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Assessee by : Shri Milin Thakore (AR) Revenue by : Shri Saurabh Deshpande (DR) Date of hearing : 23.01.2018 Date of Pronouncement : 23 .01.2018 Order Under Section 254(1) of Income Tax Act PER PAWAN SINGH, JUDICIAL MEMBER: 1. This appeal by assessee under section 253 of Income Tax Act is directed against the order of ld. Commissioner of Income-Tax (Appeals)-15, [CIT(A)] Mumbai dated 27.08.2014 for Assessment Year 2008-09, which in turn arises from the order passed by Assessing Officer (AO) under section 271(1)(c) of the Act dated 21.03.2013 for levying the penalty of Rs. 29,36,705/-. The assessee has raised the following grounds of appeal:
The Appellant is aggrieved by the order dated 27 August 2014 (received on 16 September 2014) passed by the Commissioner of Income-tax (Appeals) - 15, Mumbai ['CIT(A)'] under Section 250 of the Income Tax Act, 1961 ('the Act') on the following grounds: 1. The learned CIT(A) erred in confirming the action of the Deputy Commissioner of Income tax- 8(3) in levying penalty ofRs.29,36,705 under section 271(l)(c) of the Act.
2. The learned CIT(A) ought to have appreciated that the appellant had neither concealed any income nor filed any inaccurate particulars of income.
3. The learned CIT(A) erred in holding that the price charged by the appellant in respect of software development services to its Associated Enterprise has not been computed in accordance with the provisions of section 92C of the Act, in good faith and with due diligence and therefore explanation 7 to section 271(1)(c) of the Act was attracted, 4. The learned CIT(A) erred in not appreciating the submissions made by the appellant in correct perspective. 5. The appellant prays that the penalty of Rs.29,36,705 levied under Section 271(1)(c) of the Act should therefore be deleted. Each one of the above grounds of appeal are distinct and separate and without prejudice to the other.
Further, the assessee vide application dated 10.11.2016 has raised the following grounds of appeal:
Without prejudice to ground nos. 1 to 5 above, the appellant submits that in the event the order of the assessing officer (AO) levying penalty under section 271 (1)( c) of the Income- tax Act, 1961 ('the Act') is upheld, the penalty should be levied on the difference between the arm's length price as agreed upon pursuant to the Mutual Agreement Procedure (MAP) and the profit level indicator (PU) as computed by the appellant i.e. on the adjustment of Rs.33,73,682 and not on the entire amount of adjustment made by the Transfer Pricing Officer (TPO) of Rs.86,39,910 vide order under section 92CA(3) of the Act dated 25 October 2011.
Brief facts of the case are that assessee is a company, engaged in providing Software development services to its Associate Enterprises (AE), filed its return of income for relevant AY on 24.09.2008. The assessment was completed on 21.09.2002 under section 143(3) of the Act. The AO while passing the assessment order made the adjustment of Arms Length Price (ALP) under section 92CA(3) of Rs. 86,29,910/- and initiated penalty under section 271(1)(c). The AO levied the penalty @ 100% of the tax sought to be evaded. The AO worked out the penalty of Rs. 29,36,705/- in its order dated 21.03.2013 passed under section 271(1)(c) of the Act. On appeal before the ld. CIT(A), the penalty order was upheld. Thus, 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 of the assessee argued that the AO while passing the assessment order has not recorded its satisfaction about the initiation of penalty, if it is initiated for concealing the income or furnishing the inaccurate particular of income. The notice issued under section 274 read with section 271(1)(c) also does not indicate if the penalty is initiated for concealing the income or for filing inaccurate particulars of income. Further, while passing the penalty order, the AO has not specified under which limb of Clause-c of sub-section (1) of section 271, the penalty is levied. In support of his submission, the ld. AR of the assessee relied upon the decision of Mumbai Tribunal in Meherjee Cassinath Holdings Pvt. Ltd. V/s. ACIT in and in M/s Orbit Enterprises V/s. ITO in ITA No. 1596-1597/M/14. On merit, the ld. AR of the assessee argued that the assessee has not furnished any inaccurate particular of income nor concealed the income. The AO while passing the assessment order made the upward adjustment of Rs. 86,39,910/-. It was further argued that against the Draft Assessment Order passed by AO, the assessee filed cross objection before the Dispute Resolution Panel (DRP). The objection of assessee was rejected by DRP vide order dated 31.07.2012.
