SMT. DIPALBEN MANISH PATEL, RAIPUR,RAIPUR vs. INCOME TAX OFFICER, WARD 2(1), RAIPUR, RAIPUR

The present appeal filed by the assessee is directed against the order passed by the CIT (Appeals), National Faceless Appeal Centre (NFAC), Delhi, dated 11.05.2023, which in turn arises from the order passed by the A.O. u/s. 271(1)(c) of the Income-tax Act, 1961 (for short ‘Act’), dated 30.10.2017 for A.Y. 2015-16. The assessee has assailed the impugned order on the following grounds of appeal before us:

Succinctly stated, the assessee had e-filed her return of income for A.Y.2015- 16 on 28.08.2015, declaring an income of Rs.5,00,690/-. The case of the assessee was, thereafter, selected for scrutiny assessment u/s.143(2) of the Act.

Original assessment was framed by the A.O vide his order passed u/s. 143(3) of the Act dated 30.10.2017, determining the total income of the assessee at Rs.11,06,830/-. The A.O, while culminating the assessment proceedings is stated to have initiated penalty proceedings for “furnishing of inaccurate particulars of income” u/s. 271(1)(c) of the Act. Accordingly, a “Show Cause Notice” (SCN) u/s.274 r.w.s 271(1)(c) of the Act dated 30.10.2017 was issued by the A.O, Page 1 of APB.

Considering the facts mentioned above, the A.O. vide his order passed u/s. 271(1)(c) dated 30.10.2017 imposed a penalty of Rs.1,90,000/- for furnishing of inaccurate particulars of income.

Aggrieved the assessee assailed the order passed by the A.O u/s. 271(1)(c) of the Act dated 30.10.2017 before the CIT(Appeals) but without success.

Per contra, the Ld. Departmental Representative (for short 'D.R') relied upon the orders of the lower authorities. The Ld. D.R submitted that as the assessee was afforded sufficient opportunity in the course of penalty proceedings, thus, it was incorrect on her part to claim that no opportunity of being heard was afforded to her. The Ld. D.R submitted that now when the assessee had in the course of the penalty proceedings submitted that no penalty u/s 271(1)(c) of the Act was called for in her

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 his contentions. Admittedly, on a perusal of the SCN dated 30.10.2017, it stands revealed that the Assessing Officer had failed to strike- off the irrelevant default while calling upon the assessee to explain why she may not be subjected to penalty u/s 271(1)(c) of the Act. For the sake of clarity, the SCN dated 30.10.2017, Page 1 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, dated 30.10.2017 failed to point out the specific default for which penalty u/s.271(1)(c) was sought to be imposed in her case; therefore, the assessee was not validly put to notice as regards the default/defaults for which she was called upon to explain that as to why penalty may not be imposed on her 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 the aforesaid SCN dated 30.10.2017 had failed to point out the specific default for which penalty was 8 Smt. Dipalben Manish Patel Vs. ITO-2(1), Raipur (C.G.)

We would now test the validity of the aforesaid “Show Cause” notice dated 30.10.2017 and the jurisdiction emerging therefrom in the backdrop of the judicial pronouncements on the issue under consideration. Admittedly, the A.O. has 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 view, as penalty proceedings are like quasi criminal proceedings; therefore, as a matter of a statutory right, the assessee is supposed to know the exact charge for which he is being called upon to explain why the same may not be imposed on her. The non-specifying of the charge in the ‘Show cause’ notice not only reflects the non-application of mind by the A.O but defeats the very purpose of giving a reasonable opportunity of being heard to the assessee as envisaged under Sec. 274(1) of the I.T. Act. We find that the fine distinction between the said two defaults contemplated in Sec. 271(1)(c), viz. ‘concealment of income’ and ‘furnishing of inaccurate particulars of income’ had been appreciated at length by the Hon’ble Supreme Court in its judgments passed in the case of Dilip & Shroff Vs. Jt. CIT (2007) 210 CTR (SC) 228 and T. Ashok Pai Vs. CIT (2007) 292 ITR 11 (SC). The 10 Smt. Dipalben Manish Patel Vs. ITO-2(1), Raipur (C.G.)

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 order mentioned above 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 decision of the Hon’ble Apex Court in T. Ashok Pai Vs. CIT, 292 ITR 1 (SC) had approved the order of the 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 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 12 Smt. Dipalben Manish Patel Vs. ITO-2(1), Raipur (C.G.)

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 13 Smt. Dipalben Manish Patel Vs. ITO-2(1), Raipur (C.G.)

