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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAMIT KOCHAR
IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER
ITA no.5148/Mum./2015 (Assessment Year : 2005–06)
Polychem Ltd. 7, Jamshedji Tata Road Churchgate Reclamation ……………. Appellant Mumbai 400 020 PAN – AAACP7184M v/s Dy. Commissioner of Income Tax ……………. Respondent Circle–12(2), Mumbai
Assessee by : Shri Nitesh Joshi a/w Shri Hitesh Trivedi Revenue by : Shri Rajat Mittal
Date of Hearing – 03.10.2017 Date of Order – 23.11.2017 O R D E R PER SAKTIJIT DEY, J.M.
Aforesaid appeal by the assessee is against the order dated 3rd August 2015, passed by the learned Commissioner (Appeals)–2, Mumbai, partly confirming penalty imposed under section 271(1)(c) Income-tax Act, 1961 (for short "the Act") for the assessment year 2005–06.
Brief facts are, the assessee a company is engaged in the business of manufacture and marketing of chemicals. For the
2 Polychem Ltd. assessment year under dispute, the assessee filed its return of income on 26th October 2005, declaring nil income. In the course of assessment proceedings, the Assessing Officer after examining the books of account and calling for necessary details completed the assessment making additions of the following amount:–
Irrecoverable balance written–off in ` 46,47,611 Profit & Loss account Consideration received on assignment of trade market declared as long term ` 3,80,00,000 capital gain was assessed as business income
While completing assessment on the basis of additions made, the Assessing Officer also initiated proceedings for imposition of penalty under section 271(1)(c) of the Act. Against the addition made in the assessment order, the assessee preferred appeal before the first appellate authority.
During the pendency of appeal before the learned Commissioner (Appeals), the Assessing Officer issued show cause notice under section 274 r/w section 271(1)(c), calling upon the assessee to explain why penalty under section 271(1)(c) of the Act shall not be imposed. In response to the show cause notice, though, the assessee filed its explanation opposing imposition of penalty, however, the Assessing Officer proceeded to pass an order on 29th March 2012, imposing
3 Polychem Ltd. penalty of ` 1,55,00,000 alleging furnishing inaccurate particulars of income. The assessee challenged the penalty imposed under section 271(1)(c) before the first appellate authority.
In the course of first appellate proceedings, the learned Commissioner (Appeals) found that except the addition made on account of write–off of ` 25 lakh towards purchase of building at Silvasa, rest of the additions have been deleted by the appellate authorities. As far as the addition of ` 25 lakh is concerned, the learned Commissioner (Appeals) found that the said addition was even confirmed by the Tribunal holding that it is not relatable to the impugned assessment year. Thus, the learned Commissioner (Appeals) sustained imposition of penalty under section 271(1)(c) of the Act on the addition made of ` 25 lakh.
Challenging the imposition of penalty, the learned Authorised Representative submitted, while initiating penalty proceedings under section 271(1)(c) in the assessment order, the Assessing Officer has not recorded any satisfaction with regard to the exact nature of offence committed by the assessee in terms of section 271(1)(c). He submitted, the Assessing Officer has not mentioned whether the assessee has furnished inaccurate particulars of income or has concealed particulars of income. He submitted, even in the show cause notice issued under section 274 which is in a standard printed format,
4 Polychem Ltd. the Assessing Officer has not indicated the specific charge for which he intends to impose penalty under section 271(1)(c) by striking–off the inappropriate words. He submitted, while imposing penalty under section 271(1)(c) Assessing Officer has alleged furnishing of inaccurate particulars by the assessee and learned Commissioner (Appeals) has sustained imposition of penalty alleging furnishing of inaccurate particulars of income as well as concealing particulars of income. He submitted, while initiating penalty proceedings the Assessing Officer has not recorded his satisfaction as he was unsure whether the assessee has furnished inaccurate particulars of income or concealed particulars of income. He submitted, this has resulted in violation of rules of natural justice, hence, penalty order passed is invalid. In support of his contention, the learned Authorised Representative relied upon the following decision:–
i) Samson Perinchery v/s CIT, 392 ITR 004; and ii) CIT v/s Dilip N. Shroff, 291 ITR 519.
