HARISH KUMAR SARAWGI,KOLKATA vs. DCIT, CENTRAL CIRCLE - XI, KOLKATA, KOLKATA

1 ITA No.1222-1226/Kol/2011 & ITA No.1496-1499/K/2011, AY 2003-04-2007-08 Harish Kumar Sarawgi IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH: KOLKATA [Before Shri N. V. Vasudevan, JM & Shri M. Balaganesh, AM] I.T.A Nos. 1222 to 1226/Kol/2011 Assessment Years: 2003-04 to 2007-08

Harish Kumar Sarawgi Vs. Deputy Commissioner of Income-tax, (PAN: ALDPS5357E) Central Circle-XI, Kolkata. (Appellant) (Respondent) & I.T.A Nos. 1496 to 1499/Kol/2011 Assessment Years: 2004-05 to 2007-08

Deputy Commissioner of Income-tax, Vs. Harish Kumar Sarawgi Central Circle-XI, Kolkata. (Appellant) (Respondent)

Date of hearing: 16.08.2016 Date of pronouncement: 26.08.2016

For the Assessee: Shri D. S. Damle, FCA For the Revenue : Shri Sallong Yaden, Addl. CIT ORDER Per Bench:

These cross appeals by assessee and revenue are arising out of separate orders of CIT(A), Central-1, Kolkata vide appeal Nos. 85-89/CC-XI/CIT(A),C-1/10-11 dated 18.08.2011. Assessments was framed by DCIT, Central Circle-XI, Kolkata u/s.153A/143(3) of the Income tax Act, 1961 (hereinafter referred to as the “Act”) for AYs 2003-04 to 2007-08 vide his separate orders dated 31.12.2009. Penalties were imposed by DCIT, Central Circle- XI, Kolkata u/s 271(1)(c) of the Act vide his separate orders dated 22.06.2010. Since issues are identical and facts are common, we dispose of all the appeals by this consolidated order for the sake of convenience.

2 ITA No.1222-1226/Kol/2011 & ITA No.1496-1499/K/2011, AY 2003-04-2007-08 Harish Kumar Sarawgi 2. The appeals of the revenue are against the reduction of penalty amount from 300% to 100% against the order of ld CITA. The appeals of the assessee are against the confirmation of levy of penalty @ 100% by the ld CITA.

Assessment Year Disclosure amount

2002-03 Nil 2003-04 1,29,946 2004-05 38,94,000 2005-06 91,91,000 2006-07 38,55,000 2007-08 66,71,000 2008-09 12,62,61,040 ------------------- 15,00,01,986 -------------------

3 ITA No.1222-1226/Kol/2011 & ITA No.1496-1499/K/2011, AY 2003-04-2007-08 Harish Kumar Sarawgi The head of the group Shri S.K. Sarawgi gave a sworn statement on the date of search on 24.1.2008 / 25.1.2008 offering Rs 15 crores as undisclosed income of the entire group with a request not to initiate any penalty proceedings u/s 271AAA of the Act. Subsequently on 9.5.2008, a disclosure statement u/s 132(4) was made by Shri S.K Sarawgi before the ADIT (Inv.) Unit II, Ranchi on behalf of the entire group wherein in respect of certain entries found in the pen drive and other documents in the possession of his younger brother Shri Harish Kumar Sarawgi (assessee herein) , he made a disclosure of Rs. 10 crores in the name of the assessee. It was also stated that tax of Rs. 1.40 crores was already paid in the name of the assessee and the balance tax was undertaken to be paid at the time of filing the block return u/s 153A of the Act. In respect of the remaining undisclosed income of Rs. 5 crores, it was stated that the seized papers are under examination and after completion of the same, another statement u/s 132(4) of the Act would be given very shortly. The head of the group reinforced the disclosure originally made in the sum of Rs 15 crores in the sworn statement recorded on the date of search. This disclosure statement u/s 132(4) of the Act was jointly signed by Shri S.K.Sarawgi (head of the group) and by the assessee. Post inspection of the seized records, the balance sum of Rs. 5 crores was also offered in the hands of the assessee as undisclosed income.

