M/S ENRICE ENTERPRISES PVT. LTD,CHENNAI vs. DCIT,CENTRAL CIRCLE-3(4), CHENNAI

आदेश / O R D E R

PER MANJUNATHA. G, AM:

2. The assessee has, more or less, raised common grounds of appeal for both the assessment years. Therefore, for the sake of brevity, grounds of appeal filed for the AY 2017-18, are re-produced as under:

1. The order of the learned Commissioner Of Income (Appeals)-20, is wrong, illegal and is opposed to law. The learned Commissioner (Appeals) erred in law and on facts in confirming the action of learned assessing officer in levying penalty under section 270A(9) of the Act .

2. The learned CIT(A) ought to have seen that the assessing officer erred in levying penalty for under-reported income and such under reported income is a consequence of misreporting is not based on facts of appellants case.

3. The learned Commissioner Of Income (Appeals)-20 ought to have seen that penalty proceedings is independent of assessment proceedings nd therefore penalty is not leviable merely on the ground that certain additions have been made in the assessment proceedings.

4. The learned assessing officer erred in levying penalty merely by stating that conditions (c) and (d) of section 270(A) is attracted without substantiating the same with the facts of appellant's case. The burden of proving the allegation lies on the Assessing officer who has miserably failed to discharge the burden of proof.

5. The learned CIT(A)-20 ought to have seen that the penalty proceedings is deemed to have been initiated only with the issue of notice under section 270(A) and that the said notice should specifically state the reasons for levy of penalty. Failure on the part of the AO to specifically state the reasons under which limb the penalty is levied would tantamount to failure to record satisfaction as well as non-application of mind thereby making the said levy illegal and opposed to law. In the instant case the penalty notice suffers from aforesaid infirmity.

6. The learned CIT(A) ought to have seen that the penalty levied for misreporting of income is not only erroneous but also arbitrary and bereft of any reason. In the penalty notice the AO miserably failed to specify the limb "under reporting" of income or "under reporting as a consequence of misreporting" under which the penalty proceedings has been initiated. Thus, there is no proper recording of satisfaction or application of mind by the AO which is the very edifice for levying penalty.

7. The learned CIT(A) ought to have seen that the AO erred in stating in the notice issued u/s.270A that the appellant had "under reported and under reporting as a consequence of misreporting". The learned CIT(A) ought to have seen that "under reporting" of income and "under reporting

:: 3 :: as a consequence of misreporting" are two different concepts with clear boundaries and each operate under strict definitions and do not overlap each other and cannot exist simultaneously. While sub section (2) to (6) of 270(A) deals with "under reporting", sub section (9) of section 270(A) deals with "under reporting as a consequence of misreporting" and the same cannot be used interchangeably.

8. The learned CIT(A) ought to have seen that the AO in the assessment proceedings has unequivocally and unambiguously expressed his satisfaction on the explanation offered by the appellant and the materials submitted to substantiate the same which at best could satisfy only sub section (6) of section 2 70 (A). The AO has no where justified how the appellants case would not fall under section Sub section (6) to section 270A while levying penalty by invoking sub section (9) of section 270(A).

9. The learned CIT(A) ought to have seen that appellant has admitted a consolidated sum of Rs.113.99 Crores over the Financial Years and accordingly allocated the admitted sum over a period of 5 years on adhoc basis and the same has been assessing officer has accepted and found to be in order the income offered by the appellant by estimating disallowance of portion of marketing expense over a period. The AO has neither established or even alleged that the said income offered by the appellant as not substantiated by any evidence neither alleged in the assessment order that there has been false entries in the books of account which would attract sub (9) of section 270(A).

10.The learned CIT(A) ought to have seen that the discretion to impose penalty must be exercised judicially. The learned CIT(A) failed to see that addition made in the assessment order is on ad hoc basis, based on estimated disallowances of portion of marketing expense and based on surrender of income not backed by any incriminating material and would therefore not attract "under reporting as a consequence of misreporting" warranting levy of penalty under section (9) of section 2 70 (A).

11.The learned CIT(A) failed to see that in the instant case addition is made by the assessing officer merely based on income surrendered by the appellant and not based on any incriminating material warranting levy of penalty. Neither the appellant nor the investigation team had any evidence as to the quantum of inflated expenditure year wise.

12. The learned Commissioner ought to have seen that penalty cannot be levied merely because an amount taxed as income as held by Hon'ble Supreme Court in the case of M/s Hindustan Steel Ltd. vs State of Orissa (1972) 83 ITR 26(SC) and decision of Hon'ble High Court of Delhi in Escorts Finance Ltd. (2009) 226 CTR (Del) 105.

For these and other grounds that may be rendered at the time of hearing it is most humbly prayed that the Hon'ble Tribunal may be pleased to allow the appellants appeal and thus render justice.

& 1167/Chny/2023 :: 4 ::

During the course of search, a sum of Rs.55,27,70,000/- of unaccounted cash was found and seized from the residential premise of Shri M.Kothandarami Reddy as well as six individuals who identified themselves as associates of the assessee and claimed that they have held the cash for and on behalf of the assessee. The amount of cash seized during the course of search and seizure on 06.12.20128 in the residential premise of Shri. M.Kothandarmi Reddy and others was tabulated in Page No.2 of the assessment order. In the course of search, a sworn statement u/s.132(4) of the Act, was recorded from Shri S.D.Rami Reddy, working Director of the assessee company and in response to Q.Nos.17 & 18, he has explained the modus operandi of generation of cash found and seized during the course of search and also admitted a sum of Rs.113.99 Crs. as additional income for the period from 01.04.2014 to 06.12.2018 which includes cash seizure of Rs.55.27 Crs. The Director of the assessee company has also explained the modus operandi of generation of unaccounted cash by way of inflated expenditure booked under the head marketing expenses being ‘gift articles’ and admitted that on an average & 1167/Chny/2023 :: 5 ::

1/3rd of actual expenditure accounted in the books of accounts, has been received back in cash from the suppliers. The relevant question and answers in the statement recorded u/s.132(4) of the Act, from Shri S.D.Rami Reddy, was reproduced as under:

"Q.17. While answering to Q.6, in your sworn statement recorded under section 132(4) dated 9.12.2018, while asking the modus operandi of generating unaccounted cash, you have stated that you will raise bogus bills for which you pay them through banking channels and receive cash from them. Please go through your statement and clarify about generation of unaccounted cash.

