Kshema Geo Holdings (P.) Ltd. Vs ITO (Karnataka High Court)
Summary: Summary: The Karnataka High Court, in Kshema Geo Holdings (P.) Ltd. Vs Income Tax Officer, [2023] 151 taxmann.com 293 (Karnataka), decided on 20 March 2023, examined the validity of penalty proceedings initiated under Section 271(1)(c) of the Income-tax Act, 1961, where the Assessing Officer recorded satisfaction regarding concealment of income but issued a penalty notice alleging furnishing of inaccurate particulars of income. The dispute related to Assessment Year 2014-15, during which the assessee, a private limited company, issued 75,000 equity shares having a face value of Rs. 10 each at a premium of Rs. 690 per share. During assessment proceedings, the Assessing Officer called upon the assessee to furnish a valuation report under Rules 11U and 11UA read with Section 56(2)(viib) of the Act. Subsequently, the assessee’s director communicated acceptance of Rs. 1,47,75,000 as income from other sources, which was accordingly added to the assessed income. The Assessing Officer thereafter issued a notice dated 8 December 2016 under Section 274 read with Section 271(1)(c) and imposed a penalty of Rs. 48,01,320 by order dated 30 June 2017. The CIT(A) confirmed the penalty, while the Income Tax Appellate Tribunal remanded the matter for fresh consideration. Aggrieved by the remand order, the assessee approached the Karnataka High Court.
The assessee contended that the penalty proceedings were fundamentally defective because the charge mentioned in the statutory notice was inconsistent with the satisfaction recorded in the assessment order. Senior counsel for the assessee submitted that the Assessing Officer had specifically recorded that the assessee concealed true and correct particulars of income, whereas the penalty notice dated 8 December 2016 alleged that the assessee had furnished inaccurate particulars of income. The notice had expressly struck off the allegation relating to concealment of income, leaving only the allegation concerning inaccurate particulars. According to the assessee, these constituted two distinct statutory grounds under Section 271(1)(c), and penalty proceedings initiated on one ground could not validly proceed on another. Reliance was placed on the Supreme Court’s decision in Dilip N. Shroff Vs Joint Commissioner of Income-tax and the Karnataka High Court’s decision in Commissioner of Income-tax Vs Manjunatha Cotton & Ginning Factory. The Revenue opposed the appeal, arguing that the assessment order demonstrated concealment of income and that the assessee’s acceptance of the addition justified the penalty. It further submitted that the principles laid down in Manjunatha Cotton & Ginning Factory supported the Department’s position.
After examining the assessment order, penalty notice and judicial precedents, the Karnataka High Court observed that the Assessing Officer had recorded satisfaction regarding concealment of income but issued the notice exclusively on the ground of furnishing inaccurate particulars. The Court noted that the words relating to concealment had been struck off in the notice, making the inconsistency between the recorded satisfaction and the statutory charge apparent. Referring to Dilip N. Shroff, the Court reiterated that concealment of income and furnishing inaccurate particulars of income are separate statutory defaults and that the Assessing Officer’s satisfaction during assessment proceedings forms the foundation for imposing penalty. The Court also relied on Manjunatha Cotton & Ginning Factory, which established that the existence of a specific ground under Section 271(1)(c) is a necessary condition for initiating penalty proceedings. Once proceedings are initiated on a particular ground, the assessee must be informed of that charge and given an opportunity to respond. Penalty cannot subsequently be imposed on a different ground because such action would violate the principles of natural justice. Applying these principles, the High Court held that the discrepancy between the assessment order and the penalty notice rendered the penalty legally unsustainable.
The Karnataka High Court concluded that the penalty proceedings suffered from a fundamental legal defect because the satisfaction recorded by the Assessing Officer did not correspond with the allegation communicated through the notice under Section 274. While the assessment order referred to concealment of income, the notice alleged furnishing of inaccurate particulars, and the concealment allegation had been specifically deleted. The Court held that the statutory requirement of identifying and communicating the precise ground for penalty had not been satisfied. Consequently, the penalty order could not be sustained merely because the assessee had accepted the addition made during assessment proceedings. The High Court allowed the assessee’s appeal and set aside the ITAT’s order dated 19 February 2020 in ITA No. 896/Bang/2019 relating to Assessment Year 2014-15. The first substantial question of law, concerning vagueness, conflicting reasons and lack of application of mind in penalty proceedings, was answered in favour of the assessee and against the Revenue. Since this finding was sufficient to dispose of the appeal, the remaining substantial questions concerning Explanation 1 to Section 271(1)(c), Section 271(1B) and the valuation-based addition were treated as academic and were not answered. The appeal was accordingly allowed without any order as to costs.
