IDEAL UNEMPLOYED ENGINEERS CO-OPERATIVE SOCIETY LTD.,COOCHBIHAR vs. D.C.I.T., CIRCLE - 2, JALPAIGURI, JALPAIGURI

आदेश /O R D E R

PER Waseem Ahmed, Accountant Member:-

Ideal Unemployed Engineeers Co-Op So. Ltd. v. DCIT Cir-2, JAL Page 2 2. Only issue in this appeal of assessee is that Ld. CIT(A) erred in confirming the penalty imposed by Assessing Officer u/s 271(1)(c) of the Act. For this, assessee has raised following grounds:- “

1. For that the penalty under u/s. 271(1)(c)of the Act is opposed to requirement of law and bad in law.

2. For that imposition of penalty R.11,62,260/- u/s. 271(1)(c) of the Act without jurisdiction, opposed to requirement of law and bad in law.

3. For that the imposition of penalty Rs.11,62,260/- u/s 271(1)(c) of the Act is neither tenable in law nor in facts.

4. For that imposition of penalty at 200% is without basis, arbitrary and bad in law.”

3. Briefly stated facts are that assessee is a co-operative society and engaged in the business of contracting activity. During the course of assessment proceeding, Assessing Officer has made the addition to the total income of assessee on account of following:- i) Non disclosure of interest income earned on the FDR of Rs.19,022/- ii) Claim of bogus purchases for Rs.18,61,658/- At the time of assessment, AO initiated the penalty proceedings u/s. 271(1)(c) for the concealment of income in relation to non-disclosure of income from FDR and for the bogus purchase on account of furnishing inaccurate particulars of income. Finally, AO imposed the penalty by way of passing order dated 21.01.2013 @ 200% of the tax sought to be evaded.

4. Aggrieved, assessee preferred an appeal before Ld. CIT(A) who confirmed the action of AO by observing as under:- “4. I have gone through the submission of the assessee and have seen the case law cited. In the case of purchases of Rs.18,61,658, it is seen that this purchase was not entered in the books of account of the subsequent year. Therefore, it was indeed a bogus purchase and this entry was made in the purchase register to reduce the taxable income. This transactions was entered into with malafide intention of tax evasion. Regarding the non- disclosure of accrued interest in the return of income, the AO is directed to verify whether the entire interest for one year has been offered for tax in the Ideal Unemployed Engineeers Co-Op So. Ltd. v. DCIT Cir-2, JAL Page 3 return for the subsequent year. If this entire interest of twelve months is offered for tax in the subsequent year, then penalty under section 271(1)(c) for this interest amount of Rs.19,022 is directed to be deleted. The quantum of penalty i.e. between 100% to 300% is discretion of the AO and on the facts of the case, no interference is called for. The appeal of the assessee is dismissed.”

Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us.

Shri V.N Dutta, Ld. Authorized Representative appearing on behalf of assessee and Shri Debasish Banerjee, Ld. Departmental Representative appearing on behalf of Revenue.

On the other hand L’d DR relied on the order of the CIT(A).

6.1 The Hon’ble Karnataka High Court in the case of Manjunatha Cotton and Ginning Factory, 359 ITR 565 (Karn) (supra), 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 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 Ideal Unemployed Engineeers Co-Op So. Ltd. v. DCIT Cir-2, JAL Page 5 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.

The Hon’ble Karnataka High Court in the case of 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 farm 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.

Ideal Unemployed Engineeers Co-Op So. Ltd. v. DCIT Cir-2, JAL Page 6 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 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.

6.2 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.

Ideal Unemployed Engineeers Co-Op So. Ltd. v. DCIT Cir-2, JAL Page 8 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 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.

Ideal Unemployed Engineeers Co-Op So. Ltd. v. DCIT Cir-2, JAL Page 9 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)

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 in the case of Manjunatha Cotton and Ginning Factory (supra) we hold that the orders imposing penalty in the assessment year under consideration has to be held as invalid and consequently penalty imposed is cancelled.

6.3 For the reasons given above, we hold that levy of penalty in the present case cannot be sustained. We, therefore, cancel the orders imposing penalty u/s 271(1)(c) of the Act on the assessee and this ground of the assessee’s appeal is allowed.