Ans. Sir, we have not raised any bogus bills from our suppliers of gift articles to generate unaccounted cash. However, we received back one third of the invoice value on an average in the form of cash from our gift article suppliers. Since this amounts to inflation of the expenditure in our books of account, we undertake to withdraw of claim towards expenditure in the respective years.

Q:18. Please furnish the quantity of cash generated invoice-wise and party -wise with details of suppliers?

Ans. Sir I don't have the invoice-wise and party -wise details of cash generated. However, I am here by submitting year-wise details of cash generated on this account as under –

S.No. Financial Year Amount in Crores 1 2014-15 16.39 2 2015-16 23.62 3 2016-17 15.79 4 2017-18 25.73 5 2018-19 32.46 113.99 & 1167/Chny/2023 :: 6 ::

However, no corroborative evidence to the sworn statement was unearthed during search.

4. Consequent to search proceedings, the cases were taken up for scrutiny assessments. In response to notice u/s 153A of the Act, issued by the AO for both the assessment years, the assessee has filed its return of income on 19.02.2021 admitting a total income of Rs.2,55,35,485/- and Rs.34,55,46,473/- which includes additional income offered during the course of search towards inflated expenditure. In the return of income filed for AYs 2017-18 & 2018-19, the assessee company has offered additional income of Rs.25.73 Crs. & Rs.32.46 Crs. respectively towards additional income offered during the course of search on account of inflated expenditure under the head ‘gift articles’. During the course of assessment proceedings, on enquiry with the suppliers of gift articles, replies were received from the suppliers of gift articles along with account copy as reflected in the books of the assessee, where, all of them stated to have supplied gift articles to the assessee, but some of them also stated that the assessee took back some cash at times. The AO completed the assessment u/s.143(3) r.w.s.153A of the Act on 26.07.2021, accepting the additional income voluntarily offered by the assessee towards inflated expenditure under the head marketing expenses being purchase of ‘gift articles’. While completing the assessment, the AO has observed that after considering relevant submissions of the assessee, the income offered by the assessee, including estimated disallowance of portion of marketing expenses, is & 1167/Chny/2023 :: 7 ::

found to be in order and accepted. The relevant submissions of the assessee and findings of the AO are reproduced as under:

In continuation to the above, during assessment proceedings, assessee claimed that no corroborative evidence to the sworn statement w.r.t. found/seized materials was unearthed so as to suggest the culpability of tax evasion.

After going through the circumstances in entirety. The income offered by the assessee, including the estimated disallowance of portion of marketing expenses, is found to be in order and accepted.

In response to the show cause notice, the assessee vide letter dated 07.08.2021 filed detailed explanation and argued that show cause notice issued u/s.274 r.w.s.270A of the Act, is invalid, because, the AO has not specified any charge, for which, penalty u/s.270A of the Act, was initiated whether it is for ‘under reporting of income and under reporting as a consequence of misreporting of income’. The assessee had also challenged levy of penalty u/s.270A of the Act, on additional income offered by the assessee towards estimated disallowance of marketing expenses being ‘gift articles’ purchased on the basis of statement recorded from the Director of the assessee company during the course of & 1167/Chny/2023 :: 8 :: search and argued that the AO has not made out a case of ‘under reporting of income and under reporting as a consequence of misreporting of income’, because, if you go through the findings of the assessment order, there is no observation with regard to ‘under reporting of income and under reporting as a consequence of misreporting of income’, but the additional income offered by the assessee, has been accepted and stated that income offered by the assessee, including the estimated disallowance of portion of marketing expenses, is found to be in order and accepted.

filed for relevant assessment year and had search was not taken place, the huge unaccounted cash generated by the assessee by inflating marketing expenses was not found. Therefore, the AO opined that it is a clear case of ‘under reporting of income and under reporting as a consequence of misreporting of income’, and thus, opined that the arguments of the assessee that it is voluntarily surrendered additional income to avoid litigation and buy peace is devoid of merits. Thus, rejected arguments of the assessee and levied penalty u/s.270A of the Act, for ‘under reporting of income and under reporting as a consequence of misreporting of income’ for both the assessment years. The relevant findings of the AO are as under: & 1167/Chny/2023 & 1167/Chny/2023 & 1167/Chny/2023 & 1167/Chny/2023 :: 13 ::

7. Being aggrieved by the assessment order, the assessee preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee challenged the notice issued by the AO u/s.274 r.w.s.270A of the Act, and & 1167/Chny/2023 :: 14 ::

argued that there is no specific charge under which limb the penalty proceedings has been initiated. The assessee had also challenged penalty levied on estimated disallowance of marketing expenses on the ground that the AO has not made out a case of ‘under reporting of income and under reporting as a consequence of misreporting of income’ as specified in sub-section 9 of section 270 of the Act, which is very clear from the fact that ‘misreporting of income’ has been specifically referred to under sub-section 9 and the case of the assessee does not come under any clauses, and thus, the question of levy of penalty does not arise.

8. The Ld.CIT(A) after considering relevant submissions of the assessee and also taken note of provisions of Sec.270A of the Act, held that the assessee case is covered by Sec.270A of the Act as claimed, because, the facts gathered during the course of search clearly suggest ‘under reporting of income and under reporting as a consequence of misreporting of income’, which is evident from the enquiries conducted during the course of assessment proceedings, where the suppliers of ‘gift articles’ clearly admitted payment of 1/3rd of cash back to the assessee on the basis of admission of the assessee Company Director ‘under reporting of income and under reporting as a consequence of misreporting of income’ has been quantified for all these assessment years. The Ld.CIT(A) further held that the assessee company at the time of search itself has admitted inflation of expenditure under the head ‘marketing expenses’ and receipt of 1/3rd of cash back from suppliers of ‘gift articles’ which is & 1167/Chny/2023 :: 15 ::

not recorded in books. Hence, it is a clear case of ‘misreporting of income’ u/s.270A(9) of the Act, which does not require elaborate discussion by the AO in the penalty order. The Ld.CIT(A) further held that the AO has rightly applied sub-clauses (c) & (d) of Sec.270A(9) of the Act, which deals with claim of expenditure not substantiated by any evidence and recording of any false entry in the books of accounts. The assessee has not substantiated with necessary evidences marketing expenses and also recorded false entry in the books of accounts by inflating expenditure. Therefore, opined that it is a clear case of ‘under reporting of income and under reporting as a consequence of misreporting of income’ as per sub-section (9) of Sec.270A of the Act. Therefore, there is no error in the reasons given by the AO to impose penalty u/s.270A of the Act, and thus, rejected arguments of the assessee and upheld penalty levied by the AO. The relevant finings of the Ld.CIT(A) are as under:

7. Decision:

7.1 I have gone through the assessment order u/s 153A r.w.s. 143(3), order u/s.270A, Grounds of appeal and written submissions of the appellant, judicial precedents relied on by it.

