VIKAS SHARMA, DURG,DURG vs. INCOME TAX OFFICER-1(2), BHILAI, DURG

The present appeal filed by the assessee is directed against the order passed by the Commissioner of Income-Tax (Appeals), National Faceless Appeal Center (NFAC), Delhi, dated 16.06.2023, which in turn arises from the order passed by the A.O under Sec.271(1)(c) of the Income-tax Act, 1961 (in short ‘the Act’) dated 30.06.2018 for the assessment year 2015-16. The assessee has assailed the impugned order on the following additional ground of appeal:

Succinctly stated, the A.O framed the original assessment in the case of the assessee vide order passed u/s.143(3) dated 22.12.2017 wherein, after making two- fold additions viz.(i) addition on account of unexplained cash deposit in his bank account: Rs.10,20,000/-; and (ii) undisclosed profit on share trading: Rs.4,57,027/-, income of the assessee was determined at Rs.18,34,867/-. The A.O. at the time of culminating the assessment proceedings, initiated penalty proceedings u/s. 271(1)(c) of the Act.

After the culmination of the assessment proceedings, the A.O. vide his order passed u/s. 271(1)(c) dated 30.06.2018 imposed penalty of Rs.3,96,750/-.

Aggrieved the assessee carried the matter in appeal before the CIT(Appeals) but without success. The CIT(Appeals), while approving the penalty imposed by the A.O, observed as follows:

The assessee, being aggrieved with the order of the CIT(Appeals) has carried the matter in appeal before us.

We have heard the ld. authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by the Ld. AR to drive home their respective contentions. Admittedly, on a perusal of the SCN dated 29.12.2017, it stands revealed that the Assessing Officer had failed to strike-off the irrelevant default while calling upon the assessee to explain as to why he may not be subjected to penalty u/s 271(1)(c) of the Act. For the sake of clarity, the SCN dated 29.12.2017, Page 15 of APB is culled out as under:

Insofar the validity of the jurisdiction assumed by the A.O for imposing penalty u/s 271(1)(c) is concerned, we find that the same has been assailed before us on the ground that as the A.O had in the aforesaid “Show cause” notice(s), dated 29.12.2017 & 31.12.2017 failed to point out the specific defaults for which penalty u/s.271(1)(c) was sought to be imposed in his case; therefore, the assessee was not validly put to notice as regards the default/defaults for which he was called upon to 9 Vikas Sharma Vs. Income Tax Officer-1(2), Bhilai explain that as to why penalty may not be imposed onhim under Sec. 271(1)(c) of the I.T Act.

We have given thoughtful consideration to the facts of the case and are persuaded to subscribe to the claim of the Ld. AR that the A.O. in both the aforesaid SCN’s dated 29.12.2017 & 31.12.2017 had failed to point out the defaults for which penalty was sought to be imposed on the assessee. In our considered view, as both of the two defaults envisaged in Sec. 271(1)(c), i.e., ‘concealment of income’ and ‘furnishing of inaccurate particulars of income’ are separate and distinct defaults that operate in their respective independent and exclusive fields, therefore, it was obligatory for the A.O to have clearly put the assessee to notice as regards the default for which he was being called upon to explain that as to why penalty under Sec. 271(1)(c) may not be imposed on him. As observed by us hereinabove, a perusal of the ‘Show cause’ notice(s) issued in the present case by the A.O under Sec. 274 r.w. Sec. 271(1)(c), dated 29.12.2017 & 31.12.2017, clearly reveals that there was no application of mind by the A.O. while issuing the same. We, say so, for the reason that the A.O by using the term “OR” as a conjunction between both the defaults, i.e., “concealed the particulars of your income or furnished inaccurate particulars of such income”, had failed in his statutory obligation of conveying and validly putting the assessee to notice that w.r.t. the aforesaid additions under consideration penalty was sought to be imposed upon him for which defaults; and, thus, had divested him from putting forth his defense that as to why no such penalty was called for in his case. We are of a strong conviction that the very purpose of 10 Vikas Sharma Vs. Income Tax Officer-1(2), Bhilai affording a reasonable opportunity of being heard to an assessee as per the mandate of Sec. 274(1) of the Act would not only be frustrated but would be rendered redundant if he is not conveyed in clear terms the specific default for which penalty under the said statutory provision was sought to be imposed. In our considered view, the indispensable requirement on the part of the A.O to put the assessee to notice as regards the specific charge contemplated under the aforesaid statutory provision, viz. ‘concealment of income’ or ‘furnishing of inaccurate particulars of income’ or both of the said defaults is not merely an idle formality but is a statutory obligation cast upon him, which we find had not been discharged in the present case as per the mandate of law.

