SADHANA NITRO CHEM LTD,MUMBAI vs. DCIT 7(2), MUMBAI

Brief facts of the case are that assessee-company is engaged in manufacturing and trading in chemicals, filed its return of income for 2 – Sadhana Nitro Chem Ltd. relevant AY on 26.09.2009 declaring loss of Rs. 11,97,69,880/-. The assessment was completed on 20.03.2013 under section 143(3) of the Act. The AO while framing the assessment order disallowed Rs. 19,13,448/- on account of bogus purchases. The AO initiated the penalty proceeding under section 271(1)(c). The AO levied the penalty @ 100% f the tax sought to be evaded. The AO worked out the penalty of Rs. 6,50,380/-. On appeal before the ld. CIT(A), the action of AO was upheld. Thus, further aggrieved by the order of ld. CIT (A), the assessee has filed the present appeal before us.

We have heard the ld. Authorized Representative (AR) of the assessee and ld. Departmental Representative (DR) for the Revenue and perused the material available on record. The ld AR for the assessee argued that the AO issued notice under section 271(1)(c) r.w.s. 271(c) vide noted dated 20.03.2013. In the notice, the AO has not strike out the inappropriate portion specifically mention, if the penalty is initiated for concealing the income or furnishing inaccurate particular of such income., thus the notice issued by him is defective. It was further argued that even while initiating the penalty in assessment order, the AO has not specified the specific limb of charges as per Clause-c of sub-section 271 of the Act. In support of his submission, the ld. AR of the assessee relied upon the decisions of Uttam Value Steels Ltd. vs. ACIT (ITA No. 3622 to 3625/M/16 dated 22.05.2017), M/s. Orbit Enterprises vs. ITO (ITA Nos. 1596 & 1597/M/12 3 – Sadhana Nitro Chem Ltd. dated 01.09.2017), Meherjee Cassinath Holdings Pvt. Ltd. vs. ACIT (ITA No. 2555/M/14 dated 28.04.17), Shri Hiralal Chunilal Jain vs. ITO (ITA No. 4457/M/14 dated 01.01.2016 & Haranba Industries Ltd. vs. DCIT (ITA No. 2292/M/13 dated 08.04.2015). It was further argued that the assessee voluntarily offered for disallowance of the purchases from TARA Enterprises for Rs. 5,69,762/-, R.K. Ispat for Rs. 8,97,266/- and Centurial Sales Corporation for Rs. 4,46,420/-, thus, total of Rs. 19,13,448/-. On merit it was argued that the assessee itself withdrawn the claim of deduction during the assessment. The assessee has placed on record all the details of the purchases in ordinary course of its business and no penalty is leviable on the assessee. The ld. AR of the assessee prayed for deleting the penalty. On the other hand, the ld. DR for the Revenue supported the order of lower authorities. The ld. DR for the Revenue relied upon the decision of jurisdictional High Court in case of CIT vs. Smt. Kaushalya [1994] 75 Taxman 549 (Bom).

We have considered the rival submission of the parties and have gone through the orders of authorities below. We have noted that during the assessment proceeding, the AO confronted the assessee regarding the information received from DGIT (Inv.) about the hawala dealers from whom the assessee has shown the purchases. The assessee voluntarily withdrawn their claim for deduction in respect of the purchases of Rs. 19,13,448/-. The AO disallowed and added the same to the income of the 4 – Sadhana Nitro Chem Ltd. assessee. The AO initiated the penalty for providing inaccurate particulars of income and for concealment of particular of income. The notice under section 274 r.w.s. 271 dated 20.03.2013 was issued to the assessee. We have noted that the AO has not strike out the inappropriate portion specifically mentioning, if the penalty is initiated for concealing the particular of income or for furnishing inaccurate particular of such income.

The careful perusal of the assessment order reveals that during the assessment proceeding, the assessee voluntarily offered the deduction claimed on account of purchases for taxation. We have further noted that the AO has no other material except for surrender of the deduction on account of purchases. The Hon’ble Supreme Court in case of CIT vs. Suresh Chandra Mittal (2001) 251 ITR 9 (SC) held that if assessee offered the additional income to buy peace of mind and to avoid litigation, the penalty under section 271(1)(c) cannot be levied. We have noted that AO has not brought any material on record to show the malafide intention of the assessee about the concealment of income. There is no investigation by the AO about the non-genuine claim of the assessee in respect of the deduction of purchases claimed by assessee. In our view, there is no evidence to support the disallowance except the surrender made by the assessee himself.