7-2 Ground of appeal No 1&2: Above are general grounds which do not require separate adjudication. 7.3 Ground of appeal No 3:

7.3.1 The appellant has contested this appeal on technical ground that in the penalty notice sent both limbs of 'Under-reporting of Income* and 'Underreporting of Income as a consequence of misreporting of Income' were retained. Facts leading to penalty have been carefully considered by me. It is a case where appellant company has been making wrong entries of marketing Expenditure by inflating the expenditure in its books. Inflation of marketing expenditure is an admitted fact by Managing Director of Appellant company Sri D. Rami Reddy vide sworn statement dated 04-02-2019 while answering to questions 17 & 18 of sworn & 1167/Chny/2023 :: 16 :: statement. Admittedly the appellant company received back I/3rd of invoice value as cash from suppliers of gift articles. Cash received back was not recorded in books of company thereby generated unaccounted cash. Hence it is a clear-cut case of misreporting of Income.

7.3.2 In my opinion, the appellant's case attracts both clauses (d) and (e} of section 270A (9) which lists instances of misreporting of Income. Clause (d) of section 270A (9) - "Recording any false entry in books of accounts" and Clause (e) of section 270A (9) - "Failure to record any receipt in books of account having a bearing on total income. In the present case appellant company admittedly inflated expenditure towards "Marketing expenses". It has recorded higher amount of expenditure than what has been incurred for that purpose. Modus operandi as Explained by appellant company is that initially company makes payment of marketing expenditure as per Invoice raised by suppliers of Gift Articles, Suppliers thereafter return 1/3rd of Invoice value back to appellant in cash. Amount received back as cash which is a receipt for company is never recorded books of company. It is a practice adopted by appellant company for several years to generate unaccounted cash. Therefore, at the time of raising invoice at a higher value, appellant company is aware that it is inflating expenditure thereby making wrong entry in books attracting clause (d) of.270A. Second instance when cash is received back from suppliers, such receipt of cash is not recorded in books which attracts clause (e) of 270A.

7.3.3 Perusal of penalty order shows that AO vide page 14 of order has held that multiple clauses of section 270A (9) are attracted in its case. The AO held that (a) - Misrepresentation or suppression of facts, (c)- Claim of Expenditure not substantiated by Evidence and (d) - Recording false entry in books of account of 270A (9) are attracted in appellant's case. Therefore, there is a clear finding in the penalty order that penalty has been levied for Misreporting of Income,

7.3.4 The appellant in its submissions argued that clause {c} of 270A (9). as alleged by the AO is not attracted in its case. It is noticed from submissions-made by the appellant that the AO has queried about marketing expenditure; during assessment proceedings. The appellant replied that all purchase invoices were available with department. Thereafter it appears that the AO has not pursued the matter of seeking further evidence from the appellant to prove genuineness of expenditure claimed as the appellant itself admitted inflation of Expenditure. As per provisions of section 270A (2)(a) underreporting of income is 'difference between income assessed u/s 143(3) rws 153A and income determined u/s 143(1)'. Therefore, in the return of Income originally filed appellant has claimed expenditure not substantiated by evidence. Recording of false entry in books of account / non-entry of cash received are both undisputed admitted facts. Having accepted inflation of expenditure, claiming purchase invoices available with department prove genuineness of expenditure is incorrect.

7.3.5 Similarly appellant mentioned that there is no finding in the assessment order that there have, been false entries in the books of account, hence 270A (9) (d) is not attracted as has been mentioned by AO, Examination of assessment order shows that vide para 3 of assessment order, the AO clearly mentioned that the appellant is involved in inflation of expenditure to meet certain expenditure's and that the :: 17 :: appellant itself agreed that it has resorted into activity of withdrawing by way of cash a portion of RTGS payments towards supply of book gift articles booked under the head 'Marketing expenses' as part of selling expenses.

7.3.6 The appellant cited para 9 of assessment order to state that AO has expressed satisfaction with regard to genuineness of expenditure recorded in. Books. The appellant relied on observations made by the Assessing Officer in page 9 of assessment order which reads as:

"After going through the circumstances in the entirety, the income offered by the assesses, including the estimated disallowances of portion of marketing expenses, is found to be. in order and accepted."

7.3.7 I have also gone through the assessment order. Satisfaction recorded by the Assessing Officer is limited to sufficiency of income offered by the appellant on account of inflated marketing expenses since appellant stuck to its admission of undisclosed income for the year made before Investigating authorities. It can't be extended to conclude that the Assessing Officer has given a finding that genuineness of expenditure recorded in books has been established by appellant.

7.3.8 The appellant nowhere disputed modus operand! unearthed during search nor - it disputed generation of unaccounted cash by inflation of expenditure. Huge unaccounted cash was found during search to the tune of Rs.55.28 crores from various persons. All those persons stated that it was received from Managing Director of appellant company for safe keeping. Unaccounted cash Rs.55.28 Crores found during search is not recorded in books. The appellant explained source of unaccounted cash as inflation of marketing expenditure in books and cash received back from suppliers which is not again recorded in books. When there is primary evidence in the form of unaccounted cash found not recorded in books and sworn statement of Managing Director of appellant company giving details of unaccounted cash generated for each year'-after acknowledging primary evidence found during search, it is incorrect to say except statement of appellant there is no other evidence available with..the department.

7.3.9 The AO made enquiries during assessment proceedings with suppliers of gift articles to appellant company and some of the suppliers have agreed that the appellant company took back some cash from them (Para 2, page 8 of Assessment order). Copy of letter of one of suppliers of appellant company wherein supplier has agreed that he has withdrawn cash as required by appellant company available on assessment record is reproduced as under:

& 1167/Chny/2023 :: 18 ::

7.3.10 Hence it is incorrect to say no evidence is available with AO with regard to inflation of expenditure hence false entry made in books of accounts by the appellant company. Since the appellant company has admitted undisclosed income in the return of Income filed, the AO has not expanded scope of enquiries once sufficient evidence regarding modus operandi was found. When unaccounted cash generated is not recorded in books and inflation of expenditure has not been disputed, the appellant can't argue its case do not attract 270A (9) (d).

