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Facts
The assessee's assessment for AY 2002-03 was completed ex-parte u/s 144 due to non-submission of details, leading to significant additions including unbooked income and disallowed expenses. The quantum additions, including disallowance u/s 43B and increase in liability u/s 68, were partly confirmed by the ITAT. Penalty proceedings u/s 271(1)(c) for concealment of income were initiated by the AO and confirmed by the CIT(A).
Held
The Tribunal held that penalty under section 271(1)(c) is not a mechanical procedure and requires specific conditions. It found that the disallowance under section 43B was a bona fide claim with full details, and the addition for increased liability under section 68, though sustained, did not automatically warrant penalty. Relying on High Court judgments, the Tribunal concluded that the sustained additions were not a fit case for levying penalty.
Key Issues
Whether penalty under section 271(1)(c) is leviable for disallowances under section 43B and additions for increase in liability under section 68, particularly when details were furnished or claims were bonafide, and if the penalty initiation notice was valid.
Sections Cited
Section 271(1)(c), Explanation 1 to section 271(1)(c), Section 142(1), Section 143(2), Section 144, Section 254, Section 43B, Section 68, Section 37(1), Section 274
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Income Tax Appellate Tribunal, MUMBAI BENCH “B”, MUMBAI
Before: SMT. BEENA PILLAI & SMT. RENU JAUHRI
Date of hearing 07-10-2024 Date of pronouncement 14-10-2024 O R D E R PER : BEENA PILLAI (JM)
Present penalty appeal arises out of order dated 07/10/2019 passed by the Ld.CIT(A)-6, Mumbai for Assessment Year 2002-03 on following grounds of appeal:-
1. The Learned CIT (Appeals) erred in confirming the order by ITO passed u/s 271(1)(c) of the Act.
2 ITA 6710/Mum/2019 Nath Capital & Financial Services Ltd 2. The Learned CIT (Appeals) erred in dismissing the ground that, there is a confusion in the mind of AO about which limb penalty is to be levied.”
Brief facts of the case are as under:- 2.1 The assessee filed its return of income for the year under consideration on 30/10/2002. The case was selected for scrutiny and statutory notice under section 142(1) along with 143(2) was issued to the assessee. During the course of assessment proceedings, the Ld.AO noticed that, the assessee had not offered to tax income from stock on hire, accrued but not received. It was noted by the Ld.AO that the assessee had not been booked in the books of account, to the extent of Rs.18.06 lakhs, resulting in reduction of profit by the said amount. Similarly, the Ld.AO noted that the lease rental to the extent of Rs.6.54 lakhs accrued but not been booked in the books of account and the profit reflected in the books were lowered by the said amount. Further, it was noticed that, against the income from leasing of Rs.1.27 lakhs, the assessee claimed expenses of Rs.1,44,87,000/-, depreciation of Rs.4.26 lakhs and loans & liabilities of Rs.1,16,43,000/-. It is noted by the Ld.AO that despite giving reasonable opportunities of being heard, the assessee neither produced any books of accounts nor filed any other details. The Ld.AO therefore completed the assessment u/s.144 of the Act on 30/03/2005, determining total income at Rs.1,39,14,000/-, as against returned loss of Rs.1,51,02,000/- on the basis of material available on record.
3 ITA 6710/Mum/2019 Nath Capital & Financial Services Ltd Aggrieved by the order of the Ld.AO, the assessee preferred appeal before Ld. CIT(A). 2.1.1. The Ld.CIT(A) vide order dated 29.11.2005 dismissed the assessee's appeal on the ground that assessee had expressly admitted its inability to produce books of accounts etc. as the same were not available. Aggrieved by the order passed by the Ld. CIT(A), the assessee preferred appeal before this Tribunal. 2.1.2. This Tribunal, in vide order dated 26.09.2008 set aside the issue to the file of the Ld.AO to redo the assessment denovo after verifying the accounts and giving an opportunity to the assessee to produce the details and accounts. However, since the assessee failed to comply with the notices issued by the Ld.AO, the Ld.AO completed the assessment u/s.144 r.w.s.254 of the Act and by retaining the same income assessed in the original assessment order. On an appeal before the Ld.CIT(A), the authority confirmed the addition in the quantum proceeding vide order dated 10.02.2011. 2.1.3. On an appeal before this Tribunal, this Tribunal, vide order dated 11/01/2023 confirmed the additions in respect of disallowance of expenses under section 43B of the Act to the extent of Rs.144.87 crores. The Tribunal confirmed the addition made on account of increase in liability to the extent of Rs.59.92 crores under section 68 of the Act, as the assessee could only furnish the confirmation letters which could not be verified.
