ALLIED PHOTOGRAPHICS INDIA LIMITED ,CHURCHGATE vs NATIONAL FACELESS ASSESSMENT CENTER, DELHI

Income Tax Appellate Tribunal, A BENCH, MUMBAI

Per Rahul Chaudhary, Judicial Member:

By way of the present appeal the Assessee has challenged the order, dated 21/09/2023, passed by the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC) Delhi [hereinafter referred to as ‘the CIT(A)’] for the Assessment Year 2017-18, whereby the Ld. CIT(A) had dismissed the appeal of the Assessee against the Order dated 27/08/2021, levying penalty of INR 2,07,106/- under Section 270A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).

The Assessee has raised the following grounds of appeal:

“1. The ld. CIT(A) erred on facts, in law and under the circumstances in confirming the order of the A.O imposing penalty at the rate of 200% u/s. 270A of the Act of Rs. 2,07,106/- on the basis of disallowance of depreciation u/s 32 of Rs.1,92,024/- and addition u/s 14A of Rs. 1,21,179/-. The ld CIT(A) failed to that there is no underreporting of any income by way of misreporting of income, all facts of the case were duly disclosed in return as well as in course of assessment proceedings. Due to that no penalty should have been levied merely for disallowance of depreciation and addition made u/s 14A of the IT Act 1961. 2. The ld. CIT(A) further erred on facts, in law and under the circumstances in confirming the order of the A.O imposing penalty u/s. 270A of the Act on the basis of disallowance of addition u/s 14A of Rs. 1,21,179/- without appreciating that in the assessment order passed u/s 143(3) of the act dated 23.12.2019 in the case of the appellant, no penalty was initiated under section 270A nor in the penalty notice it has mentioned about intention of A.O to levy penalty, therefore the penalty imposed this addition i.e 14A of Rs. 1,21,179/- is bad in law.

The ld. CIT(A) failed to appreciate that the assessee has not earned any exempt income during the year, hence the provision of section u/s 14A r.w.r 8D is not applicable. Therefore, the penalty imposed on this addition is bad in law.

The Id. CIT(A) failed to appreciate that the A.O had not ticked in the notice issued for levying penalty whether he intended to charge penalty for underreporting or for misreporting. The penalty notice does not clarify the same and that make the penalty notice is invalid.”

The relevant facts in brief are that the Appellant is a company engaged, inter alia, in the business of trading of photographic goods and x-ray films, chemicals, lime stone and dolomite. The Appellant filed return of income on 28/10/2017 declaring total income of INR 3,57,10,370/-. The case of the Appellant was 2 selected for regular scrutiny. The Assessing Officer completed the assessment under Section 143(3) of the Act on 23/12/2019 assessing the total income at INR 3,60,23,570/- after making (a) disallowance of depreciation of INR 1,92,024/- claimed in respect of flats income arising wherefrom was offered to tax by the Appellant as income from house property, and (b) disallowance of INR 1,21,179/- under Section 14A read with Rule 8D of the Income Tax Rules, 1962 (for short the ‘IT Rules’). It is stated that the Appellant accepted the assessment order and did not file appeal before CIT(A) to avoid litigation and in view of smallness of the amount involved.

3.1.

Subsequently, the Assessing Officer initiated the penalty proceedings under Section 270A of the Act for under-reporting of income in consequence of misreporting and a show cause notice under Section 274 read with Section 270A of the Act was issued on 23/12/2019. In response, the Appellant filed, reply letter dated 16/08/2021, claiming that the disallowance of depreciation made by the Assessing Officer was on account of rejection of the legal claim and therefore, there was neither under-reporting nor misreporting of income by the Appellant. During the relevant previous year, one of the business assets of the Appellant was given on rent. In order to avoid litigation, the rental income earned the aforesaid flat was offered to tax as income from house property instead of business income. Since the aforesaid business asset was part of the block of assets, depreciation was claimed on the same on the basis of the understanding that when a group of similar assets form part of block of assets the same lose their individual identity and the block of assets cannot be broken down to make disallowance of depreciation. It was specifically submitted that Clause (a) to (f) of Section 270A(9) of the Act were not attracted in the case of 3 the Appellant. However, the Assessing Officer was not convinced with the submission/explanation of the Appellant. The Assessing Officer concluded that there was under-reported income in consequence of misreporting by the Appellant and vide order, dated 27/08/2021, passed under Section 270A of the Act levied penalty of INR 2,07,106/- computed at the rate of 200% of the tax payable on the aggregate under-reported income.