4.1. The details of income declared in the return filed u/s 139(1) of the Act for each assessment year , income offered in disclosure statement u/s 132(4) of the Act for each assessment year pursuant to the search , income declared in the return filed u/s 153A of the Act for each assessment year and assessed income thereon are tabulated as below:- Particulars 03-04 04-05 05-06 06-07 07-08 08-09 1 Income admitted 125974 169888 253220 38221 676289 N.A. u/s. 139(1) 2 Additional 129946 3894000 9191000 3855000 6671000 126261040 income offered in proceedings u/s. 153A pursuant to statement u/s. 132(4) 3 Income disclosed 255920 4063688 9444220 4243221 7347289 127486910 in computation u/s. 153A 4 Income assessed 255920 4063688 9444220 4243221 7347289 127486910 u/s. 153A 5 Any other NIL NIL NIL NIL NIL NIL

4 ITA No.1222-1226/Kol/2011 & ITA No.1496-1499/K/2011, AY 2003-04-2007-08 Harish Kumar Sarawgi addition made in order u/s. 153A beyond the income returned u/s. 153A Total sum Rs.15,00,01,986/-

4.2. This was followed by further letter dated 5.10.2009 wherein detailed explanation substantiating the manner in which undisclosed income was derived by the assessee for each asst year was given by the assessee and enclosing the fund flow analysis for each assessment year for the purpose of computation of undisclosed income. It was submitted that the authorized officer had informed both the assessee as well as his eldest brother Shri S.K Sarawgi at the time of search, that if disclosure is made for undisclosed income, manner of deriving the same is explained and taxes due thereon were paid, then the assessee would be eligible for immunity from levy of penalty. It was stated that the assessee had accordingly come forward to disclose a sum of Rs 15 crores as undisclosed income on the date of search which was later followed by the disclosure statement u/s 132(4) of the Act and disclosed in the return filed u/s 153A of the Act. The assessments were ultimately completed u/s 153A of the Act without making further additions to the returned income. The ld AO levied penalty u/s 271(1)(c ) of the Act by invoking Explanation 5A thereon for the Asst Years 2003-04 to 2007-08 on the premise that but for the search, the assessee would not have come forward to disclose the undisclosed income of Rs 15 crores which was ultimately returned by the assessee u/s 153A and assessments framed thereon. The ld AO levied penalty u/s 271(1)(c ) of the Act at the rate of 300% of tax . On first appeal, the ld CITA reduced the same to 100% of tax. Aggrieved, both the assessee as well as the revenue is in appeals before us.

5 ITA No.1222-1226/Kol/2011 & ITA No.1496-1499/K/2011, AY 2003-04-2007-08 Harish Kumar Sarawgi statement u/s 132(4) of the Act was recorded by the Authorised Officer from the assessee and his elder brother Mr S K Sarawgi. It was argued by the ld AR that in the course of search, the Authorised Officer informed the assessee that in terms of Explanation 5 to Section 271(1)(c ) of the Act , if suo moto disclosure of income is made u/s 132(4) of the Act, then the assessee would get immunity from levy of penalty. After peripheral scrutiny of the seized documents, an income disclosure of Rs 15 crores was made in the statement recorded u/s 132(4) of the Act . This preliminary statement recorded on the date of search was followed by another statement u/s 132(4) of the Act on 12.5.2008 wherein the assessee reiterated the offer to pay tax on undisclosed income of Rs 15 crores. We find that except the undisclosed income offered by the assessee in the statement recorded u/s 132(4) of the act and subsequently in the return filed u/s 153A of the Act, the ld AO did not detect any further undisclosed income in the search assessment. We find that the assessee had deposited the taxes due on the said income. We find that the ld AO had held that since the income was disclosed only at the time of search and not in the return filed u/s 139(1) of the Act, there was deliberateness in the action of the assessee warranting levy of penalty.

