METAL RECYLING INDUSTRY,MUMBAI vs. ITO 14(1)(1), MUMBAI

This appeal filed by the assessee on 18.2.2014 is against the order of the CIT (A)-25, Mumbai for the assessment year 2004-05. In this appal, assessee raised the seven grounds in toto and they relate to the penalty levied by the AO u/s 271(1)(c) of the Act.

Briefly stated relevant facts of the case are that the assessee is engaged in the business of manufacturing of ferrous and non-ferrous metals. Assessee claimed to be 100% export oriented unit and claimed deduction u/s 10B of the Act. Assessee filed the return of income declaring the total income at Rs. NIL and the same was scrutinised u/s 143(3) of the Act. During the assessment proceedings AO noticed the claim of deduction u/s 10B of the Act as claimed is not allowable. Accordingly, against the claim of deduction u/s 10B of the Act amounting to Rs. 1.55 Crs (rounded off), AO restricted the deduction to Rs. 84.47 lakhs. In the assessment, AO made addition of Rs. 70,21,910/- (Rs. 1,54,68,830 - Rs. 84,46,920/- ). Matter travelled to the FAA and the CIT (A) confirmed the same. On appeal, the Tribunal also decided the issue against the assessee. Meanwhile, AO levied the penalty u/s 271(1)(c) of the Act amounting to Rs. 25,22,310/-. The said penalty was confirmed by the CIT (A). Aggrieved with the said order of the CIT (A), assessee is in appeal before the us.

During the proceedings before us, Ld Counsel for the assessee submitted that this is the case where all the details are fully disclosed in the return of income and available on record and relied on the audit report u/s 44AB of the Act as well as in Form No.56G of the Rules and also the CBDT‟s certificate treating the assessee as a 100% EOU etc. He also submitted that the assessee is on the bonafide belief that the sales made by the assessee to the local parties constitute „deemed exports‟ which qualifies for treating the profits as allowable profits u/s 10B of the Act. Therefore, Ld Counsel for the assessee, based on the disclosure of all the particulars, submitted that this being the case of no concealment of particulars, penalty should not be levied.

Per contra, Ld DR for the Revenue heavily relied on the order of the AO and the CIT (A) and submitted that assessee is not a 100% EOU and the major sales were made to the local parties and earned profits, which is not eligible for deduction u/s 10B of the Act. Bringing our attention to the provisions of the said section, Ld DR submitted that there is no concept of „deemed export‟ in this section. Further, AO invoked of the provisions of section 133(6) of the Act and issued letters to the local parties (to inquire about their export activities, if any) and gathered the adverse information. He found that the some of those local buyers were not engaged in any export activity at all. Therefore, the gains relatable to such sales amounting to Rs. 70,21,910/- (supra) is nowhere related to any „export‟ or „deemed export‟ of the assessee in the year under consideration. AO relied on the documents referred above gathered during the proceedings u/s 133(6) of the Act and mentioned that this is a case „furnishing of inaccurate particulars of income‟ and therefore, it is a fit case for levy of penalty. Bringing our attention to para 4.1 of the CIT (A), ld DR submitted that penalty of Rs. 25,22,310/- levied by the AO should be confirmed without any amendments. During the rebuttal time, Ld Counsel for the assessee submitted that the noticed issued by the AO u/s 274 of the Act suffers from ambiguity and the AO is not clear in his mind about the applicable limb of the provisions of clause (c) of section 271(1) of the Act ie „concealment of income‟ of „furnishing of inaccurate particulars of income‟. He also brought our attention to the decision of the CIT (A) passed the order ambiguously without going to the arguments of the assessee on this issue. He also relied on various decisions for the proposition that the penalty proceedings are invalid if the relevant limb in the notice u/s 274 is not struck down at the time of issue of the said notice.

On hearing both the parties, we gave attention to the argument relating to the ambiguity in the notice u/s 274 of the Act. In this regard, we find para 4.4.3 of the CIT (A) order is relevant and the same is extracted as under:- “4.4.3 The appellant alleged that the show cause notice was a vogue notice as it was not clear whether the same was for “concealment of income” or for “furnishing of inaccurate particulars of income”. I find no merit in said allegation of appellant since both these circumstances are covered u/s 271(1)(c) of the Act and in any show chow cause notice under that section, it is customary to quote both these circumstances.”

From the above, it is evident that the CIT (A) dismissed this part of the argument of the assessee by simply saying that „it is customary to quote both these circumstances‟. In our opinion, the stand of the CIT (A) is not appreciated considering the binding judgments / the order of the Tribunal on this issue. The customs and traditions do not replace the law on the subject. AO should act as per the law and the CIT (A) should go into the facts relating to the actual contents of the said notice u/s 274 of the Act, the way AO has dealt with this issue at the time of initiation in the assessment order and the levy of penalty in the penalty order. No facts about the said notice are discussed in his order. Therefore, the issue of ambiguity of AO, being a legal and preliminary issue, we are of the opinion, the CIT (A) should pass a speaking order on this important and significance part of the argument of the assessee. For this purpose, we remand this legal issue to the file of the CIT (A) for fresh adjudication after granting a reasonable opportunity of being heard to the assessee as per the set principles of natural justice. Further, on the other arguments also, we set aside the findings of the CIT (A) for want of a speaking order after appreciating the existing precedents on the subject of validity of the said notice u/s 274 of Act. Assessee is free to file the documents, if any, in support of their assertions. Without going into the merits of the penalty and for want of facts on the legal issue (if AO struck down the relevant limb or not) relating to ambiguity, we order accordingly. Thus, all the grounds raised