3.2.

Being aggrieved, the Appellant preferred appeal before CIT(A) against the penalty order, dated 27/08/2021. Before CIT(A) it was contended on behalf of the Appellant that the Assessing Officer has wrongly imposed penalty under Section 270A of the Act in respect of disallowance of INR 1,21,179/- made by the Assessing Officer under Section 14A of the Act without appreciating that in the assessment order, the Assessing Officer had not recorded satisfaction or given direction for initiation of penalty proceedings in relation to the same. The penalty proceedings initiated by the Assessing Officer was restricted to disallowance of depreciation claim of INR 1,92,024/-. It was also contended that even in respect of the aforesaid claim of depreciation penalty under Section 270A of the Act was not leviable since the Appellant had disclosed all facts in the return as well as in the course of assessment proceedings, and there was neither under-reporting nor misreporting by the Appellant. The CIT(A) rejected the aforesaid contention/submission of the Appellant and confirmed levy of penalty of INR 2,07,106/- under Section 270A of the Act while dismissing the appeal vide order dated 21/09/2023. 3. 3. Being aggrieved, the Appellant is now in appeal before us.

We have heard the rival contention and perused the material on record including the judicial precedents cited during the course

4 of hearing.

Analysis of Legal Provisions

During the course of hearing reliance was placed on behalf of the Appellant on judicial precedents dealing with levy of penalty under Section 271(1)(c) of the Act. Issue that arises for consideration is whether the said judicial precedents can be applied while interpreting the provisions contained in Section 270A of the Act the relevant extract of which reads as under:

“270A. (1) The Assessing Officer or [the Joint Commissioner (Appeals) or] the Commissioner (Appeals) or the Principal Commissioner or Commissioner may, during the course of any proceedings under this Act, direct that any person who has under-reported his income shall be liable to pay a penalty in addition to tax, if any, on the under-reported income.

xx xx (7) The penalty referred to in sub-section (1) shall be a sum equal to fifty per cent of the amount of tax payable on under-reported income.

(8) Notwithstanding anything contained in sub-section (6) or sub-section (7), where under-reported income is in consequence of any misreporting thereof by any person, the penalty referred to in sub-section (1) shall be equal to two hundred per cent of the amount of tax payable on under-reported income.

(9) The cases of misreporting of income referred to in sub- section (8) shall be the following, namely:—

(a) misrepresentation or suppression of facts;

5 (b) failure to record investments in the books of account;

(d) recording of any false entry in the books of account; (e) failure to record any receipt in books of account having a bearing on total income; and (f) failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply.” Satisfaction/Directions

On examining the provisions of Section 270A and 271(1) of the Act, we find that the language of Section 270A of the Act differs from Section 271(1) of the Act. Section 271(1) of the Act specifically provides that the Assessing Officer ‘may’ direct the levy of penalty if the Assessing Officer ‘is satisfied’ that an assessee has concealed particulars or furnished inaccurate particulars of income, whereas Section 270A of the Act does not mandate drawing of such satisfaction by the Assessing Officer and therefore, the directions issued for initiating penalty proceedings cannot be challenged on the ground of non-recording of satisfaction by the Assessing Officer. However, in our view, it cannot be said that the provisions contained in Section 270A of the Act get triggered automatically on passing of the assessment/re-assessment order. Section 270A(1) of the Act provides that Assessing Officer ‘may’ direct that a person under-reporting his income shall be liable to pay penalty.

6.1.

Chapter XXI of the Act contains provisions related to penalties

6 imposable under the Act. Section 270A forms part of Chapter XXI of the Act. The Act does not contain a separate set of provisions dealing with assumption of juri iction and timeline for initiating the penalty proceedings under Section 270A of the Act and passing of the penalty order. Therefore, as was the case for levy of penalty under Section 271(1)(c) of the Act, for the purpose of assumption of juri iction to levy penalty under Section 270A of the Act the Assessing Officer is required to direct initiation of penalty proceedings under Section 270A of the Act at the time of passing the assessment/reassessment order. Direction for Initiating Penalty Proceeding

The issue that raises for consideration is whether at the time of issuing directions at the time of passing the assessment/reassessment order, the Assessing Officer is mandated to specify that the direction is being issued for initiating penalty proceeding for under-reporting of income in consequence of misreporting.