5.1. The ld AR argued that consequent on completion of search, there were proposals for centralization of case records of Sarawgi Group first at Ranchi and thereafter at Patna. On the other hand, the assessee was requesting for centralization of assessment records of the group at Kolkata where the registered office of Atibir Industries Ltd was situated. Since the issue of centralization of records had not reached finality, the assessee did not have any idea about the correct jurisdiction and it was alos not possible for him to obtain inspection of the seized records so as to compile full and proper return of income in response to notice u /s 153A of the Act. He argued that the CBDT vide its order dated 9.4.2009 transferred jurisdiction over Atibir Industries Group of cases to Kolkata. Pursuant to the said order , the seized materials were transferred to ld AO at Kolkata. On receipt of the case records , inspection of the seized records were done by the AR of the assessee and based on information gathered from inspection of the seized records, the assessee was able to ascertain the actual extent of undisclosed income which was required to be included in the returns in accordance with the statements recorded u/s 132(4) of the Act.

6 ITA No.1222-1226/Kol/2011 & ITA No.1496-1499/K/2011, AY 2003-04-2007-08 Harish Kumar Sarawgi

5.2. The ld AR argued that the Hon’ble Supreme Court in the case of Hindusthan Steel vs State of Orissa reported in 83 ITR 26 (SC) had held that penalty should not be levied on an assessee merely because a statute contains a provision for levy of penalty. Unless the conduct of an assessee is contumacious or unless the deliberateness is involved in assessee’s act of defiance of a statutory provision, penalty should not be imposed. The ld AR further stated that the Hon’ble Supreme Court in its recent decision in the case of CIT vs Bank of Nova Scotia in Civil Appeal No. 1704 of 2008 dated 7.1.2016 had upheld the view taken by the CITA and the Tribunal and held that no substantial question of law was involved in the said appeal and accordingly dismissed the appeal of the revenue. In the said case, the tribunal had held in the context of levy of penalty u/s 271C of the Act that it is necessary to establish that there was contumacious conduct on the part of the assessee. The tribunal also placed reliance on the decision of the Hon’ble Delhi High Court in the cases of Itochu Corporation reported in 268 ITR 172 (Del) and CIT vs Mitsui & Company Ltd reported in 272 ITR 545 (Del) while rendering their decision. He argued that it is not in dispute that the assessee had made complete disclosure of his undisclosed income right at the time of search duly substantiating the manner of deriving the same and paid taxes due thereon. The explanations furnished by the assessee in respect of seized documents containing earning of income were not found to be false or inaccurate. Hence the bona fide conduct is proved in the instant case beyond doubt. This was further sanctified by the ld AO assessing the same returned income declared u/s 153A of the Act without making any addition. He argued that in the instant case, the assessee had made full disclosure in the return of income, cooperated in the assessment proceedings and paid full and proper taxes along with interest in the income disclosed in the return filed u/s 153A of the Act. It is not a case where the assessee had made false disclosures in the return of income or failed to cooperate during the assessment proceedings. Further, it is also not a case where no explanations were furnished or the explanation furnished were found to be false. It would be pertinent to note that the ld AO was unable to identify any further undisclosed income other than the income offered by the assessee. He stated that ultimately the penalty has been levied on the ground that but for the search, the assessee would not have come forward for disclosure of his undisclosed income and pay taxes thereon. With regard to arguments of Learned DR that

7 ITA No.1222-1226/Kol/2011 & ITA No.1496-1499/K/2011, AY 2003-04-2007-08 Harish Kumar Sarawgi but for the search this undisclosed income could not have been unearthed, the Learned AR argued that this issue is squarely covered in favour of the assessee by the decision of the Hon’ble Calcutta High Court in CIT vs Amardeep Singh Dhanjal in ITA No. 39 of 2010 dated 11.1.2013.

5.3. At this juncture, it would be relevant to address the amendment brought in Explanation 5A to Section 271(1)(c ) of the Act by Finance (No. 2) Act, 2009 with retrospective effect from 1.6.2007. The provisions of old Explanation 5A and amended Explanation 5A could be tabulated as under for better understanding:-

