AQUATECH SYSTEMS (ASIA) PVT. LTD.,PUNE vs. DEPUTY COMMISSIONER OF INCOME-TAX,

आदेश / ORDER

PER VIKAS AWASTHY, JM :

This appeal by the assessee is against the order of Commissioner of Income Tax (Appeals)-1, Pune dated 31-12-2014 confirming levy of penalty u/s. 271(1)(c) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for the assessment year 2009-10.

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assessee company is engaged in the business of providing engineering

software and technical design services with the use of Computer Aided

Design (CAD), Computer Aided Manufacturing (CAM), advanced pressure

vessel design and product data system design techniques to its Associated

Enterprises (AEs). The assessment order was passed u/s. 143(3) r.w.s.

144C(3) of the Act on 19-03-2013 making addition on account of transfer

pricing adjustment Rs.5,92,560/- and disallowance of warranty provision

Rs.41,22,637/-. The Assessing Officer initiated penalty proceedings u/s.

271(1)(c) of the Act for concealing particulars of income or furnishing

inaccurate particulars of income in respect of above mentioned additions /

disallowances. Thereafter, the Assessing Officer levied penalty vide order

dated 30-09-2013 in respect of both the additions for furnishing inaccurate

particulars of income.

Aggrieved by the order levying penalty, the assessee filed appeal

before the Commissioner of Income Tax (Appeals). The Commissioner of

Income Tax (Appeals) rejected the contentions of assessee and upheld the

order levying penalty u/s. 271(1)(c) of the Act. Now, the assessee is in

second appeal before the Tribunal against the findings of Commissioner of

Income Tax (Appeals) in confirming levy of penalty.

submitted at the outset that the manner in which penalty has been levied

suffers from ambiguity. In assessment order the Assessing Officer has

recorded satisfaction for levy of penalty u/s. 271(1)(c) in respect of both the

additions separately. The Assessing Officer while recording satisfaction

has mentioned both the limbs of section 271(1)(c) i.e. concealment of

income or furnishing inaccurate particulars of income. However, the

penalty has been levied for furnishing inaccurate particulars of income

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only. The manner in which satisfaction has been recorded by the

Assessing Officer for initiating penalty proceedings u/s. 271(1)(c) clearly

reflects ambiguity in the mind of Assessing Officer with respect to charge

for levy of penalty. This ambiguity is further perpetuated at the time of

issuance of notice u/s. 274 of the Act. In the notice, the Assessing Officer

has again mentioned both the limbs of section 271(1)(c) with conjunction

‘or’. The ld. AR submitted that the Hon’ble High Courts and Pune Bench

of the Tribunal in several cases have held that where there is ambiguity in

recording of satisfaction, the penalty proceedings are liable to be quashed.

In support of his submissions the ld. AR placed reliance on the following

decisions :

i. Commissioner of Income Tax Vs. Samson Perinchery, 392 ITR 4

(Bom);

ii. CIT Vs. SSA’S Emerald Meadows, 73 taxmann.com 248 (SC);

iii. CIT Vs. SSA’S Emerald Meadows, 73 taxmann.com 241 (Karnataka);

iv. CIT Vs. Manjunatha Cotton & Ginning Factory, 359 ITR 565

(Karnataka);

v. Kanhaiyalal D. Jain Vs. ACIT in ITA Nos. 1201 to 1205/PN/2014 for

assessment years 2003-04 to 2007-08 decided on 30-11-2016;

vi. M/s. Sai Venkata Construction Vs. Addl. CIT in ITA No.

994/PN/2013 for assessment year 2008-09 decided on 11-03-2016;

vii. Girdhari Ishwarlal Chhablani Vs. ITO in ITA No. 2089/PUN/2012 for

assessment year 2007-08 decided on 18-01-2017;

viii. Jitendra Ramesh Deshmukh Vs. ITO in ITA No. 2150/PUN/2014 for

assessment year 2008-09 decided on 13-09-2017.

vehemently supported the impugned order in confirming levy of penalty.

The ld. DR submitted that there is no requirement for recording of

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satisfaction for levy of penalty u/s. 271(1)(c) in any particular manner.