7.1.

In this regard it would be pertinent to note that under Section 271(1)(c) of the Act penalty could be levied (a) for the charge of concealment of particulars of income; or (b) for the charge of furnishing inaccurate particulars of income. Whereas, in terms of Section 270A of the Act penalty can be levied only for the charge of under-reporting. The quantum of penalty to be levied depends upon whether there is under-reporting or under- reporting in consequence of misreporting. Where such charge of under-reporting made out for the reason of misreporting, higher penalty @ 200% of the tax on under-reported income is leviable. Therefore, unlike Section 271(1)(c) of the Act where penalty could be levied two different charges (being charge of 7 concealment of particulars of income or the charge of furnishing inaccurate particulars of income), under Section 270A of the Act penalty can be levied only for the charge of under-reporting of income. Therefore, while issuing the direction for initiation of penalty proceedings under Section 270A of the Act at the time of passing of assessment/reassessment order the Assessing Officer need not specify that the direction is for levy of penalty for under-reporting or under-reporting in consequence of misreporting. In case of under-reporting of income as well as in the case of under-reporting of income in consequence of misreporting, it would suffice in case the Assessing Officer directs initiation of penalty proceedings for the charge of under- reporting of income under Section 270A(1) of the Act without specifying anything further.

7.2.

In view of paragraph 7.1. above, the reliance placed by the Learned Authorised Representative for Appellant in this regard on the provisions of Section 271(1)(c) of the Act and the judgment of the Full Bench of the Hon’ble Bombay High Court in the case of Mohd. Farhan A Shaikh Vs. DCIT, Central Circle-1, Belgaum: 434 ITR 1 (Bombay) is clearly misplaced. Communication of Charge & Notice under Section 274 of the Act

The next issue that arises for consideration is whether or not the Assessee should be informed that the Assessing Officer is proposing to levy penalty for under-reporting of income or penalty for under-reporting of income in consequence of misreporting.

8.1.

It is settled legal position penalty levied under the provisions of the Act are generally in the nature of a civil liability; albeit a strict liability.[Commissioner of Income-tax, Delhi Vs Atul Mohan Bindal : [2009] 317 ITR 1 (SC)]. Therefore, the penalty

8 proceedings under the Act cannot be treated at par with criminal nor quasi-criminal proceedings to contend that even at the stage of issuing notice under Section 274 of the Act the assessee should be confronted with the exact charge giving details of section, sub-section and clause/limb thereof. At the same time, it cannot be disputed that assessee ought to be granted an effective opportunity to defend the allegations against him. In this regard, it would be pertinent to consider the provisions contained in Section 270A of the Act in totality. Section 270A(1) of the Act empowers the Assessing Officer to levy penalty for under-reporting of income. Section 270A(2) of the Act provides that a person shall be considered to have under-reported income in case of instances specified in sub-clause (a) to (g) of Section 270A(2) of the Act. Section 270A(3) to 270A(6) of the Act deal with the computation of amount of under-reported income. Section 270A(6)(a) of the Act, specifically excludes from the ambit of amount of under-reported income the amount of income in respect of which the assessee offers explanation provided the concerned income tax authority is satisfied that the explanation so offered is bona fide and that the assessee has disclosed all the material facts to substantiate the explanation so offered. Section 270A(7) of the Act provides that penalty equal to 50% of amount tax on under-reported income shall be levied on under-reported income. However, Section 270A(8) of the Act provides that notwithstanding the provisions contained in Section 270A(6) and 270A(7) of the Act, where under-reporting of income is in consequence of any misreporting specified in Section 270A(9) of the Act, the penalty to be levied shall be 200% of the amount of tax on under-reported income. Thus, the scheme of Section 270A of the Act provides for two separate quantum of penalties for the single charge of under-reporting of income on the basis of the reason for such under-reporting.

