Case Law Details
Orient Fabritech Pvt. Ltd. Vs ITO (ITAT Mumbai)
The case of Orient Fabritech Pvt. Ltd. vs. ITO (ITAT Mumbai) involves an appeal by the assessee against the imposition of a penalty under section 271(1)(c) of the Income Tax Act, 1961 (the Act) for the Assessment Year 2009-10. The dispute centers around the alleged bogus purchases made by the assessee, which were estimated at 12.5% of the total alleged bogus purchases. The appeal challenges the penalty imposed by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) – National Faceless Appeal Centre, Delhi (CIT(A)).
Key Arguments:
1. Estimate-Based Additions: The AO had initially made an addition of the entire alleged bogus purchases, which the Tribunal later reduced to 12.5% of the total. The appellant argued that penalty under section 271(1)(c) cannot be levied when additions are made based on estimates, citing various legal precedents.
2. Defect in Notice: The appellant contested the validity of the notice issued under section 274 r.w.s. 271(1)(c) of the Act. The argument focused on the notice’s ambiguity, as the AO failed to strike off the irrelevant clause, and the subsequent notice issued in 2019 mentioned both limbs of section 271(1)(c).
3. Legal Precedents and Jurisdictional High Court Decision:
- The appellant relied on legal precedents such as CIT vs. Krishi Tyre Re-trading & Rubber Industries, CIT vs. Subhash Trading Company, and CIT vs. Sangrur Vanaspati Mills Ltd., asserting that penalty cannot be imposed when additions are based on estimates.
- The appellant referred to the full bench decision of the Hon’ble Bombay High Court in Mohd. Farhan A. Shaikh vs. DCIT, highlighting the court’s stance on the defect in a notice vitiating penalty proceedings.
Key Findings:
1. Estimate-Based Additions and Penalty: The Income Tax Appellate Tribunal (ITAT) agreed with the appellant’s argument that penalty cannot be levied when additions are made on estimates. Legal precedents were cited to support the position that penalty under section 271(1)(c) is not applicable when the addition is based on estimation.
2. Defect in Notice and Ambiguity:
- The ITAT acknowledged the defect in the notice issued by the AO, emphasizing that a penal provision must be construed strictly, and any ambiguity must be resolved in favor of the assessee.
- The ITAT referred to the Hon’ble Bombay High Court’s decision in Mohd. Farhan A. Shaikh, stating that a notice with irrelevant clauses not struck off would vitiate penalty proceedings.
3. Ambiguity in Charge Under Section 271(1)(c): The ITAT noted the ambiguity in the second notice issued by the AO, where both limbs of section 271(1)(c) were mentioned. The appellant’s argument that the AO failed to clearly convey the specific charge for which the penalty was to be levied was upheld.
Conclusion: The ITAT concluded that the penalty levied under section 271(1)(c) of the Act was unsustainable due to the defect in the statutory notice and the fact that the penalty was imposed on additions made through estimation. The appeal of the assessee was allowed, setting aside the impugned order. This case reinforces the principle that penalties must be imposed with precision, clearly specifying the grounds and avoiding ambiguity, especially when based on estimate-based additions.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-National Faceless Appeal Centre, Delhi (NFAC) (in short ‘the CIT(A)’dated 30.07.2021 for the Assessment Year (AY) 2009-10, confirming levy of penalty under section 271(1)(c) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).