Mere reference by the Assessing Officer in the assessment order viz : ‘a

separate penalty proceedings u/s. 271(1)(c) are being initiated’, is

sufficient for initiating penalty. The ld. DR referring to the Explanatory

Notes to the provisions of the Finance Act, 2008 submitted that the CBDT

has clarified that no separate satisfaction is required to be recorded before

initiating penalty proceedings. The ld. DR further referred to the order of

Pune Bench of the Tribunal in the case of Ghodawat Foods International

Pvt. Ltd. Vs. ACIT in ITA Nos. 817 & 818/PN/2010 decided on 11-01-2013

to contend that the manner of recording satisfaction is nowhere explained

in the provisions of the Act or Income Tax Rules. To further buttress his

submissions the ld. DR placed reliance on the following decisions :

i. Shyam Biri Works Pvt. Ltd. Vs. Commissioner of Income Tax, 259

ITR 625 (All);

ii. Becker Gray And Co. Ltd. Vs. ITO And Ors., 112 ITR 503 (Cal);

iii. Dr. Syamal Baran Mondal Vs. Commissioner of Income Tax in

Income Tax Appeal No. 698 of 2007 decided on 18-02-2011 (Cal);

iv. M. Sajjanraj Nahar Vs. Commissioner of Income Tax, 283 ITR 230

(Mad);

v. M.S. Mohammed Marzook (Late) And Another Vs. ITO, 283 ITR 254

(Mad);

vi. M/s. Maharaj Garage & Company Vs. Commissioner of Income Tax

in Income Tax Reference No. 21 of 2008 decided on 22-08-2017;

vii. MAK Data Pvt. Ltd. Vs. Commissioner of Income Tax in Civil Appeal

No. 9772 of 2013 decided on 30-10-2013.

sides and have perused the orders of authorities below. We have also

taken into consideration various decisions on which the rival sides have

ITA No. 416/PUN/2015, A.Y. 2009-10

placed reliance in support of their contentions. We observe that while

recording satisfaction for initiating penalty proceedings u/s. 271(1)(c), the

Assessing Officer mentioned both the limbs of section 271(1)(c) with

conjunction ‘or’. The Assessing Officer has recorded separate satisfaction

for initiating penalty u/s. 271(1)(c) for both the additions. The relevant

extract of the assessment order where the Assessing Officer has recorded

satisfaction for initiating penalty proceedings is reproduced here-in-below :

“4.2 ……….As a consequence of this adjustment the income of the assessee will be increased by Rs.5,92,560/-. Further, penalty proceedings under section 271(1)(c) read with explanation 7 of the Act, are initiated separately for concealing the particulars of its income or furnishing inaccurate particulars of such income.

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5.6 Thus, the expenditure claimed on account of warranty claim at Rs.41,22,637/- is hereby disallowed and added to the total income of the assessee under section 37(1) of the Act. Further, penalty proceedings under section 271(1)(c) is initiated separately for concealing the particulars of its income or furnishing inaccurate particulars of such income.”

2013, the Assessing Officer levied penalty on the charge of furnishing

inaccurate particulars of income. The Assessing Officer in penalty order

while levying penalty in respect of Transfer Pricing adjustment held :

“5.2 ……….Thus, it is held that assessee has furnished inaccurate particulars of income within the meaning of section 271(1)(c) r.w. explanation 7 of the Act on the issue of Transfer Pricing adjustment.”

In respect of levy of penalty on disallowance of warranty provision,

the Assessing Officer observed :

“5.8 ……….It is held that assessee has furnished inaccurate particulars of income within the meaning of section 271(1)(c) r.w. explanation-1 of the Act only with a view to avoid tax and has committed default in view of provisions of Section 271(1)(c) and explanation there off, hence he is liable for penalty.”

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of section 271(1)(c) i.e. inaccurate particulars of income, but the ambiguity

in the mind of Assessing Officer while recoding satisfaction is apparent writ

large.

Income Tax Vs. Samson Perinchery (supra) has held :

“6. The above submission on the part of the Revenue is in the face of the decision of the Supreme Court in Ashok Pai v/s. CIT 292 ITR 11 [relied upon in Manjunath Cotton & Ginning Factory (supra)] – wherein it is observed that concealment of income and furnishing of inaccurate particulars of income in Section 271(1)(c) of the Act, carry different meanings/ connotations. Therefore, the satisfaction of the Assessing Officer with regard to only one of the two breaches mentioned under Section 271(1)(c) of the Act, for initiation of penalty proceedings will not warrant/ permit penalty being imposed for the other breach. This is more so, as an Assessee would respond to the ground on which the penalty has been initiated/notice issued. It must, therefore, follow that the order imposing penalty has to be made only on the ground of which the penalty proceedings has been initiated, and it cannot be on a fresh ground of which the Assessee has no notice.”

there is no specific manner for recording of satisfaction. Mere mentioning

of the words by the Assessing Officer that penalty proceedings are initiated

separately are sufficient to prove the satisfaction of Assessing Officer for

initiating penalty proceedings. We have considered the judgments referred

by ld. DR and are of the view that the ratio laid down by the judgments are

not applicable to the facts of the case. The ld. DR has placed heavy

reliance on the decision of Hon’ble Supreme Court of India in the case of

MAK Data Pvt. Ltd. Vs. Commissioner of Income Tax (supra). The Hon’ble

Apex Court has referred to the decisions of Union of India Vs. Dharmendra

Taxtile Processors reported as 13 SCC 369 and CIT Vs. Atul Mohan Bindal

reported as 9 SCC 589 and held that during the course of assessment

proceedings, the Assessing Officer is not required to record his satisfaction

in a particular manner or reduced it in writing. There is no dispute about

ITA No. 416/PUN/2015, A.Y. 2009-10

the manner of recording satisfaction. In whatever manner satisfaction is

recorded by the Assessing Officer, the principles of natural justice

demands that the satisfaction should convey in an unambiguous manner

the charge for which the assessee is being penalized. Under the provisions

of section 271(1)(c) the penalty can be levied on two charges :

(a) concealing the particulars of income; or, (b) furnishing inaccurate particulars of income.

