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Facts
The assessee is in appeal against the penalty order passed under section 271(1)(c) of the Income-tax Act, 1961. The penalty was levied on account of disallowance of interest expenses of Rs. 2,22,73,973/-. The assessee had debited this interest in its P&L account on optionally convertible debentures issued to Global Vantage Private Limited. However, it was noted that no interest was actually paid by the assessee, nor was there a liability to pay it, as the debentures were issued in settlement of an inter-company deposit, which already included the interest amount.
Held
The Tribunal noted that the penalty notice issued by the AO was defective as it did not specify the limb of section 271(1)(c) which was attracted. Citing judicial precedents, the Tribunal held that a penal provision must be construed strictly and any ambiguity should be resolved in favour of the assessee.
Key Issues
Whether the penalty imposed under section 271(1)(c) is sustainable when the penalty notice is vague and does not specify the exact limb of the section attracted, especially when the issue involves complex financial transactions like optionally convertible debentures and inter-company deposits.
Sections Cited
271(1)(c), 274, 143(3), 14A, 8D
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Income Tax Appellate Tribunal, MUMBAI BENCH “C”, MUMBAI
Before: SHRI ANIKESH BANERJEE & SHRI GAGAN GOYAL
Instant appeal of the assessee is preferred against the order of theNational Faceless Appeal Centre, Delhi [for brevity, ‘Ld.CIT(A)’] passed under section 250 of the Income-tax Act, 1961 (in short, ‘the Act’), for Assessment Year 2014-15, date of order 16.01.2024.The impugned orderis emanated from the order of the Ld.Deputy Commissioner of Income-tax, Ward 6(3)(1),Mumbai (in short, ‘the A.O.’) passed U/s271(1)(c)of the Act, date of orderdated 30/05/2017.
Inimitable Capital Finance Pvt Ltd 2. The assesseehas taken the following grounds of appeal:-
“1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre ("CIT(A)/NFAC") erred in sustaining the penalty under section 271(l)(c) of the Income-tax Act, 1961 (the "Act") on the amount of R. 2,22,73.973/- being interest expenses incurred during the year and payable to M/s Global Vantage Ltd which was not allowable as deduction in the assessment order dated for the reason that the said interest was not paid by the Appellant nor payable by it and was therefore not genuine expense. 2. 'The Appellant craves leave to add. amend or delete any of the above grounds of appeal.” 2.1.The assessee has taken the following additional ground. Additional Ground: On the facts and in the circumstances of the case, and without prejudice to the other ground(s), the order passed under section 271(1) (c) is bad in view of the fact that both at the time of initiation as well as at the time of imposition of the penalty the Assessing Officer was not clear as to which limb of section 271(l)(c) was attracted.”
Brief facts of the case are that the assessment was completed under section 143(3) of the Act dated 15/11/2016 determining the total income of Rs.6,35,370/-. The addition was confirmed related to disallowance of interest amount to Rs.2,22,73,973/- and disallowance under section 14A read with Rule 8D amount to Rs.26,492/-. So, the total amount works out to Rs.2,23,00,465/-. The assessee has not challenged the quantum appeal before any of the authorities. The penalty proceeding was initiated U/s 271(1)(c) of the Act. The Ld.AO determined the tax sought to be evaded amount to Rs.75,70,923/- which is 100% of the tax sought to be evaded of the total income. Accordingly, the penalty is confirmed amount to Rs.75,70,923/-. Accordingly, the assessee filed an Inimitable Capital Finance Pvt Ltd appeal before the CIT(A) by challenging the penalty order. The Ld.CIT(A) upheld the penalty order. Being aggrieved, assessee filed an appeal before us.
