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PER PAWAN SINGH, JUDICIAL MEMBER:
This appeal by assessee under section 253 of the Income-tax Act (the Act)
is directed against the order of ld. Commissioner of Income Tax (Appeals)- 34 [the CIT(A)], Mumbai dated 30.11.2016 for the Assessment Year 20091-10. The assessee has raised following grounds of appeals; (1) The learned Commissioner (Appeals) erred in law as well as in facts by not adjudicating and not dealing with additional ground of appeal raised before him in the following terms “the learned assessing officer initiated penalty in respect of explanation 1 to section 271(1) © whereas notice under section 274 did not specify any limb or charge ultimately levied penalty on your appellant for filing inaccurate particulars of its income and concealed particular of income. Since, the order levied penalties differed from initiation of penalty and notice issued without specifying charge or limb therefore, illegal, invalid and without jurisdiction to be quashed.” The learned Commissioner (Appeals) ought to have quashed the penalty order being invalid, illegal and without jurisdiction. (2) The learned Commissioner (Appeals) has erred in facts and in law while confirming the order of penalty under section 271(1)(c) of the ITO by dismissing the appeal of your appellant in respect of penalty levied of Rs.1,41,377/- the learned Commissioner (Appeals) failed to consider and appreciate the facts and contention of your appellant in its true perspective. Your appellant substantiated the claim and there is no finding that explanation offered by him is found to be false or not bonafide. It is merely a case that explanations and claim made by your appellant is not acceptable to the Department. He failed to consider and appreciate that the penalty proceeding and assessment proceedings are separate and distinct, finding of assessment proceedings may not be sufficient to label penalty. Under the fact and circumstances the learned Commissioner (Appeals) ought to have deleted and cancelled the penalty.
Brief facts of the case are that the assessee filed his return of income for relevant AY on 30.07.2009 declaring total income of Rs. 6,36,654/-. The assessment was completed on 10.12.2011 under section 143(3) of the Act.
The Assessing Officer (AO) while passing the assessment order made addition of Rs. 1,00,000/- under section 69B on account of unexplained investment, disallowance of interest of Rs. 2,08,000/- under section 24(b) and an addition of Rs. 2,97,054/- on account of rental income.
Simultaneously, the AO initiated penalty under section 271(1) (c) vide notice dated 10.12.2011. On appeal before the ld. CIT(A), the addition under section 69B was deleted. However, the disallowance of interest of Rs. 2,08,000/- and addition of Rs.2,97,054/- on account of Income from House Property was confirmed. Thereafter, the AO again issued show caused notice dated 16.01.201 for levying penalty. The assessee contested the notice and filed reply dated 23.01.2014. In reply for disallowance of interest under 24(b) the assessee contended that merely no nexus was established for interest paid for property investment, it does not mean that it was a false claim. For rental income the assessee contended that the addition was made on estimate basis. The contention of the assessee was not accepted by AO. The AO levied penalty @ 100% of amount of tax sought to be evaded. The AO worked out the penalty of Rs.1,41,377/-. On appeal before the ld. CIT(A), the penalty was confirmed. Thus, further aggrieved by the order of ld. CIT(A), the present appeal is filed before us.
We have heard the ld. Authorized Representative (AR) of the assessee and ld. Department Representative (DR) for the Revenue and perused the material available on record. The ld. AR of the assessee argued that while issuing notice u/s 274 r.w.s. 271 of the Act. The AO has not strike out the irrelevant portion of the notice. The ld. AR of the assessee placed on record the copy of notice dated 10.12.2011. It was argued that the quantum assessment proceeding has become final after the dismissal of appeal of assessee by the ld. CIT(A). It was further argued that the penalty notice dated 10.12.2011 issued under section 274 r.w.s. 271 of the Act, copy of which is placed on record reveals non application of mind by the AO as as the irrelevant portion of the notice has not been stuck off. The ld. AR of the assessee, therefore, contended that the levy of penalty is illegal and deserve to be set-aside/deleted. On merit, it was argued that the addition on account of rental income is based on estimation, it is settled law that no penalty is leviable on addition made in the assessment order on estimation basis. For addition on account of borrowed fund, it was argued that the assessee has furnished all detailed particulars and mere disallowance of bonafide claim would not attract the penalty. The AO has not specified that the particulars furnished by assessee were false. In support of his submission, the ld. AR of the assessee relied upon the following decisions:
Sr No. Particulars 1 CIT vs. M/s SSA'S Emerald Meadows. [SLP No. 11485/2016 (Arising out of decision of High Court Karnataka [ITA 380/2015) Supreme Court of India)] 2 CIT vs. M/s SSA'S Emerald Meadows. [ITA 380/2015 (High Court Karnataka.) 3 Meherjee Cassinath Holdings Private Limite Limited vs. ACIT [ITA 2555/Mum/2012]
On the other hand, the ld. DR for the Revenue supported the order of authorities below. It was argued that various Courts have held that penalty can be levied on the additions on estimate basis. The ld. DR for the Revenue relied on the decision of Hon’ble Bombay High Court in Kaushalya & Ors. (216 ITR 660).
