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Income Tax Appellate Tribunal, “G” Bench, Mumbai
O R D E R Per B.R. Baskaran (AM) :-
The appeal filed by the assessee is directed against the order dated 19.11.2013 passed by the learned CIT(A)-36, Mumbai and it relates to A.Y. 2008-09.
The assessee is aggrieved by the decision of the learned CIT(A) in confirming the penalty of ` 19.11 lakhs levied by the Assessing Officer u/s. 271(1)(c) of the Act.
We heard the parties and perused the record. The assessee was carrying on share broking and trading activities and it was barred from carrying on that business by the order passed by SEBI in April 2001. The assessee challenged the said order before the Securities Appellate Tribunal and later on before Hon'ble Supreme Court but could not win the case. Hon'ble Supreme Court finally passed the order in May 2007 i.e. during the financial year relevant to assessment year under consideration, wherein it confirmed the order passed by SEBI. The assessee claimed following expenses as deduction:-
2 M/s. Panther Fincap & Management Services Ltd.
Amount (`) Sr. Expenditure Head(s) No. 1 Operating & other business expenses 54,59,287 2 Depreciation 1,22,049 3 Share trading loss 98,417 Total 56,79,753
In the assessment proceedings, the Assessing Officer disallowed the said claim by holding that the assessee is not entitled to carry on its business and hence no expenditure is allowable. Thereafter the Assessing Officer initiated penalty proceedings and held that the assessee had furnished inaccurate particulars of income to the extent of ` 56,79,753/- and accordingly levied penalty of ` 19,11,800/- u/s. 271(1)(c) of the Act. The learned CIT(A) also confirmed the same and hence the assessee has filed this appeal before us.
Learned AR submitted that the assessee has incurred expenditure only to defend its case before various forums and further it has incurred expenditure to explore new business activities. He further submitted that the assessee has been prohibited from carrying on share trading activities for a period of 14 years and it cannot be construed that the assessee has completely discontinued its activities. He submitted that mere disallowance of expenditure which is otherwise incurred in the normal course shall not lead to a case of furnishing of inaccurate particulars of income. Accordingly, he prayed that the impugned penalty should be cancelled.
Learned AR also raised a legal claim. He submitted that the penalty notice issued by the Assessing Officer does not mention anything about the penalty proceedings u/s. 271(1)(c) of the Act and it mentions about only filing of return of income and compliance of notices issued u/s. 142(1)/143(2) of the Act. He submitted that there is non-application of mind on the part of the Assessing Officer and in that case, impugned penalty is liable to be quashed. For the sake of convenience, we extract below the notice issued by the assessing officer for initiating penalty proceedings u/s 271(1)(c) of the Act:-
3 M/s. Panther Fincap & Management Services Ltd.
4 M/s. Panther Fincap & Management Services Ltd.
On the contrary, learned Departmental Representative submitted that the assessee was well aware of the fact that it could not claim any expenditure after receipt of the order passed by Hon'ble Supreme Court in May 2007. Despite the fact that the assessee has claimed expenses and hence the same would lead to furnishing of inaccurate particulars of income. With regard to the legal ground urged by the assessee learned Departmental Representative submitted that the assessee was well aware of the charge under which penal proceedings were initiated and hence legal claim urged by the assessee should be dismissed.
We heard the rival contentions and perused the record. We shall first deal with the legal contention of the assessee. We noticed that an identical issue was considered by the Coordinate Bench of the Tribunal in the case of Dr. Sarita Mill (ITA No. 2187/Mum/2014 dated 21.12.2016). For the sake of convenience, we extract below the relevant observations made and the decision taken by the Coordinate Bench:-
We have heard the rival contentions on this legal issue and perused the record. We have gone through the notice issued by the AO for initiating the penalty proceedings. For the sake of convenience, the scanned copy of the notice is given below:-
“Whereas in the course of proceedings before me for the assessment year 2009-10 it appears to be that you :-
*have without reasonable cause failed to furnish me return of income which you were required to furnish by a notice given under section 22(1)/22(2)/34 of the Indian Income-tax Act, 1922 or which you were required to furnish under Section 139( 1) or by a notice under Section 139(2)/148 of the Income- tax Act, 1961, No._____ dated_____ or have without reasonable cause failed to furnish it within the time allowed and the manner required by the said Section 139( 1)or by such notice.
"have without reasonable cause failed to comply with a notice under Section 22(4)/23(2) of the Indian Income tax Act. 1922 or under Section 142(1)/143(2) of the Indian Income-tax Act,1961.No.__________dated _____________.
5 M/s. Panther Fincap & Management Services Ltd.
You are hereby requested to appear before me at 11.30 A.M. on 10.01.2012 and show cause why an order imposing a penalty on you should not be made under Section 271 of the Income-tax Act, 1961. If you do not wish to avail yourself of this opportunity of being heard in person or through authorized representative, you may show cause in writing on or before the said date which will be considered before any such order is made under Section 271(1)(c ).”
A careful perusal of the notice would show that the contents of the notice are primarily meant to ask the assessee to furnish a return of income. However, the assessing officer appears to have modified the last paragraph by show causing the assessee to explain as to why an order imposing a penalty should not be made u/s 271(1)(c) of the Act. There should not be any doubt that the provisions of section 271(1)(c) prescribes two types of charge viz., (a) concealment of particulars of income and (b) furnishing of inaccurate particulars of income. However, in the above said notice the AO did not specify the type of charge for which the penalty proceedings have been initiated.
10. In this regard, it is pertinent to refer to the following observations made by Hon’ble Supreme Court in the case of Dilip N Shroff (291 ITR 519)(SC).
“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. Commissioner of Income Tax, Kerala State, (2000) 2 SCC 718]”.