Sl. Explanation 5A (As introduced by FA, Explanation 5A (As amended by FA, 2007) 2009) (i) Search conducted after 01.06.2007 Search conducted after 01.06.2007 (ii) Assessee should be found to be Assessee should be found to be (a) owner of any money, bullion, jewellery (a) owner of any money, bullion, or valuable article or thing which has been jewellery or valuable article or thing acquired out of income; OR which has been acquired out of income; OR (b) any income found based on any entry in (b) any income found based on any entry books of account, documents or transactions in books of account, documents or which represents his income transactions which represents his income (iii) Such Income pertains to a previous year Such Income pertains to a previous year which has ended before the date of search which has ended before the date of search AND due date of filing return of income has AND expired AND assessee had not filed return (a) where return of income for such for of income the year; previous year has already been furnished before date of search but such income has not been declared therein, OR (b) due date of filing return of income has expired and assessee had not filed return of income for the year; (iv) Notwithstanding that such income has been Notwithstanding that such income has declared in any return of income filed been declared in any return of income filed subsequent to date of search shall for the subsequent to date of search shall for the purposes of imposition of penalty will be purposes of imposition of penalty will be deemed to have concealed particulars of deemed to have concealed particulars of income or furnished inaccurate particulars of income or furnished inaccurate particulars income of income

8 ITA No.1222-1226/Kol/2011 & ITA No.1496-1499/K/2011, AY 2003-04-2007-08 Harish Kumar Sarawgi

In the instant case, the assessee had been searched on 24.1.2008 which was prior to the amendment brought in by Finance Act 2009, wherein, even the persons who had regularly filed their returns prior to the date of search also would get covered by the Explanation 5A to section 271(1)(c ) of the Act. In this regard, we hold that the assessee was made to understand the penalty provisions as it stood on the date of search and disclosure was made accordingly with a bona fide belief that no penalty would be levied. Just because the law is changed retrospectively, the assessee cannot be invited with a penal liability when his case was falling under the erstwhile provisions of Explanation 5A to Section 271(1)( c) of the Act on the date of search. In this regard, we draw reference to the decision of Full Bench of Hon’ble Supreme Court in the case of CIT vs Vatika Township (P) Ltd reported in (2014) 367 ITR 466 (SC) wherein it was held :-

5.4. We find that the erstwhile and amended provisions of Explanation 5A to Section 271(1)(c) of the Act have been considered by the Co-ordinate Bench of Hyderabad Tribunal in the case of Dilip Kedia vs ACIT reported in (2013) 40 taxmann.com 102 wherein it was held as below:- “21. In the Circular No 5/2010, dated 3.6.2010 issued by the CBDT explaining the provisions of the Finance (no. 2) Act, 2009, the amendment to explanation 5A was explained as under: "53.2 By substituting the Explanation 5A it has been clarified that the scope extends to the cases where the assessee has filed the return of income for any previous year and the income found during the course of search relates to such previous year and had not

9 ITA No.1222-1226/Kol/2011 & ITA No.1496-1499/K/2011, AY 2003-04-2007-08 Harish Kumar Sarawgi been disclosed in the said return, then such income shall represent deemed concealment of income and assessee shall be liable to pay penalty under section 271." 22. Thus as per the existing Explanation 5A prior to the amendment by Finance (No.2) Act, 2009, if an Assessee had filed the return of income for the years covered by the search, then the addition made shall not be considered as deemed concealment. It is only by the Amendment to explanation 5A by the Finance (no.2) Act, 2009, (which received the assent of the president on 13.8.2009), that addition made in the course of assessment u/s 153A, will be deemed to be concealed income, even if the Assessee had filed a return of income earlier for the relevant Assessment Year. Prior to the amendment, if an assessee had already filed a return of income, the addition made in the assessment made u/s 153A cannot be deemed to be concealed income) 23. No doubt the amendment to Explanation 5A has been made with retrospective effect from 1.6.2007 and is applicable to searches initiated after 1.6.2007, the issue is whether this amendment to Explanation will apply to returns filed before the amended explanation became part of the Statute in 2009. In the instant case the Assessee had filed return of income on 7.7.2008. He filed revised return pursuant to notice u/s 153A on 12.11.2008. Thus both the original return as well as the revised return was filed before the amendment to Explanation5A became a part of the Statute.”