2. Sh. Rajkumar Singh appearing on behalf of the assessee submitted that the assessment for AY 2009-10 in the case of assessee was re-opened on the ground that the assessee had obtained bogus purchase bills from M/s Ankit Enterprises – Rs. 5,11,810/-, Raj Hans Steel – Rs. 77,444/- and Mukta Steel – Rs. 10,00,350/-. The Assessing Officer (AO) made addition of Rs. 15,89,604/- in respect of the entire alleged bogus purchases made by the assessee from the aforesaid three parties. The assessee carried the issue in appeal before the Tribunal in ITA No. 5113/Mum/2017. The Tribunal vide order dated 30.11.2018 estimated the addition in respect of bogus purchases to 12.5% of alleged purchases. The AO vide order dated 28.03.2019 levied penalty of 300% of the tax i.e. Rs. 1,84,200/- in respect of the addition confirmed by the Tribunal. The ld. Authorized Representative (AR) submitted that in first appeal, the CIT(A) upheld the levy of penalty, however, partial relief was granted to the assessee by restricting penalty @ 100%. The ld. AR submitted that the CIT(A) has erred in upholding penalty to the extent of 100% instead of deleting the penalty as the penalty has been levied on addition merely on estimations. The ld. AR further pointed that the notice issued under section 274 r.w.s. 271(1)(c) of the Act dated 18.03.2015 is ambiguous, in as much as the irrelevant clause have not been struck off by the AO before issuing the notice. Even in subsequent notice issued on 15.03.2019, the AO has mentioned both the limbs of section 271(1)(c) of the Act. The ld. AR pointed that the Hon’ble Bombay High Court in full bench decision in the case of Mohd. Farhan A. Shaikh Vs. DCIT 434 ITR 1 has held that defect in notice i.e. non-striking off irrelevant matter would vitiate penalty proceedings under section 271(1)(c) of the Act.
3. Per contra, Sh. R. A. Dhyani representing the Department vehemently defended the impugned order and submitted that penalty under section 271(1)(c) of the Act has rightly been levied by the AO and upheld by the CIT(A). The ld. Departmental Representative (DR) submitted that the Tribunal in quantum appeal has concurred with the findings of the AO that the assessee has indulged in obtaining bogus purchase bills. It is only the quantum of addition that has been reduced by the Tribunal.
4. Both sides heard, orders of the authorities below examined. The assessee is in appeal against levy of penalty in respect of assessee’s involvement in obtaining bogus purchase bills. In quantum proceedings, the AO made addition of the entire alleged bogus purchases. The matter travelled to the Tribunal, the Tribunal restricted the addition to 12.5% of the alleged bogus purchases. The addition has been made in the hands of assessee on account of bogus purchase merely on It is an accepted legal position that no penalty under section 271(1)(c) of the Act can be levied where additions are made on estimate. [Re: CIT Vs. Krishi Tyre Re-trading & Rubber Industries 360 ITR 580(Raj.), CIT Vs. Subhash Trading Company 221 ITR 110 (Guj.), CIT Vs. San grur Vanaspati Mills Ltd. 303 ITR 53 (P&H)].
5. We further find that the notice issued under section 274 r.w.s. 271(1)(c) of the Act dated 18.03.2015 and the subsequent notice issued under section 271(1)(c) of the Act dated 15.03.2019 falls short of the legal requirement to be a valid notice for levy of penalty. The first notice issued under section 274 r.w.s. 271(1)(c) is in Performa, without any application of mind by the AO. The irrelevant limb of section 271(1(c) of the Act has not been struck off. The Hon’ble jurisdictional High Court in the case of Mohd. Farhan A. Shaikh (supra) has dealt with the issue where the notice was issued without striking off the irrelevant matter. The Hon’ble High Court held that non-striking off irrelevant matter would vitiate the penalty proceedings. The relevant extract of the judgment is reproduced here-in-below:
“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(1)(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.
182. 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.
6. In the second notice dated 15.03.2019, the AO has mentioned both the charges of section 271(1)(c) of the Act. This shows ambiguity in the mind of AO with regard to charge under section 271(1)(c) of the Act, that is to be invoked. The Hon’ble Apex Court in the case of T. Ashok Pai Vs. CIT 292 ITR 11 has held the concealment of income and furnishing inaccurate particulars of income carry different connotations. Thus, the AO is duty bound to clearly convey to the assessee the limb for which penalty is to be levied. Where the position is unclear, penalty is unsustainable.
7. Thus, the penalty levied under section 271(1)(c) of the Act is unsustainable on account of defect in statutory notice issued under section 274 of the Act, as well for the reason that penalty is levied on addition made on mere estimations. The impugned order is set-aside and the appeal of assessee is allowed.
Order pronounced in the open court on Monday, the 7th day of March, 2022.
Author Bio
sir Penalty issue on bogus bill Revenue has filed appeal in Mumbai Highcourt on 2021 which is pending in Mumbai Highcourt.