7.3.11 Further I have come across cases where it is held that minor defect in the notice issued cannot be the basis of deletion of penalty levied or declaring the penalty proceedings as null and void some of which are as under.

1. Dhanraj Mills Pvt. Ltd. vs ACIT, & 3833/Mum/2009 dated 21.03.2017

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3. Mahesh M Gandhi vs ACIT.ITA No.2976/Mum/2016 dated 27.02.2017

5. Hon'ble Bombay High Court (Nagpur Bench) in the case of ML/s. Maharaj Garage & Company Vs. CIT Dt.22-08-2017.

6. Hon'ble Patna High court in the case of CIT v, Mithila Motors (P.) Ltd. [1984] 149 ITR 731 (Patna)

7. Sundaram Finance Limited Vs ACIT ( 2008) 99 taxmann.com 152

8.Jyothirmoy yamsani Vs DCIT ITA No 1519/Hyd/20l6

9. Manjeet kaur saran Vs DCIT to 2643/del/2017

10. HPCL Mittal Energy Vs Addl CIT 97 Taxmann.com 3

7.3.12 It is clear from.= penalty order that penalty of Rs.10,92,92,064/- has been levied on charge of "under-reporting of Income as a consequence of Misreporting of Income". The appellant company filed its objections to penalty vide letter dated 07-0§-2021 before the Assessing Officer (reproduced in penalty order) in which the appellant company has replied to both charges of 'Under-reporting of Income' and "Under- reporting of Income as a consequence of Misreporting of Income". The appellant company was of the view that though its case attracts 'under- reporting of Income' as per section 270A (2) (a) since assessed income u/s 143(3] rws 153A for the year is more than income determined u/s 143(1}, penalty is not leviable in view of sec 270A (6) (b) since amount of under-reported income is determined for the year is on estimate basis. Similarly, it has given detailed submissions as to how none of clauses u/s 270A (9) are not attracted in its case. Reply given by the appellant wrt 270A (3) and 270A (9) was considered by the AO before levying penalty for 'misreporting of Income', Hence, no prejudice has been caused to appellant. Therefore, on this part, I do not find any reason to allow these grounds of the appellant. Ground of Appeal No 3 is Dismissed.

7.4 Ground of appeal Ho 4 & 5:

7.4.1 The contention of appellant vide above grounds Is that the AO has not adjudicated applicability of provisions of section 270A (6) to the facts of case for the year and consequently incorrectly levied penalty @ 200%, The question to be determined is whether it was required on part of AO to verify applicability of 270A(6).

7.4.2 Section 270A(2) defines 'under-reported income'. Section 270A (6) spells out instances of exceptions to under-reporting of Income. Section 270A(9) defines 'misreporting of Income*. Verification of penalty order under consideration shows that the AO has clearly mentioned in the penalty order that it is a case of misreporting income and attracts clauses (c) & (d) of section 270A(9) vide page 14 of order . In this context it is :: 20 :: relevant to refer to provisions of section 270A (8) which is reproduced as under:

(8) Notwithstanding anything contained in sub-section (6) or subsection (7), where under-reported income is in consequence of any misreporting thereof by any person, the penalty referred to in subsection (1) shall be equal to two hundred per cent of the amount of tax payable on under- reported income.

7.4.3 Therefore, provisions of section 270A (8) say that as far as a case where 'Misreporting of Income' is attracted, provisions of section 270A (6) do not apply. Hence, it is reasonable to conclude that having given a finding that facts of case attract 270A (9), the AO was under no obligation to verify whether facts of case attract 270A (6) or not as it is already held that it is not case of pure under-reporting.

7.4.4 While disposing appeal of appellant company against penalty u/s 271 (1) (c), I have already given a finding that undisclosed income admitted by appellant company on account of unaccounted cash for different years is not on estimate basis which is reproduced under:

"I have carefully examined the claim of appellant that the amount disclosed was estimated income in the tight of sworn statement of Managing Director of company Sri D. Kami Reddy recorded on 04-02- 2019.

"Q.No.17 While answering to Q.No,6, in your sworn statement recorded u/s 132(4) of the Income Tax Act, 1961 dated 09.12.2018, while asking the modus operandi of generating unaccounted cash, you have stated that will raise bogus bills for which you pay them through banking channels and receive cash from them. Please go through your statement and clarify about your generation of unaccounted cash,

Ans.: Sir, we have not raised any bogus bills from our suppliers of gift articles to generate unaccounted cash. However, we received back, one third of the invoice value on an average in the form of cash from our gift articles suppliers. Since this amounts to inflation of the expenditure in our books of accounts, we undertake to withdraw our claim towards expenditure m the respective -years,

Q.No.18 Please furnish the quantity of cash generated invoice-wise and party-wise with the details of suppliers?

Ans.: Sir, I don't have the invoice-wise and party-wise details of cash generated. However. lam hereby submitting the year-wise details of cash generated on this account as under:

S.No. Financial Amount (in Year Crores) 1 2014-15 16.39 2 2015-16 23.62 3 2016-17 15.79 4 2017-18 25.73 5 2013-19 32.46 Total 113.99

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I hereby offer this amount of Rs. 113.99 crores as the additional income in the hands of M/s.Enrica Enterprises Private Ltd. For the respective financial years as mentioned above."

It can be seen from above that nowhere Managing Director stated that he is offering income on estimate basis. He has clarity with regard to unaccounted cash generated by inflation of expenditure each year. Though he said he can't product invoice-wise cash generated, he is clear about total quantum of unaccounted cash generated each year. Amounts admitted for each year are not some random round figures. That itself shows that disclosure made by the appellant is not on estimate basis but basing on actual unaccounted cash generated each year, Shri D. Rami Reddy in his sworn statement dated 04-02-2019 while replying to question No: 17 stated that the appellant receives I/3rd of invoice value as cash back from suppliers. Therefore 1/3rd of invoice value of gift articles recorded as marketing expenses for the year would give unaccounted cash generated by the appellant

Coming to issue why entire unaccounted cash generated could not be found during search, the AO has mentioned in penalty order that unaccounted cash generated was admittedly used by appellant company to meet some inadmissible expenditure outside books.

