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Facts
The assessee, Sushil Rajendra Kothari, filed his return for AY 2017-18. During scrutiny assessment, the AO disallowed 6% of interest paid by the assessee (out of 18% claimed) for being in excess of the market rate, an addition the assessee voluntarily conceded to buy peace. Subsequently, the AO initiated penalty proceedings under section 270A, rejecting the assessee's claim for immunity under Form-68, contending it was a case of misreported income. The CIT(A) upheld the penalty of Rs. 11,29,012/-.
Held
The Tribunal held that the penalty levied under Section 270A was unsustainable because the AO's penalty notice failed to specify the particular limb of Section 270A(9) invoked, which is a violation of natural justice. Furthermore, the Tribunal found that income voluntarily admitted by the assessee during assessment, without any allegation of misrepresentation or suppression of facts, does not constitute "under-reporting" or "misreporting of income." The Tribunal emphasized that penalty is not mandatory for every technical breach and should only be imposed for conscious defiance of law.
Key Issues
The key legal issues were whether a penalty notice under Section 270A is valid without specifying the particular limb of Section 270A(9), and whether an assessee's voluntary concession of a disallowance during assessment constitutes 'under-reporting' or 'misreporting' of income for penalty imposition.
Sections Cited
Section 270A, Section 270AA, Section 57, Section 143(3), Section 274, Section 246A, Section 271(1)(c), Section 270A(8), Section 270A(9), Finance Act, 2016
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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI SANDEEP GOSAIN, JM &
(Assessment Year: 2017-18) Sushil Rajendra Kothari National Faceless Appeal 102, Kalpavraksha Apartment 27 Centre, Delhi / ACIT Circle- Ridge Road, Malabar Hill, Vs. 19(3), Matru Mandir, Mumbai-400006. Mumbai-400007. PAN : AGZPK8404H Appellant) : Respondent) Appellant /Assessee by : Shri Dharmesh Shah, AR Revenue / Respondent by : Shri Nagnath Bhimrao Pasale, Sr. DR : 12.11.2024 Date of Hearing Date of Pronouncement : 21.11.2024 O R D E R
Per Padmavathy S, AM:
This appeal by the assessee is against the order of Commissioner of Income Tax (Appeals)/ National Faceless Appeal Centre (NFAC) Delhi [in short 'the CIT(A)'] dated 27.10.2023 for Assessment Year (AY) 2017-18. The assessee raised the following ground of appeal:-
1. The learned NFAC CIT (A) erred in confirming the penalty u/s 270A of the Act of Rs 1129012 and completely ignored the facts and merits of the case.
Sushil Rajendra Kothari 2. The learned NFAC CIT (A) erred in Completely ignoring the fact that learning AO has not passed an order for rejection or granting of Immunity as Form 68 was duly submitted before the AO. The AO was duly bond to pass an order either granting or rejecting the immunity, penalty levied by AO, Confirmed by NFAC CIT (A) in is bad in law.
3. The learned NFAC CIT (A) Without Jurisdiction erred in concluding that Interest paid in excess of Interest received was a shift from sound business prudence and hence it is misreporting & not eligible for Immunity.
