ACIT CC 3(4) CEN RG 3, MUMBAI vs. ZIAUDDIN A. SIDDIQUE, MUMBAI

Per D.T. GARASIA, Judicial Member:

ITA No.7413/M/2014 (for A.Y. 2004-05)

2 & 7414/M/2014 Shri Ziauddin A Siddique Centre as income under the head "Income from Business & Profession". In the assessments completed under s. 143(3) r.w.s. 153A of the Income Tax Act 1961 dated 23.12.2009, the Assessing Officer (hereinafter referred to as the AO) considered the receipts from the Business Centre as income under the head "Income from House Property". The AO initiated Penalty proceedings by issue of notice under s. 271(1)(c) of the Income Tax Act 1961. So also, the assessee declared a sum of Rs.1,22,58,193/- on account of Long Term Capital Gains on sale of shares of Eltrol Ltd. in respect of the previous year relevant to Assessment Year 2004-05 and a sum of Rs.25,58,138/- on account of LTCG from sale of shares of Eltrol Ltd. with respect to the previous year relevant to Assessment Year 2005-- 06. While completing the assessment, the AO considered the claim of LTCG for both the impugned assessment years as unexplained cash credit; and accordingly penalty proceedings were initiated for both the years under consideration by issue of notice under s. 271(1)(c) of the Income Tax Act. After giving an opportunity of being heard, the AO has held that for both the years under consideration the assessee has furnished inaccurate particulars of income thereby warranting penalty under s 271(1)(c) of the Income Tax Act Accordingly, the AO has imposed penalty of Rs.43,48,728/- in respect of the Assessment Year 2004-05 and penalty of Rs.11,85,903/- in respect of Assessment Year 2005-06.

3 & 7414/M/2014 Shri Ziauddin A Siddique “5.7. I have very carefully considered the report of the Assessing Officer which has been forwarded with the remarks of the Addl.CIT. The report of the Assessing Officer only mentions facts and does not touch upon the legal ground raised additionally by the appellant. With regard to the comments of the Addl. CIT, it can be seen that the comments of the Addl.CIT is with reference to the statutory satisfaction that is to be arrived at by an Assessing Officer in the course of proceedings under the Income Tax Act thus enabling the Assessing Officer to direct such person to pay penalty. This satisfaction is to be arrived at in the course of assessment or reassessment and is to be spelt out in such assessment or reassessment order. The Hon'ble Supreme Court in CIT vs. S.V Angidi Chettiar

44. ITR 739 SC had observed that the power to impose penalty depends upon the satisfaction of the ITO in the course of proceedings under the Act and that it cannot be exercised if he is not satisfied about the existence of conditions specified, before the proceedings are concluded. In other words, it was held by the Supreme Court that merely because penalty proceedings have been initiated, it cannot be assumed that such a satisfaction was arrived at in the absence of the same being spelt out by the order of the assessing authority. This was the law prior to insertion of 271(1B) in the Income Tax Act. It was in his context that the Finance Act 2008 inserted a new section(1B) in section 271 w.e.f. 1.4.1989 so as to unambiguously provide that where any amount is added or disallowed in computing the total income or loss in any order of assessment or reassessment and the said order contains a direction for initiation of penalty proceedings under s. 271(1)(c), such a direction shall be deemed to constitute satisfaction for initiating penalty proceedings under clause (c). It has to be stated that by the very nature of things, satisfaction indeed precedes the issue of notice and it would not be correct to equate satisfaction with the actual issue of notice. The issue of notice indeed is a consequence of satisfaction of the Assessing Officer. In this context it is to be mentioned here that the Karnataka High Court, has recently in its judgment in CIT vs. M/s MWP Ltd.(ITA No.332 of 2007) dated

26. November 2013, observed that even as per the amended provision, phrases like (a) penalty proceedings are being initiated (b) penalty proceedings under section 271(1)(c) are initiated separately do not comply with the meaning of the word "direction" in the amended provision. Be that as it may, it is after the formation of satisfaction which is to be discussed from the assessment order or reassessment order that the assessee is show-caused through the issue of notice as provided under s. 274 of the Act. Thus the penalty proceedings are initiated by issue of notice, and it is this notice under s. 274 which is the subject matter of challenge. In view of the said stated legal position, I am unable to agree with the comments made by the Addl.CIT on the additional ground as raised by the appellant. In this view of the matter, the submission of the Addl.CIT that the additional ground is to be dismissed cannot be acceded to as per law.