7.4.5 In view of detailed discussion made above, I am of the opinion that appellant's case is not covered by 270A (6) and no fault can be found with AO for not verifying applicability of section 270A (6) in view of section 270A (8) having held that section 270A (9) is applicable. Accordingly, Grounds of appeal 4 & 5 are Dismissed.

7.5 Ground of appeal No.6:

7.5.1 Vide this Ground the appellant alleged that the AO has not tried to establish how clause (c) and (d) of 270 A (9) are attracted in the penalty order.

7.5.2 I have gone through penalty order. The AO vide para (b), page 10 of penalty order has discussed modus operand! of appellant. Vide para (e) held that since there is admitted inflation of expenditure by appellant, its case attracts clause (c) and (d) of 270 A (9).

7.5.3 It is a case where appellant company at the time of search itself has admitted inflation of expenditure under the head 'marketing expenses', receipt of 173rd cash back from suppliers of gift articles which is not recorded in books. These facts are never disputed at any stage. Hence, it is a clear-cut case of 'misreporting of income' u/s 270A (9) which does not require elaborate discussion by the AQ in the penalty order , need not to be established separately.

7.5.4 The appellant has time and again harping that no incriminating evidence was found during search. Incriminating, irrefutable evidence found during search was unaccounted cash which was not recorded in books. In order to explain source of such unaccounted cash generated out of books, appellant had to explain its modus operandi of inflation of expenditure in its books both of which attract different clauses of section 270A as discussed in preceding paragraphs. Accordingly > Ground of appeal 6 is Dismissed.

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7.6 Ground of appeal No.7:

7.6.1 The appellant vide above grounds raised issue that while computing penalty, AO has not followed provisions of section 270A (10).

7.6.2 Section 270A (10) details about tax payable in respect of 'under- reported income' for the year. It reads as under:

(10) The tax payable in respect of the under-reported income shall be —

(a) where no return of income has been furnished and the income has been assessed for the first time, the amount of tax calculated on the under-reported income as increased by the maximum amount not chargeable to tax as if it were the total income;

(b) where the total income determined under clause (a) of sub-section fl) of section 143 or assessed/reassessed or recomputed in a preceding order is a toss, the amount of tax calculated on the under-reported income as if it were the total income;

(c) in any other case determined in accordance with the formula —

(X-Y) where,

X = the amount of tax calculated on the under-reported income as increased by the ""total income determined under clause (a) of subsection (1) of section 143 or total income assessed, reassessed or recomputed in a preceding order as if it were the total income; and Y = the amount of tax calculated on the total income determined under clause {a} of sub-section (1) of section 143 or total income assessed, reassessed or recomputed in a preceding order.

7.6.3 The above section divides the cases into two categories,

2. In all other cases, tax payable is to be computed as per provisions of section 270A (10) (C). The present case falls under clause (c) of section 270A (10) since the appellant has filed return of income originally and income is assessed u/s 143(3) rws 153A for the first time.

7.6.4 Simply put, as per clause (c) of section 270A (10), X= Tax on (under-reported income plus amount determined vide preceding order) Y= Tax on preceding order

Clause (a) of Explanation (b) of section 270A(3) defines ( Preceding order) as under:

& 1167/Chny/2023 :: 23 ::

(a) "preceding order" means an order immediately preceding the order during the course of which the penalty under subsection (1) has been initiated;

7.6.5 In the present case, penalty has been initiated vide order u/s 143(3) rws 153A. "Preceding order1 prior to order u/s 143(3) rws 153A is order u/s 143(1) dated 25.05.2018 vide which loss admitted by the appellant Rs.13,23,64,515/- has been accepted.

X= Tax on {under-reported income plus amount determined vide 143(1) order)

Y= Tax on amount determined vide 143(1) order

Hence, tax payable u/s 270A (10)(c) r.w.s 270A (3) should have been calculated by AO before levying penalty at 200% of tax as per Sec. 270A(8). However, it appears that the AO has computed tax on income admitted u/s 132(4) for the year Rs.15,79,00,000/- and levied 200% of penalty on such tax computed. The AO is directed to compute tax payable on '*under reported income' for the year u/ s 270A( 10) (c) before levying penalty as per Sec. 270A(8), Needless to say that the appellant gets relief to the extent of excess penalty levied vide order under appeal. Accordingly, Ground of appeal 7 is partly allowed.

9. The Ld. Counsel for the assessee Shri. D. Anand, Advocate, submitted that the Ld.CIT(A) is erred in confirming the action of the AO in levying penalty u/s.270A(9) of the Act, without appreciating the fact that the assessee neither ‘under reported income and such under reporting as a consequence of misreporting of income’. The Ld. Counsel for the assessee referring to show cause notice issued u/s.274 r.w.s.270A of the Act, submitted that the notice has been issued in a routine manner without referring under which limb of Sec.270A of the Act, the assessee is liable for penalty. Although, the AO has levied penalty u/s.270A(9) of the Act, for ‘under reporting of income and under reporting as a consequence of misreporting of income’, but no such ground was specified in the show cause notice issued u/s.274 r.w.s.270A of the Act. Therefore, he submitted that order passed by the AO imposing penalty u/s.270A(9) of & 1167/Chny/2023 :: 24 ::

the Act, consequent to vague notice is invalid, unlawful and liable to be quashed. The Ld. Counsel for the assessee further submitted that levy of penalty u/s.270A of the Act, is not mandatory in every case, where, there is difference between assessed/re-assessed income and the return of income. This is very important, if you go by the wording in Sec.270A of the Act, where the expression used is ‘may’. Therefore, the AO is vested with the power either to levy or not to levy penalty u/s.270A of the Act.

Therefore, before issuing penalty, the AO is required to arrive at a clear satisfaction to the effect that under which limb the assessee is charged for tax evasion i.e. it is for ‘under reporting of income and under reporting as a consequence of misreporting of income’. In the present case, if you go by the findings of the AO, there are no findings with regard to ‘under reporting of income and under reporting as a consequence of misreporting of income’. Further, show cause notice issued by the AO is also not clear under which limb, the AO is proposed to initiate penalty u/s.270A of the Act. Therefore, he submitted that penalty levied by the AO as a consequence of vague or incorrect notice cannot be sustained under law.

In this regard, he relied upon certain judicial precedents, including the decision of the Hon’ble Supreme Court in the case of CIT v. SSA’s Emerald Meadows reported in [2016] 73 taxmann.com 241 (SC).