9 Section 274 of the Act provides that no penalty under Chapter XXI of the Act (which includes Section 270A) can be levied unless the assessee is heard or has been given a reasonable opportunity of being heard. There can be no dispute that the opportunity of being heard granted to the assessee must be effective and not merely empty formality. Therefore, the Appellant must be given effective opportunity to defend the charge of under-reporting as well as the quantum of penalty proposed to be levied for such charge. Therefore, the Appellant should be communicated the charge of under-reporting as well as the reason or quantum of levying penalty. It would be pertinent to note that the Section 274 does not confer juri iction upon the Assessing Officer to levy penalty. It merely provides an opportunity to the Assessee to set up a case for non-levy of penalty. We have concluded hereinabove, that the assessing officer must direct initiation of penalty under Section 270A of the Act while passing the assessment/reassessment order and thereby, assume juri iction. Therefore, if the charge along with the proposed quantum is communicated to the assessee anytime before the passing of the penalty order giving opportunity of being heard to the Appellant, the requirements of Section 274 of the Act shall stand satisfied irrespective of the fact that the initial/first notice issued under Section 274 of the Act did not meet the aforesaid requirements.

8.2.

During the course of hearing, it was contended on behalf of the Appellant that the notice issued under Section 274 of the Act was bad in law as it did not specify the specific limb of Section 270A(9) of the Act which was being invoked by the Assessing Officer. In our view, there is no statutory requirement to this effect and therefore, we do not find any merit in the aforesaid submission advanced on behalf of the Appellant. Once the 10 broader charge of under-reporting in consequence of misreporting is communicated to the Assessee, the requirements of Section 274 of the Act stand fulfilled.

Penalty Order under Section 270A(1), 270A (8) & 270A(9)

The next issue that arises for consideration is whether the Assessing Officer is required to specify in the order levying penalty for under-reporting in consequence of misreporting under Section 270A(1) read with Section 270A(8) of the Act the specific limb of Section 270A(9) of the Act invoked by the Assessing Officer while levying such penalty.

9.1.

In our view, having been confronted with the charge of under- reporting in consequence of misreporting, it is for the assessee to take a defense that there is no misreporting as none of the provisions contained in Section 270A(9)(a) to Section 270A(9)(g) of the Act get triggered. On co-joint reading of various provisions contained in Section 270A of the Act it becomes clear that on occurrence of the instance of under- reporting of income specified in Section 270A(2)(a) to 270A(2)(g) of the Act, the assessee is required to provide explanation, inter alia, in terms of Section 270A(6)(a) of the Act and make out a case for non-levy of penalty. In case the explanation does not meet the requirements of Section 270A(6)(a) of the Act, the Assessing Officer can levy penalty under Section 270A(7) of the Act at a rate of 50% of the amount of tax on under-reported income. However, in case the Assessing Officer arrives at a conclusion that the under- reporting of income is in consequence of misreporting, Assessing Officer is required to exhibit that the aforesaid misreporting falls within the ambit of the cases of misreporting specified in Section 270A(9)(a) to 270A(9)(g) of the Act before the Assessing Officer

11 can levy penalty at a higher rate of 200% of the amount of tax on under-reported income by invoking provisions of Section 270A(8) of the Act. Therefore, while levying penalty under Section 270A of the Act for under-reporting income in consequence of misreporting, the Assessing Officer is required to establish that there is misreporting and that such misreporting falls within the cases of misreporting specified in Section 270A(9)(a) to 270A(9)(g) of the Act. Therefore, we hold that while passing the penalty order under Section 270A(1) read with Section 270A(8) of the Act the Assessing Officer is required to specify the specific limb of Section 270A(9) of the Act under which the Appellant was held to have misreported its income leading to under-reporting of income. The invocation of specific limb of Section 270A(9)(a) to 270A(9)(g) of the Act should either be apparent from the express provisions stated in the penalty order or should be unambiguously discernable from the reading of the penalty order as a whole.

Findings

10.

Having dealt with the legal contentions raised during the course of hearing, we now revert to the facts of the present case.

11.

On perusal of paragraph 5.11 of the Assessment Order, dated 23/12/2019, we find that Assessing Officer has not directed initiation of penalty proceedings while making disallowance of INR 1,21,179/- under Section 14A of the Act. Even the penalty order, dated 27/08/2021, does not contain any discussion on disallowance made under Section 14A of the Act read with Rule 8D of the IT Rules. Therefore, we hold that in absence of the aforesaid directions no penalty under Section 270A of the Act could have been levied by the Assessing Officer in respect of the addition of INR 1,21,179/- made by the Assessing Officer on account of 12 disallowance made under Section 14A of the Act read with Rule 8D of the IT Rules. Accordingly, we delete the levy of penalty under Section 270A of the Act to the extent is pertains to disallowance of INR 1,21,179/- made under Section 14A read with Rule 8D of the IT Rules.