4 & 7414/M/2014 Shri Ziauddin A Siddique 5.8 I have given thoughtful consideration to the facts of the case, the findings of the 'Assessing Officer, the decision of the CIT(A), the order of the ITAT, the submissions made by the appellant and also the additional ground raised

. It is trite that penalty proceedings are separate from assessment proceedings and that considerations arising in penalty proceedings are different from assessment proceedings. The addition made in the quantum proceedings will not automatically trigger imposition of penalty. In view of the additional ground raised by the appellant for both the years under consideration, it has to be examined at the threshold, whether the procedure under s. 274 and the conditions of section 271(i) with reference to the grounds mentioned in section 271(l)(c) has been followed, i.e. whether the notice issued is for concealment of particulars of income or for furnishing inaccurate particulars. I have examined the assessment order of the Assessing Officer. In the order of assessment for both the years under consideration, the Assessing Officer has only stated "penalty proceedings under section 271(1)(c) are initiated". The notice under s. 274 has been issued thereafter. The ground raised by the appellant that the notices issued for both the years under consideration do not specify whether the penalty is being initiated for concealment of particulars of income or furnishing of inaccurate particulars is not controverted. It is a fact that the particular limb in the printed notice under s. 274 has not been ticked with respect for both the years under consideration, it is also an undisputed fact that the direction in the assessment order for both the years under consideration also do not specify whether the recording of satisfaction is for concealment of income or for furnishing inaccurate particulars of income. The appellant contends that failure to specify the specific charge in respect of which the assessee is proposed to be penalized is a jurisdictional defect which cannot be cured, the same being a pre-condition before levy of penalty, in the absence of which there can be no penalty. For this proposition the appellant places reliance on and draws support from the order of the Mumbai ITAT in the case of Samson Perincherry in ITA No. 4625/M/2013 to ITA No: 4630/M/2013, as per order dated 11th October, 2013. In the six appeals under consideration in the case of Samson Perincherry, without going into the merits of the penalty, the question considered by the Hon'ble ITAT was whether the penalty was valid, when the Assessing Officer has not specified if the notice was issued “for concealment of particulars of income" or furnishing of inaccurate particulars of income particulars of such income". Also, it was considered in these cases, whether penalty was valid, when in the assessment order it was stated that penalty is being initiated for "furnishing inaccurate particulars of income", however penalty was levied for "concealment of income". Drawing support from the decision of the Karnataka High Court in the case of CIT vs. Manjunatha Cotton & Ginning Factory[2013]

35. Taxmann.com 250(Kar), the judgment of the Gujarat High Court in the case of 5 & 7414/M/2014 Shri Ziauddin A Siddique Manu Engineering 122 ITR 306, and that of the Delhi High Court in the case of Virjo Marketing 171 Taxmann 156, it was held by the Mumbai ITAT that the levy of penalty has to be clear as to the limb for which it is levied and the position being unclear, penalty is not leviable. The Tribunal has observed that the Assessing Officer is under obligation to specify whether penalty is to be initiated for "furnishing of inaccurate particulars of income" or for "concealment of income". Borrowing heavily from the legal proposition as set forth by the Karnataka High Court in the case of Manjunatha Cotton and Ginning Factory(Supra) as regards notice under s. 274, the Mumbai [ITAT in Samson Perincherry, has held as under: The Assessing Officer is empowered under the Act to initiate penalty proceedings once he is satisfied in the course of any proceedings that there is concealment of income or furnishing of inaccurate particulars of total income under clause (c). Concealment, furnishing inaccurate particulars of income are different. Thus the Assessing Officer while issuing notice has to come to the conclusion that whether is it a case of concealment of income or is it a case of furnishing of inaccurate particulars. The Apex Court in the case of Ashok Pal reported in 292 ITR 11 at page 19 has held that concealment of income and furnishing inaccurate particulars of income carry different connotations. The Gujrat High Court in the case of Manu Engineering reported in 122 ITR 306 and the Delhi High Court in the case of Virgo Marketing reported in 171 Taxman. 156 has held that levy of penalty has to be clear as to the limb for which it is levied and the position being unclear penalty is not sustainable. Therefore, when the Assessing Officer proposes to invoke the first limb being concealment, then the notice has to be appropriately marked. Similar is the case for furnishing inaccurate particulars of income. The standard proforrna without striking of the relevant clauses will lead to an inference as to non- application of mind. From the above, it is clear that the penalty should be clear as the limb for which it is levied and the position being unclear here the penalty is not sustainable. Therefore, considering, the same, we are of the opinion that the ground raised by the assessee should be allowed on technical grounds. Accordingly, adjudication of the penalties on merits become an academic exercise. Therefore, the grounds raised in all the six assessment years are allowed. 5.9 The moot question to be considered is whether penalty is sustainable considering the legal proposition as set forth in the pre- paragraphs above. It is an undisputed fact that in the last paragraph 6 & 7414/M/2014 Shri Ziauddin A Siddique of the assessment orders under consideration in respect of Assessment Years 2004-05 and 2005-06, the Assessing Officer has only written "Penalty proceedings under s.271(1)(c) are initiated separately". The notice under S. 274 issued for both the years under consideration have been perused and it is observed that the printed El form has been sent where all the grounds have been mentioned, without specifically stating whether it is for concealment of income or for furnishing inaccurate particulars. These being the undisputed and uncontroverted facts, I am left with no alternative other than to follow the legal proposition as laid down in the order of the Mumbai ITAT in the case of Samson Perincherry, wherein the ITAT considered the cited judgement of the Karnataka High Court in the case of Manjunatha Cotton and Ginning Factory, that of the Apex Court in the case of Ashok Pai, that of the Gujarat High Court in the case of Manu Engineering and that of the Delhi High Court in the case of Virgo Marketing. In the instant case, the assessment order, the notice under s. 274 and also the show cause notice for both the years under consideration, do not specify the limb for which penalty is levied. The legal position as per the above cited judicial pronouncement is that when the notice issued under s. 274 does not satisfy the grounds which the assessee has to meet specifically, the principle of natural Justice is offended and no penalty can be imposed. This being the legal preposition and when it strikes at the very root of the penalty orders, the adjudication on merits becomes academic. I am constrained to follow the legal proposition as laid down in the cited judicial pronouncements (supra) especially that of jurisdictional ITAT, which is a binding precedent, keeping in view the observations of the Hon'ble Supreme Court on the subject of judicial discipline in the case of Union of India vs Kamakshi Finance Corporation AIR 1992 SC 711. On the above stated facts and the legal position as discussed above, I am unable to sustain the order of penalty in respect of both the impugned years, i.e. Assessment Year 2004-05 and Assessment Year 2005-06. The penalty under s. 271(1)(c) imposed for Assessment Year 2004-05 and Assessment Year 2005-06 are hereby deleted. It is ordered accordingly.