10. The Ld. Counsel for the assessee further submitted that assessment proceedings and penalty proceedings are two different proceedings. The findings in the assessment proceedings cannot be considered as & 1167/Chny/2023 :: 25 ::

conclusive and final for the purpose of imposing penalty. Therefore, before levying penalty, the AO should independently ascertain the facts with regard to nature of tax evasion. If you go by the additions made towards additional income offered by the assessee, there is no separate addition in the assessment order and the AO has simply accepted income returned by the assessee in response to notice issued u/s.153A of the Act.

The AO further observed in the assessment proceedings that after considering relevant details, income admitted by the assessee towards estimated disallowance of proportionate marketing expenses, is found to be in order and accepted. Form the above, it is very clear that the AO has not made out a case of ‘under reporting of income and under reporting as a consequence of misreporting of income’ and thus, the question of levy of penalty u/s.270A(9) of the Act, does not arise. In this regard, he relied upon certain judicial precedents, including the decision of the Hon’ble High Court of Delhi in the case of Prem Brothers Infrastructure LLP v. NFAC reported in [2022] 288 Taxman 768 (Delhi).

reporting of income and under reporting as a consequence of misreporting of income’ on the basis of findings recorded in the assessment order, where, the additions has been made towards additional income offered during the course of search on estimated disallowance of marketing expenses. During the course of search, the Department has found huge unaccounted cash which resulted in generation of unaccounted cash by inflating marketing expenses, and this fact has been gathered during the course of search, which is evident from the statement recorded from the Director of the assessee company, where, they have clearly admitted inflation of expenditure under the head ‘marketing expenses’. Further, during the course of assessment proceedings, enquiries are conducted with suppliers of ‘gift articles’, where, they have confirmed, refund of 1/3rd of amount of supplies to the assessee in cash at times. Form the above, it is very clear that the assessee has ‘under reporting of income and under reporting as a consequence of misreporting of income’ in respect of marketing expenses, and thus, the case of the assessee clearly falls under sub-clauses (c) & (d) of Sec.270A(9) of the Act, and thus, the AO has rightly levied penalty u/s.270A of the Act, and their orders should be upheld.

consequence of misreporting of income’. The AO invoked provisions of clauses (c) & (d) of Sec. 270A(9) of the Act, which deals with claim of expenditure not substantiated by any evidence and recording of any false entry in the books of accounts. The AO has arrived at the above conclusion on the basis of findings in the assessment order, where income admitted by the assessee in the return of income filed in response to notice u/s.153A of the Act, has been accepted. In the revised return filed u/s.153A of the Act, the assessee has admitted taxable income of Rs.2,55,35,485/- which is higher than the last return filed u/s.139(1) of the Act. According to the AO, the assessee has ‘under reporting of income and under reporting as a consequence of misreporting of income’ in respect of marketing expenses, which is clearly evident from information gathered during the course of search coupled with statement recorded from the Director of the assessee company and also enquiries conducted with suppliers of ‘gift articles’ during the course of assessment proceedings. The AO further observed that had search was not taken place u/s.132 of the Act, ‘under reporting of income and under reporting as a consequence of misreporting of income’ would not have come to light. Therefore, the AO opined that it is a clear case of ‘under reporting of income and under reporting as a consequence of misreporting of income’ which attracts provisions of Sec.270A(9) of the Act, and thus, levied penalty for both the assessment years for ‘under reporting of income and under reporting as a consequence of misreporting of income’. & 1167/Chny/2023 :: 28 ::

to refer to provisions of Sec.270A of the Act, and the reasons given by the AO to impose penalty u/s.270A(9) of the Act. The provisions of Sec.270A of the Act, deals with penalty for ‘under reporting of income and under reporting as a consequence of misreporting of income’. Sub-section 1 to 6 of Sec.270A of the Act, deals with ‘under reporting of income and under reporting as a consequence of misreporting of income’, has been specified in sub-section 7 of Sec.270A of the Act. Sub-section 8 & 9 deals with ‘under reporting of income and under reporting as a consequence of misreporting of income’ thereof by any person and such cases of ‘misreporting of income’ referred to in sub-sec.8 has been specified in sub sec.9 of Sec.270A of the Act. From the above, it is manifestly clear that provisions of Sec.270A of the Act, has two limbs or two charges for which penalty can be levied. The first limb or first charge is ‘under reporting of income and such under reporting of income’ has been specifically referred to in sub-section 2 to 6 of Sec.270A of the Act. In the present case, these provisions are not relevant, because, the AO has not invoked under reporting of income. The second limb or charge is ‘under reporting of income as consequence of misreporting of income’ thereof and in the present case, the AO invoked second limb of provisions of Sec.270A of the Act. Admittedly, these provisions have been substituted by the Finance Act, 2016 w.e.f.01.04.2017 and applicable for AY 2017-18 onwards. Prior to insertion of Sec.270A of the Act, a similar provision was existed in the statue by way of sec.271(1)(c) of the Act, for concealment of particulars & 1167/Chny/2023 :: 30 :: of income or furnishing of inaccurate particulars of income. Provisions of Sec.271(1)(c) of the Act, was also having two limbs or two charges i.e. i) for concealment of particular of income and ii) furnishing of inaccurate particulars of income. If you go by provisions of Sec. 271(1)(c) of the Act & Sec.270A of the Act, and wordings therein both provisions are similar and para materia to each other. Although, the term ‘tax evasion’ has been redefined by way of ‘under reporting of income and under reporting as a consequence of misreporting of income’ but it is synonymous to concealment of particular of income or furnishing of inaccurate particulars of income. Therefore, it is necessary to examine whether penalty proceedings u/s.270A of the Act, is mandatory in nature and further, such penalty can be invoked without providing an opportunity to the assessee as required u/s.274 of the Act.

deals with the procedure for levy of penalty, wherein, it directs that no order imposing penalty shall be made unless the assessee has been heard or has been given a reasonable opportunity of hearing. Thus, it is evident that the penalty u/s.270A of the Act, cannot be imposed unless the assessee has given a reasonable opportunity and the assessee is being heard. Once, the AO is bound to act to hear the assessee and give reasonable opportunity to explain its case, then, there is no mandatory requirement of imposing penalty, because the opportunity of hearing is not a mere formality, but it is to adhere to the principle of natural justice.