12.

As regards the disallowance of claim of deprecation of INR 1,92,024/- is concerned, we do not find any infirmity in the initiation of the penalty proceedings under Section 270A of the Act. In paragraph 4 of the Assessment Order, dated 23/12/2019, the Assessing Officer has directed initiation of penalty proceedings under Section 270A of the Act on the ground that there has been misreporting by the Appellant.

12.1.

Further, in the notice, dated 23/12/2019, issued under Section 274 of the Act it was clearly stated that the penalty was proposed to be levied for under-reporting of income in consequence of misreporting. Accordingly, we reject the contention advanced on behalf of the Appellant/Assessee that in the facts of the present case the notice issued under Section 274 of the Act is bad in law as it does not specify the specific limb of Section 270A(9) of the Act which was sought to be invoked by the Assessing Officer while proposing to levy penalty for under-reporting of income as a consequence of misreporting.

12.2.

On perusal of the penalty order we note that the Assessing Officer has levied penalty at the rate of 200% in respect of disallowance of claim of depreciation of INR 1,92,024/- holding as under:

“3. Accordingly, SCN was sent ………….

xx xx

The claim of depreciation was made in spite of the income being

13 offered under the head house property. The case laws quoted by the assessee are not attributed to the issue at hand, and assessee has submitted case laws related to claims of depreciation in general, and not specific to the issue where the assessee, in spite of offering income earned under the head house property attempted to claim depreciation expenditure under the head Income from Business and Profession. This is a clear cut case of misreporting and penalty is to be levied for the same.

The assessee also contended that Mere disallowance of Legal claim does not amount to furnishing inaccurate particulars of income and submitted case laws regarding the same. As already seen in the above discussion, there was no disallowance on the basis of legal claim and disallowance was made on the basis of factual inaccuracies, provided by the assessee, where in spite of offering income from building as income from house property, chose to claim depreciation allowance on the same.

In view of the above discussion, I am satisfied that there is underreporting of income in consequence of misreporting and penalty is being levied as per the calculation provided below.

xx xx” (Emphasis Supplied)

12.3.

On perusal of the above it emerges that the levy of penalty under Section 270A of the Act is based upon the conclusion drawn by the Assessing Officer that the disallowance of depreciation was made ‘on the basis of factual inaccuracies provided by the assessee’. To attract levy of penalty under Section 270A(8) of the Act, the under-reporting should be in consequence of misreporting as defined in Section 270A(9) of the Act. On perusal of the penalty order, dated 27/08/2021, we find that the same does not make reference to the provisions contained in Section 270A(9) of the Act. Further, on perusal of 14 the said penalty order it is not discernable which limb of Section 270A(9) has been invoked by the Assessing Officer. We have already concluded hereinabove that the Assessing Officer was under obligation to identify the misreporting by the Appellant and the limb of Section 270A(9) of the Act which would be attracted in case of such misreporting before levying penalty under Section 270A(1) read with 270A(8) of the Act. Since in the present case, the Assessing Officer has failed to discharge this obligation, the penalty levied under Section 270A of the Act in respect of disallowance of depreciation of INR 1,92,024/- cannot be sustained and is hereby deleted.

12.4.

In terms of above, Ground No. 1 to 4 raised by the Appellant are allowed.

13.

In result, the present appeal preferred by the Assessee is allowed.

Order pronounced on 30.04.2024. (B.R. Baskaran) Judicial Member मुंबई Mumbai; िदनांक Dated : 30.04.2024 Alindra, PS

15 आदेश की "ितिलिप अ"ेिषत/Copy of the Order forwarded to : 1. अपीलाथ" / The Appellant

""थ" / The Respondent. 3. आयकर आयु"/ The CIT

"धान आयकर आयु" / Pr.CIT 5. िवभागीय "ितिनिध, आयकर अपीलीय अिधकरण, मुंबई / DR, ITAT, Mumbai 6. गाड" फाईल / Guard file.

आदेशानुसार/ BY ORDER, स"ािपत "ित //// उप/सहायक पंजीकार /(Dy./Asstt.

ALLIED PHOTOGRAPHICS INDIA LIMITED ,CHURCHGATE vs. NATIONAL FACELESS ASSESSMENT CENTER, DELHI