The assessee meanwhile filed an application before the competent authority under Mutual Agreement Procedure (MAP) as per Article-27 of Double Taxation Avoidance Agreement between India and UK. In pursuance of MAP agreement, the Transfer Pricing Adjustment in respect of software development services was calculated at Rs. 33,73,682/- thereby, the assessee was granted relief of Rs. 52,66,228/- and the same was accepted by the assessee. Accordingly, the assessee has raised the additional ground of appeal in the present appeal. The assessee also relied upon the decision of Hon’ble Bombay High Court in CIT V/s. Samson Perinchery in of 2014, Shri Suresh Sheth V/s. ITO in ITA No. 6914-6915/M/12, P.K. Joshua V/s. ITO in ITA No. 4487 to 4491/M/14, Aditya Chemicals Ltd. V/s. ITO in ITA No. 5006/Del/13, CIT V/s. Manjunatha Cotton & Ginning Factory (359 ITR 565), CIT V/s. SSA’S Emerald Meadows (73 taxmann.com 241), CIT V/s. SSA’S Emerald Meadows (73 taxmann.com 248) & Sarita Milind Davare V/s. ACIT in ITA No. 2187/M/14. On the other hand, the ld. DR for the Revenue relied upon the order of the authorities below. In support of his submissions relied on the decision of Nagpur Bench of Hon’ble Bombay High Court in M/s Maharaja Garage & Co. v/s. CIT in ITA No. 21/2008 dated 22.08.2017. In the rejoinder submission, the ld. AR of the assessee submits that the finding given in the case of M/s Maharaja Garage & Co. have no application on the facts of the present case as question before the Hon’ble Court was something different. And that the decision in Maharaja Garage & Co is distinguished by coordinate bench in Mrs Indrani Sunil Pillai Vs ACIT vide ITA No. 1339/M/2016.
5. We have considered the rival submission of the parties and have gone through the orders of authorities below. The perusal of assessment order passed under section 143(3) on 21.09.2002 reveals that the AO while passing the assessment order made upward adjustment of Rs. 86,39,910/- on account of ALP between assessee and its AE. We have noted that the AO, while passing the assessment order under section 143(3) has not recorded the satisfaction under which limb of Clause-c of sub-section (1) of section 271, the penalty is proposed. We have also perused the copy of notice under section 274 rws 271(1)(c) dated 07.09.2012 (Page No.1 of PB). We have noted that the assessing officer has not strike out the inappropriate portion of the notice. Again while levying the penalty under section 271(1)(c), the AO has not specified, if the penalty is levied for concealing the particular of income or furnishing inaccurate particular. The co-ordinate bench of Mumbai Tribunal in Meherjee Cassinath Holdings Pvt. Ltd. (supra) while considering the similar issues 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 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 justice. (See Malabar Industrial Co. Ltd. v. CIT [2000] 2 SCC 718]" 9. 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 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 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 aware as to which of the two limbs of Sec. 271(1)(c) of the Act he has to respond.
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.”
In view of the above discussion, we find that the ratio laid down in the aforesaid decisions is applicable on the facts of the present case. So far as decision of jurisdictional High Court relied by ld. DR in Maharaj Garage & Co. (supra) has no application on the facts of the case. With utmost regard, on careful reading of the decision, we find that basic issue arising out of the reference application before the Hon’ble High Court was whether while granting the previous approval by the Inspecting Assistant Commissioner of Income-tax as per provision of section 271(1)(c)(iii) of that Act, the assessee was required to be given an opportunity of being heard. The Hon’ble Court observed that the provision of section 271(1)(c) (iii) does not attract the rule of presumption of mens rea as the penalty imposable under the said provision is for the breach of civil obligation. Thus, in our view, the observation of Hon’ble High Court for issuance of show-cause notice appears to be in context of quantum of penalty to be levied and not with reference of issuance of show-cause notice as provided under section 274. Thus, in our view, the decision cannot be read out in manner that here is no need for mentioning the specific limb of sub-section 271(1)(c) for which penalty was intended to be imposed. In our view, such issue has not come up for consideration before the Hon’ble High Court. Hence, the decision relied by ld. DR is not helpful to the Revenue.
Considering the above legal and factual position, in our view, the AO has not recorded any satisfaction before initiating the penalty under which limb of clause-c of sub section (1) of section 271 is initiated. Similarly in the notice under section 274 the assessing officer has not specified the specific limb of clause-c of sub-section (1) of section 271. Again, no such satisfaction was recorded while levying the penalty. Thus, we accept the legal submissions of the ld AR for the assessee and allow the appeal on legal grounds. As we have allowed the appeal of the assessee on legal ground, the discussion on merit and other grounds of appeal became academic.
In the result, appeal filed by assessee is allowed. . Order pronounced in the open court on this 23rd day of January, 2018.