Case Law Details
DCIT Vs R. Elangovan (ITAT Chennai)
Material Facts: The Revenue filed an appeal and the assessee filed a cross objection against the order of the Commissioner of Income Tax (Appeals)-18, Chennai dated 23.01.2017. The Revenue’s appeal, filed with a delay of two days, was admitted after condonation of delay. In the cross objection, the assessee challenged the levy of penalty on the ground that the notice issued under Section 274 read with Section 271AAB of the Income-tax Act, 1961 was vague and invalid. Since the assessee questioned the validity of the initiation of penalty proceedings, the Tribunal considered this issue first.
Procedural History:The Commissioner (Appeals) had reduced the penalty levied under Section 271AAB from 30% to 10% but had not adjudicated the assessee’s ground challenging the validity of the penalty notice. The Revenue appealed against the reduction of penalty, while the assessee filed a cross objection seeking complete quashing of the penalty on the basis of the defective notice.
Legal Issues
The Tribunal considered:
- Whether the notice issued under Section 274 read with Section 271AAB was vague and invalid.
- Whether failure to specify the exact charge in the notice rendered the penalty proceedings invalid.
- Whether the penalty imposed under Section 271AAB could survive if the initiation of penalty proceedings was based on an invalid notice.
Relevant Statutory Provisions
The Tribunal referred to:
- Sections 271AAB, 274, 275, 132, 139 and 153A of the Income-tax Act, 1961.
- Explanation to Section 271AAB defining “undisclosed income”.
Assessee’s Submissions
The assessee contended that:
- The notice issued under Section 274 read with Section 271AAB was vague as it did not clearly specify the reason for initiating penalty proceedings.
- The Assessing Officer failed to indicate whether the penalty was for concealment of income, furnishing inaccurate particulars of income, or for having undisclosed income within the meaning of Section 271AAB.
- The Commissioner (Appeals) had failed to decide the ground challenging the validity of the notice.
- Reliance was placed on the judgments in CIT vs. Manjunatha Cotton and Ginning Factory and CIT vs. SSA’s Emerald Meadows, the latter having been affirmed by dismissal of the Revenue’s Special Leave Petition by the Supreme Court.
Revenue’s Submissions
The Revenue submitted that:
- The notice had been issued under Section 274 read with Section 271AAB and specifically referred to undisclosed income within the meaning of Section 271AAB.
- The notice was not vague and therefore the decisions in Manjunatha Cotton and Ginning Factory and SSA’s Emerald Meadows were not applicable.
- The Commissioner (Appeals) had rightly reduced the penalty from 30% to 10%, and the Revenue’s appeal was directed against such reduction.
Tribunal’s Findings and Reasoning
The Tribunal examined the notice issued under Section 274 read with Section 271AAB and observed that the Assessing Officer had not struck off the inapplicable portions. The notice simultaneously referred to concealment of income, furnishing inaccurate particulars of income and undisclosed income under Section 271AAB without specifying the exact charge for which the assessee was required to respond.
The Tribunal observed that although the notice carried the caption of Section 274 read with Section 271AAB, it did not specify the applicable clause or the precise basis for the proposed penalty. It referred to Section 271AAB(3), which makes Sections 274 and 275 applicable to penalty proceedings, and noted that Section 274 requires a meaningful opportunity of hearing.
Relying on the judgments of the Karnataka High Court in CIT vs. Manjunatha Cotton and Ginning Factory and CIT vs. SSA’s Emerald Meadows, as well as the dismissal of the Revenue’s Special Leave Petition by the Supreme Court in SSA’s Emerald Meadows, the Tribunal held that a notice which does not specify the exact charge is invalid. It observed that the assessee must clearly know the ground on which penalty proceedings are initiated and that a printed notice containing multiple grounds without striking off the inapplicable portions does not satisfy the requirement of law.
Final Ruling
The Tribunal held that the notice issued under Section 274 read with Section 271AAB was invalid. Consequently, the penalty order was set aside.