In the instant case, the notice u/s 153A of the Act was issued on the assessee only on 3.8.2009 and the return in response to such notice was filed on 31.8.2009 and by that time the amended provisions of Explanation 5A to Section 271(1)(c ) of the Act would become applicable , but still the circumstances leading to delayed issuance of notice u/s 153A of the Act and filing of return thereon could not be ignored in the facts and circumstances of the case. As stated earlier, there was lot of correspondences between the assessee and the revenue with regard to centralization of cases to Ranchi and Patna and ultimately that dispute got settled vide order of CBDT dated 9.4.2009 wherein it was decided to centralize the cases at Kolkata. Only after the said CBDT order was served on the officials of Kolkata jurisdiction , thereafter ld DGIT (Inv) Kolkata vide his order dated 15.5.2009 assigned the jurisdiction of the case to DCIT, CC-XI, Kolkata. After the issue of jurisdiction over the group was settled, seized materials were transferred by DDIT (Inv) Ranchi to the ld AO at Kolkata in July 2009 who thereafter allowed inspection of the seized documents to the assessee at Kolkata. Notice u/s 153A of the Act was issued by the Kolkata jurisdictional officer on 3.8.2009 and the returns were filed by the assessee on 31.8.2009. We find that on the date of giving sworn statement u/s 132(4) of the Act on the date of search, the amended provisions of Explanation 5A to section 271(1)(c ) of the Act was not in force. It is quite evident from the statement recorded u/s 132(4) of the Act on 24.1.2008 / 25.1.2008 that there is a reference to waiver of penalty proceedings by the group

10 ITA No.1222-1226/Kol/2011 & ITA No.1496-1499/K/2011, AY 2003-04-2007-08 Harish Kumar Sarawgi head in his statement. These special facts cannot be brushed aside in order not to give effect and weightage to the decision of the Hyderabad Tribunal to the facts of the instant case. Infact we find that these facts are clearly brought on record and taken cognizance by the order passed by the Ld DGIT (Inv) while granting waiver of interest u/s 234A in full, interest u/s 234 B and 234 C in part vide order u/s 119 of the Act dated 14.12.2012 for the Asst Years 2002-03 to 2008-09.

From the above, it could be understood that the assessee was prevented from reasonable cause from filing the return u/s 153A of the Act before the amendment was proposed by the Finance (No.2 ) Act, 2009 in Explanation 5A to Section 271(1)( c) of the Act. It cannot be ignored that returns u/s 153A of the Act could be filed only after issuance of notice u/s 153A of the Act thereon which was admittedly issued only on 3.8.2009 and assessee had immediately filed the returns in response thereto on 31.8.2009. It is not in dispute that the assessee had filed regular returns u/s 139(1) of the Act prior to the date of search for all the years under appeal. Hence the ratio laid down by the Co-ordinate Bench of Hyderabad Tribunal supra would be squarely applicable to the facts of the instant case wherein it was held that penalty u/s 271(1)(c ) of the Act by application of Explanation 5A (amended provisions) could not be made applicable to the assessee.

5.5. Another argument advanced by the ld AR is that the show cause notice issued u/s 274 read with section 271(1)(c ) of the Act is defective in as much as the ld AO had not struck off the relevant portion in the show cause notice as to whether the assessee had concealed his income or furnished inaccurate particulars of income. Reliance was placed on the decision of the Hon’ble Karnataka High Court in the case of CIT vs Manjunatha Cotton and Ginning Factory reported in (2013) 359 ITR 565 (Kar) . We find that the ld AO had merely made a tick mark in the show cause notice for the Asst Year 2003-04 without striking off the specific charge on which the assessee has to meet while replying to the penalty notice. In respect tof Asst Years 2004-05 to 2007-08, we find that the ld AO had not even given any tick or struck off the irrelevant portion and had merely given a blank show cause notice by just mentioning the name of the assessee, Asst Year, date and time of penalty hearing. The ld AR pointed out