We would now test the validity of the aforesaid “Show Cause” notice(s) dated 29.12.2017 & 31.12.2017 and the jurisdiction emerging therefrom in the backdrop of the judicial pronouncements on the issue under consideration. Admittedly, the A.O. is vested with the powers to levy penalty under Sec. 271(1)(c) of the Act if, in the course of the proceedings, he is satisfied that the assessee had either ‘concealed his income’ or ‘furnished inaccurate particulars of his income’ or had committed both the defaults w.r.t. the various additions/disallowances made in his hands while framing the assessment. In our considered view as the penalty proceedings are in the nature of quasi-criminal proceedings, therefore, the assessee, as a matter of a statutory right, is supposed to know the exact charge for which he is being called upon to explain that as to why the same may not be imposed on him. The non- specifying of the charge in the ‘Show cause’ notice not only reflects the non-

The impugned order, therefore, suffers from non- application of mind. It was also bound to comply with the principles of natural justice [See Malabar Industrial Co. Ltd. Vs. CIT (2000) 2 SCC 718].

We find the Hon’ble High Court of Karnataka in the case of CIT Vs. SSA’s Emerald Meadows (73 taxmann.com 241)(Kar) following its earlier order in the case of CIT Vs. Manjunatha Cotton and Ginning Factory (2013) 359 ITR 565 (Kar), had held that where the notice issued by the A.O under Sec. 274 r.w Sec. 271(1)(c) does not specify the limb of Sec. 271(1)(c) for which the penalty proceedings were initiated, i.e., whether for ‘concealment of particulars of income’ or ‘furnishing of inaccurate particulars,’ then, the same has to be held as bad in law. The ‘Special Leave Petition’ (for short ‘SLP’) filed by the revenue against the aforesaid order of the Hon’ble High Court of Karnataka had been dismissed by the Hon’ble Supreme Court in CIT Vs. SSA’s Emerald Meadows (2016) 73 taxmann.com 248 (SC). Apart from that, we find that the Hon’ble High Court of Bombay had taken a similar view in the case of CIT Vs. Samson Perinchery (ITA No. 1154 of 2014; Dt. 05.01.2017)(Bom). The Hon’ble High Court relied on the judgment of the Hon’ble High Court of Karnataka in the case of Manjunathja Cotton and Ginning Factory (supra), which in turn had relied on the judgment of the Hon’ble Apex Court in T. Ashok Pai Vs. CIT, 292 ITR 1 (SC) had approved the order of the 13 Vikas Sharma Vs. Income Tax Officer-1(2), Bhilai Tribunal that had deleted the penalty u/s 271(1)(c) imposed by the A.O and had, inter alia, observed that the failure of the AO to strike off the irrelevant default in the notice issued under Sec. 274 of the Act, which is in a standard proforma clearly indicates a non-application of mind by the A.O. while issuing the notice. Further, we find that the Hon’ble High Court of Bombay, in the case of Pr. CIT (Central), Bengaluru Vs. Golden Peace Hotels & Resorts (P) Ltd. (2021) 124 tamnn.com 249 (SC), by drawing support from its earlier order in the case of CIT Vs. Shri Samson Perinchery (2017) 392 ITR 4 (Bom) and PCIT Vs. New Era Sova Mine (2020) 420 ITR 376 (Bom), had observed that AO, while issuing show-cause, should clearly indicate that, as per him, the case of the assessee involves concealment of particulars of income or there is the furnishing of inaccurate particulars. It was further observed that if the notice is issued in printed form, then the necessary portions which are not applicable are required to be struck off so as to indicate with clarity the nature of the satisfaction recorded. The High Court observed that, as in the case before them, the AO had failed to strike off the irrelevant default in the body of the SCN issued under Sec. 274 of the Act, therefore, the penalty imposed by the AO u/s 271(1)(c) of the Act was liable to be vacated. For the sake of clarity the observations of the Hon’ble High Court of Bombay in its aforesaid order are culled out as under:

