CHANDRU K MIRCHANDANI,MUMBAI vs. ITO 14(3)(3), MUMBAI

Per Jason P. Boaz, A.M.

This appeal by the assessee is directed against the order of the CIT(A)- 25, Mumbai dated 15.07.2014 for A.Y. 2009-10 wherein the assessee was granted partial relief in respect of penalty of `9,29,562/- levied by the Assessing Officer (AO) under section 271(1)(c) of the Income Tax Act, 1961 (in short 'the Act'). 2. The facts of the case, briefly stated are as under: - 2.1 The assessee, Prop. M/s. C.C. Pharma, engaged in the business of distributing goods of M/s. Champion Photochemistry, filed its return of income for A.Y. 2009-10 on 31.07.2009 declaring income of `9,97,113/- from business, other sources and house property. The return was processed under section 143(1) of the Act and the case was then taken up for scrutiny. The assessment was completed under section 143(3) of the Act vide order dated 20.12.2011 wherein the income of the assessee was determined at `34,14,200/-. Notice under section 274 r.w.s. 271 of the Act was issued simultaneously on 31.12.2011 for initiating penalty

2 ITA No. 5368/Mum/2014 Shri Chandru K. Mirchandani proceedings under section 271(1)(c) of the Act. The AO vide order dated 27.09.2013 levied penalty of `9,29,562/- on four additions/disallowances aggregating to `25,31,284/- which are listed hereunder: - `10,29,364/- (i) Income from House Property on Mehar-Dad Property `5,68,761/- (ii) Difference on Income from House Property of Hari Niwas property `6,28,866/- (iii) Expenses disallowed – claimed against interest income `3,04,293/- (iv) Society and maintenance charges disallowed 2.2 On appeal, the learned CIT(A) vide the impugned order dated 15.07.2014 deleted the penalty levied under section 271(1)(c) of the Act in respect of the issues listed at (i) and (ii) in para 2.1 (supra) and upheld the levy of penalty on issues listed at S.Nos. (iii) and (iv) of para 2.1 (supra). 3.1 Aggrieved by the order of the CIT(A)-25, Mumbai dated 15.07.2014 for A.Y. 2006-07, the assessee has preferred this appeal raising the following grounds: - “1. The learned Commissioner of Income Tax (Appeals) - 25. Mumbai [CIT(A)] erred in partly confirming the order of the learned Income Tax Officer, Ward 14(3)(3), Mumbai (Assessing Officer) levying penalty u/s.271 (1)(c) of the Act. Your appellant submits that the order u/s.271(1)(c) is illegal, bad-in-law and the same ought to be cancelled. 2. The learned CIT(A) erred in confirming the order of the Assessing Officer levying penalty u/s.271(1)(c) of the Act amounting to Rs.2,13,752 in respect of addition of Rs.6,28,866 made to the total income on account of disallowance of expenses claimed against interest income. Your appellant submits that the penalty of Rs.2,13,752 is wrongly levied and the same ought to be cancelled. 3. The learned CIT(A) erred in confirming the order of the Assessing Officer levying penalty u/s.271(1)(c) of the Act amounting to Rs. 1,03,429 in respect of addition of Rs.3,04,293 made to the total income on account of disallowance of society maintenance and other charges claimed Your appellant submits that the penalty of Rs.1,03,429 is wrongly levied and the same ought to be cancelled. 4. Your appellant carves leave to add to, alter, amend or vary all or any of the aforesaid ground(s) of appeal as they/their representative may deem fit.”

3 ITA No. 5368/Mum/2014 Shri Chandru K. Mirchandani 3.2.1 Subsequently, vide letter dated 24.11.2016, the assessee has filed a petition for admission of additional grounds of appeal which are as under:- “1. On the facts and in the circumstances of the case & in law, the penalty proceedings initiated vide notice u/s. 271(1)(c) dated 30.12.2011 is invalid and bad in law. 2. On the facts and in the circumstances of the case and in law, the penalty order dated 27.09.2013 passed u/s 271(1)(c) is invalid and bad in law.” 3.2.2 We have heard both parties on the issue of admission of the additional grounds sought to be raised by the assessee in this appeal (supra). According to the learned A.R. of the assessee, these grounds were inadvertently omitted to be taken earlier and being purely legal grounds, prayed that the same be admitted in view of the decision of the Hon'ble Apex Court in the case of NTPC Ltd. vs. CIT (229 ITR 383) (SC). After due consideration of the assessee’s submissions and the facts of the case, we are of the view that the additional grounds raised are to be admitted being legal grounds that would go to the very root of the matter and accordingly admit the same for consideration and adjudication in this appeal following the ratio of the decision of the Hon'ble Apex Court in the case of NTPC Ltd. vs. CIT (supra). 4. Additional grounds of appeal 1 & 2 – Validity of penalty proceedings initiated under section 271(1)(c) vide notice dated 30.12.2011 and consequent penalty order dated 27.09.2013 4.1.1 At the outset, the Bench heard both parties on the additional grounds raised. In these grounds, the assessee contends that the penalty proceedings initiated under section 271(1)(c) of the Act are invalid and bad in law as the show cause notice issued under section 274 r.w.s. 271 of the Act on 30.12.2011 for A.Y. 2006-07 is ambivalent; in so far as it does not mention or indicate as to whether the initiation of penalty is for concealing of income or for furnishing of inaccurate particulars of income and consequently the penalty order dated 27.09.2013 levying penalty under section 271(1)(c) of the Act is invalid and bad in law. 4.1.2 In this regard the learned A.R. of the assessee drew the attention of the Bench to the notice issued by the Assessing Officer, i.e. the ITO Ward

