MEHERJEE CASSINATH HOLDINGS P.LTD,MUMBAI vs. ASST CIT CIR 4(2), MUMBAI

The captioned appeal by the assessee is directed against the order of the CIT(A)-8, Mumbai dated 24.1.2012, pertaining to the Assessment Year 2008-09, which in turn has arisen from the order passed by the Assessing Officer dated 29.6.2011 under section 271(1)(c) of the Income Tax Act, 1961 (in short ‘the Act’).

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271(1)(c) of the Act has been levied by the Assessing Officer. In the course of assessment proceedings, the Assessing Officer noted that assessee had reported Long Term Capital Loss of Rs.18,19,34,011/- on redemption of Preference shares of Shri Santram Finance Ltd., detailed as under :-

Sale consideration 191,711,723 Less : Indexed cost of acquisition Convertible preference shares acquired in 83,232,628 F.Y. 1997-98 (Rs.50,000,000/331*551) Convertible preference shares acquired in 290,413,105 F.Y. 1998-99 (Rs.185,000,000/351*551) (373,645,734) Long term capital loss (181,934,011)

redemption value was agreed upon mutually between the parties and the investee company had incurred losses on its investments. The written submission dated 6.12.2010 of the appellant, which has been reproduced in the assessment order, reveals the assertion of the assessee that the incurrence of loss by the investee company was evidenced in the financial statements submitted. The Assessing Officer, however, disagreed with the assessee and treated the entire transaction of sale of shares as a sham transaction. According to the Assessing Officer, one R.K. Byramjee was a Director in both the concerns, i.e., assessee as well as the investee company and, therefore, it was a transaction between associate concerns. Secondly, as per the Assessing Officer, the basis of valuation of shares was not submitted by the assessee. Thirdly, the Assessing Officer observed that assessee has not been able to produce the details of the bank account through which the payment is effected. In the assessment order, the Assessing Officer further notes that mere reflection of the said investment in the Balance sheets at the time of purchase and sale is not sufficient proof of the genuineness of the transaction. In this background, the Assessing Officer disallowed the entire Long Term Capital Loss and also denied its carry forward.

5 Meherjee Cassinath Holdings Pvt. Ltd. representative emphasised that so far as the adequacy of disclosure is concerned, the return of income filed by the assessee itself contains a Note explaining the loss computed under the head ‘Capital Gains on account of redemption of Preference shares of Shri Santram Finance Ltd.’ during the year. In this context, he has referred to page 2 of the Paper Book wherein is placed a copy of the statement of computation of total income for the year under consideration. Apart therefrom, our attention has also been drawn to the various written statements made to the Assessing Officer in the course of the assessment proceedings, viz. written submissions dated 12.11.2010 (pages 4 to 17 of Paper Book), 22.11.2010 (page 18 of Paper Book), 25.11.2010 (pages 19 to 33 of Paper Book) and 6.12.2010 (pages 34 & 35 of Paper Book). On the basis of the aforesaid submissions made before the Assessing Officer, the learned representative has sought to demonstrate that not only assessee had furnished the complete details, but also explained the basis on which the redemption price was mutually agreed, and also justification for the same. In particular, the learned representative has emphasised that before the Assessing Officer, assessee has all along contended that in all probability, the impugned Capital Loss would not be utilized by the assessee and that the same would lapse. A reference has been made to the written submissions dated 25.11.2010 addressed to the Assessing Officer, wherein it was asserted that there is no financial benefit of carry forward of loss to the assessee-company since assessee had no business plans for earning Capital Gains in future to enable it to set-off the impugned loss against the future income and that assessee has been investing its funds in fixed deposits with bank. At the time of hearing, the learned representative for the assessee

6 Meherjee Cassinath Holdings Pvt. Ltd. made a statement at Bar that upto Assessment Year 2016-17 assessee has not taken advantage whatsoever from the impugned Capital Loss inasmuch as assessee had not earned any positive income on account of Capital Gains so as to set-off such Capital Loss. The learned representative pointed out that in all eventuality, the impugned Capital Loss will expire after the unused period of 8 years and, therefore, this clearly demonstrates that the entire transaction which resulted in the loss was entered on genuine grounds and not with any motive to deflate tax liability. Another pertinent point raised by the assessee was that the penalty notice issued u/s 274 r.w.s. 271 of the Act dated 10.12.2010, a copy of which has been placed on record, reveals non- application of mind by the Assessing Officer inasmuch as the irrelevant portion of the notice has not been struck off. It was, therefore, contended that the levy of penalty is illegal and deserves to be set- aside. In support of the aforesaid proposition, reliance has been placed on the following decisions :- i) M/s. SSA’s Emerald Meadows, dated 23.11.2015 (Hon'ble Karnataka High Court); ii) Manjunatha Cotton and Ginning Factory & Ors., 359 ITR 565 (Kar.); iii) Dilip N. Shroff, 161 Taxman 218 (SC); iv) Dr. Sarita Milind Davare, ITA No. 2187 & 1789/Mum/2014 dated 21.12.2016; v) Shri Samson Perinchery, ITA No. 4625 to 4630/Mum/2013 dated 11.10.2013

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mind by the Assessing Officer for initiation of proceedings u/s 271(1)(c) of the Act and that the notice issued u/s 274 r.w.s. 271(1)(c) of the Act dated 10.12.2010 cannot be solely examined to see whether the Assessing Officer has duly applied his mind to the initiation of proceedings u/s 271(1)(c) of the Act. The ld. CIT-DR has also referred to the observations of the CIT(A) in para 2.12 of his order wherein the tenability and the bona fide of the explanation rendered by the assessee have been rejected. It was, therefore, contended that the penalty has been rightly levied u/s 271(1)(c) of the Act in the present case.

9 Meherjee Cassinath Holdings Pvt. Ltd. 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

10 Meherjee Cassinath Holdings Pvt. Ltd. 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 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 the Hon'ble Bombay High Court also in the case of Shri Samson Perinchery, 953, 1097 & 1126 of 2014 dated 5.1.2017 (supra) and the decision of the Tribunal holding levy of penalty in such circumstances being bad, has been approved.

“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 12 Meherjee Cassinath Holdings Pvt. Ltd. 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.”

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14 Meherjee Cassinath Holdings Pvt. Ltd. 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.

Order pronounced in the open court on 28th April, 2017.