We have considered the rival submission of the parties and have gone through the order of authorities below. We have perused the copy of notice dated 10.12.2011 issued by AO under section 274 r.w.s. 271(1)(c). The perusal of the notice reveals that the AO has not strike out the irrelevant portion of the notice. Further, we have also perused the Assessment Order passed under section 143(3) dated 10.12.2011. The perusal of Assessment Order reveals that the AO has not specified under which limb of section 271(1((c), the penalty is initiated. The AO simply noted “the issue attract provision of penalty under section 271(1)(c) with explanation-1 of IT Act, 1961. The penalty proceeding initiated.” We have seen that this bench while considering with almost similar contention in case of Meherjee Cassinath Holding Pvt. Ltd.(supra) held as under:
“8. We have carefully considered the rival submissions. Sec. 271(1)(c) of the Act empowers the Assessing Officer to impose penalty to the extent specified if, in the course of any proceedings under the Act, he is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income. In other words, what Sec. 271(1)(c) of the Act postulates is that the penalty can be levied on the existence of any of the two 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 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.
The impugned order, therefore, suffers from non-application of mind. It was also bound to comply with the principles of natural justice. (See Malabar Industrial Co. Ltd. v. CIT [2000] 2 SCC 718]"
Factually speaking, the aforesaid plea of assessee is borne out of record and having regard to the parity of reasoning laid down by the Hon'ble Supreme Court in the case of Dilip N. Shroff (supra), the notice in the instant case does suffer from the vice of non-application of mind by the Assessing Officer. In fact, a similar proposition was also enunciated by the Hon'ble Karnataka High Court in the case of M/s. SSA's Emerald Meadows (supra) and against such a judgment, the Special Leave Petition filed by the Revenue has since been dismissed by the Hon'ble Supreme Court vide order dated 5.8.2016, a copy of which is also placed on record.
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 considered by (supra) and the decision of the Tribunal holding levy of penalty in such circumstances being bad, has been approved.
Apart from the aforesaid, the ld. CIT-DR made an argument based on the decision of the Hon'ble Bombay High Court in the case of Smt. Kaushalya & Others, 216 ITR 660 (Bom.) to canvass support for his plea that non-striking off of the irrelevant portion of notice would not invalidate the imposition of penalty u/s 271(1)(c) of the Act. We have carefully considered the said argument set-up by the ld. CIT-DR and find that a similar issue had come up before our coordinate Bench in the case of Dr. Sarita Milind Davare (supra). Our coordinate Bench, after considering the judgment of the Hon'ble Bombay High Court in the case of Smt. Kaushalya & Ors., (supra) as also the judgments of the Hon'ble Supreme Court in the case of Dilip N. Shroff (supra) and Dharmendra Textile Processors, 306 ITR 277 (SC) deduced as under :-
"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."
The aforesaid discussion clearly brings out as to the reasons why the parity of reasoning laid down by the Hon'ble Supreme Court in the case of Dilip N. Shroff (supra) is to prevail. Following the decision of our coordinate Bench in the case of Dr. Sarita Milind Davare (supra), we hereby reject the aforesaid argument of the ld. CIT-DR.
Apart from the aforesaid discussion, we may also refer to the one more seminal feature of this case which would demonstrate the importance of non-striking off of irrelevant clause in the notice by the Assessing Officer. As noted earlier, in the assessment order dated 10.12.2010 the Assessing Officer records that the penalty proceedings u/s 271(1)(c) of the Act are to be initiated for furnishing of inaccurate particulars of income. However, in the notice issued u/s 274 r.w.s. 271(1)(c) of the Act of even date, both the limbs of Sec. 271(1)(c) of the Act are reproduced in the proforma notice and the irrelevant clause has not been struck-off. Quite clearly, the observation of the Assessing Officer in the assessment order and non-striking off of the irrelevant clause in the notice clearly brings out the diffidence on the part of Assessing Officer and there is no clear and crystallised charge being conveyed to the assessee u/s 271(1)(c), which has to be met by him. As noted by the Hon'ble Supreme Court in the case of Dilip N. Shroff (supra), the quasi-criminal proceedings u/s 271(1)(c) of the Act ought to comply with the principles of natural justice, and in the present case, considering the observations of the Assessing Officer in the assessment order alongside his action of non-striking off of the irrelevant clause in the notice shows that the charge being made against the assessee qua Sec. 271(1)(c) of the Act is not firm and, therefore, the proceedings suffer from non-compliance with principles of natural justice inasmuch as the Assessing Officer is himself unsure and assessee is not made aware as to which of the two limbs of Sec. 271(1)(c) of the Act he has to respond.
Therefore, in view of the aforesaid discussion, in our view, the notice issued by the Assessing Officer u/s 274 r.w.s. 271(1)(c) of the Act dated 10.12.2010 is untenable as it suffers from the vice of non- application of mind having regard to the ratio of the judgment of the Hon'ble Supreme Court in the case of Dilip N. Shroff (supra) as well as the judgment of the Hon'ble Bombay High Court in the case of Shri Samson Perinchery (supra). Thus, on this count itself the penalty imposed u/s 271(1)(c) of the Act is liable to be deleted.”