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Income Tax Appellate Tribunal, “B” Bench, Mumbai
Before: Shri B.R. Baskaran (AM)& Shri Pawan Singh (JM)
O R D E R Per B.R. Baskaran (AM) :-
The assessee has filed this appeal challenging the order dated 03-01- 2012 passed by Ld CIT(A)-40, Mumbai confirming the penalty levied by the AO u/s 271(1)(c) of the Act for assessment year 2008-09.
The assessee is engaged in the business of running a Hotel. The penalty was levied on the following additions made by the AO:- (a) The assessee had received income from joint venture agreement entered with M/s Favourite food India P Ltd,(FFIPL) which holds promotion rights of “Pizza hut” brand. The assessee declared the same as income from house property. The AO treated the same as business income of the assessee and accordingly disallowed the claim for deduction of 30% made u/s 24 of the Act.
(b) The assessee has received a sum of Rs.9,55,620/- from Vodafone Essar towards the installing of tower in its terrace. The assessee declared the same as rental income under the head income from house property. The AO treated the same as business income of the assessee and accordingly disallowed the claim for deduction of 30% made u/s 24 of the Act.
(c) The assessee had claimed interest expenditure of Rs.1.70 crores against income received from FFIPL (Pizza Hut). The AO noticed that the same was given by the assessee under an arbitration agreement for termination of joint venture business agreement. The AO held that the said interest expenditure was not incurred in connection with the acquisition of any building and hence not allowable u/s 24 of the Act. He also held that the same is not allowable u/s 28 of the Act also. Accordingly the AO disallowed the claim of interest expenditure also.
The AO levied a penalty of Rs.62.69 lakhs on the above said additions u/s 271(1)(c) of the Act and it was also confirmed by Ld CIT(A). Aggrieved, the assessee has filed this appeal.
The Ld A.R first raised a legal contention that the assessing officer has imposed the penalty in a mechanical manner without applying his mind on the issue. (a) He submitted that the assessing officer has stated in the assessment order that the above said additions amount to furnishing of inaccurate particulars of income and deemed concealment of income in terms of Explanation 1 to 271(1) of the Act. He submitted that the Hon’ble Supreme Court in the case of T.Ashok Pai (292 ITR 11) has observed that the two charges mentioned in sec. 271(1)(c) of the Act, viz., concealment of particulars of income or furnishing of inaccurate particulars of income are specific and separate charges. Accordingly he submitted that the AO, at the time of initiation of charges during the course of assessment proceedings, was not sure about the limb under which the penalty proceedings are initiated by him.
(b) Referring to the notice issued by the AO for initiating penalty proceedings, the Ld A.R said that the AO has not struck off inapplicable portion in the notice and this action of the AO also confirms that that he was not sure about the limb under which he has initiated penalty proceedings.
(c) The Ld A.R further submitted that the AO has passed the assessment order on 31.12.2010, where as the penalty notice is dated 30-12-2010, meaning thereby, the AO has initiated penalty proceedings even prior to the passing of assessment order, which is an impossibility.
On merits, the Ld A.R submitted that the assessee submitted that mere change in head of income would not result in either concealment of income or furnishing of inaccurate particulars of income. With regard to interest expenditure claimed by the assessee, the Ld A.R submitted that the said interest was given under arbitration agreement for the delayed refund of deposit and hence it is admissible business expenditure. He submitted that it may not be admissible under the head Income from house property, but certainly allowable under the head business. Since the assessing officer has computed the income from Pizza Hut as business income, the same should have been allowed by him. In any case, the disallowance was on account of difference of opinion and hence the same would also not give rise to penalty.
The Ld D.R, on the contrary, placed reliance on the order passed by the Ld CIT(A).
Having heard rival submissions, we are of the view that there is merit in the contentions of the assessee. The assessing officer, while initiating penalty proceedings, has to be satisfied and should also be very clear about the charge, i.e., the AO should be very clear as to whether he is imposing penalty for concealment of particulars of income or furnishing of inaccurate particulars of income. In the instant case, the AO has mentioned both the charges in the assessment order and also in the penalty noticed issued to the assessee. Though the AO has finally levied penalty for furnishing of inaccurate particulars of income in the penalty order, but he was not sure about the same at the time the penalty was initiated. The satisfaction of the AO and clarity of his mind are essential elements at the time of initiation of penalty proceedings. If the penalty proceeding has been initiated in a mechanical manner without any application of mind, the same is liable to be quashed.