4. The National faceless Appeal Centre CIT (A) Ignored the fact that granting of Immunity is the power of AO and not of NFAC or National Faceless Appeal Centre. 2. The assessee is an individual and filed the return of income for AY 2017-18 on 31.10.2017 declaring total income at Rs.63,02,320/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. During the course of assessment, the AO noticed that the assessee has claimed a deduction of Rs. 1,58,09,988/- under section 57 of the Income Tax Act, 1961 (the Act) against the interest income of Rs. 1,60,00,683/-. The AO called on the assessee to furnish the details pertaining to the interest paid and from the details furnished by the assessee the AO noticed that the assessee has paid interest of Rs. 54,80,631/- at 18% to one Mr. Sunil Dalal. The AO was of the view that the assessee has paid interest at extra rate when compared to the prevailing market rate and accordingly issued a show-cause notice to the assessee as to why interest paid to Mr. Sunil Dalal should not be restricted to 12% thereby making a disallowance to the extent of 6%. The assessee conceded before the AO that the interest may be disallowed to the extent of 6% and accordingly the AO made an addition of Rs. 18,26,877/-. Subsequently the AO initiated penalty proceedings under section 270A of the Act. The assessee in response to the penalty notice submitted that the disallowance of interest was offered by the assessee voluntarily in order to buy peace and to avoid Sushil Rajendra Kothari prolonged litigation. The assessee further submitted that tax due on the amount disallowed is already paid and accordingly requested that the penalty proceeding be dropped. The assessee also submitted Form-68 for immunity against the penalty initiated under section 270 of the Act. The AO however did not accept the submissions of the assessee and held that “4. However, on perusal of section 270AA, it is clearly visible that cases of misreported income are not eligible for immunity u/s 270AA. Therefore, in this case question of granting immunity does not arise, as it is a case of mis-reported income and penalty proceedings are concluded based on this fact and circumstances of the case.
5. The reply filed by the assessee has duly been considered and it is observed that during assessment proceedings, the assessee admitted that there was difference between the amounts claimed by the assessee of the actual allowable interest and agreed to the addition of Rs. 18,26,877/-. It was only during the scrutiny assessment proceedings that such under- reporting or misreporting of income were disclosed. Only few cases are taken up for scrutiny. Had the assessee's case not been taken up for scrutiny, there would have been an obvious revenue loss for the Government. The assessee cannot arrange the matters to reduce tax liability by hiding the facts or income.
The relevant provisions of Section 270A(8) of the Income Tax Act, 1961 are reproduced below "(8) Notwithstanding anything contained in sub- section (6) or sub- section (7), where under-reported income is in consequence of any misreporting thereof by any person, the penalty referred to in-sub-section (1) shall be equal to two hundred percent of the amount of tax payable on under-reported income". As per the provisions of Section 270A(9) of the Income Tax Act, 1961, the misreporting of income includes misrepresentation or suppression of facts and for sake of clarity, the relevant provisions are reproduced as under: (9) The cases of misreporting of income referred to in sub-section (9) shall be the following namely (a) misrepresentation or suppression of facts;……. Hence, it is held that the assessee has misrepresented the facts of actual taxable income.
7. In view of the above, it is held that this is a fit case for levy of penalty uns. 270A of the Income Tax Act, 1961 for under-reporting of income in Sushil Rajendra Kothari consequence of misreporting. Hence, the assessee is liable to pay penalty of two hundred percent of the amount of tax payable on the under-reporting of income in consequence of misreporting. The income tax payable on under- reported in consequence of misreported income worked out as under- Particulars Amount (in Rs.) Tax Payable on Assessed income (A) 23,31,673- Tax Payable on Returned Income (B) 17,67,167/- Tax payable on under-reported in consequence of misreported income (A-B) 5,64 506/- 200% of Tax payable on under-reported in consequence of misreported income 11,29,012/- Penalty u/s. 270A of the I.T. Act, 1961 11,29,012/-”
3. Aggrieved the assessee filed appeal before the CIT(A). The CIT(A) upheld the penalty levied by the AO by holding that but for the scrutiny assessment the under reporting of income in consequence of misreporting by the assessee would not have come to light and therefore the AO has correctly levied penalty. The assessee is in appeal against the order of the CIT(A) before the Tribunal.
4. The ld. AR submitted that AO in the notice issued under section 270A of the Act has not specified under which clause of section 270A(9) the penalty is levied in assessee's case. The ld. AR further submitted that in the assessment order passed by the AO under section 143(3) of the Act there is no allegation of under- reporting in consequence of misreporting by the assessee. The ld. AR also submitted that there is no under-reporting in the first place since the alleged excess interest voluntarily conceded by the assessee for disallowance was part of the statement of income and therefore the AO is not correct in stating that there is an under-reporting of income in consequence of misreporting. The ld. AR submitted that the disallowance of 6% of interest is made on estimated basis and therefore no penalty can be levied when the addition is based on estimation. The ld. AR relied on the following judgments in this regard.