Therefore, in our considered view, the penalty u/s.270A of the Act, is not mandatory and it is based on the facts and merits placed before the AO.

Though, the AO while passing the impugned order has imposed penalty u/s.270A(9) of the Act, but no such ground was specified in the show cause notice dated 26.07.2021. In our considered view, notice u/s.274 & 1167/Chny/2023 :: 32 :: r.w.s.270A of the Act, is not a valid notice for the reason that the AO did not specify the satisfaction as to whether assessee had either ‘under reporting of income’ or ‘misreporting of income’. In absence of proper notice, which is mandatory, the AO cannot impose penalty, because, it is a clear violation of principles of natural justice, because, issuing a vague notice without specifying the charge under which limb the proposed penalty proceedings is initiated, would vitiate the entire proceedings, because, the assessee was not given an opportunity to explain its case on specific charge. Therefore, in our considered view, penalty levied on the basis of invalid or vague notice is invalid and void ab initio.

Since, ‘under reporting of income’ and ‘misreporting of income’ are two concepts and separate charges, the AO before initiating penalty proceedings should specifically arrive at a satisfaction to the effect that, for which charge, he has initiated penalty Sec.270A of the Act. In the & 1167/Chny/2023 :: 33 :: present case, if you go by the assessment order passed by the AO, there is no satisfaction in respect of initiation of penalty proceedings u/s.270A of the Act, whether it is for ‘under reporting of income and under reporting as a consequence of misreporting of income’ thereof which is clearly evident from the assessment order passed by the AO, where, the AO simply referred to initiation of penalty proceedings u/s.270A of the Act. Further, said lapse is even continued while issuing show cause notice u/s.274 r.w.s.270A of the Act, where, the AO simply specified ‘under reporting of income and under reporting as a consequence of misreporting of income’, without specifying for which charge the assessee is directed to pay penalty u/s.270A of the Act. There is no whisper as to which limb of Sec.270A of the Act, is attracted and how the ingredients of sub-sec.9 of Sec.270A of the Act are specified. In absence of such particulars, the mere reference to the word ‘misreporting of income’ in the assessment order or in the show cause notice makes the impugned order manifestly arbitrarily. Therefore, we are of the considered view that show cause notice issued by the AO u/s.274 r.w.s.270A of the Act, without specifying the charge under which penalty is proposed u/s.270A of the Act, is a clear case of non-application of mind at the time of issuing show cause notice and thus, in absence of specific charge against the assessee, the assessee is not in a position to counter the show cause notice issued by the AO as well as cogent reply to the show cause notice. In view of vague notice without any whisper as to which limb of section 270A of the Act is & 1167/Chny/2023 :: 34 :: attracted and how ingredients of sub-section 9 is specified, initiation of penalty u/s.270A of the Act for ‘misreporting of income’ is not only erroneous, but also arbitrary and thus, penalty proceedings cannot be sustained. This legal position is strengthened by the decision of the Hon’ble Delhi High Court in the case of Prem Brothers Infrastructure LLP (supra), where the Hon’ble Delhi High Court by following the earlier decision in the case of Schneider Electric South East Asia (HQ) Pte Ltd. v.

ACIT, International Taxation in WP (C) No.5111 of 2022 dated 28.03.2022, held that in view of vague notice without any whisper as to which limb of section 270A of the Act is attracted and how ingredients of sub-section 9 is specified, initiation of penalty u/s.270A of the Act for ‘misreporting of income’ is not only erroneous, but also arbitrary and bereft of any reason and consequently, penalty order passed by the AO, cannot be sustained. The relevant findings of the Hon’ble Delhi High Court are as under:

6. This court in the case of Schneider Electric South East Asia (HQ) PTE Ltd. Vs. ACIT, International Taxation Circle 3(1)(2), New Delhi and Ors. W.P.(C) No. 5111/2022 vide judgment dated 28.03.2022 observed as under:-

“6. Having perused the impugned order dated 9th March, 2022, this Court is of the view that the Respondents’ action of denying the benefit of immunity on the ground that the penalty was initiated under Section 270A of the Act for misreporting of income is not only erroneous but also arbitrary and bereft of any W.P.(C) 7092/2022 Page 4 of 6 reason as in the penalty notice the Respondents have failed to specify the limb - "underreporting" or "misreporting" of income, under which the penalty proceedings had been initiated.

8. This Court is of the opinion that the entire edifice of the assessment order framed by Respondent No.1 was actually voluntary computation of income filed by :: 35 ::

the Petitioner to buy peace and avoid litigation, which fact has been duly noted and accepted in the assessment order as well and consequently, there is no question of any misreporting.

9. This Court is further of the view that the impugned action of Respondent No.1 is contrary to the avowed Legislative intent of Section 270AA of the Act to encourage/incentivize a taxpayer to (i) fast-track settlement of issue, (ii) recover tax demand; and (iii) reduce protracted litigation.

7. This Court is of the opinion that the only addition in the assessment order framed by Respondent No.1 is in respect of disallowance under section 14A of the Act. The Petitioner has made a disallowance of Rs.3,20,14,010/- which was recomputed by the Assessing Officer at Rs.6,82,45,759/-. Thus, this is a case where the amount of underreporting of income is consequent to increase in the disallowance voluntarily estimated by the assessee. This court is conscious of the fact that there can be cases where underreporting of income may result in misreporting of income, however, in peculiar facts of the present case, the underreporting allegedly done by the assessee cannot amount to misreporting as the assessee had furnished all the details of the transactions relating to disallowance made under Section 14A of the Act and the AO as well as assessee has used the same details to arrive at different conclusions i.e. differing quantum of disallowances under Section 14A of the Act. This by no stretch of imagination can be held to be ‘misreporting’.

ACIT reported in [2018] 93 taxmann.com 250, held that issuing a printed form of notice without striking inapplicable portion in the notice and not charging the assessee for particular evasion vitiates the entire penalty & 1167/Chny/2023 :: 36 :: proceedings, including the order passed by the AO imposing penalty u/s.271(1)(c) of the Act. A similar view has been taken by the Hon’ble Karnataka High Court in the case of CIT v. Manjunatha Cotton & Ginning Factory reported in [2013] 359 ITR 565, where the issue of show cause notice and consequent penalty proceedings has been dealt in detail and held that penalty proceedings consequent to vague and invalid notice becomes invalid and liable to be quashed. The Hon’ble Supreme Court has upheld the decision of the Hon’ble Karnataka High Court in the case of CIT v. SSA’s Emerald Meadows reported in [2016] 73 taxmann.com

proceedings. The findings in the assessment proceedings cannot be considered as conclusive and final for the purpose of imposing penalty.