11 ITA No.1222-1226/Kol/2011 & ITA No.1496-1499/K/2011, AY 2003-04-2007-08 Harish Kumar Sarawgi that the Hon’ble Karnataka High Court in the aforesaid decision has considered the effect of Sec.271(1B) of the Act, in the light of the decision of the Hon’ble Delhi High Court in the case of Ms.Madhushree Gupta Vs. Union of India 317 ITR 107(Del) wherein it was held :- “In the result, conclusions are as follows : (i) sec. 271(1B) is not violative of Art. 14 of the Constitution; (ii) the position of law both pre and post amendment is similar, inasmuch, the AO will have to arrive at a prima facie satisfaction during the course of proceedings with regard to the assessee having concealed particulars of income or furnished inaccurate particulars, before he initiates penalty proceedings; (iii) ‘prima facie’ satisfaction of the AO that the case may deserve the imposition of penalty should be discernible from the order passed during the course of the proceedings. Obviously, the AO would arrive at a decision, i.e., a final conclusion only after hearing the assessee; (iv) at the stage of initiation of penalty proceeding the order passed by the AO need not reflect satisfaction vis-a-vis each and every item of addition or disallowance if overall sense gathered from the order is that a further prognosis is called for; (v) however, this would not debar an assessee from furnishing evidence to rebut the ‘prima facie’ satisfaction of the AO; since penalty proceeding are not a continuation of assessment proceedings; (vi) due compliance would be required to be made in respect of the provisions of ss. 274 and 275; (vii) the proceedings for initiation of penalty proceeding cannot be set aside only on the ground that the assessment order states ‘penalty proceedings are initiated separately’ if otherwise, it conforms to the parameters set out hereinabove are met. The prayers made in the writ petitions are thus rejected with the caveat that provisions of s. 271(1)(c) post- amendment will be read in the manner indicated above.”

We have also perused the show-cause notice issued u/s.274 of the Act for all the aforesaid AYs 2003-04 to 2007-08. The AO in the said show cause notice has not struck off the irrelevant portion as to whether the charge against the Assessee is “concealing particulars of income or furnishing of inaccurate particulars of income”. In this regard, this tribunal in the case of Shri Satyananda Achariya Biswas Vs. DCIT ITA No.5/Kol/2010 order dated 2.12.2015 for AY 2003-04 has taken the following view on the effect of not striking off the irrelevant portion in the show cause notice u/s.274 of the Act as follows:

9.1. The Hon’ble Karnataka High Court in the case of CIT & Anr. v. M.anjunatha Cotton and Ginning Factory, 359 ITR 565 (Karn), has held that notice u/s. 274 of the Act should specifically state as to whether penalty is being proposed to be imposed for concealment of particulars of income or for furnishing inaccurate particulars of income. The Hon’ble High court has further

12 ITA No.1222-1226/Kol/2011 & ITA No.1496-1499/K/2011, AY 2003-04-2007-08 Harish Kumar Sarawgi laid down that certain printed form where all the grounds given in section 271 are given would not satisfy the requirement of law. The Court has also held that initiating penalty proceedings on one limb and find the assessee guilty in another limb is bad in law. It was submitted that in the present case, the aforesaid decision will squarely apply and all the orders imposing penalty have to be held as bad in law and liable to be quashed.

9.2. The Hon’ble Karnataka High Court in the case of CIT & Anr. v. Manjunatha Cotton and Ginning Factory (supra) has laid down the following principles to be followed in the matter of imposing penalty u/s.271(1)(c) of the Act. “NOTICE UNDER SECTION 274 59. As the provision stands, the penalty proceedings can be initiated on various ground set out therein. If the order passed by the Authority categorically records a finding regarding the existence of any said grounds mentioned therein and then penalty proceedings is initiated, in the notice to be issued under Section 274, they could conveniently refer to the said order which contains the satisfaction of the authority which has passed the order. However, if the existence of the conditions could not be discerned from the said order and if it is a case of relying on deeming provision contained in Explanation-1 or in Explanation-1(B), then though penalty proceedings are in the nature of civil liability, in fact, it is penal in nature. In either event, the person who is accused of the conditions mentioned in Section 271 should be made known about the grounds on which they intend imposing penalty on him as the Section 274 makes it clear that assessee has a right to contest such proceedings and should have full opportunity to meet the case of the Department and show that the conditions stipulated in Section 271(1)(c) do not exist as such he is not liable to pay penalty. The practice of the Department sending a printed form where all the ground mentioned in Section 271 are mentioned would not satisfy requirement of law when the consequences of the assessee not rebutting the initial presumption is serious in nature and he had to pay penalty from 100% to 300% of the tax liability. As the said provisions have to be held to be strictly construed, notice issued under Section 274 should satisfy the grounds which he has to meet specifically. Otherwise, principles of natural justice is offended if the show cause notice is vague. On the basis of such proceedings, no penalty could be imposed on the assessee. 60. Clause (c) deals with two specific offences, that is to say, concealing particulars of income or furnishing inaccurate particulars of income. No doubt, the facts of some cases may attract both the offences and in some cases there may be overlapping of the two offences but in such cases the initiation of the penalty proceedings also must be for both the offences. But drawing up penalty proceedings for one offence and finding the assessee guilty of another offence or finding him guilty for either the one or the other cannot be sustained in law. It is needless to point out satisfaction of the existence of the grounds mentioned in Section 271(1)(c) when it is a sine qua non for initiation or proceedings, the penalty proceedings should be confined only to those grounds and the said grounds have to be specifically stated so that the assessee would have the opportunity to meet those grounds. After, he places his version and tries to substantiate his claim, if at all, penalty is to be imposed, it should be imposed only on the grounds on which he is called upon to answer. It is not open to the authority, at the time of imposing penalty to impose penalty on the grounds other than what assessee was called upon to meet. Otherwise though the initiation of penalty proceedings may be valid and legal, the final order imposing penalty would offend principles of natural justice and cannot be sustained. Thus once the proceedings are initiated on one ground, the penalty should also be