As far as the merit of the issue is concerned, the learned Authorised Representative submitted in the year 1995, assessee had entered into the agreement for purchase of a factory building and an advance of ` 30 lakh was paid to the owner of the factory building. However, ultimately the transaction did not materialize and the owner of the property agreed to refund the advance paid and in that regard
5 Polychem Ltd. paid an amount of ` 5 lakh to the assessee and for the balance amount of ` 25 lakh he issued post dated cheques which were dishonoured by the Bank on presentation due to unavailability of funds. He submitted, though, the assessee filed complaint under section 138 of Negotiable Instrument Act, 1881, however, it was not able to recover the amount of ` 25 lakh. Therefore, assessee decided to write–off the amount in its books. He submitted, the assessee never claimed it as a bad debt under section 36(1)(vii), but, treated it as business loss, since, the advance was made in course of business. He submitted, all informations related to the write–off of ` 25 lakh was furnished not only in the audited accounts but also in the return of income. In this context, he drew our attention to the Profit & Loss account at Page–19 of the paper book and more particularly to Schedule–15 of the Profit & Loss account which is placed at Page–26 of the paper book. He submitted, in the computation of income also assessee has specifically appended a note mentioning about the write–off of ` 25 lakh and the reasons for such write–off. The learned Authorised Representative submitted, since the assessee has disclosed all material facts relating to write–off of ` 25 lakh in its return of income and audited accounts, it cannot be charged with the offence of furnishing incorrect particulars of income. Learned Authorised Representative submitted, the assessee having made a claim of deduction in the return of income which was not found allowable by the Departmental Authorities, by itself would
6 Polychem Ltd. not amount to furnishing of inaccurate of particulars of income in terms of section 271(1)(c). In support of such contention, he relied upon the decision of the Hon'ble Jurisdictional High Court in CIT v/s Nalin P. Shah (HUF), ITA no.49/2013 dated 4th March 2013. He also relied upon the decision of the Hon'ble Supreme Court in CIT v/s Reliance Petroproducts Pvt. Ltd., [2010] 322 ITR 158 (SC).
Learned Departmental Representative relied upon the observations of the learned Commissioner (Appeals).
We have heard rival contentions and perused the material available on record. We have also applied our mind to the decisions relied upon. At the outset, we propose to deal with the legal issue concerning the validity of the penalty proceedings initiated under section 271(1)(c) of the Act due to non–recording of satisfaction and failure to comply to the rules of natural justice while issuing the show cause notice. Undisputedly, out of the additions made by the Assessing Officer on the basis of which the Assessing Officer imposed penalty of ` 1.55 crore under section 271(1)(c), addition only to the extent of ` 25 lakh survived after the appeal proceedings. Thus, the major part of the addition was deleted. Be that as it may, in the present appeal, we are concerned with the penalty under section 271(1)(c) on the addition of ` 25 lakh. On a careful scrutiny of the assessment order passed for the impugned assessment year, it is evident, while initiating proceedings
7 Polychem Ltd. for imposition of penalty under section 271(1)(c) in the body of the assessment order, the Assessing Officer has not recorded any satisfaction to the effect that the addition made by him was on account of either furnishing of inaccurate particulars of income or concealing particulars of income by the assessee. The Assessing Officer has simply mentioned “penalty proceedings under section 271(1)(c) are initiated”. Thus, on a reading of the assessment order, satisfaction of the Assessing Officer with regard to the nature of offence committed by the assessee in terms of section 271(1)(c) is not discernible. Further, on a perusal of the show cause notice dated 31st December 2007, issued under section 274 r/w section 271(1)(c), which is in a standard printed format and a copy of which is placed at Page–35 of the paper book, it is noticed that the Assessing Officer has not deleted the inappropriate words to indicated the specific charge of offence for which he initiated proceedings for imposition for imposition of penalty under section 271(1)(c). Neither in the assessment order nor in the show cause notice issued under section 274 of the Act, the Assessing Officer has notified the assessee about the specific limb of section 271(1)(c) of the Act for which he intends to impose penalty. That being the fact, it is very much surprising to note that in the impugned penalty order passed under section 271(1)(c) the Assessing Officer has observed that during the assessment proceedings, it was noticed that the assessee has furnished inaccurate particulars of
8 Polychem Ltd. income. The aforesaid observations of the Assessing Officer is unfounded and contrary to the materials on record. As observed earlier, nowhere in the assessment order, the Assessing Officer has whispered about furnishing of inaccurate particulars of income by the assessee. It is also equally surprising to note that while confirming imposition of penalty under section 271(1)(c), the learned Commissioner (Appeals) has observed that the assessee has furnished inaccurate particulars of income and concealed particulars of income. As could be seen, even in the impugned order passed under section 271(1)(c) the Assessing Officer has not found any concealment of income by the assessee. Thus, from the aforesaid facts, it is clear that the Department was unsure about the nature of offence committed by the assessee.
