GUPTA GEMHOUSE P.LTD,MUMBAI vs. ITO 1(1)(4), MUMBAI

These two appeals by assessee for Assessment Year [AY] 2003-04 & 2006-07 contest separate orders of confirmation of levy of penalty u/s 271(1)(C) passed by Ld. Commissioner of Income Tax (Appeals)-1 [CIT(A)], Mumbai on legal grounds as well as on merits. Since additional grounds are legal in nature and do not require appreciation of new fact, the same are taken on records. As per registry noting, it is noticed that both the appeals have been filed with a delay of 25 days and the assessee, by way of condonation petition, has pleaded for the condonation of the same and attributed the delay to non-availability of directors at relevant time to sign the appeals. Keeping in view the quantum of delay and in the interest of justice, the delay is condoned.

First, we take up for AY 2003-04 where the assessee is saddled with penalty of Rs.80,94,048/- which has been confirmed by Ld. CIT(A) vide order dated 28/08/2014. Since legal grounds goes to the root of the matter, we take up the same first. 3. Briefly stated the assessee, being resident corporate assessee engaged in the processing and trading of gem stones, was assessed u/s 143(3) at loss of Rs.13,46,690/- after certain adjustments / disallowances as against returned loss of Rs.23,51,285/-. One of the disallowance of was related to abnormal loss of Rs.2,20,24,623/- claimed by the assessee against sale to associated concern which was disallowed being non bona fide business loss on account of unjustifiable sale price. -71/M/2014 Gupta Gem House Private Ltd. Assessment Years-2003-04 & 2006-07 Against the said disallowance, penalty proceedings u/s 271(1)(C) were initiated in the quantum assessment. 4. Consequently, the assessee was issued show-cause notice for imposition of penalty u/s 274 read with section 271(1)(c) dated 30/12/2005. Finally, the assessee was saddled with a penalty of Rs.80,94,048/- which, upon appeal, was upheld by Ld. CIT(A) on the premises that the assessee made an attempt to claim fictitious loss and also resorted to manipulation in book entries in respect of valuation of stock. Aggrieved, the assessee is in appeal before us and contests the penalty on legal grounds as well on merits of the case. 5. The Ld. Counsel for Assessee [AR], while raising legal issue, drew our attention to the fact that the Ld. AO did not fulfill the jurisdictional requirement of arriving at a clear finding and satisfaction for the levy of penalty in the quantum order as the AO, in the body of assessment order, stated that ‘the penalty proceedings u/s 271(1)(c) are initiated on account of addition of Rs.2,20,24,623/- being the non bonafide loss on account of sales to associate concerns and various parties during the year at unjustifiable prices……………….Penalty proceedings u/s 271(1)(c) are initiated’ . Whereas in contrast, show cause notice u/s 274 read with section 271(1)(C) mentions the charges as ‘have concealed the particulars of your income or furnished inaccurate particulars of such income’ without striking-off the relevant words/clause/limb. Finally, the penalty has been imposed by Ld. AO in the penalty order by stating that ‘It has been established that the assessee furnished inaccurate particulars of income leading to concealment of income. The assessee has furnished particulars which were factually incorrect and not bona fide -71/M/2014 Gupta Gem House Private Ltd. Assessment Years-2003-04 & 2006-07 for which penalty is leviable…………….Thus, the assessee not only concealed the particulars of its income but also filed inaccurate particulars while filing return of income.’ Therefore, the same reflects non-application of mind on the part of AO and the AO himself was not sure about the limb / exact charge for which the assessee was being penalized. Therefore, the penalty order stands vitiated for want of principles of natural justice and hence, need to be quashed. Reliance has been placed on the judgment of Apex Court in Dilip N.Shroff Vs. JCIT (291 ITR 519) wherein the Supreme Court observed that the concealment of income and furnishing of inaccurate particulars of income are different. The Hon’ble Court further held that non-striking off of the relevant portions of standard show-cause notice reflects non- application of mind by AO and hence vitiates the penalty. Our attention is further drawn to the fact that the ratio of this case was very much relevant and valid despite the judgment of Apex Court in the case of CIT Vs. Dharmendra Textile Processor (306 ITR 277) in view of another judgment of Supreme Court in CIT Vs. Reliance