnataka High Court has been reiterated by the same court in the case of CIT vs. M/s. SSA’S Emerald Meadows in order dated 23.3.2015 and also in the case of Safina Hotels (P) Ltd. vs. CIT (2016) 137 DTR 0089. Following the said judgments of Hon'ble Karnataka High Court, the ITAT Benches in several cases (some of them as cited by the Ld. Counsel above) have reiterated the same ratio. Even prior to these judgments, the Hon'ble Delhi High Court in the case of CIT vs. Virgo Marketing Pvt. Ltd. reported in (2008) 171 Taxman. 156 has opined the same principle, wherein it was held that the assessment order must clearly indicate as to under which part of section 271(1) (c) the Assessing Officer chooses to initiate the penalty proceedings against the assessee.

Thus, we hold that the impugned penalty levied by the Assessing Officer and as confirmed by the ld. CIT (A) cannot be sustained on this legal ground and is directed to be deleted.

In assessment year 2003-04, penalty has been levied by the Assessing Officer, firstly, on difference between the ALV shown by the assessee in the return of income filed in response to notice under section 148 at Rs.65,76,835/- and as per valuation report of ALV of the property by the approved valuer at Rs.76,04,853/-; secondly, disallowance of loss of shares of Rs.9,49,865/- on account of non-furnishing of details by the assessee; thirdly, claim of set off of business loss of Rs.22,16,747/- made in the return filed in response to notice under section 148 as compared to the claim of loss of Rs.20,023/- in the original return of income; and lastly, disallowance under section 14A by the Assessing Officer of Rs.6,58,344/- by applying rule 8D.

So far as the first issue is concerned, we have already held that assessee is not liable for levy of penalty under section 271(1)(c) and, therefore, for this year also, we direct deletion of penalty on this score.

So far as levy of penalty on disallowance under section 14A is concerned, admittedly disallowance has been made by the Assessing Officer by applying rule 8D, which is not applicable prior to the assessment year 2008-09 and, therefore, no penalty can be levied on such a disallowance worked out on the basis of rule 8D. Accordingly, penalty levied is deleted on this score.

So far as levy of penalty on loss of sale of shares and disallowance of set off of business loss, we find that here again the Assessing Officer has sought to levy penalty both for concealment and furnishing of inaccurate particulars of income, which is evident from para 8 of the assessment order as well as paras 6 & 11 of the impugned penalty order. Without specifying the charge, under which limb he is initiating penalty proceedings, the Assessing Officer cannot levy penalty as held by the Hon'ble Karnataka High Court in the aforesaid case, as discussed while deciding the appeal for assessment year 2002-03. In view of our finding given therein, we hold that under these facts and circumstances, penalty cannot be levied and the same is directed to be deleted.

In assessment years 2004-05 and 2005-06, again penalty has been levied on account of ALV as well as disallowance made under rule 8D. So far as levy of penalty on the issue of ALV, our finding given above will apply mutatis-mutandis and, therefore, we hold that no penalty should be levied. On the issue of disallowance under section 14A read with rule 8D, admittedly rule 8D is not applicable prior to assessment year 2008-09 and, therefore, such a disallowance will not attract levy of penalty and the same is directed to be deleted.

In the result, appeals of the assessee are allowed.