4 ITA 6710/Mum/2019 Nath Capital & Financial Services Ltd 2.2. In the mean while the Ld.AO initiated penalty proceedings u/s.271(1)(c) of the Act for concealment of income. A show cause notice was issued to the assessee on 14/12/2009. The assesee requested to keep the penalty proceeding in abeyance till the disposal of the appeal by the Ld.CIT(A). Once the Ld.CIT(A) confirmed the addition in quantum proceeding, the Ld.AO issued another show cause notice dated 26/03/2012.
2.2.1 In penalty, proceedings, the Ld.AO after considering relevant provision of Explanation 1 to section 271(1)(c) and placing reliance on various decisions of Hon'ble High Courts, concluded that the assessee concealed particulars of income for the year under consideration, within the meaning of section 271(1)(c) read with Explanation 1 thereto. Accordingly, the Ld.AO worked out the minimum penalty @100% of tax sought to be evaded at Rs.1,03,58,712/-.
Aggrieved by the penalty levied by the Ld.AO, the assessee preferred appeal before the Ld.CIT(A)., who confirmed the levy of penalty by the Ld.AO.
Aggrieved by the penalty order of the Ld.CIT(A), the assessee is in appeal before this Tribunal.
The Ld.AR submitted that, in the quantum proceeding, one of the disallowance made by this Tribunal is under section 43B regarding
5 ITA 6710/Mum/2019 Nath Capital & Financial Services Ltd expenses claimed by the assessee. He submitted that the disallowance cannot be treated as concealment as all the relevant details pertaining to the same were available on record. He submitted that the claim of the assessee un section 37(1) of the act, was a bonafide claim. He thus submitted that, the made under section 43B do not fall under the category of either “concealment” or “furnishing of inaccurate particulars”.
3.1. The Ld.AR referring to the penalty order passed by the assessee, stated that, the penalty was been levied for concealment of the particulars, whereas the Ld.AO initiated the penalty proceedings in the assessment order for both the concealment as well as for furnishing of inaccurate particulars of income.
3.2. In respect of the addition partly confirmed by this Tribunal pertaining to addition of increase in liability, it is the submission of the Ld.AR that, all details were available on record and the disallowance made by the authorities below to the extent it is upheld by this Tribunal cannot be considered under either of the category for which penalty under section 271(1)(c) could be levied. He submitted that the confirmation were submitted regarding the lenders. The Ld.AR thus prayed for the penalty to be deleted.
3.4. On the contrary, the Ld.DR taking support of the orders passed by the authorities below submitted that the assessee has 6 ITA 6710/Mum/2019 Nath Capital & Financial Services Ltd made a wrong claim for which the additions were made and, therefore, the levy of penalty is justified.
We have perused the submissions advanced by both sides in the light of records placed before us.
We note that the penalty was levied on the addition/disallowance of various items being part of the total addition. The Ld.AO, in the second round of assessment, has made addition of Rs.1,39,14,000/- being the addition made by him in the assessment order dated 30/03/2005 passed under section 144 and initiated penalty for concealement/inaccurate particulars. This Tribunal while passing order in the quantum proceeding partly gave relief. This Tribunal partly confirmed addition in respect of, additions made on liability. And certain expenditure claimed by the assessee was disallowed under section 43B of the Act.
4.1. Now coming to the penalty order, it is noted that penalty is levied by the Ld.AO for concealment alone. The main contention of the Ld.AR was that the initiation of penalty has not been clearly mentioned in the notice issued u/s.274 of the Act and therefore the penalty levied for concealment of income/furnishing of inaccurate particulars of income in respect of the addition made amounting to Rs.1,39,14,000/- is bad in law.
7 ITA 6710/Mum/2019 Nath Capital & Financial Services Ltd 4.2. We note that the disallowance of expenditure has been confirmed by this Tribunal under section 43B. The assessee had claimed certain expenditure on accrual basis, under a bonafide belief. In so far as the addition of increase in liabilities are concerned, the assessee had furnished confirmations which the Ld.CIT(A) did not verify. The Tribunal partly confirmed the addition under section 68 on this issue.