While dealing with the issue relating to directions of the Assessing Officer for initiation of penalty proceedings and recording of satisfaction the Hon'ble Karnataka High Court in CIT v/s Manjunatha Cotton and Ginning Factory, [2013] 359 ITR 565 (Kar.) has held as under:–
“50. A reading of Section clearly indicates that the assessment order should contain a direction for initiation of penalty proceedings. The meaning of the word direction is of importance. Merely saying that penalty proceedings are being initiated will not satisfy the requirement. The direction to initiate proceedings should be clear and not be ambiguous. It is well settled law that fiscal statutes are to be construed strictly and more so the
9 Polychem Ltd. deeming provisions by way of legal fiction are to be construed more strictly. They have to be interpreted only for the said issue for which it has deemed and the manner in which the deeming has been contemplated to be restricted in the manner sought to be deemed. As the words used in the legal fiction or the deeming provisions of Section 271(1B) is Direction, it is imperative that the assessment order contains a direction. Use of the phrases like (a) penalty proceedings are being initiated separately and (b) penalty proceedings under Section 271(1)(c) are initiated separately, do not comply with the meaning of the word direction as contemplated even in the amended provisions of law. The direction should be clear and without any ambiguity. The word „direction‟ has been interpreted by the decision of the Apex Court in the case of RAJENDRANATH reported in 120 ITR pg.14, where it has been held that in any event whatever else it may amount to, on its very terms the observation that the ITO is free to take action, to assess the excess in the hand of the coowners cannot be described as a direction. A direction by a statutory authority is in the nature of an order requiring positive compliance. When it is left to the option and discretion of the ITO whether or not take action, it cannot be described as a direction. 51. Therefore, it is settled law that in the absence of the existence of these conditions in the assessment order penalty proceedings could not be proceeded with. The proceedings which are initiated contrary to the said legal position are liable to be set aside.”
As could be seen from the aforesaid observations of the Hon’ble Court, use of phrase like “penalty proceedings under section 271(1)(c) are initiated” cannot be construed as a direction for initiation of penalty proceedings. As far as the contention of the Learned Departmental Representative that in terms of sub–section (1B) of section 271(1)(c), the Assessing Officer has recorded a satisfaction is concerned, we must observe, the aforesaid aspect was also considered by the Hon’ble Karnataka High Court in the case referred to above and the Hon’ble Court referring to a decision of Hon'ble Delhi High Court in
10 Polychem Ltd. Madhushree Gupta & Anr. v/s Union of India & Anr., [2009] 317 ITR 107 (Del.), held that even after introduction of sub–section (1B) of section 271(1)(c) of the Act, there is not much difference and the satisfaction is required to be arrived at in the course of assessment proceedings and should be discernible in the assessment order. The Hon’ble Court observed, the satisfaction should be that the assessee has concealed particulars of income or furnished inaccurate particulars of such income and even in the absence of those express words or finding recorded in the assessment proceedings, if a direction as aforesaid is mentioned, it constitute satisfaction of the Assessing Officer.
The Hon’ble Court after dealing with all the aspects ultimately concluded as under:–
“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.
11 Polychem Ltd.
f) Even if there is no specific finding regarding the existence of the conditions mentioned in Section 271(1)(c), at least the 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(1)(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 1B 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
12 Polychem Ltd. 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. 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.