4 ITA No. 5368/Mum/2014 Shri Chandru K. Mirchandani 14(3)(3), Mumbai under section 274 r.w.s. 271(1)(c) of the Act dated 30.12.2011 (copy placed at pg. 1 of paper book). It is is submitted that the notice is a standard printed notice which does not indicate the required particulars, i.e. as to whether the initiation of penalty is for concealment of income or for furnishing of inaccurate particulars of income, since the AO has not deleted therein the inappropriate words and paragraphs; thereby evidencing total non-application of mind by the AO and of his not being clear as to under which of the two limbs the penalty was to be considered for levy. The learned A.R. contends that the said penalty proceedings have been initiated on all possible grounds. However, in the order dated 27.09.2013 levying penalty under section 271(1)(c) of the Act, the penalty has been levied (i) for concealment of income in respect of the disallowance of expenses of `2,28,866/- claimed against interest income, whereas in the assessment order there is no mention of whether penalty proceedings was being initiated for concealment of income or furnishing of inaccurate particulars and (ii) for furnishing of inaccurate particulars of income in respect of disallowance of `3,04,293/- being society maintenance and other charges; whereas in the order of assessment proceedings are stated to be taken up for concealment of income. In support of the proposition that the said notice dated 30.12.2011 issued under section 274 r.w.s. 271 of the Act for initiating penalty proceedings under section 271(1)(c) of the Act was invalid and bad in law, as per the contentions listed out above, the learned AR placed reliance on the following judicial pronouncements: - (i) CIT vs. Samson Perinchery (ITA No. 114 of 2014 and others dated 05.01.2017) of the Hon'ble Bombay High Court (ii) Manjunatha Cotton and Ginning Factory (359 ITR 565) (Hon'ble Karnataka High Court) (iii) Precision Containeurs Ltd. in ITA No.s. 3448 & 3449/Mum/2011 dated 04.01.2017 4.2 Per contra, the learned D.R. for Revenue supported the orders of the learned CIT(A). 4.3.1 We have heard the rival contentions on the issues raised in these additional grounds and perused and carefully considered the material on

5 ITA No. 5368/Mum/2014 Shri Chandru K. Mirchandani record; including the judicial pronouncements cited. The issue for consideration is to examine whether or not penalty under section 271(1)(c) of the Act is exigible in the facts and circumstances of the case, as laid out above. In our considered view, proceedings for levy of penalty under section 271(1)(c) of the Act can be initiated only if the AO is satisfied that any person has ‘concealed particulars of income’ or has ‘furnished inaccurate particulars of income’; only then can he hold that such person shall pay by way of penalty the sum mentioned in section 271(1)(c)(iii) of the Act. 4.3.2 We find that the Coordinate Bench of this Tribunal in the case of Precision Containeurs Ltd. vs. ACIT in ITA Nos. 3448 & 3449/Mum/2011 dated 04.01.2017 has in similar circumstances, where the notice under section 274 r.w.s. 271 of the Act did not mention as to whether the initiation of penalty proceedings was for concealment of income or for furnishing of inaccurate particulars of income, considered the issue and after taking into consideration the ratio of the decisions of the Hon'ble Apex Court in Dilip N. Shroff (2007) 291 ITR 519 (SC), Dharmendra Textile Processers & Others (2008) 306 ITR 277 and DCIT vs. Reliance Petroproducts Pvt. Ltd. (2010) 322 ITR 158 (SC) and of the Hon'ble Karnataka High Court in Manjunatha Cotton & Ginning Factory (2013) 359 ITR 565 (Kar), held the notice issued under section 274 r.w.s. 271 of the Act to be invalid since it was defective and issued without application of mind by the AO. Consequently, the order levying penalty under section 271(1)(c) of the Act was held to be invalid and cancelled. In its order, the Coordinate Bench at paras 5.2.1 to 5.2.4 thereof held as under: - 5.2.1 We have heard the rival contentions of both parties on the issues raised in these additional grounds and perused and carefully considered the material on record, including the judicial pronouncements cited. The issue for consideration before us is to examine whether or not penalty under section 271(1)(c) of the Act is exigible in the facts and circumstances of the case on hand as laid out above. In our considered view, proceedings under section 271(1)(c) of the Act can be initiated only if the AO is satisfied in the course of proceedings under the Act that any person has ‘concealed particulars of income’ or has ‘furnished inaccurate particulars of income’ and only then can he direct that such person shall pay by way of penalty the sum mentioned in section 271(1)(c)(iii) of the Act.