13 ITA No.1222-1226/Kol/2011 & ITA No.1496-1499/K/2011, AY 2003-04-2007-08 Harish Kumar Sarawgi imposed on the same ground. Where the basis of the initiation of penalty proceedings is not identical with the ground on which the penalty was imposed, the imposition of penalty is not valid. The validity of the order of penalty must be determined with reference to the information, facts and materials in the hands of the authority imposing the penalty at the time the order was passed and further discovery of facts subsequent to the imposition of penalty cannot validate the order of penalty which, when passed, was not sustainable. 61. The Assessing Officer is empowered under the Act to initiate penalty proceedings once he is satisfied in the course of any proceedings that there is concealment of income or furnishing of inaccurate particulars of total income under clause (c). Concealment, furnishing inaccurate particulars of income are different. Thus the Assessing Officer while issuing notice has to come to the conclusion that whether is it a case of concealment of income or is it a case of furnishing of inaccurate particulars. The Apex Court in the case of Ashok Pai reported in 292 ITR 11 at page 19 has held that concealment of income and furnishing inaccurate particulars of income carry different connotations. The Gujarat High Court in the case of MANU ENGINEERING reported in 122 ITR 306 and the Delhi High Court in the case of VIRGO MARKETING reported in 171 Taxman 156, has held that levy of penalty has to be clear as to the limb for which it is levied and the position being unclear penalty is not sustainable. Therefore, when the Assessing Officer proposes to invoke the first limb being concealment, then the notice has to be appropriately marked. Similar is the case for furnishing inaccurate particulars of income. The standard proforma without striking of the relevant clauses will lead to an inference as to non-application of mind.” The final conclusion of the Hon’ble Court was as follows:-

“63. In the light of what is stated above, what emerges is as under: a) Penalty under Section 271(1)(c) is a civil liability. b) Mens rea is not an essential element for imposing penalty for breach of civil obligations or liabilities. c) Willful concealment is not an essential ingredient for attracting civil liability. d) Existence of conditions stipulated in Section 271(1)(c) is a sine qua non for initiation of penalty proceedings under Section 271. e) The existence of such conditions should be discernible from the Assessment Order or order of the Appellate Authority or Revisional Authority. f) Even if there is no specific finding regarding the existence of the conditions mentioned in Section 271(1)(c), at least the facts set out in Explanation 1(A) & (B) it should be discernible from the said order which would by a legal fiction constitute concealment because of deeming provision. g) Even if these conditions do not exist in the assessment order passed, at least, a direction to initiate proceedings under Section 271(l)(c) is a sine qua non for the Assessment Officer to initiate the proceedings because of the deeming provision contained in Section 1(B). h) The said deeming provisions are not applicable to the orders passed by the Commissioner of Appeals and the Commissioner. i) The imposition of penalty is not automatic. j) Imposition of penalty even if the tax liability is admitted is not automatic. k) Even if the assessee has not challenged the order of assessment levying tax and interest and has paid tax and interest that by itself would not be sufficient for the authorities either to initiate penalty proceedings or impose penalty, unless it is discernible from the assessment order that, it is