Besides, we note that the Division Bench of this Court in Samson (supra) as applicable are required to be struck off, so as to indicate with clarity the nature of the satisfaction recorded. In both Samson Perinchery and New Era Soya furnishing of inaccurate particulars of income or both, with clarity. If the notice is issued in the printed form, then, the necessary portions which are not applicable are required to be struck off, so as to indicate clarity the nature of satisfaction recorded. In both Samson Perinchery and New Era Sova Mine (supra), the notices issued had not struck off the portion which were inapplicable. From this, the Division Bench concluded that there was no proper record of satisfaction or proper application of mind in matter of initiation of penalty proceedings.

In the present case, as well if the notice dated 30/09/16 (at page 32) is perused, it is apparent that the inapplicable portions have not been struck off. This coupled with the fact adverted to in paragraph (5) of this order, leaves no ground for interference with the impugned order. The impugned order is quite consistent with the law laid down in the case of Samson Perinchery and New Era Soya Mine (supra) and therefore, warrants no interference.”

Kaushalya has adopted an ex-post approach to the issue resolution; Goa Dourado Promotions, an ex-ante approach. Kaushalya saves one single case from further litigation. It asks the assessee to look back and gather answers from whatever source he may find, say, the assessment order. On the other hand, Goa Dourado Promotions saves every other case from litigation. It compels the Revenue to be clear and certain. To be more specific, we may note that if we adopt Kaushalya’s approach to the issue, it requires the assessee to look for the precise charge in the penalty proceedings not only from the statutory note but from every other source of information, such as the assessment proceedings. That said, first, penalty proceedings may originate from the assessment proceedings, but they are independent; they do not depend on the assessment proceeding for their outcome. Assessment proceedings hardly influence the penalty proceedings, for assessment does not automatically lead to a penalty 176. Second, not always do we find the assessment proceedings revealing the grounds of penalty proceedings. Assessment order need not contain a specific, explicit finding of whether the conditions mentioned in section 271(1)(c) exist in the 16 Vikas Sharma Vs. Income Tax Officer-1(2), Bhilai case. It is because Explanations 1(A) and 1(B), as the deeming provisions, create a legal fiction as to the grounds for penalty proceedings. Indeed, the Apex Court in CIT v. Atul Mohan Bindal [ 73], has explained the scope of section 271(1)(c) thus: “[Explanation 1, appended to section 27(1) provides that if that person fails to offer an explanation or the explanation offered by such person is found to be false, or the explanation offered by him is not substantiated, and he fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, for the purposes of section 271(1)(c), the amount added or disallowed in computing the total income is deemed to represent the concealed income.”

That is, even if the assessment order does not contain a specific finding that the assessee has concealed income or he is deemed to have concealed income because of the existence of facts which are set out in Explanation 1, if a mere direction to initiate penalty proceedings under clause (c) of sub-section (1) is found in the said order, by legal fiction, it shall be deemed to constitute satisfaction of the Assessing Officer for initiation of penalty proceedings under the said clause (c). In other words, the Assessing Officer’s satisfaction as to be spelt out in the assessment order is only prima facie. Even if the assessment order gives no reason, a mere direction for penalty proceedings triggers the legal fiction as contained in the Explanation (1).

Therefore, in every instance, it is a question of inference whether the assessment order contained any grounds for initiating the penalty proceedings. Then, whenever the notice is vague or imprecise, the assessee assails it as bad; the Revenue defends it by saying that the assessment order contains the precise charge. Thus, it becomes a matter of adjudication, opening litigious floodgates. The solution is a tick mark in the printed notice the Revenue is used to serving on the assessees.

Besides, the prima facie opinion in the assessment order need not always translate into actual penalty proceedings. These proceedings, in fact, commence with the statutory notice under section 271(1)(c) read with section 274. Again, whether this prima facie opinion is sufficient to inform the assessee about the precise charge for the penalty is a matter of inference and, thus, a matter of litigation and adjudication. The solution, again, is a tick mark; it avoids litigation arising out of uncertainty.