Cases Discussed
- Dilip N. Shroff Vs Joint Commissioner of Income-tax, Special Range, Mumbai — Supreme Court.
- CIT Vs Manjunatha Cotton and Ginning Factory — Karnataka High Court.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
This appeal by the assessee directed against order dated 19.02.2020 in ITA No.896/Bang/2019 passed by the ITAT has been admitted to consider the following questions of law:
1. Whether, in the facts and circumstances of the case, the Tribunal ought to have quashed the penalty levied in the penalty proceedings being vitiated by vagueness, conflicting reasons and lack of application of mind?
2. Whether, in the facts and circumstances of the case, the Tribunal ought to have held that the Explanation 1 to section 271(1)(c) is not applicable to the instant case?
3. Whether, in the facts and circumstances of the case, the Tribunal ought to have quashed the penalty as the provisions of section 271(1B) are not satisfied?
4. Whether, in the facts and circumstances of the case, the Tribunal ought to have quashed the penalty as the addition arose from only a valuation exercise and the same was not challenged by the appellant to buy peace?
2. After hearing Shri. K.K. Chythanya, learned Senior Advocate for the assessee and Shri. E.I. Sanmathi, learned Standing Counsel for the Revenue, in our view, the first question needs to be considered at the outset.
3. Briefly stated the facts of the case are, assessee, a Private Limited Company filed its returns for the A.Y. 2014-15. It has collected premium for issue of shares in the relevant assessment year. The Assessing Officer has recorded in para 3.1 of his order that the assessee had issued 75000 equity shares with the face value of Rs.10/- at a premium of Rs.690/- and had called upon the assessee to submit the valuation report in accordance with Rule 11U/11UA read with Clause (viib) Sub-section (2) of Section 56 of the Income Tax Act, 19611. The Assessing Officer came to the conclusion that where a Company, not being a Company in which public are substantially interested, receives in any previous year, from any person being a resident, any amount for issue of shares that exceeds the face value of such shares, the aggregate consideration for such shares which exceeds the fair market value of the shares shall be chargeable to Income tax under the head `Income from other sources. He has also recorded that assessee’s representative had submitted a letter written by the Director of the Company stating that the assessee had agreed for consideration of Rs.1,47,75,000/- as income from other sources for A.Y. 2014-15 and accordingly added the said sum to the total income of the assessee as ‘Income from other sources’ within the meaning of Section56, (2)(viib) of the Act. Subsequently, a notice dated December 8, 2016 under Section 274 read with Section 271(i)(c) of the Act was issued to initiate penalty proceedings and imposed penalty of Rs.48,01,320/- vide order dated June 30, 2017. Assessee challenged the same before the CIT(A). CIT(A) confirmed Assessing Officer’s order. On further appeal, the ITAT remanded the matter for fresh consideration in accordance with law. Challenging the said remand order, assessee is before this Court.
4. Shri. Chythanya, submitted that although ITAT has remanded the matter, the issue is covered by the decision of the Hon’ble Supreme Court of India and also this Court. According to him, the notice dated December 8, 2016 issued under Section 274 of the Act was categorical that the assessee had furnished inaccurate particulars of the income. The said notice is contrary to the satisfaction of the Assessing Officer to initiate penalty proceedings. In support of this contention, he placed reliance on Dilip N. Shroff Vs. Joint Commissioner of Income-tax, Special Range, Mumbai2. He made particular reference to para 60 and argued that the satisfaction of the Assessing Officer during the course of assessment proceedings with regard to concealment of income would constitute the basis of foundation for proceedings to levy penalty. He next relied upon Commissioner of Income-tax Vs. Manjunatha Cotton & Ginning Factory3. Adverting to para 60 of the said authority, he argued that the existence of grounds mentioned in Section 271(1)(c) of the Act is the sine qua non for initiation of proceedings and the penalty proceedings would be confined to only those grounds.
