Mohd. Farhan A. Shaikh Vs DCIT (Bombay High Court)
Conclusion: In present facts of the case, the Larger Bench of the Hon’ble High Court was referred an issue ‘mere failure to tick mark the applicable grounds’ in the notice issued under Section 271 of the Income Tax Act, 1961 (IT Act) vitiate the entire penalty proceedings. To this, it was held that a penal provision even with civil consequences, must be construed strictly. And ambiguity, if any, must be resolved in the affected assessee’s favour.
Held:
In present facts of the case, there was direct conflict between The Principal Commissioner of Income-Tax, Panaji v. Goa Dourado Promotions Pvt. Ltd., TXA No.18/2019 dtd. 26.11.2019 and Commissioner of Income-Tax v. Smt. Kaushalya 216 ITR 660 (Bombay).
Besides, the Division Bench has also referred two more aspects: (a) “the impact of non-discussion on the aspect of ‘prejudice’ in the [first set of decisions]”; (b) and “the effect of the decision of the Hon’ble Supreme Court in case of Dilip N. Shroff v. Joint Commissioner of Income-Tax, (2007) 291 ITR 519 (SC) on the issue of non-application of mind where the relevant portions of the printed notices are not struck off ”.
In present facts of the case, there was search and seizure under section 132 of the IT Act in a company’s premises and the appellant was one of the main transporters of that company. So the appellant’s case stood covered under section 153C of the IT Act. Initially, the Company filed a return of income declaring a total income of Rs.39,67,790, but because of the search and seizure, the return was revised to include Rs.50,00,000/- on account of the declaration given during the search, which was earlier erroneously offered to tax for AY 2007-08. As a result, the amount of Rs.50 lakhs was treated as undisclosed income, and penalty proceedings under section 271(1)(c) were initiated.
The main contention of the Appellant was that a vague notice under section 274 r/w 271(1)(c) of the IT Act, in a printed form without a tick mark to the relevant ground, would vitiate the penalty proceedings. It was also contended that Kaushalya has overlooked the two ingredients to be satisfied by AO before his issuing notice under section 274 r/w 271 (1)(c): (a) that the Assessee has concealed the particulars of his income, or (b) Furnished inaccurate particulars of such income. Both these ingredients, points out, are in contradistinction to each other. The notice issued to the appellants by the AO contained both the ingredients. And the notice, therefore, discloses non-application of mind. That is, the AO is not sure or categoric about which of the two ingredients applies to the case. A composite notice would create confusion in the assessee’s mind and disables him from defending his case effectively. Thus, it results in the denial of a right to adequate opportunity and fair hearing under section 274.
The Hon’ble High Court summarised the issues the learned Division Bench has referred which were:
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), will a mere defect in the notice—not striking off the irrelevant matter —vitiate the penalty proceedings?
2. Has Kausalya failed to discuss the aspect of ‘prejudice’?
3. What is the effect of the Supreme Court’s decision in Dilip N. Shroff on non-application of mind when the irrelevant portions of the printed notices are not struck off?
The Hon’ble High Court while relying on the Judgment of CIT v. Manjunatha Cotton and Ginning Factory, 359 ITR 565 (Kant), have observed that in the said case the AO proposes to invoke the first limb—that is, the concealment—then the notice has to be appropriately marked. Similar is the case for the second limb—that is, the inaccurate particulars of income. The standard proforma without striking of the relevant clauses will lead to an inference as to non-application of mind. Then, on the facts, Manjunatha has affirmed the Tribunal’s finding that the entire proceedings were vitiated as the notice issued was not under the law.
The Hon’ble High Court also relied on the Judgments of CIT v. Samson Pericherry, ITA/1154/2014 (Bom); PCIT v. Goa Dorado, TXA/18/2019 (Bom) and PCIT v. New Era Sova Mine TXA/70/2019 (Bom), wherein it was observed that “No notice could be issued under Section 274, read with Section 271(1)(c), of the IT Act without indicating which particular limb of Section 271(1)(c) was invoked for initiating the penalty proceedings”
While making observations on the Judgment of Kaushalya, it was observed that there was a difference between the notice for AY 1967-68 and that for AY 1968-69. In the said Judgment it was has held that the assessment order for AY 1968-69 already spelt out the grounds for initiating the penalty proceedings. So the assessee fully knew the exact charge of the Revenue against him for the AY 1968-69. According to it, the notice for AY 1968-69 suffered neither from non-application of mind nor from ambiguity. That is, the assessee suffered no prejudice. In this context, Kaushalya has held that after all, section 274 or any other provision in the Act or the Rules prescribed no particular form of notice.
While making observation on the Judgment of Dilip N. Shroff, it was observed by the Hon’ble High Court that Primary burden of proof, is on the Revenue. The Assessing Officer must satisfy himself that there is primary evidence to establish that the assessee had concealed the amount or furnished inaccurate particulars. And this onus is to be discharged by the Revenue. While considering whether the assessee has discharged his burden, the Assessing Officer should not begin with the presumption that he is guilty. Once the Revenue discharges its primary burden of proof, the secondary burden of proof, would shift on to the assessee. It is because “the proceeding under Section 271(1)(c) is of penal nature in the sense that its consequences are intended to be an effective deterrent which will put a stop to practices which the Parliament considers to be against the public interest”. So, it was for the Revenue “to establish that the assessee shall be guilty of the particulars of income”.
Finally, the larger Bench of Hon’ble high Court observed as under:
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?
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.
The Judgment of Goa Dourado Promotions and other cases have adopted an approach more in consonance with the statutory scheme and the Judgment of Kaushalya does not lay down the correct proposition of law.