The Ld.AR filed a written submission which are kept in the record(in short, APB). The Ld.AR has invited our attention in the penalty order para 4.1 and 4.3 which are reproduced as below:- “4.1 The facts of the issue and the submissions of the asscssee were considered carefully. However, the same was not convincing. On going though die Profit and Loss Account of the Asscssee Company, it is noticed thatthe assessee co. had debited interest expenses to the tune of Rs. 2,22,73,973/- under the head "Finance Cost" in the P&L Account. It was seen that the assessee had issued optionally convertible debentures amounting to Rs. 26,86,13.500/-, inclusive of interest amounting to Rs. 6,86,13,500/-. to Global Vantage Private Limited with the option of gaining a part ownership in the assesseeco. and no interest was thus paid on the said debentures. It is important to mention here that these optional convertible debentures were issued in the current year in full settlement of the Inter Company Deposit of Rs. 20.00.00.000/- made by the said company withthe assesseeco., which included the interest amount of Rs. 6,86,13,500/- and thus, issued optionally convertible debentures amounting to Rs. 26.86, l3,500/-,. Accordingly, the assessee's liability to pay interest has been ceased and no such interest was paid by the assessee. The assessee had confirmed this fact in its submission dated 08.08.2016. Therefore, the assessee had neither paid the said interest till date, nor, had any liability to pay any such interest in future. 4.3 It was also noticed that the. assessee co. had debited interest expenses of Rs. 2,22,73,973/- as interest on Inter Corporate Deposits which are the sameDeposits that have been fully settled in the form of convertible debentures which also includes the interest payable. Further, the Assessee'sAuthorised Representative, vide order sheet notingdated 09.11.2016 has agreed that the saidinterest expenses claimed, amounting to Rs. 2,22,73,9737- needs to the disallowed as the AssesseeCompany had not paid
Inimitable Capital Finance Pvt Ltd any such interest nor is liable to pay/payable in the view of above discussion. Hence, the said interest expenses wasdisallowed and added back to total income of the assessee company. “
The Ld.AR placed that the addition was made related to the disallowance of interest amounting to Rs.2,22,73,973/- charged in the P&L Account in the head of ‘Finance Cost’. The assessee has issued optionally convertible debentures amounting to Rs.26,86,13,500/- to Global Vantage Private Limited with the option of gaining a part of ownership in the assessee company and no interest was paid on the said debenture. Later on, this interest was calculated in the optionally converted share and finally, the settlement was done in ICD (Inter Company Deposit) of Rs.20 crore was made by the said company with the assessee company which included the interest amount Rs. 6,86,13,500/- which works out total amount toRs.26,86,13,500/- and thus issued the optionally converted debenture amounting to Rs.26,86,13,500/-. For explanation of the fact, the relevant para of the assessment order para 4 is reproduced below: - “4. Disallowance of interest amounting to Rs. 2,22,73,973/-. 4.1 During the course of assesssment proceedings, ongoing though the Profit and Loss Account of the Assessee Company, it is noticed that the assessee co. had debited interest expenses to the tune of Rs. 2,22,73,973/- under the head "Finance Cost" in the P&L Account. On perusal of the details submitted by assessee co. it is seen that the assessee has issued optionally convertible debentures amounting to Rs. 26,26,13,500/-, inclusive of interest amounting to Rs. 6,86,13,500/-, to Global Vantage Private Limited with the option of gaining a part ownership in the assessee co. and no interest was thus paid on the said debentures. The assessee company has submitted, vide its submission dated 09.11.2016, Balance confirmation of Global Vantage Private Limited along with the Financial statement and Income Tax Return of Global Vantage Private Limited, which confirms the above.
4.2 It is important to mention here that these optionally convertible debentures were issued in the current year in full settlement of the Inter Company Deposit of Rs. 20,00,00,000/- made by the said company with the assessee co., which included the interest amount of Rs. 6,86,13,500/- and thus, issued optionally convertible debentures amounting to Rs. 26,86,13,500/-. Accordingly, the assessee's liability to pay interest hue been ceased and no such interest v/as paid by the assessee. The assessee has confirmed this fact in its submission dated 08.08.2016. Therefore, the assessee hasneither paid the said interest till date, nor, has any liability to pay any such interest in future.
4.3 On further perusal, it is ;: /need that the assessee co. has debited interest expenses of Rs. 2,22,73,973/- ie:. interest on Inter Corporate Deposits which are the same Deposits that have ) a fully settled in the form of convertible debentures which also includes the in!--.ve; payable. Accordingly, a show cause was issued to assessee vide notice dated. 7.10.216 as to why the said amount of Rs. 2,22,73,973 shall not be disallowed me year under consideration in the view of above discussion.”