5. In reply, Sanmathi, learned Standing Counsel for the Revenue submitted that combined reading of paras 3.3 and 4 of the assessment order, shows that concealed income has been admitted in the letter written by the Director of the Assesee Company. Therefore, there is no legal infirmity in the penalty order. Adverting to para 63(e) & (f) of Manjunatha Cotton and Ginning Factory, he submitted that incorrect submission of facts is discernable from the assessment order. Therefore, the conclusion at para 63(e) in the said authority is in favour of the Revenue.
6. We have carefully considered rival contentions and perused the records.
7. Para 4 of the assessment order reads as follows:
“4. As the assessee failed to disclose income under the head Income from Other Sources in the return of income filed for the asst. year 2014-15, in the manner detailed at para 3.2 above, the provisions of section 270(1)(c) are attracted in so far as the assessee has concealed true and correct particulars of its income. Therefore, penalty proceedings u/s.271(1)(c) are initiated separately.”
8. In the notice dated December 8, 2016, among other things, the Assessing Officer has struck-off one half of para 3 and it reads as follows:
*have concealed particulars of income/ have furnished inaccurate particulars of income.
9. The principal contention urged by Shri. Chythanya is that the penalty proceedings have been initiated based on the satisfaction recorded in para 4 of the assessment order. A careful perusal of the same shows that the Assessing Officer was of the view that assessee has concealed true and correct particulars of its income whereas the ground on which the notice is issued is ‘have furnished inaccurate particulars of income’. It is relevant to note that five words `have concealed particulars of income’ have been struck off in the notice.
10. We may record that in paras 60 and 67 of Dilip Shroff, it has held as follows:
60. It is furthermore interesting to note that this Court in D.M. Manasvi (supra) categorically opined that it would be the satisfaction of the Income Tax Officer in the course of the assessment proceedings regarding the concealment of income which would constitute the basis of foundation of the proceedings for levy of penalty. It was furthermore observed :
“It may also be observed that what is contemplated by Sections 271 and 274 of the Act is that there should be, prima facie, satisfaction of the Income Tax Officer or the Appellate Assistant Commissioner in respect of the matters mentioned in sub-section (1) before he hears the assessee or gives him an opportunity of being heard. The final conclusion on the point as to whether the requirements of clauses (a), (b) and (c) of Section 271(1) have been satisfied would be reached only after the assessee has been heard or has been given a reasonable opportunity of being heard.”
67. ‘Concealment of income’ and ‘furnishing of inaccurate particulars’ are different. Both concealment and furnishing inaccurate particulars refer to deliberate act on the part of the assessee. A mere omission or negligence would not constitute a deliberate act of suppression ved or suggestiofalsi. Although it may not be very accurate or apt but suppression ved would amount to concealment, suggestion falsi would amount to furnishing of inaccurate particulars.
11. A similar question arose for consideration before this Court in Manjunatha Cotton and Ginning factory. The relevant portion of the order concerning a notice under Section 274 reads as follows:
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.
(Emphasis Supplied)
12. A combined reading of the authorities in Dilip Shroff and Manjunatha Cotton & Ginning Factory, leads us to an inference that the satisfaction of existence of ground under Section 271(1)(c) is the sine qua non for initiation of proceedings and the penalty proceedings should be confined only to those grounds specifically stated in the notice. As recorded hereinabove, the Assessing Officer had issued notice only with regard to furnishing in accurate particulars. Whereas the satisfaction recorded is with regard to concealment of income particulars and the very ground has been struck-off. The notice has been issued on the specific premise that assessee had furnished inaccurate particulars of income.
13. In view of the law laid down in the authorities referred by us, we are of the view that the penalty order is not sustainable in law. Hence, the following:
ORDER
(a) Appeal is allowed.
(b) Order dated February 19, 2020 in ITA No.896/Bang/2019 for the A.Y. 2014-15 passed by the ITAT is set-aside.
(c) Question No.1 is answered in favour of the assessee and against the Revenue.
(d) In view of our answer to question No.1, other questions are rendered academic and hence not answered.
No costs.