“1. Schneider Electric South East Asia (HQ) Pte. Ltd. v. ACIT [145 taxmann.com 665].
Prem Brothers Infrastructure LLP v. NFAC [142 taxmann.com 38].
Greenwoods Govt. officers Welfare Society v. DCIT [160 taxmann.com 105].
Enrica Enterprises (P.) Ltd. v. DCIT [163 taxmann.com 105].
Ganga Iron & Steel Trading Co. v. CIT [447 ITR 743].
6. CIT v. Sonal Construction Co. [55 Taxmann.com 425].”
5. The ld. DR on the other hand submitted that it cannot be held that since the assessee has accepted the disallowance there is no suppression. The DR further submitted that the AO in the penalty order has clearly stated that the assessee's case falling under 270A(9)(a) and therefore assessee's contention that AO has not specified the clause is not tenable. Accordingly, the ld. DR submitted that the AO has applied clause (a) of section 270A(9) and correctly levied penalty in assessee's case.
6. We heard the parties and perused the material on record. In the scrutiny assessment, the AO proposed the disallowance of 6% of interest which according to the AO is in excess of market rate. The assessee agreed to the disallowance and accordingly the addition towards excess interest claimed by the assessee is made while completing the assessment under section 143(3) of the Act. Subsequently the AO initiated the penalty proceedings under section 270A stating that penalty proceedings are initiated since there is "under-reporting of income in consequence of misreporting". The main contention of the assessee is that the AO in the penalty notice has not mentioned specific limb of section 270A(9) under which penalty proceedings are initiated in assessee's case. In this regard we notice that the Hon'ble Delhi High Court in the case of Schneider Electric South East Asia (HQ) Pte Ltd. (supra) has considered a similar issue and held that “6. Having perused the impugned order dated 09th March, 2022, this Court is of the view that the Respondents action of denying the benefit of immunity on the ground that the penalty was initiated under Section 270A of the Act for misreporting of income is not only erroneous but also arbitrary and bereft of any reason as in the penalty notice the Respondents have failed to specify the limb "underreporting" of "misreporting of income, under which the penalty proceedings had been initiated.
7. This Court also finds that there is not even a whisper as to which limb of Section 270A of the Act is attracted and how the ingredient of sub-section (9) of Section 270A is satisfied. In the absence of such particulars, the mere reference to the word "misreporting" by the Respondents in the assessment order to deny immunity from imposition of penalty and prosecution makes the impugned order manifestly arbitrary.
This Court is of the opinion that the entire edifice of the assessment order framed by Respondent No.1 was actually voluntary computation of income filed by the Petitioner to buy peace and avoid litigation, which fact has been duly noted and accepted in the assessment order as well and consequently, there is no question of any misreporting.”