One course of action before us is curing a defect in the notice by referring to the assessment order, which may or may not contain reasons for the penalty proceedings. The other course of action is the prevention of defect in the notice— and that prevention takes just a tick mark. Prudence demands prevention is better than cure. Answers: Question No.1: If the assessment order clearly records satisfaction for imposing penalty on one or the other, or both grounds mentioned in Section 17 Vikas Sharma Vs. Income Tax Officer-1(2), Bhilai 271(l)(c), does a mere defect in the notice—not striking off the irrelevant matter— vitiate the penalty proceedings? 181. It does. The primary burden lies on the Revenue. In the assessment proceedings, it forms an opinion, prima facie or otherwise, to launch penalty proceedings against the assessee. But that translates into action only through the statutory notice under section 271(1)(c), read with section 274 of IT Act. True, the assessment proceedings form the basis for the penalty proceedings, but they are not composite proceedings to draw strength from each other. Nor can each cure the other's defect. A penalty proceeding is a corollary; nevertheless, it must stand on its own. These proceedings culminate under a different statutory scheme that remains distinct from the assessment proceedings. Therefore, the assessee must be informed of the grounds of the penalty proceedings only through statutory notice. An omnibus notice suffers from the vice of vagueness.

More particularly, a penal provision, even with civil consequences, must be construed strictly. And ambiguity, if any, must be resolved in the affected assessee’s favour.

Therefore, we answer the first question to the effect that Goa Dourado Promotions and other cases have adopted an approach more in consonance with the statutory scheme. That means we must hold that Kaushalya does not lay down the correct proposition of law. Question No.2: Has Kaushalya failed to discuss the aspect of 'prejudice'? 184. Indeed, Kaushalya did discuss the aspect of prejudice. As we have already noted, Kaushalya noted that the assessment orders already contained the reasons why penalty should be initiated. So, the assessee, stresses Kaushalya, “fully knew in detail the exact charge of the Revenue against him”. For Kaushalya, the statutory notice suffered from neither non-application of mind nor any prejudice. According to it, “the so-called ambiguous wording in the notice [has not] impaired or prejudiced the right of the assessee to a reasonable opportunity of being heard”. It went onto observe that for sustaining the plea of natural justice on the ground of absence of opportunity, “it has to be established that prejudice is caused to the concerned person by the procedure followed”. Kaushalya closes the discussion by observing that the notice issuing “is an administrative device for informing the assessee about the proposal to levy penalty in order to enable him to explain as to why it should not be done”. 185 No doubt, there can exist a case where vagueness and ambiguity in the notice can demonstrate non-application of mind by the authority and/or ultimate prejudice to the right of opportunity of hearing contemplated under section 274. So asserts Kaushalya. In fact, for one assessment year, it set aside the penalty proceedings on the grounds of non-application of mind and prejudice.

We have given thoughtful consideration to the issue before us and, after deliberating on the facts, are of the considered view that the failure on the part of the A.O. to clearly put the assessee to notice as regards the default for which penalty under Sec. 271(1)(c) was sought to be imposed on him by clearly and explicitly pointing out the specific defaults in the SCN(s), 29.12.2017 (supra) & 31.12.2017 (supra) for which he was called upon to explain that as to why penalty u/s.271(1)(c) of the Act may not be imposed upon him, had, thus, left the assessee guessing of the default for which he was being proceeded against, and had divested him of an opportunity to put forth an explanation before the A.O that no such penalty was called for in his case. We, thus, in the backdrop of our aforesaid observations, are of a strong conviction that as the A.O had clearly failed to discharge his statutory obligation of fairly putting the assessee to notice as regards the defaults for which he was being proceeded against, therefore, the penalty under Sec. 271(1)(c) of Rs.3,96,750/- imposed by him being in clear violation of the mandate of Sec. 274(1) of the Act cannot be sustained. We, thus, for the aforesaid reasons not being able to persuade ourselves to subscribe to the imposition of penalty by the A.O., set aside

In the result, appeal of the assessee is allowed in terms of our aforesaid observations.