4.3. At this juncture, we refer to the decision of Hon'ble Karnataka High Court in case of CIT vs. Manjunatha Cotton and Ginning Factory reported in (2013) 359 ITR 565, upheld by Hon’ble Supreme Court in case of Emerald reported in (2016) 73 taxmann.com 248. Honble Court deals with circumstances under which penalty should be imposed / cannot be imposed and also holds that penalty though a civil liability, it imposition is not automatic. Hon’ble has emphsised that there must be a willful concealment as an essential element for imposing penalty. “63. In the light of what is stated above, what emerges is as under: a) Penalty under Section 271(1)(c) is a civil liability. b) Mens rea is not an essential element for imposing penalty for breach of civil obligations or liabilities. c) Willful concealment is not an essential ingredient for attracting civil liability. d) Existence of conditions stipulated in Section 271(1)(c) is a sine qua non for initiation of penalty proceedings under Section 271. e) The existence of such conditions should be discernible from the Assessment Order or order of the Appellate Authority or Revisional Authority. f) Even if there is no specific finding regarding the existence of the conditions mentioned in Section 271(1)(c), at least the 8 ITA 6710/Mum/2019 Nath Capital & Financial Services Ltd facts set out in Explanation 1(A) & (B) it should be discernible from the said order which would by a legal fiction constitute concealment because of deeming provision. g) Even if these conditions do not exist in the assessment order passed, at least, a direction to initiate proceedings under Section 271(l)(c) is a sine qua non for the Assessment Officer to initiate the proceedings because of the deeming provision contained in Section 1(B). h) The said deeming provisions are not applicable to the orders passed by the Commissioner of Appeals and the Commissioner. i) The imposition of penalty is not automatic. j) Imposition of penalty even if the tax liability is admitted is not automatic. k) Even if the assessee has not challenged the order of assessment levying tax and interest and has paid tax and interest that by itself would not be sufficient for the authorities either to initiate penalty proceedings or impose penalty, unless it is discernible from the assessment order that, it is on account of such unearthing or enquiry concluded by authorities it has resulted in payment of such tax or such tax liability came to be admitted and if not it would have escaped from tax net and as opined by the assessing officer in the assessment order. l) Only when no explanation is offered or the explanation offered is found to be false or when the assessee fails to prove that the explanation offered is not bonafide, an order imposing penalty could be passed. m) If the explanation offered, even though not substantiated by the assessee, but is found to be bonafide and all facts relating to the same and material to the computation of his total income have been disclosed by him, no penalty could be imposed. n) The direction referred to in Explanation IB to Section 271 of the Act should be clear and without any ambiguity. o) If the Assessing Officer has not recorded any satisfaction or has not issued any direction to initiate penalty proceedings, in appeal, if the appellate authority records satisfaction, then the penalty proceedings have to be initiated by the appellate authority and not the Assessing Authority. p) Notice under Section 274 of the Act should specifically state the grounds mentioned in Section 271(1)(c), i.e., whether it is for concealment of income or for furnishing of incorrect particulars of income
9 ITA 6710/Mum/2019 Nath Capital & Financial Services Ltd q) Sending printed form where all the ground mentioned in Section 271 are mentioned would not satisfy requirement of law. r) The assessee should know the grounds which he has to meet specifically. Otherwise, principles of natural justice is offended. On the basis of such proceedings, no penalty could be imposed to the assessee. s) Taking up of penalty proceedings on one limb and finding the assessee guilty of another limb is bad in law. t) The penalty proceedings are distinct from the assessment proceedings. The proceedings for imposition of penalty though emanate from proceedings of assessment, it is independent and separate aspect of the proceedings. u) The findings recorded in the assessment proceedings in so far as "concealment of income" and "furnishing of incorrect particulars" would not operate as res judicata in the penalty proceedings. It is open to the assessee to contest the said proceedings on merits. However, the validity of the assessment or reassessment in pursuance of which penalty is levied, cannot be the subject matter of penalty proceedings. The assessment or reassessment cannot be declared as invalid in the penalty proceedings.”
4.4. The disallowance confirmed by this Tribunal is under section 43B, of the expenditure claimed by the assessee. This disallowance is not due to any concealement of income by the assessee. The assessee had filed all details pertaining to the expenditure claimed by it. However, certain expenditure could be allowed only on actual payment and therefore the disallowance was made under section 43B of the Act.
4.5. In respect of the addition on increase in liability, we note that assessee provided details like confirmation regarding the increase in liability. There is no whisper about veracity of the confirmation filed by the assessee before the Ld.CIT(A). Merely because the addition
10 ITA 6710/Mum/2019 Nath Capital & Financial Services Ltd has been partly confirmed by the Tribunal cannot be a reason to ipso facto levy penalty. From the proceeding before the Ld.CIT(A) it is discernable that the confirmations filed by the assessee not been verified.
4.6. In our view, levy of penalty is not a mechanical procedure and has to be issued with lot of checks and balances. For the above reasons, in our considered opinion, both the additions sustained by this Tribunal is not a fit case to levy penalty u/s. 271(1)(c) of the Act. In the result, the appeal filed by the assessee stands allowed.
Order pronounced in the open court on 14/10/2024.