7 & 7414/M/2014 Shri Ziauddin A Siddique 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 8 & 7414/M/2014 Shri Ziauddin A Siddique 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.

We further find that at para 9 of the order in Reliance Petroproducts P. Ltd. (supra), the Hon’ble Supreme Court has held as under: “9. Therefore, it is obvious that it must be shown that the conditions under section 271(1)(c) must exist before the penalty is imposed. There can be no dispute that everything would depend upon the return filed because that is the only document, where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. In Dilip N. Shroff v. Joint CIT [2007] 6 SCC 329****, this court explained the terms "concealment of income" and "furnishing inaccurate particulars". The court went on to hold therein that in order to attract the penalty under section 271(1)(c), mens rea was necessary, as according to the court, the word "inaccurate" signified a deliberate act or omission on behalf of the assessee. It went on to hold that clause (iii) of section 271(1)(c) provided for a discretionary jurisdiction upon the assessing authority, inasmuch as the amount of penalty could not be less than the amount of tax sought to be evaded by reason of such concealment of particulars of income, but it may not exceed three times thereof. It was pointed out that the term "inaccurate particulars" was not defined anywhere in the Act and, therefore, it was held that furnishing of an assessment of the value of the property may not by itself be furnishing inaccurate particulars. It was further held that the Assessing Officer must be found to have failed to prove that his explanation is not only not bona fide but all the facts relating to the same and material to the computation of his income were not disclosed by him. It was then held that the explanation must be preceded by a finding as to how and in what manner, the assessee had furnished the particulars of his income. The court ultimately went on to hold that the element of mens rea was essential. It was only on the point of mens rea that the judgment in Dilip N. Shroff v. Joint CIT* was upset. In Union of India v. Dharamendra Textile Processors**, after quoting from section 271 extensively and also considering section 271(1)(c), the court came to the conclusion that since section 271(1)(c) indicated the element of strict liability on the assessee for the concealment or for giving inaccurate particulars while filing return, there was no necessity of mens rea. The court went on to hold that the objective behind the enactment of section 271(1)(c) read with Explanations indicated with the said section was for providing remedy for loss of revenue and such a penalty was a civil liability and, therefore, wilful concealment is not an essential ingredient for attracting civil liability as was the case in the matter of prosecution under section 276C of the Act. The basic reason why decision in Dilip N. Shroff v. Joint CIT was overruled by this court in 9 & 7414/M/2014 Shri Ziauddin A Siddique Union of India v. Dharamendra Textile Processors2, was that according to this court the effect and difference between section 271(1)(c) and section 276C of the Act was lost sight of in the case of Dilip N. Shroff v. Joint CIT1. However, it must be pointed out that in Union of India v. Dharamendra Textile Processors**, no fault was found with the reasoning in the decision in Dilip N. Shroff v. Joint CIT*, where the court explained the meaning of the terms "conceal" and "inaccurate". It was only the ultimate inference in Dilip N. Shroff v. Joint CIT1 to the effect that mens rea was an essential ingredient for the penalty under section 271(1)(c) that the decision in Dilip N. Shroff v. Joint CIT* was overruled.”

6. 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 10 & 7414/M/2014 Shri Ziauddin A Siddique considered by the Hon'ble Bombay High Court also in the case of Shri Samson Perinchery, ITA Nos. 1154, 953, 1097 & 1126 of 2014 dated 5.1.2017 (supra) and the decision of the Tribunal holding levy of penalty in such circumstances being bad, has been approved.

“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.”

Order pronounced in the open court on 31.10.2017.