From the bare reading of satisfaction the charge should be

decipherable to the assessee, so that he can defend himself accordingly.

The Hon’ble Karnataka High Court in the case of CIT Vs.

Manjunatha Cotton & Ginning Factory (supra) after considered the law laid

down by the Hon’ble Apex Court in the in the case of Union of India Vs.

Dharmendra Taxtile Processors (supra) and various other judgments has

held as under :

“60. Clause (c) deals with two specific offences, that is to say, concealing particulars of income or furnishing inaccurate particulars of income. No doubt, the facts of some cases may attract both the offences and in some cases there may be overlapping of the two offences but in such cases the initiation of the penalty proceedings also must be for both the offences. But drawing up penalty proceedings for one offence and finding the assessee guilty of another offence or finding him guilty for either the one or the other cannot be sustained in law. It is needless to point out satisfaction of the existence of the grounds mentioned in Section 271(1)(c) when it is a sine qua non for initiation or proceedings, the penalty proceedings should be confined only to those grounds and the said grounds have to be specifically stated so that the assessee would have the opportunity to meet those grounds. After, he places his version and tries to substantiate his claim, if at all, penalty is to be imposed, it should be imposed only on the grounds on which he is called upon to answer. It is not open to the authority, at the time of imposing penalty to impose penalty on the grounds other than what assessee was called upon to meet. Otherwise though the initiation of penalty proceedings may be valid and legal, the final order imposing penalty would offend principles of natural justice and cannot be sustained. Thus once the proceedings are initiated on one ground, the penalty should also be imposed on the same ground. Where the basis of the initiation of penalty proceedings is not identical with the ground on which the penalty was imposed, the imposition of penalty is not valid. The validity of the order of penalty must be determined with reference to the information, facts and materials in the hands of the authority imposing the penalty at the time the order was passed and further discovery of facts subsequent to the imposition of penalty

ITA No. 416/PUN/2015, A.Y. 2009-10

cannot validate the order of penalty which, when passed, was not sustainable.

The ld. DR has further placed reliance on the decision of

Jurisdictional High Court in the case of M/s. Maharaj Garage & Company

Vs. Commissioner of Income Tax (supra). We find that in the aforesaid

case neither the assessee/appellant nor the respondent/Department has

brought to the notice of Hon’ble Court, the earlier decision rendered by

Hon’ble Bombay High Court in the case of Commissioner of Income Tax Vs.

Samson Perinchery (supra). Be that as it may, when two reasonable

construction of the statute is possible, that favourable to the assessee has

to be preferred as has been held by the Hon’ble Apex Court in the case of

Commissioner of Income Tax Vs. Vegetable Products Ltd. reported as 88

ITR 192.

Court in the case of CIT Vs. SSA’S Emerald Meadows (supra) deleted levy of

penalty u/s. 271(1)(c) of the Act by following the decision in the case of CIT

Vs. Manjunatha Cotton & Ginning Factory (supra). The Department

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carried the matter in appeal before the Hon’ble Supreme Court of India. The Hon’ble Apex Court dismissed the SLP filed by the Department.

Order pronounced on Monday, the 18th day of June, 2018.

Sd/- Sd/- (अ�नल चतुव�द� / Anil Chaturvedi) (�वकास अव�थी / Vikas Awasthy) लेखा सद�य / ACCOUNTANT MEMBER �या�यक सद�य / JUDICIAL MEMBER

पुणे / Pune; �दनांक / Dated : 18th June, 2018 RK/SB

आदेश क� ��त�ल�प अ�े�षत / Copy of the Order forwarded to :

अपीलाथ� / The Appellant. 1. ��यथ� / The Respondent. 2. आयकर आयु�त (अपील) / The CIT(A)-1, Pune 3. आयकर आयु�त / The CIT-1, Pune 4. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, “बी” ब�च, 5. पुणे / DR, ITAT, “B” Bench, Pune. गाड� फ़ाइल / Guard File. 6.

//स�या�पत ��त // True Copy//

आदेशानुसार / BY ORDER,

�नजी स�चव / Private Secretary, आयकर अपील�य अ�धकरण, पुणे / ITAT, Pune