As a result:
- the assessee’s cross objection was allowed;
- the penalty order was quashed; and
- the Revenue’s appeal challenging reduction of penalty became infructuous and was dismissed. The order was pronounced on 05.04.2018.
Cases Discussed
- CIT vs. SSA’s Emerald Meadows (Karnataka High Court), ITA No. 380/2015 dated 23.11.2015
- CIT vs. Manjunatha Cotton and Ginning Factory (Karnataka High Court), 359 ITR 565
- SSA’s Emerald Meadows (Supreme Court of India), CC No. 11485 of 2017 dated 05.08.2016
FULL TEXT OF THE ORDER OF ITAT CHENNAI
These are appeal and cross objection of the Revenue and assessee respectively directed against an order dated 23.1.2017 of ld. Commissioner of Income Tax (Appeals)-18, Chennai. Appeal of the Revenue has been filed with a delay of 2 days. Condonation petition is on record. Delay is condoned and appeal admitted.
2. Cross Objection of the assessee assails levy of penalty for the impugned assessment year for a reason that notice issued for levy of penalty was ambiguous and was not valid due to this infirmity. Since assessee had questioned the very validity of initiation of the penalty, this is considered first.
3. Ld. Counsel for the assessee submitted that notice issued to the assessee u/s.274 r.w.s. Section 271AAB of the Income Tax Act, 1961 (in short ‘’the Act”) was vague. According to him, the reason for initiating the penalty proceeding was not clear from such income. As per the Ld. Authorised Representative, by virtue of judgments of Hon’ble Karnataka High Court in the case of CIT vs. Manjunatha Cotton and Ginning Factory, 359 ITR 565 and that of CIT vs. SSA’s Emerald Meadows (ITA No.380/2015, dated 23.11.2015. proceedings based on a vague penalty notice were void. Ld. Authorised Representative, pointed out that the judgment of Hon’ble Karnataka High Court in the case of SSA’s Emerald Meadows (supra) stood affirmed by the Hon’ble Apex Court in CC No.11485 of 2017 dated 05.08.2016. Ld. Authorised Representative submitted that assessee had raised a ground before the ld. Commissioner of Income Tax (Appeals)questioning the validity of the notice. As per the ld. Authorised Representative, though ld. Commissioner of Income Tax (Appeals) reduced the levy of penalty under section 271 AAB from 30% to 10%, he had not disposed off the ground assailing the validity of the notice issued to the assessee. Contention of the ld. Authorised Representative was that the notice being bad in law, levy of penalty had to be quashed.
4. Per contra, ld. Departmental Representative submitted that notice issued to the assessee was one under Section 274 r.w.s. 271 AAB of the Act and not under Section 274 r.w.s. 271(1) (c) of the Act. As per the ld. Departmental Representative, ld. Assessing Officer had in the such notice dated 13.08.2014, clearly mentioned the proceedings to have been initiated for having undisclosed income within the meaning of Section 271AAB of the Act. Thus, according to him, notice was not at all vague and assessee could not take advantage of the judgments of Hon’ble Karnataka High Court in the case of Manjunatha Cotton and Ginning Factory (supra) SSA’s Emerald Meadows (supra). Further, as per the ld. Departmental Representative, ld. Commissioner of Income Tax (Appeals) had reduced the penalty levied on the assessee from 30% to 10% and the Department was in appeal against such reduction.
5. We have considered the rival contentions and perused the orders of the authorities below. Notice issued to the assessee u/s.274 r.w.s.271 AAB of the Act is reproduced hereunder:-
NOTICE UNDER SECTION 274 READ WITH SECTION 271AAB OF THE INCOME TAX ACT, 1961
PAN: AADPE1841Q
Office of Deputy Commissioner of
Income-tax,
Central Circle-I, Coimbatore. Date: 13.08.2014
To
Shri.R.Elangovan
821/2, Kallipalayam,
Chikkarampalayam Post,
Karamadai – 641104
Whereas in the course of the proceedings before me for the Assessment Year 2013 – 14.