In case of Dilip N. Shroff v/s JCIT, [2007] 291 ITR 519 (SC), the Hon'ble Supreme Court observed, while issuing the notice under section 274 r/w section 271 of the Act in standard format, the Assessing Officer should delete the inappropriate words or paragraphs, otherwise, it may indicate that the Assessing Officer himself was not sure as to whether he had proceeded on the basis that the assessee
13 Polychem Ltd. had concealed his income or had furnished inaccurate particulars of income. This, according to the Hon'ble Supreme Court, deprives the assessee a fair opportunity to explain its stand, thereby, violating the principle of natural justice. As held by the Hon'ble Supreme Court in CIT v/s Reliance Petroproducts Pvt. Ltd., [2010] 322 ITR 158 (SC). The aforesaid principle laid down in case of Dilip N. Shroff (supra) still holds good in spite of the decision of the Hon'ble Supreme Court in Union of India v/s Dharmendra Textile Processors, [2008] 306 ITR 277 (SC). Even in case of CIT v/s Kaushalya & Ors. [1995] 261 ITR 660, on which the Learned Departmental Representative relied upon the Hon'ble Jurisdictional High Court has observed that notice issued under section 274 must reveal application of mind by the Assessing Officer and the assessee must be made aware of the exact charge on which he had to file his explanation. The Court observed, vagueness and ambiguity in the notice deprives the assessee of reasonable opportunity as he is unaware of the exact charge he has to face.
In case of Samson Perinchery (supra), the Hon'ble Jurisdictional High Court while referring to the decision of the Hon’ble Karnataka High Court in Manjunatha Cotton Ginning and Weaving Mills Ltd. (supra) has held that the Assessing Officer cannot initiated proceedings for imposition of penalty under section 271(1)(c) for a particular limb and impose penalty for another limb. In the case before
14 Polychem Ltd. us, the Department is on a more sticky ground as the Assessing Officer has not even mentioned either in the assessment order or in the show cause notice issued under section 274 of the Act, which limb of section 271(1)(c) he intends to invoke for imposing penalty. Therefore, applying the ratio laid down in the decisions referred to above we hold that the penalty order passed under section 271(1)(c) being in violation of rules of nature justice, is legally unsustainable. Accordingly, penalty imposed under section 271(1)(c) on the addition made of ` 25 lakh is hereby deleted.
Even otherwise also, in our considered opinion, the assessee has a strong case on merits as well. As could be seen from the facts on record, out of the advance given of ` 30 lakh towards purchase of factory building, the assessee could recover the amount of ` 5 lakh only and the balance amount of ` 25 lakh could not be recovered in spite of best efforts. Therefore, in the return of income filed for the impugned assessment year, the assessee claimed deduction on account of write–off of the amount of ` 25 lakh. From the Profit & Loss account and its schedule, it is apparent that the assessee had furnished full particulars of the claim of write–off. Even, in the computation of income filed along with the return of income the assessee has appended a note, wherein he has disclosed full particulars about the facts relating to write–off of ` 25 lakh. The
15 Polychem Ltd. assessment order itself reveals that relying upon the note appended to the computation of income as well as Profit & Loss account the Assessing Officer has made disallowance of the write–off. The aforesaid facts clearly demonstrate that the assessee has furnished full particulars of write–off of 25 lakh. Therefore, it cannot be alleged that the assessee has furnished inaccurate particulars of income for which the Assessing Officer had ultimately imposed penalty under section 271(1)(c). Rather, it is a bonafide claim of deduction made by the assessee considering the fact that it was unable to recover the amount of ` 25 lakh. As could be seen from the appeal order passed by the learned Commissioner (Appeals) and the Tribunal, disallowance of ` 25 lakh was sustained merely for the reason that it was not relatable to the impugned assessment year. None of the authorities have disputed the primary facts relating to write–off of the amount of ` 25 lakh. Therefore, the ratio laid down by the Hon'ble Supreme Court in Reliance Petroproducts Pvt. Ltd. (supra) would squarely apply to the facts of the assessee’s case. We have also noted that in case of Nalin P. Shah (HUF) (supra), a case of similar nature, the Hon'ble Jurisdictional High Court deleted the penalty imposed under section 271(1)(c) considering the fact that the assessee has disclosed full particulars of its claim in the return of income filed. In view of the aforesaid, we hold that the penalty imposed under section 271(1)(c) in
16 Polychem Ltd. the instant case cannot be sustained. Accordingly, we delete the imposition of penalty.
In the result, assessee’s appeal is allowed. Order pronounced in the open Court on 23.11.2017
Sd/- Sd/- SAKTIJIT DEY RAMIT KOCHAR ACCOUNTANT MEMBER JUDICIAL MEMBER
MUMBAI, DATED: 23.11.2017 Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary (Dy./Asstt. Registrar) ITAT, Mumbai