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Income Tax Appellate Tribunal, C Bench, Mumbai
Before: Shri Jason P. Boaz & Shri Sandeep GosainDr. Dinshaw Master Road
This appeal by the assessee is directed against the order of the CIT(A)- 32, Mumbai dated 25.02.2016 for A.Y. 2008-09.
The facts of the case, briefly, are as under: - 2.1 The assessee, a firm having income from the business of trading in shares and securities filed its return of income for A.Y. 2008-09 on 03.09.2008 declaring loss of `44,86,620/- on account of trading loss as well as speculation loss (jobbing) in shares and securities. In the courses of assessment proceedings, the Assessing Officer (AO) noticed that the assessee was having profits in delivery based transactions against which it set off the loss of non-delivery based transactions, i.e. speculative transactions. On being queried in this regard, the assessee submitted that in scrips where no delivery has taken place during the year, the same are separately shown as speculation (jobbing). However, where even one share of a scrip is delivered, then all transactions in that scrip in the year are reported under trading in the Profit & Loss account. This explanation/ M/s. Meghayields position put forth by the assessee was not accepted by the AO; who held that the loss incurred by assessee from non-delivery based transactions constituted speculation loss under section 43(5) of the Act and could not be set off against normal business income from trading of shares. The assessment was accordingly completed under section 143(3) of the Act vide order dated 27.12.2010 wherein the income of the assessee was determined at `52,29,550/-. Penalty proceedings under section 271(1)(c) of the Act was simultaneously initiated by issue of notice under section 274 r.w.s. 271 of the Act of even date for furnishing of inaccurate particulars of income. On appeal, the learned CIT(A) vide order dated 19.04.2012 dismissed the assessee’s appeal and upheld the AO’s addition holding that whatever loss arose on account of non-delivery of shares has to be classified as speculative loss and such loss is to be allowed set off only against speculation income in accordance with the provisions of section 73 of the Act. 2.2 Subsequently, the AO took up penalty proceedings initiated vide notice under section 274 r.w.s. 271 of the Act dated 27.12.2010. In response to show cause notice as to why penalty should not be levied under section 271(1)(c) of the Act the assessee, inter alia, submitted that since the income of the assessee was rectified, under section 154 of the Act vide order dated 29.11.2011, to NIL by setting off previous year’s loss, the penalty proceedings initiated should be dropped. This explanation of the assessee was rejected as the AO was of the view that setting off of previous year’s loss does not obviate the fact that the assessee has adjusted losses from speculation against income from business income which is in direct contravention to the mandate of the provisions of section 43(5) of the Act. The AO was of the opinion that in view of the decision of the Hon'ble Apex Court in CIT vs. Gold Coin Health Food Pvt. Ltd. (SC) 304 ITR 308 even if there was no positive income after additions on account of concealed income, penalty under section 271(1)(c) of the Act could be levied. In that view of the matter, the AO proceeded to levy penalty under section 271(1)(c) of the Act @100% of tax on income of `52,29,547/- sought to be evaded by the assessee for concealment of income/furnishing of inaccurate M/s. Meghayields particulars of income. On appeal the learned CIT(A)-32, Mumbai vide the impugned order dated 25.02.2016 dismissed the assessee’s appeal and further enhanced the penalty to be levied under section 271(1)(c) of the Act for furnishing of inaccurate particulars of income of `1,02,83,292/- as against income of `52,29,550/- adopted by the AO. 3. Aggrieved by the order of the CIT(A)-32, Mumbai dated 25.02.2016, the assessee has preferred this appeal raising the following grounds: - “
1. On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the penalty and enhancing the penalty to Rs.31,77,536/-. The appellant prays that, the penalty levied be deleted.
2. The learned assessing officer erred in stating that, the appellant had concealed the income and furnished inaccurate particulars of income and CIT(A) erred in confirming the same, the appellant prays that, there is no concealment of income and submission of inaccurate particulars.
3. On the facts and in the circumstances of the case, the learned assessing officer erred in levying penalty without issuing correct and proper notice uls.274 and without recording any reasons for levy of penalty the penalty order being bad in law it be cancelled.
4. On the facts and in the circumstances of the case, the learned CIT(A) erred in issuing notice of enhancement which is contrary to the facts and hence the same should be cancelled.
5. The appellant prays that, the penalty levied uls.271(1)(c) be cancelled. Without prejudice the penalty levying be excessive it be reduced.
6. The appellant craves leave to add amend or alter any or all of the ground of appeal.”
4. Ground No. 3 – Validity of penalty proceedings initiated by issue of defective notice under section 274 r.w.s. 271 dated 27.12.2010 and consequent penalty order dated 26.03.2014 4.1 At the outset, the Bench heard both parties on ground No. 3 in which the assessee contends that the learned AO erred in levying penalty under section 271(1)(c) of the Act by initiating penalty proceedings by issuing a defective notice under section 274 r.w.s. 271 of the Act dated 27.12.2010; which rendered both the said notice and the consequent order dated 26.03.2014 levying penalty under section 271(1)(c) of the Act invalid and bad in law.
M/s. Meghayields 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 AO, i.e. the ACIT, Circle 17(2), Mumbai under section 274 r.w.s. 271(1)(c) of the Act dated 27.12.2010 (copy placed at pages 1 & 2 of the assessee’s paper book). It is submitted that the said notice is a standard printed notice which does not indicate the required particulars, i.e. as to whether the penalty proceedings have been initiated for concealment of income or furnishing of inaccurate particulars of income, since the AO has not deleted/struck off therein the inappropriate words and paragraphs; thereby evidencing total non- application of mind by the AO and also of his not being clear as to under which of the two limbs the penalty is to be considered for levy. The learned A.R. contends that while the AO has initiated the penalty proceedings under section 271(1)(c) of the Act on all possible grounds; in the order dated 26.03.2014 levying penalty under section 271(1)(c) of the Act, the penalty is levied for both concealment of income/furnishing of inaccurate particulars of income. However, on appeal the learned CIT(A) at para 5.1.2 of the impugned order has upheld the penalty levied under section 271(1)(c) of the Act for furnishing of inaccurate particulars of income only. In support of the proposition that the said notice dated 27.12.2010 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 raised above. The learned A.R. of the assessee placed reliance, inter alia, on the following judicial pronouncements: - (i) CIT vs. Samson Perinchery (ITA No. 1154 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) Dr. Sarita Milin Davare (ITA Nos. 2187 & 1789/Mum/2014 dated 21.12.2016 4.2 Per contra, the learned D.R. for Revenue supported the orders of the learned CIT(A)/AO. 4.3.1 We have heard the rival contentions 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 M/s. Meghayields 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, penalty 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 Dr. Sarita Milind Davere in dated 21.12.2016 has in similar circumstances, where the notice issued under section 274 r.w.s. 271 of the Act did not mention or specify the charge for which the penalty notice was issued, i.e. 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 account the ratio of the decisions of the Hon'ble Apex Court in the cases of 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); of the Hon'ble Bombay High Court in the case of Kaushalya Devi (1995) 216 ITR 660 (Bombay) 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 9 to 14 thereof held as under: - “9. 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 M/s. Meghayields 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 _____________. 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.
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 M/s. Meghayields case of Dilip N Shroff 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 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.
M/s. Meghayields 12. The last decision relied upon is the case of N. N. Subramania Iyer v. Union of India [1974] 97 ITR 228 (Ker). The following passage from the said decision would 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 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 M/s. Meghayields 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 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.” 4.3.3 This legal proposition 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. The