6 ITA No. 5368/Mum/2014 Shri Chandru K. Mirchandani 5.2.2 The expression ‘concealed the particulars of income’ and ‘furnished inaccurate particulars of income’, have not been defined, but refer to different acts on the part of the assessee. The Hon'ble Apex Court in the case of Dilip N. Shroff vs. JCIT (291 ITR 519 (SC) on the issue of imposition of penalty under section 271(1)(c) of the Act at paragraphs 95 to 97 thereof has held/observed as under: - “It is of some significance that in the standard proforma used by the AO in issuing a notice despite the fact that the same postulates that inappropriate words and paras were to be deleted, but the same had not been done. Thus, the AO 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. vs. CIT (2000) 159 CTR (SC) 1 : (2000) 2 SCC 718].

We have, however, noticed hereinbefore that the ITO had merely held that the assessee is guilty of furnishing of inaccurate particulars and not of concealment of income;”

On a perusal of the notices issued under section 274 r.w.s. 271 of the Act for initiation of penalty proceedings under section 271(1)(c) of the Act for both assessment years 1996-97 and 1997-98 in the case on hand, we find that in the standard proforma (ITNS-29) used by the AO for issuing the said notices, the AO himself is not certain as to whether he has to proceed on the basis that the assessee has concealed his income or had furnished inaccurate particulars of his income. 5.2.3 The Hon'ble Apex Court in the case of CIT vs. Reliance Petroproducts P. Ltd. (2010) 322 ITR 158 (SC), while referring to its decisions in the case of Dilip N. Shroff vs. JCIT (2007) 291 ITR 519 and UOI vs. Dharmendra Textile Processors (2008) 306 ITR 277, in para 9 of its order has observed and clarified that the basic reason why the decision in Dilip N. Shroff (supra) was overruled by Dharmendra Textile Procesors (supra) was only to the effect that mens rea was not to be considered an essential ingredient for levy of penalty under section 271(1)(c) of the Act. No fault, however, was found with the reasoning in the decision of Dilip Shroff. At para 9 of the order in Reliance Petroproducts P. Ltd. (supra), their Lordships held/clarified the position as under: - “Therefore, it is obvious that it must be shown that the conditions under section 271(1)(c) must exist before the penalty is imposed. There can be no dispute that everything would depend upon the

7 ITA No. 5368/Mum/2014 Shri Chandru K. Mirchandani return filed because that is the only document, where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. In Dilip N. Shroff Vs. Joint CIT [2007) 6 SCC 329, this court explained the terms "concealment of income" and "furnishing inaccurate particulars". The court went on to hold therein that in order to attract the penalty under section 271(1)(c), mens rea was necessary, as according to the court, the word "inaccurate" signified a deliberate act or omission on behalf of the assessee. It went on to hold that clause (iii) of section 271(1)(c) provided for a discretionary jurisdiction upon the assessing authority, inasmuch as the amount of penalty could not be less than the amount of tax sought to be evaded by reason of such concealment of particulars of income, but it may not exceed three times thereof. It was pointed out that the term "inaccurate particulars" was not defined anywhere in the Act and, therefore, it was held that furnishing of an assessment of the value of the property may not by itself be furnishing inaccurate particulars. It was further held that the Assessing Officer must be found to have failed to prove that his explanation is not only not bona fide but all the facts relating to the same and material to the computation of his income were not disclosed by him. It was then held that the explanation must be preceded by a finding as to how and in what manner, the assessee had furnished the particulars of his income. The court ultimately went on to hold that the element of mens rea was essential. It was only on the point of mens rea that the judgment in Dilip N. Shroff Vs. Joint CIT was upset. In Union of India Vs. Dharamendra Textile Processors, after quoting from section 271 extensively and also considering section 271(1)(c), the court came to the conclusion that since section 271(1)(c) indicated the element of strict liability on the assessee for the concealment or for giving inaccurate particulars while filing return, there was no necessity of mens rea. The court went on to hold that the objective behind the enactment of section 271(1)(c) read with Explanations indicated with the said section was for providing remedy for loss of revenue and such a penalty was a civil liability and, therefore, wilful concealment is not an essential ingredient for attracting civil liability as was the case in the matter of prosecution under section 276C of the Act. The basic reason why decision in Dilip N. Shroff Vs. Joint CIT was overruled by this court in Union of India Vs. Dharamendra Textile Processors, was that according to this court the effect and difference between section 271(1)(c) and section 276C of the Act was lost sight of in the case of Dilip N. Shroff Vs. Joint CIT However, it must be pointed out that in Union of India Vs. Dharamendra Textile Processors, no fault was found with the reasoning in the decision in Dilip N. Shroff Vs. Joint CIT, where the court explained the meaning of the terms "conceal" and "inaccurate". It was only the ultimate inference in Dilip N. Shroff Vs. Joint CIT to the effect that mens rea was an