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 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. 179. 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. 180. 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 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 16 Smt. Dipalben Manish Patel Vs. ITO-2(1), Raipur (C.G.)

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.

That said, regarding the other assessment year, it reasons that the assessment order, containing the reasons or justification, avoids prejudice to the assessee. That is where, we reckon, the reasoning suffers. Kaushalya’s insistence that the previous proceedings supply justification and cure the defect in penalty proceedings has not met our acceptance. Question No.3: What is the effect of the Supreme Court’s decision in Dilip N. Shroff on the issue of non-application of mind when the irrelevant portions of the printed notices are not struck off ? 187. In Dilip N. Shroff, for the Supreme Court, it is of "some significance that in the standard Pro-forma used by the assessing officer in issuing a notice despite the fact that the same postulates that inappropriate words and paragraphs were to be 17 Smt. Dipalben Manish Patel Vs. ITO-2(1), Raipur (C.G.)

We may, in this context, respectfully observe that a contravention of a mandatory condition or requirement for a communication to be valid communication is fatal, with no further proof. That said, even if the notice contains no caveat that the inapplicable portion be deleted, it is in the interest of fairness and justice that the notice must be precise. It should give no room for ambiguity. Therefore, Dilip N. Shroff disapproves of the routine, ritualistic practice of issuing omnibus show-cause notices. That practice certainly betrays nonapplication of mind. And, therefore, the infraction of a mandatory procedure leading to penal consequences assumes or implies prejudice.

In Sudhir Kumar Singh, the Supreme Court has encapsulated the principles of prejudice. One of the principles is that "where procedural and/or substantive provisions of law embody the principles of natural justice, their infraction per se does not lead to invalidity of the orders passed. Here again, prejudice must be caused to the litigant, “except in the case of a mandatory provision of law which is conceived not only in individual interest but also in the public interest".

Here, section 271(1)(c) is one such provision. With calamitous, albeit commercial, consequences, the provision is mandatory and brooks no trifling with or dilution. For a further precedential prop, we may refer to Rajesh Kumar v. CIT[ 74], in which the Apex Court has quoted with approval its earlier judgment in State of Orissa v. Dr. Binapani Dei[ 75]. According to it, when by reason of action on the part of a statutory authority, civil or evil consequences ensue, principles of natural justice must be followed. In such an event, although no express provision is laid down on this behalf, compliance with principles of natural justice would be implicit. If a statue contravenes the principles of natural justice, it may also be held ultra vires Article 14 of the Constitution.

As a result, we hold that Dilip N. Shroff treats omnibus show cause notices as betraying non-application of mind and disapproves of the practice, to be particular, of issuing notices in printed form without deleting or striking off the inapplicable parts of that generic notice. Conclusion: We have, thus, answered the reference as required by us; so we direct the Registry to place these two Tax Appeals before the Division Bench concerned for further adjudication.”

We have given thoughtful consideration to the issue before us. After deliberating on the facts, we are of the considered view that the failure on the part of the A.O. to put the assessee to notice as regards the default for which penalty under Sec. 271(1)(c) was sought to be imposed on her by clearly and explicitly pointing out the specific defaults in the SCN, dated 30.10.2017, for which she was called upon to explain that as to why penalty u/s.271(1)(c) of the Act may not be imposed upon her, had, thus, left the assessee guessing of the default for which she was being proceeded against, and had divested her of an opportunity to put forth an explanation before the A.O that no such penalty was called for in her case. We, thus, in the backdrop of our observations above, are of a firm conviction, that as the A.O had failed to discharge his statutory obligation of fairly putting the assessee to notice as regards the default for which she was being proceeded against, therefore, the penalty under Sec. 271(1)(c) of Rs.1,90,000/- imposed by him being in clear violation of the mandate of Sec. 274(1) of the Act cannot be sustained. We, thus, for the reasons above not being able to persuade ourselves to subscribe to the imposition of penalty by the A.O, therefore, set aside the order of the CIT(A) who had upheld the same. The penalty of Rs.1,90,000/- imposed by the A.O under Sec.271(1)(c) is quashed in terms of our observations above. The Ground of appeal Nos. 2 raised by the assessee is allowed in terms of our aforesaid observations.

As the penalty imposed on the assessee under Sec. 271(1)(c) of the Act had been quashed by us for want of valid assumption of jurisdiction by the A.O; therefore, we refrain from adverting to and adjudicating the other grounds of appeal raised by 20 Smt. Dipalben Manish Patel Vs. ITO-2(1), Raipur (C.G.)

In the result, the assessee's appeal is allowed in terms of our observations above. Order pronounced in open court on 14th day of September, 2023.