The Hon’ble Punjab & Haryana High Court in case of CIT Vs M/s Sidhartha Enterprises in ITA No 908 of 2008 dated 14.07.2009 while 5 – Sadhana Nitro Chem Ltd. considering the decision of the Supreme Court in Union of India Vs Dharamendra Textile Processors [2008] 306 ITR 277/ 174 Taxman 571 cannot be read as laying down that in every case where particulars of income are inaccurate, penalty must follow. What has been laid down is that qualitative difference between criminal liability under section 276C and penalty under section 271(1)(c) has to be kept in mind and approach adopted for the trial of a criminal case need not be adopted while considering the levy of penalty. Even so, concept of penalty has not undergone change by virtue of the said judgment. Penalty is imposed only when there is some element of deliberate default and not for a mere mistake.

The ordinate bench of the Tribunal on almost similar facts in Meherjee Cassinath Holdings Pvt. Ltd. (supra) after considering the decision of Jurisdictional High Court in Kaushalya (supra) relied by ld DR held 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 6 – Sadhana Nitro Chem Ltd. 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 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.

The impugned order, therefore, suffers from non-application of mind. It was also bound to comply with the principles of natural 7 – Sadhana Nitro Chem Ltd. justice. (See Malabar Industrial Co. Ltd. v. CIT [2000] 2 SCC 718]"

Factually speaking, the aforesaid plea of assessee is borne out of record and having regard to the parity of reasoning laid down by the Hon'ble Supreme Court in the case of Dilip N. Shroff (supra), the notice in the instant case does suffer from the vice of non- application of mind by the Assessing Officer. In fact, a similar proposition was also enunciated by the Hon'ble Karnataka High Court in the case of M/s. SSA's Emerald Meadows (supra) and against such a judgment, the Special Leave Petition filed by the Revenue has since been dismissed by the Hon'ble Supreme Court vide order dated 5.8.2016, a copy of which is also placed on record.

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 (supra) and the decision of the Tribunal holding levy of penalty in such circumstances being bad, has been approved.

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 8 – Sadhana Nitro Chem Ltd. 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 :- "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 9 – Sadhana Nitro Chem Ltd. 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."

The aforesaid discussion clearly brings out as to the reasons why the parity of reasoning laid down by the Hon'ble Supreme Court in the case of Dilip N. Shroff (supra) is to prevail. Following the decision of our coordinate Bench in the case of Dr. Sarita Milind Davare (supra), we hereby reject the aforesaid argument of the ld. CIT-DR.

Apart from the aforesaid discussion, we may also refer to the one more seminal feature of this case which would demonstrate the importance of non-striking off of irrelevant clause in the notice by the Assessing Officer. As noted earlier, in the assessment order dated 10.12.2010 the Assessing Officer records that the penalty proceedings u/s 271(1)(c) of the Act are to be initiated for furnishing of inaccurate particulars of income. However, in the notice issued u/s 274 r.w.s. 271(1)(c) of the Act of even date, both the limbs of Sec. 271(1)(c) of the Act are reproduced in the proforma notice and the irrelevant clause has not been struck-off. Quite clearly, the observation of the Assessing Officer in the assessment order and non-striking off of the irrelevant clause in the notice clearly brings out the diffidence on the part of Assessing Officer and there is no clear and crystallised charge being conveyed to the assessee u/s 271(1)(c), which has to be met by him. As noted by the Hon'ble Supreme Court in the case of Dilip N. Shroff (supra), the quasi-criminal proceedings u/s 271(1)(c) of the Act ought to comply with the principles of natural justice, and in the present case, considering the observations of the Assessing Officer in the assessment order alongside his action of non- striking off of the irrelevant clause in the notice shows that the charge being made against the assessee qua Sec. 271(1)(c) of the Act is not firm and, therefore, the proceedings suffer from non- compliance with principles of natural justice inasmuch as the Assessing Officer is himself unsure and assessee is not made

Therefore, in view of the aforesaid discussion, in our view, the notice issued by the Assessing Officer u/s 274 r.w.s. 271(1)(c) of the Act dated 10.12.2010 is untenable as it suffers from the vice of non- application of mind having regard to the ratio of the judgment of the Hon'ble Supreme Court in the case of Dilip N. Shroff (supra) as well as the judgment of the Hon'ble Bombay High Court in the case of Shri Samson Perinchery (supra). Thus, on this count itself the penalty imposed u/s 271(1)(c) of the Act is liable to be deleted.” 8. Considering the above referred factual and legal position as narrated above, we held that the notice issued by assessing officer under section 274rws 271(1)(c) was defective as the assessee was not informed about specific charge of penalty. Moreover, there is no finding of the assessing officer on record to show the malafide intention of the assessee about the concealment of income. There is no investigation by the AO about the non-genuine claim of the assessee in respect of the deduction of purchases claimed by assessee. Thus, the levy of penalty in the present case is not justifiable.