A similar view has been held by the Delhi Bench of the Tribunal in the case of Greenwoods Government Officers Welfare Society (supra). We further notice that the Chennai Bench of the Tribunal in the case of Enrica Enterprises Pvt. Ltd(supra). while considering a similar issue has held that “14. In light of above factual back ground, if we examine the order passed by the AO imposing penalty u/s.270A(9) of the Act, it is necessary to refer to provisions of Sec.270A of the Act, and the reasons given by the AO to impose penalty u/s.270A(9) of the Act. The provisions of Sec.270A of the Act, deals with penalty for 'under reporting of income and under reporting as a consequence of misreporting of income'. Sub-section 1 to 6 of Sec.270A of the Act, deals with 'under reporting of income and under reporting as a consequence of misreporting of income', has been specified in sub-section 7 of Sec.270A of the Act. Sub-section 8 & 9 deals with 'under reporting of income and under reporting as a consequence of misreporting of income' thereof by any person and such cases of 'misreporting of income' referred to in sub- sec.8 has been specified in sub sec.9 of Sec.270A of the Act. From the above, it is manifestly clear that provisions of Sec.270A of the Act, has two limbs or two Sushil Rajendra Kothari charges for which penalty can be levied. The first limb or first charge is 'under reporting of income and such under reporting of income' has been specifically referred to in sub-section 2 to 6 of Sec.270A of the Act. In the present case, these provisions are not relevant, because, the AO has not invoked under reporting of income. The second limb or charge is 'under reporting of income as consequence of misreporting of income' thereof and in the present case, the AO invoked second limb of provisions of Sec.270A of the Act. Admittedly, these provisions have been substituted by the Finance Act, 2016 w.e.f.01.04.2017 and applicable for AY 2017-18 onwards. Prior to insertion of Sec.270A of the Act, a similar provision was existed in the statue by way of sec.271(1)(c) of the Act, for concealment of particulars of income or furnishing of inaccurate particulars of income. Provisions of Sec.271(1)(c) of the Act, was also having two limbs or two charges i.e. i) for concealment of particular of income and ii) furnishing of inaccurate particulars of income. If you go by provisions of Sec. 271(1)(c) of the Act & Sec.270A of the Act, and wordings therein both provisions are similar and para materia to each other. Although, the term 'tax evasion' has been redefined by way of 'under reporting of income and under reporting as a consequence of misreporting of income' but it is synonymous to concealment of particular of income or furnishing of inaccurate particulars of income. Therefore, it is necessary to examine whether penalty proceedings u/s.270A of the Act, is mandatory in nature and further, such penalty can be invoked without providing an opportunity to the assessee as required u/s.274 of the Act.
The order imposing penalty u/s.270A of the Act, is an appealable order u/s.246A of the Act before the First Appellate Authority. If penalty u/s.270A of the Act, has been mandatory, there have not been any provision of appeal u/s.246A of the Act. Since, the order imposing penalty Sec.270A of the Act, is an appealable order, then, it cannot be said that penalty u/s.270A of the Act, is not mandatory in nature. Since, penalty u/s.270A of the Act, is not mandatory in nature, the AO is required to give an opportunity to the assessee to show cause 'as to why' penalty should not be levied in terms of sec.274 of the Act. Admittedly, the AO issued notice u/s.274 r.w.s.270A of the Act. Sec.274 of the Act deals with the procedure for levy of penalty, wherein, it directs that no order imposing penalty shall be made unless the assessee has been heard or has been given a reasonable opportunity of hearing. Thus, it is evident that the penalty u/s.270A of the Act, cannot be imposed unless the assessee has given a reasonable opportunity and the assessee is being heard. Once, the AO is bound to act to hear the assessee and give reasonable opportunity to explain its case, then, there is no mandatory requirement of imposing penalty, because the opportunity of hearing is not a mere formality, but it is to adhere to the principle of natural justice. Therefore, in our Sushil Rajendra Kothari considered view, the penalty u/s.270A of the Act, is not mandatory and it is based on the facts and merits placed before the AO.
Having said so, let us come back to notice issued u/s.274 r.w.s.270A of the Act. We have gone through notice u/s 274 r.w.s. 270A of the Act dated 26.07.2021, wherein, the AO has stated that 'under reporting of income and under reporting as a consequence of misreporting of income'. From the notice, it is not discernable whether penalty has been initiated for 'under reporting of income' as per section 270A (1) to (6) or Though, the AO while passing the impugned order has imposed penalty u/s./ 270A(9) of the Act, but no such ground was specified in the show cause notice dated 26.07.2021. In our considered view notice u/s 274 r.w.s. 270A of the Act, is not valid notice for the reason that the AO did not specify the satisfaction as to whether assessee had either ‘under reporting of income’ or ‘misreporting of income’. In absence of proper notice, which is mandatory, the AO cannot imposed penalty, because, it is a cleare violation of principles of natural justice, because, issuing a vague notice without specifying the charge under which limb the proposed penalty proceedings is initiated, would vitiate the entire proceedings, because, the assessee was not given an opportunity to explain its case on specific charge. Therefore, in our considered view, penalty levied on the basis of invalid or vague notice is invalid and void ab initio.