The ld. DR vehemently argued and fully relied on the order of the revenue authorities.
We heard the rival submission and considered the documents available in record. The ld. AR explained that the observation of both the revenue authorities are not correct related to adjustment of interest. The ld. AR has accepted the interest are wrongly debited in P & L account. The ld. AR was unable to proveabout the contrary on imposition of penalty. The addition U/s 143(3) of the Act was also accepted by the assessee and has not challenged the addition before the higher authority. In our considered view the ground no-1 is dismissed. The ground no-2 is general in nature.
ADDITIONAL GROUND: -
Inimitable Capital Finance Pvt Ltd 8. The ld. AR now proceed to argue the additional ground. The ld. AR has drawn our attention in APB page-2, notice issued by the ld. AO u/s 271(1)(c)/ 274 of the Act dated 15/11/2016. In argument ld. AR mentioned that the notice is itself defective for non-mentioning the specific limb of the penalty U/s 271(1)(c) of the Act.
Copy of the notice is duly annexed herewith: -
The ld. DR vehemently argued and fully relied on the order of the revenue authorities.
We heard the rival submission and considered the documents available in record. The issue is squarely covered by the judgement of Hon’ble Jurisdictional High Court in the case of Mohammed Farhan A. Shaikh Vs. PCIT (125 taxamnn.com 253) vide order dt. 11.3.2021. The relevant paragraphs are reproduced as below: - “179. Besides, the prima facie opinion in the assessment order need not always translate into actual penalty proceedings. These proceedings, in fact, commence with the statutory notice under section 271(1)(c) read with section 274. Again, whether this prima facie opinion is sufficient to inform the assessee about the precise charge for the penalty is a matter of inference and, thus, a matter of litigation and adjudication. The solution, again, is a tick mark; it avoids litigation arising out of uncertainty. 180. One course of action before us is curing a defect in the notice by referring to the assessment order, which may or may not contain reasons for the penalty proceedings. The other course of action is the prevention of defect in the notice—and that prevention takes just a tick mark. Prudence demands prevention is better than cure. Answers: Question No. 1: If the assessment order clearly records satisfaction for imposing penalty on one or the other, or both grounds mentioned in Section 271(1)(c), does a mere defect in the notice— not striking off the irrelevant matter—vitiate the penalty proceedings? 181. It does. The primary burden lies on the Revenue. In the assessment proceedings, it forms an opinion, prima facie or otherwise, to launch penalty proceedings against the assessee. But that translates into action only through the statutory notice under section 271(1)(c), read with section 274 of IT Act. True, the assessment proceedings form the basis for the penalty proceedings, but they are not composite proceedings to draw strength from each other. Nor can each cure the other's defect. A penalty proceeding is a corollary; nevertheless, it must stand on its own. These proceedings culminate under a different statutory scheme that remains distinct from the assessment proceedings. Therefore, the assessee must be informed of the grounds of the penalty proceedings only through statutory notice. An omnibus notice suffers from the vice of vagueness.
Inimitable Capital Finance Pvt Ltd 182. More particularly, a penal provision, even with civil consequences, must be construed strictly. And ambiguity, if any, must be resolved in the affected assessee's favour.”
The counsel laid down that in the absence of such specific notice, the notice would be invalid. As held in various judicial pronouncements including the decision of Hon’ble Karnataka High Court in CIT V/s SAS’s Emerald Meadows (73 Taxmann.com 241) against which Special Leave Petition (SLP) filed by the department stood dismissed by Hon’ble Supreme Court which is reported as 73 Taxmann.com 248. The notice u/s 274/271(1)(c) of the Act is not carrying the specific limb. Therefore, this is a case where both the parts of the offences i.e., concealment of income as well as furnishing of inaccurate particulars of income were involved.
Finally, respectfully following the binding judicial precedents as cited aforesaid, we are of the considered opinion that the impugned penalty is not sustainable on legal grounds. Hence, by deleting the same, we allow the appeal of the assessee. Accordingly, the additional ground of the assessee is allowed.