An identical issue relating to application of mind on the part of the AO was considered in the case of Sarita Milind Deora (ITA No.2187/M/14) by the co-ordinate bench of Mumbai ITAT and the relevant discussions made therein are extracted below, for the sake of convenience:- “11. Hence, we are of the view that the application of mind on the part of the assessing officer at the time of issuing notice for initiation of penalty is a mandatory requirement and the non-application of mind
would vitiate the penalty proceedings. We notice that the Hon’ble Bombay High Court has also expressed identical view in the case of Smt. Kaushalya and Others (supra), on which the revenue has placed heavy reliance. In that case also, it was contended that the AO has not indicated the appropriate charge for which the penalty proceedings were initiated. The Hon’ble Bombay High Court has expressed the following view:-
“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 inaccurate portion cannot by itself invalidate the notice. The entire factual background would fall for consideration in the matter and non one aspect would be decisive. In this context, useful reference may be made to the following observation in the case of CIT Vs. Mithila Motors (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.”
The Hon’ble Bombay High Court, thereafter, considered various decisions relied upon by the parties and came to the conclusion that there should be application of mind on the part of assessing officer. For the sake of convenience, we extract below the relevant observations made by Hon’ble Bombay High Court.
“11. The case of CIT v. Lakhdhir Lalji [1972] 85 ITR 77 (Guj) is the other decision upon which the Tribunal has placed reliance. In that case a notice under section 274 was issued on the footing of concealment of income by suppression of sales whereas the penalty was levied on the footing that there was furnishing of inaccurate particulars of income since the stock at the closing of the year was undervalued. The penalty was quashed upon a view that the very basis for the penalty proceedings had disappeared when it was held that there was no suppression of income by the assessee. Thus, it would be seen that the ratio of that decision cannot be applied to this case.
12. The last decision relied upon is the case of N. N. Subramania Iyer v. Union of India [1974] 97 ITR 228 (Ker). The following passage from the said decision would demonstrate how entirely different the background of that case was and, therefore, the ratio of that decision also could not be applied (at page 231) :
"The penalty notice, exhibit P-2, is illegal on the face of it. It is in a printed form, which comprehends all possible grounds on which a penalty can be imposed under section 18(1) of the Wealth-tax Act. The notice has not struck off any one of those grounds; and there is no indication for what contravention the petitioner was called upon to show cause why a penalty should not be imposed. Even in the counter-affidavit filed by the second respondent, he has not stated for what specific violation he issued it. It is not that it would have saved his action. Apparently, exhibit P-2 is a whimsical notice issued to an assessee without intending anything."
No doubt, there can exist a case where vagueness and ambiguity in the notice can demonstrate non-application of mind by the authority and/or ultimate prejudice to the right of opportunity of hearing contemplated under section 274. Take for example; the notice dated March 28, 1972, for the assessment year 1967- 68. This show-cause notice was issued even before the assessment order was made. The assessee had no knowledge of the exact charge of the Department against him. In the notice, not only there is use of the word "or" between the two groups of charges but there is use of the word "deliberately". The word "deliberately" did not exist in section 271(1)(c) when the notice was issued. It is worthwhile recalling that the said word was omitted by the Finance Act, 1964, with effect from April 1, 1964, and the Explanation was added. 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 charges he had to face. In this background, quashing of the penalty proceedings for the assessment year 1967-68 seems to be fully justified.”
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, the Ld A.R has demonstrated as to how there was no application of mind on the party of the AO. The various sequences narrated by him shows that the AO did not arrive at proper satisfaction and was not clear in his mind and has initiated the penalty proceedings in a mechanical manner. Hence the impugned penalty order is liable to be quashed on this ground alone.
Accordingly we quash the orders passed by the tax authorities.
In the result, the appeal of the assessee is allowed. Order has been pronounced in the Court on 28.02.2018.