14 ITA No.1222-1226/Kol/2011 & ITA No.1496-1499/K/2011, AY 2003-04-2007-08 Harish Kumar Sarawgi on account of such unearthing or enquiry concluded by authorities it has resulted in payment of such tax or such tax liability came to be admitted and if not it would have escaped from tax net and as opined by the assessing officer in the assessment order. l) Only when no explanation is offered or the explanation offered is found to be false or when the assessee fails to prove that the explanation offered is not bonafide, an order imposing penalty could be passed. m) If the explanation offered, even though not substantiated by the assessee, but is found to be bonafide and all facts relating to the same and material to the computation of his total income have been disclosed by him, no penalty could be imposed. n) The direction referred to in Explanation IB to Section 271 of the Act should be clear and without any ambiguity. o) If the Assessing Officer has not recorded any satisfaction or has not issued any direction to initiate penalty proceedings, in appeal, if the appellate authority records satisfaction, then the penalty proceedings have to be initiated by the appellate authority and not the Assessing Authority. p) Notice under Section 274 of the Act should specifically state the grounds mentioned in Section 271(1)(c), i.e., whether it is for concealment of income or for furnishing of incorrect particulars of income q) Sending printed form where all the ground mentioned in Section 271 are mentioned would not satisfy requirement of law. r) The assessee should know the grounds which he has to meet specifically. Otherwise, principles of natural justice is offended. On the basis of such proceedings, no penalty could be imposed to the assessee. s) Taking up of penalty proceedings on one limb and finding the assessee guilty of another limb is bad in law. t) The penalty proceedings are distinct from the assessment proceedings. The proceedings for imposition of penalty though emanate from proceedings of assessment, it is independent and separate aspect of the proceedings. u) The findings recorded in the assessment proceedings in so far as "concealment of income" and "furnishing of incorrect particulars" would not operate as res judicata in the penalty proceedings. It is open to the assessee to contest the said proceedings on merits. However, the validity of the assessment or reassessment in pursuance of which penalty is levied, cannot be the subject matter of penalty proceedings. The assessment or reassessment cannot be declared as invalid in the penalty proceedings.” (emphasis supplied)

9.3. It is clear from the aforesaid decision that on the facts of the present case that the show cause notice u/s. 274 of the Act is defective as it does not spell out the grounds on which the penalty is sought to be imposed. Following the decision of the Hon’ble Karnataka High Court, we hold that the orders imposing penalty in all the assessment years have to be held as invalid and consequently penalty imposed is cancelled.

The aforesaid ruling will squarely apply to the facts of the present case. In the present case also the show cause notice u/s.274 of the Act is defective. Following the decision referred to above, we hold that the penalty imposed on the Assessee u/s.271(1)( c) of the Act cannot be sustained and the same is directed to be cancelled.

15 ITA No.1222-1226/Kol/2011 & ITA No.1496-1499/K/2011, AY 2003-04-2007-08 Harish Kumar Sarawgi

5.6. We also find that this decision was subsequently followed by the Hon’ble Karnataka High Court in the case of CIT Vs. MWP Ltd. (2014) 41 taxmann.com 496 (Karn.) against which order, the Special Leave Petition (SLP) preferred by the revenue has been dismissed by the Hon’ble Supreme Court.

In view of our aforesaid findings and respectfully following the judicial precedents relied upon hereinabove and considering the totality of the facts and circumstances of the case, we hold that the penalty levied u/s 271(1)(c ) of the Act deserves to be cancelled on all counts. Accordingly, the grounds raised in the revenue appeals are dismissed and that of the assessee appeals are allowed.

Order pronounced in the open court on 26.08.2016

Sd/- Sd/- (N. V. Vasudevan) (M. Balaganesh) Judicial Member Accountant Member

Dated : 26th August, 2016 Jd.(Sr.P.S.) Copy of the order forwarded to: APPELLANT – Shri Harish Kumar Sarawgi, 7B (7th Floor), 20B, Abdul 1. Hamid Street (British India Street), Kolkata-700 069. Respondent – DCIT, Central Circle-XI, Kolkata. 2 The CIT(A), Kolkata 3. 4. CIT , Kolkata 5. DR, Kolkata Benches, Kolkata /True Copy, By order, Asstt. Registrar.