8 ITA No. 5368/Mum/2014 Shri Chandru K. Mirchandani essential ingredient for the penalty under section 271(1)(c) that the decision in Dilip N. Shroff Vs. Joint CIT was overruled.” 5.2.4 In the above view of the matter, the finding rendered by the Hon'ble Apex Court in the case of Dilip N. Shroff (supra); in respect of holding that ‘inappropriate words’ and ‘paragraphs’ in the standard proforma of the notices issued under section 274 r.w.s. 271 of the Act as used by the AO were required to be deleted and the same not having been done, the impugned notices issues on 13.12.2007 for assessment years 1996-97 and 1997-98; then the fact the impugned notices/orders suffer from non-application of mind still holds good and is intact. This legal position has also been reiterated by the Hon'ble Karnataka High Court in the case of CIT vs. Manjunatha Cotton & Ginning Factory (2013) 357 ITR 565 (Kar) and which has also not been interfered with by the Hon'ble Apex Court on the appeal filed against it by Revenue. Before us, no contrary judgement of the Hon'ble Apex Court has been cited or referred. We, therefore, while taking into consideration the facts and circumstances of the case on hand and applying the ratio and deriving support from the aforesaid decisions of the Hon'ble Apex Court (discussed supra), hold that the notices dated 13.12.2007 issued for initiation of penalty proceedings under section 247 r.w.s. 271 of the Act for levy of penalty under section 271(1)(c) of the Act for assessment years 1996-97 and 1997-98 are defective and issued without application of mind and are therefore invalid and consequently the orders levying penalty under section 271(1)(c) of the Act for both assessment years 1996-97 and 1997-98 are also invalid and liable to be cancelled. In this view of the matter, the additional grounds 1 and 2 raised by the assessee for both assessment years 1996-97 and 1998-99 are allowed.” 4.3.3 This legal position has been reiterated by the Hon'ble Karnataka High Court in the case of CIT vs. Manjunatha Cotton & Ginning Factory (2013) 359 ITR 565 (Kar) and which has not been interfered with by the Hon'ble Apex Court in the appeal preferred against it by Revenue. This proposition has been affirmed and upheld by the Hon'ble Bombay High Court in the case of CIT vs. Samson Perinchery (supra). Before us, no contrary judgement of the Hon'ble High Courts or of Hon'ble Apex Court, referred to and followed by the Coordinate Bench in its order in Precisions Containeurs Ltd. (supra) has been brought to our notice or cited or referred to. Therefore, taking into consideration the facts and circumstances of the case on hand and applying the ratio and deriving support from the decision of the Hon'ble Apex Court relied on by the Coordinate Bench in its order (supra), we hold that the notice dated 30.12.2011 issued for initiation of penalty proceedings under section

9 ITA No. 5368/Mum/2014 Shri Chandru K. Mirchandani 271(1)(c) of the Act for A.Y. 2006-07 is defective and issued without application of mind and is therefore invalid and bad in law. Consequently the order dated 27.09.2013 levying penalty under section 271(1)(c) of the Act for A.Y. 2006-07 is also invalid and liable to be cancelled. In this view of the matter the impugned order of the learned CIT(A) is reversed and the additional grounds 1 and 2 raised by the assessee for A.Y. 2006-07 are allowed. 5. Since the penalty levied under section 271(1)(c) of the Act for A.Y. 2006-07 has been held to be invalid and cancelled, and the assessee’s grievance has been addressed by allowing the additional grounds raised in this regard, the other grounds of appeal at S. Nos. 1 to 4 raised on the merits of levy of the said penalty under section 271(1)(c) of the Act are rendered academic in nature and require no adjudication at this stage. 6. In the result, the assessee’s appeal for A.Y. 2009-10 is allowed as indicated above. Order pronounced in the open court on 5th April, 2017. Sd/- Sd/- (Sandeep Gosain) (Jason P. Boaz) Judicial Member Accountant Member

Mumbai, Dated: 5th April, 2017

Copy to: 1. The Appellant 2. The Respondent 3. The CIT(A) -25, Mumbai 4. The CIT - 14, Mumbai 5. The DR, “C” Bench, ITAT, Mumbai By Order

//True Copy// Assistant Registrar ITAT, Mumbai Benches, Mumbai n.p.