It appears to me that you:-
*have without reasonable cause failed to furnish the return of income which you were required to furnish by a notice given under section 22( 1 )/22(2)/3 4 of the Indian Income tax Act 1922 or which you were required to furnish under section 139(1) or by a notice given under section 13 9(2)/148 of the Income tax l\ct, 1961, No. dated or have without reasonable cause failed to furnish it within the time allowed and in themanner by the said section 139(1) or by such notice.
*have ‘without reasonable cause failed to comply with a notice under section
22(4 )/23 (2) of the Indian Income tax Ad, 1922 or under section 142(1 )/143 (2) of the
Income tax Act, 1961 No dated *have concealed the particulars of your income or……………………. _
furnished inaccurate particulars of such income.
*have undisclosed income within the meaning of section 271AAB of the IT Act.
You are hereby requested to appear before me at 10.30 AM on
12/09/2014and show cause why an order imposing a penalty on you should not be made under section 271 of the Income-tax Act 1961. If you do not wish to avail yourself of this opportunity of being heard in person or through authorized representative you may show cause in writing on or before the said date which will be considered before any such order is made under section 271.
(A. ANANDA KUMAR, IRS)
Deputy Commissioner of Income Tax
Central Circle –I, Coimbatore.
Ld. Assessing Officer had not scored out any one of the two limbs in such notice, viz have concealed the particulars of income or furnished inaccurate particulars of such income or have undisclosed income within the meaning of Section 271AAB of the Act. Nor did he specifically mention, on which clause assessee was answerable. No doubt the caption of the notice do mentioned that it was being issued u/s.274 r.w.s. 271AAB of the Act. Section 271AAB is reproduced hereunder:-
‘’ (1) The Assessing Officer may, notwithstanding anything contained in any other provisions of this Act, direct that, in a case where search has been initiated under section 132 on or after the 1st day of July, 2012, the assessee shall pay by way of penalty, in addition to tax, if any, payable by him,—
(a) a sum computed at the rate of ten per cent. of the undisclosed income of the specified previous year, if such assessee—
i. in the course of the search, in a statement under sub-section (4) of section 132, admits the undisclosed income and specifies the manner in which such income has been derived ;
ii. substantiates the manner in which the undisclosed income was derived ; and
iii. on or before the specified date— (A) pays the tax, together with interest, if any, in respect of the undisclosed income ; and
(B) furnishes the return of income for the specified previous year declaring such undisclosed income therein ;
(b) a sum computed at the rate of twenty per cent. of the undisclosed income of the specified previous year, if such assessee—
i. in the course of the search, in a statement under sub-section (4) of section 132, does not admit the undisclosed income ; and
ii. on or before the specified date—
A. declares such income in the return of income furnished for the specified previous year; and
B. pays the tax, together with interest, if any, in respect of the undisclosed income ;
(c) a sum which shall not be less than thirty per cent. but which shall not exceed ninety per cent. of the undisclosed income of the specified previous year, if it is not covered by the provisions of clauses (a) and (b).
2. No penalty under the provisions of clause (c) of sub-section (1) of section 271 shall be imposed upon the assessee in respect of the undisclosed income referred to in sub-section (1).
3. The provisions of sections 274 and 275 shall, as far as may be, apply in relation to the penalty referred to in this section.
Explanation For the purposes of this section,—
(a) “specified date” means the due date of furnishing of return of income under sub-section (1) of section 139 or the date on which the period specified in the notice issued under section 153A for furnishing of return of income expires, as the case may be ;
(b) “specified previous year” means the previous year—
i. which has ended before the date of search, but the date of furnishing the return of income under sub-section (1) of section 139 for such year has not expired before the date of search and the assessee has not furnished the return of income for the previous year before the date of search ; or
ii. in which search was conducted ;
(c) “undisclosed income” means—
(i) any income of the specified previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search under section 132, which has—
A. not been recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous year ; or
B. otherwise not been disclosed to the Chief Commissioner or Commissioner before the date of search ; or
(ii) any income of the specified previous year represented, either wholly or partly, by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the specified previous year which is found to be false and would not have been found to be so had the search not been conducted”.