The Hon’ble Supreme Court in the case of CIT v. Anwar Ali, reported in [1970] 76 ITR 696 (SC) observed that the findings in assessment proceedings may constitute evidence in the penalty proceedings, but it does not follow that penalty is mandatory whenever addition or disallowance is made. Further, the jurisdictional High Court in the case of CIT v. Gem Granites reported in [2013] 86 CCH 160 (Madras), observed that merely because, the assessment proceedings namely the quantum assessment having been confirmed, cannot automatically lead to the conclusion that the penalty proceedings are justified. In other words, there should be an independent finding from the AO regarding under reporting of income or misreporting of income in the penalty proceedings which alone can lead to conclusion that it is a fit case for levy of penalty.

generation of cash by way of inflation of expenditure and received back cash from the supplier, but there is no specific reference to any material unearthed during the course of search which shows the amount of cash received back by the assessee from any supplier. Further, cash seized during the course of search could not be identified with a particular assessment year either by the assessee or the investigation Team and further, the additional sum of Rs.58.72 Crs. (Rs.113.99 Crs. – Rs.55.27 Crs.) offered by the assessee was not identified with any Financial Year.

This amount was estimated figure which did not belong to any year nor was it represented by asset or income that was unearthed in the search proceedings. Although, the department found unaccounted cash during the course of search in the residential premises of the directors and their associates, said cash was not directly linked to assessee and its business with any evidence. Assuming for a moment said cash belongs to appellant Company, but it was found during the course of search and at best it can be linked to year of search. However, it cannot be extrapolated or estimated to any other years without any reference to incriminating materials. The allocation of 1/3rd of marketing expenses on estimated basis is purely on the basis of admission of the assessee company in the statement recorded u/s.132(4) of the Act, but such admission was not corroborated by any evidences found during the course of search.

Although, the AO referred to investigation carried out during the course of assessment proceedings with suppliers of ‘gift articles’, but on perusal of & 1167/Chny/2023 :: 39 :: one reply received from a supplier of ‘gift articles’ which has been reproduced in assessment order clearly shows that the suppliers have admitted to have supplied goods to the assessee and further stated that at a times cash has been returned back to the assessee. We further noted that there is no specific instance of any reference to bill on which cash has been returned and also any reference to any financial year cash has been refunded to the assessee. Further, the AO has also not made out any case of under reporting of income consequent to inflation of expenditure under the head ‘marketing expenses’ with reference to replies received from suppliers qua total amount of purchases made from them and year of such purchase. This is further fortified by the findings of the AO in the assessment order, where the AO expressed complete satisfaction of income admitted without any reservations/adverse comments. Further allocation of amount over the years was only on ad hoc basis and there was no evidence with the AO as regards with accuracy. Further, it could be seen from the assessment order that there is no observation of ‘under reporting of income and under reporting as a consequence of misreporting of income’ either in the assessment order or in the show cause notice u/s.274 r.w.s.270A of the Act specifying the limb of misreporting of income. The addition in the assessment is purely based on sworn statement u/s.132(4) of the Act, but nothing else. Form the above, it is undisputedly clear that the AO has not made out a case of ‘under reporting of income and under reporting as a consequence of & 1167/Chny/2023 :: 40 :: misreporting of income’, which falls under Clauses (c) & (d) of sub-section 9 of sec.270A of the Act.

Clause-(c) speaks about misrepresentation or suppression of facts. If you go by the facts, the assessee has admitted additional income in response to return filed u/s.153A of the Act, for both the assessment years and in the order passed u/s.153A of the Act, the AO accepted the returned income without any additions/disallowance. Further, the quantification made towards additional income was purely on ad hoc estimation basis by taking into account statement recorded from the assessee and disallowed 1/3rd of total expenditure incurred under the head ‘marketing expenses’. There is no finding in the assessment order to the effect that the assessee had either ‘misreported income’ or ‘under reporting of income’. Further, quantification of estimated disallowance was made on the basis of regular books of accounts maintained by the assessee, but not based on any unaccounted purchase bills etc,. Further, the assessee has disclosed total expenditure incurred under the head marketing expenses in the regular return of income filed for both assessment years.

From the above, it is undisputedly clear that the appellant has not misrepresented facts with regard to marketing expenditure. Therefore, we are of the considered view that it is not a case of misrepresentation or suppression of facts based on any evidences, but admission of additional income is purely on the basis of statement recorded u/s.134 of the Act, & 1167/Chny/2023 :: 41 :: without any reference to incriminating material found as a result of search. Therefore, in our considered view, Clause-(C) of sub-sec.9 to sec.270A, is not applicable.

In our considered view, it is not a case of any investment which is not recorded in the books of accounts. Therefore, said Clause is not applicable. In our considered view, the AO is completely erred in invoking said section and levied penalty u/s.270A of the Act. As regards sub- Clause (e) to section 270A(9) of the Act, invoked by the Ld.CIT(A), in our considered view, there is no allegation from the AO regarding failure to record any receipt in books of accounts of the assessee having a bearing on total income in so far as estimated disallowance of proportionate marketing expenses. The additional income has been quantified by the Revenue on the basis of estimated disallowance of marketing expenses and such estimation is ad hoc without there being any specific findings with regard to year for which the assessee has inflated expenditure.

There cannot be any reasons for uniformity in inflation of expenditure for all assessment years as alleged by the AO. Further, it cannot be uniformly 1/3rd of total expenditure incurred under the head was inflated and further, it cannot be the case of receipt of 1/3rd amount from all suppliers. In absence of any findings as to quantification of inflated expenditure qua each assessment year with reference to total purchase & 1167/Chny/2023 :: 42 :: from each party, amount of inflated expenditure, actual cash received back by the assessee. in our considered view, merely because addition was made on the basis of voluntary surrender of income by the assessee, penalty for ‘under reporting of income’ or ‘misreporting of income’ cannot be fastened on the assessee. Therefore, we are of the considered view that even on merits, penalty levied by the AO u/s 270A of the Act, cannot be sustained.

ITA No.1167/Chny/2023 for AY 2018-19:

Order pronounced on the 06th day of March, 2024, in Chennai.