The Hon’ble Supreme Court has observed that the AO, while issuing a notice should apply his mind and make it clear as to whether he had proceeded on the basis that the assessee had concealed his income or he had furnished inaccurate particulars of income. The Hon’ble Supreme Court has clarified in the case of Reliance petro products (322 ITR 158) has clarified that the observations made by it in the case of Dilip N Shroff
6 M/s. Panther Fincap & Management Services Ltd. with regard to “mens rea” alone have been overruled in Dharmendra Textile processors (306 ITR 277), meaning thereby that the above said observations made by the Hon’ble Supreme Court in the case of Dilip N Shroff shall continue to prevail.
Hence, we are of the view that the application of mind on the part of the assessing officer at the time of issuing notice for initiation of penalty is a mandatory requirement and the nonapplication of mind would vitiate the penalty proceedings. We notice that the Hon’ble Bombay High Court has also expressed identical view in the case of Smt. Kaushalya and Others (supra), on which the revenue has placed heavy reliance. In that case also, it was contended that the AO has not indicated the appropriate charge for which the penalty proceedings were initiated. The Hon’ble Bombay High Court has expressed the following view:-
“The issuance of notice is an administrative device for informing the assessee about the proposal to levy penalty in order to enable him to explain as to why it should not be done. Mere mistake in the language used or mere non-striking inaccurate portion cannot by itself invalidate the notice. The entire factual background would fall for consideration in the matter and non one aspect would be decisive. In this context, useful reference may be made to the following observation in the case of CIT Vs. Mithila Motors (P) Ltd (1984)(149 ITR 751)(Patna) (head note):
“Under section 274 of the Income tax Act, 1961, all that is required is that the assessee should be given an opportunity to show cause. No statutory notice has been prescribed in this behalf. Hence, it is sufficient if the assessee was aware of the charges he had to meet and was given an opportunity of being heard. A mistake in the notice would not invalidate penalty proceedings.” The Hon’ble Bombay High Court, thereafter, considered various decisions relied upon by the parties and came to the conclusion that there should be application of mind on the part of assessing officer. For the sake of convenience, we extract below the relevant observations made by Hon’ble Bombay High Court.
“11. The case of CIT v. Lakhdhir Lalji [1972] 85 ITR 77(Guj) is the other decision upon which the Tribunal has placed reliance. In that case a notice under section 274 was issued on the footing of concealment of income by suppression of sales whereas the penalty was levied on the footing that there was furnishing of inaccurate particulars of income since the stock at the closing of the year was undervalued. The penalty was quashed upon a view that the very basis for the penalty proceedings had disappeared when it was 7 M/s. Panther Fincap & Management Services Ltd. held that there was no suppression of income by the assessee. Thus, it would be seen that the ratio of that decision cannot be applied to this case.
12. The last decision relied upon is the case of N. N. Subramania Iyer v. Union of India demonstrate how entirely different the background of that case was and, therefore, the ratio of that decision also could not be applied (at page 231) : "The penalty notice, exhibit P-2, is illegal on the face of it. It is in a printed form, which comprehends all possible grounds on which a penalty can be imposed under section 18(1) of the Wealth-tax Act. The notice has not struck off any one of those grounds; and there is no indication for what contravention the petitioner was called upon to show cause why a penalty should not be imposed. Even in the counter-affidavit filed by the second respondent, he has not stated for what specific violation he issued it. It is not that it would have saved his action. Apparently, exhibit P-2 is a whimsical notice issued to an assessee without intending anything."
13. No doubt, there can exist a case where vagueness and ambiguity in the notice can demonstrate nonapplication of mind by the authority and/or ultimate prejudice to the right of opportunity of hearing contemplated under section 274. Take for example; the notice dated March 28, 1972, for the assessment year 1967-68. This show-cause notice was issued even before the assessment order was made. The assessee had no knowledge of the exact charge of the Department against him. In the notice, not only there is use of the word "or" between the two groups of charges but there is use of the word "deliberately". The word "deliberately" did not exist in section 271(1)(c) when the notice was issued. It is worthwhile recalling that the said word was omitted by the Finance Act, 1964, with effect from April 1, 1964, and the Explanation was added. 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 charges he had to face. In this background, quashing of the penalty proceedings for the assessment year 1967-68 seems to be fully justified.”
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 8 M/s. Panther Fincap & Management Services Ltd.
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 Ld D.R submitted that the assessee has participated in the penalty proceedings and hence the error, if any, that has occurred would be cured in view of the provisions of sec. 292B/292BB of the Act. Opposing the said contention, the Ld A.R placed reliance on the decision rendered by the Bangalore bench of Tribunal in the case of Shri K Prakash Shetty (supra), wherein it was held that the provisions of sec. 292BB would not come to the rescue of the revenue, when the notice was not in substance and effect in conformity with or according to the intent and purpose of the Act. In our view, the notice issued by the AO, which is extracted above, was not in substance and effect in conformity with or according to the intent and purpose of the Act, since the AO did not specify
9 M/s. Panther Fincap & Management Services Ltd. the charge for which penalty proceedings were initiated and further there was non-application of mind on the part of the AO.
In view of the foregoing discussions, we are of the view that assessee should succeed on this legal issue. Accordingly the penalty proceedings initiated by the AO without application of mind is liable to be set aside and we order accordingly.”
9. In the instant case also the Assessing Officer has issued an identical notice as in the case of Dr.Sarita (supra), and hence the decision rendered in that case shall apply to the facts of the present case. Accordingly, we hold that the Assessing Officer did not apply his mind at the time of initiation of penalty proceedings and hence impugned penalty proceeding is liable to be quashed. We order accordingly. In this view of the matter, we set aside the order passed by the tax authorities.
In the result, appeal filed by the assessee is treated as allowed.
Order has been pronounced in the Court on 2.6.2017.