It is clear from the Sub Section (3) of Section 271 AAB that Sections 274 and Section 275 of the Act shall, so far as may be, apply. Sub Section (1) of Section 274 of the Act mandates that order imposing penalty has to be imposed only after hearing the assessee or giving a assessee opportunity of hearing. Opportunity that is to be given to the assessee should be a meaningful one and not a farce. Notice issued to the assessee reproduced (supra), does not show whether penalty proceedings were initiated for concealment of income or for furnishing inaccurate particulars of income or for having undisclosed income within the meaning of Section 271AAB of the Act. Notice in our opinion was vague. Hon’ble Karnataka High Court in the case of SSA’s Emerald Meadows (supra) relying in its own judgment in the case of Manjunatha Cotton and Ginning Factory (supra) had held as under:-
‘’2. This appeal has been filed raising the following substantial questions of law:
(1) Whether, omission if assessing officer to explicitly mention that penalty proceedings are being initiated for furnishing of inaccurate particulars or that for concealment of income makes the penalty order liable for cancellation even when it has been proved beyond reasonable doubt that the assessee had concealed income in the facts and circumstances of the case?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the penalty notice under Section 274 r.w.s. 271(1)(c) is bad in law and invalid despite the amendment of Section 271(1B) with retrospective effect and by virtue of the amendment, the assessing officer has initiated the penalty by properly recording the satisfaction for the same?
3. Whether on the facts and in the circumstances of the case, the Tribunal was justified in deciding the appeals against the Revenue on the basis of notice issued under Section 274 without taking into consideration the assessment order when the assessing officer has specified that the assessee has concealed particulars of income?
3. The Tribunal has allowed the appeal filed by the assessee holding the notice issued by the Assessing Officer under Section 274 read with Section 271(1)(c) of the Income Tax Act, 1961 (for short ‘the Act’) to be bad in law as it did not specify which limb of Section 271(1)(c) of the Act, the penalty proceedings had been initiated i.e., whether for concealment of particulars of income or furnishing of inaccurate particulars of income. The Tribunal, while allowing the appeal of the assessee, has relied on the decision of the Division Bench of this Court rendered in the case of CIT vs. Manjunatha Cotton and Ginning Factory (2013) 359 ITR 565.
4. In our view, since the matter is covered by judgment of the Division Bench of this Court, we are of the opinion, no substantial question of law arises in this appeal for determination by this Court. The appeal is accordingly dismissed”.
In the earlier case of Manjunatha Cotton and Ginning Factory (supra) their lordship had observed as under:-
‘’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. Sending printed form where all the grounds mentioned in section 271 are mentioned would not satisfy the requirement of law ;
The assessee should know the grounds which he has to meet specifically. Otherwise, the principles of natural justice are offended. On the basis of such proceedings, no penalty could be imposed on the assessee ; ) taking up of penalty proceedings on one limb and finding the assessee guilty of another limb is bad in law ; penalty proceedings are distinct from the assessment proceedings : though proceedings for imposition of penalty emanate from proceedings of assessment, they are independent and a separate aspect of the proceedings ;
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 proceedings on the 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 invalid in the penalty proceedings’’.
View taken by the Hon’ble Karnataka High Court in the above judgment was indirectly affirmed by the Hon’ble Apex Court, when it dismissed an SLP filed by the Revenue against the judgment in the case of SSA’s Emerald Meadows (supra), specifically observing that there was no merits in the petition filed by the Revenue. Considering the above cited judgments, we hold that the notice issued u/s.274 r.w.s. 271AAB of the Act, reproduced by us at para 5 above was not valid. Ex-consequenti, the penalty order is set aside.
6. Since we have set aside the penalty order for the impugned assessment year, the appeal filed by the Revenue has become infructuous.
7. In the result, Cross Objection of the assessee is allowed whereas appeal of the Revenue is dismissed as infructuous.
Order pronounced on Thursday, the 5th day of April, 2018, at Chennai.
Author Bio