Petro products Pvt. Ltd. [322 ITR 158] wherein it was observed that reasoning given in the case of Dilip N.Shroff could not be faulted except to the extent of observations regarding necessity of mens-rea for the purpose of Section 271(1)(C). Reliance is also placed on the judgment of Hon’ble Karnataka High Court in CIT Vs. Manjunatha Cotton & Ginning Factory [2013 359 ITR 565] which was later followed by the same court in CIT Vs. SSA’s Emerald Meadows [ITA NO. 380 OF 2015 23/11/2015] against which special leave petition [SLP] filed by the revenue before Apex Court in CC No.11485/2016 order dated 05/08/2016 was dismissed by the -71/M/2014 Gupta Gem House Private Ltd. Assessment Years-2003-04 & 2006-07 Hon’ble court, finding no merits in the case. Further, Hon’ble Bombay High Court has followed the ratio of same judgment in CIT Vs. Shri Samson Perinchery [ITA No. 1154 of 2014 order dated 05/01/2017] and further Tribunal, in catena of judgment and more particularly in Wadhwa Estate & Developers Vs. ACIT [ITA N0. 2158/Mum/2016 dated 24/02/2017] has taken the same view following the aforesaid judgments. Therefore, the penalty, being devoid of jurisdiction, was liable to be quashed. 6. Per contra, the Ld. Departmental representative placed reliance on Section 292B to contend that mere defect in the notice do not vitiates the penalty proceedings and no prejudice was caused to the assessee by non-striking off of relevant words. The assessee very well knew the grounds for which he was being penalized and the Ld. AO with due application of mind initiated penalty proceedings in quantum assessment and levied the same after providing ample opportunity to the assessee to contest the same. Moreover, the assessee actively contested the penalty proceedings before AO and therefore, the legal grounds, being only hyper-technical in nature, do not carry much weight. The assessee tried to claim fictitious business loss on sale made to associated concerns and incorrect valuation of stock and therefore, rightly saddled with the impugned penalties. Reliance has been placed on the judgment of Hon’ble Bombay High Court in CIT Vs. Smt. Kaushalya [216 ITR 660 14/01/1992]. 7. We have heard the rival contentions and perused the relevant material on record including cited case laws. Since legal grounds goes to the roots of the matter, we take up the same first. A perusal of the -71/M/2014 Gupta Gem House Private Ltd. Assessment Years-2003-04 & 2006-07 quantum assessment order reveals that the penalty has been initiated without specifying the limb i.e. furnishing of inaccurate particulars of income / concealment of income for which the penalty was being initiated as both the limbs, as per settled legal propositions, are different connotations and carry different meaning. The same also becomes clear from the language of show-cause notice which states that the assessee have concealed the particulars of income or furnished inaccurate particulars of income. Even the show-cause notice did not specify the limb / offence for which the penalty was being initiated. Finally, the penalty has been levied for filing of inaccurate particulars of income leading to concealment of income which shows inconsistent thinking on the part of AO. Undisputedly, the AO was required to specify the exact charge for which the assessee was being penalized which he has failed to do so and the same has resulted into taking away assessee’s valuable right of contesting the same and thereby violates the principles of natural justice. Our view is fortified by the cited judicial pronouncements of superior court and even the SLP filed by the revenue in CIT Vs. SSA’s Emerald Meadows [supra] has been dismissed by the Apex Court, being devoid of any merits. Even in the case of CIT Vs. Smt. Kaushalya [supra], the Hon’ble jurisdictional High Court observed that the notice issued under Section 274 must reveal application of mind by the Assessing Officer and the assessee must be aware of the exact charge on which he had to file his explanation. It was further observed that vagueness and ambiguity in the notice deprives the assessee of reasonable opportunity to contest the same. Therefore, viewed in the light of principles laid down in the judicial precedents discussed ITA Nos.7370-71/M/2014 Gupta Gem House Private Ltd. Assessment Years-2003-04 & 2006-07 hereinabove, we are inclined to conclude that the penalty proceedings stood vitiated for want of principles of natural justice and hence liable to be quashed. Accordingly, we delete the same and allow assessee’s appeal on legal grounds.