In this view of the matter and considering the facts and circumstances of the case, we are of the considered view that penalty levied by the AO u/s.270A of the Act, is unsustainable in law on two counts, i.e. for failure to specify in the notice issued u/s.274 r.w.s.270A of the Act, as to under which limb of sub- section, 270A of the Act, penalty is initiated, i.e. 'under reporting of income' or 'misreporting of income', the penalty proceedings are initiated. Further, the AO accepted income admitted by the assessee with categorical statement without any allegation against the income admitted or incorrectness of the books of accounts or evidence for the expenditure. In our considered view, income voluntarily admitted by the assessee does not constitute 'under reporting of income' or 'misreporting of income, and thus, in our considered view, penalty levied u/s.270A of the Act is unsustainable in law on merits, and thus, we quashed the order passed by the AO imposing penalty u/s 270A(9) of the Act.”
8. In assessee's case we notice that the disallowance is made by the AO based on the acceptance of the assessee to the disallowance and from the perusal of the findings of the AO as extracted in the earlier part of this order, the AO has not recorded any allegation against the disallowance admitted by the assessee or any Sushil Rajendra Kothari adverse findings with regard to the expenditure disallowed. In the above decision the co-ordinate bench has also given a finding that income voluntarily admitted by the assessee does not constitute under-reporting or income or misreporting of income. Further in assessee's case from the perusal of the penalty notices issued by the assessee we notice that the AO has not invoked any specific limb of section 270A(9) for the purpose of levying penalty though in the penalty order the AO has stated that the penalty is levied since there is "misrepresentation or suppression of facts" by the assessee under 270(9)(a) of the Act. In the case of CIT v. Om Prakash Mittal [2005] 194 CTR 97/273 ITR 326/143 Taxman 373 (SC), it was held that the term "misrepresentation" implies that there is no true and fair disclosure. The Madras High Court in the case of P.M. Perianna Pillai v. CIT 46 STC 94 has held that the act of making a false or misleading assertion about something, usually with the intent to deceive amounts to "misrepresentation' and the assertion so made, that does not accord with the facts is also termed false representation. In assessee's case the assessee has made the claim of interest at the rate of 18% which AO's view is in excess of market rate and the AO has made the addition estimating 12% to be reasonable which is not disputed by the assessee. When we look at these facts in the light of the above legal position we are of the view that making a claim which in the opinion of the AO is excess cannot be held to be misrepresentation or suppression of facts. Mere fact that there exists a provision for levy of penalty it does not mean that the levy of penalty is mandatory. The below observations of the Hon'ble Supreme Court in the case of Hindustan Steel Ltd. v. State of Orissa [(1972) 83 ITR 26 (SC) is relevant in this context – "Penalty is not to be imposed if there is no conscious breach of law. An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or guilty of conduct, contumacious or dishonest, or acted in conscious disregard to its obligation. Penalty will not also be imposed merely because it is lawful to do Sushil Rajendra Kothari so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute"
As already stated in the notice of penalty the AO has not specified the particular limb of 270A(9) which has been invoked in assessee 's case and therefore, there is merit in the contention that the ratio laid down by the Hon'ble Delhi High Court is applicable in assessee's case. Considering the facts and circumstances of the case and respectfully following the decisions of the Hon'ble High Court and Co-ordinate Benches, we hold that the penalty levied by the AO under section 270A of the Act in assessee's case is not tenable.
In the result, the appeals of the assessee is allowed.