No penalty u/s 271(1)(c) for disallowance of administrative expenses claimed against LTCG

Amit Capital & Securities (P) Ltd. Vs ITO (ITAT Mumbai)

Conclusion: Merely because assessee’s had claimed administrative expenditure which was not acceptable to Revenue, that by itself would not attract penalty under Section 271(1)(c) if there was absence of concealment and / or furnishing of inaccurate particulars of income.

Held: Assessee was a share trading and investment company. AO determined the total income by treating capital gains as business income and it appeared that assessee had claimed all administrative expenses as deduction against long term capital gain which was rejected by  him. He also leived penalty u/s 271(1)(c) for wrong claim of expenditure. Assessee had challenged penalty order passed by AO under section 271(1)(c) on the ground that AO had issued vague notice without striking off inappropriate portion in the notice whether penalty had been levied for concealment of particulars of income or furnishing of inaccurate particulars of income, therefore, penalty levied on such vague notice could not survive. It was a settled position of law that mere rejection of claim, made by assessee, would not ipso-facto, result in penalty imposed under section 271(1)(c) as was held  also in CIT vs Reliance Petro Products Pvt. Ltd. (2010)(11) SCC 762(Supreme Court). Before penalty could be imposed under Section 271(1)(c), Revenue in terms thereof must be satisfied that assessee had concealed particulars of income or furnished inaccurate particulars of his income. In case, where an assessee makes a complete disclosure of facts it  then could not be said to have concealed the particulars of income or furnished inaccurate particulars of income. Thus, mere making a claim for benefit under a particular provision of law would not attract penalty under Section 271(1)(c) of the Act if there was absence of concealment and / or furnishing of inaccurate particulars of income. Thus, the penalty imposed under section 271(1)(c) was directed to be deleted.

FULL TEXT OF THE ITAT JUDGEMENT

The assessee is aggrieved by the impugned order dated 08/02/2017 of the First Appellate Authority, Mumbai, confirming the penalty of Rs.4,30,000/-, imposed under section 271(1)(c) of the Income Tax Act, 1961 (hereinafter the Act) and further holding that the assessee while claiming deduction of administrative expenses to the extent of Rs.13,99,521/- did not furnish any evidence.

2. During hearing, the Ld. counsel for the assessee, Shri Govind Jhaveri, explained that the Tribunal partly allowed the quantum addition (ITA No.1405/Mum/2017), order dated 14/09/2017. It was also pleaded that in the notice issued under section 274 r.w.s 271(1)(c), the relevant limb in the notice has not be struck down by the Assessing Officer. On the other hand, Shri Satishchandra Rajore, Ld. DR, defended the imposition of penalty.

2.1. We have considered the rival submissions and perused the material available on record. Before adverting further, we are reproducing hereunder the relevant portion from the aforesaid order of the Tribunal dated 14/09/2017.

“The appeal filed by the assessee is directed against the order dated 16- 12-2016 passed by Ld CIT(A)-3, Mumbai and it relates to the assessment year 2006-07. The assessee is aggrieved by the decision of Ld CIT(A) in confirming the disallowance of expenses of Rs.13.87 lakhs as expenses not relating to long term capital gain earned by the assessee. The assessee also seeks direction to assess the Long term capital gains at concessional rate of tax.

2. The assessee is a share trading and investment company. It filed its return of income declaring a total income of Rs.10,25,000/-. The assessing officer determined the total income at Rs.1,03,53,890/- by treating capital gains as business income; disallowing administrative expenses; adding deemed dividend and adding transactions not disclosed in the books. It appears that the assessee had claimed all administrative expenses as deduction against long term capital gain and the same was rejected by the AO. In the appeal filed before Ld CIT(A), the first appellate authority deleted all the additions/adjustments made by the AO. The revenue preferred appeal challenging the order of Ld CIT(A) before the Tribunal. The Tribunal confirmed the order of Ld CIT(A) in respect of all items except that relating to administrative expenses. The Tribunal restored the issue relating to administrative expenses with the following observations:-

“Admittedly, the AO, in the scrutiny assessment order for AY 2005-06 has accepted the expenditure of Rs.9,466/- and allowed the same. However, during the year the total expenditure has gone upto Rs.13,99,521/- which includes salary and allowances of Rs.13,37,196/-. Further, the assessee during the impugned A.Y has purchased the Bombay Stock Exchange Card at a cost of Rs.65,10,000/-. Under these circumstances, the entire expenditure, in our opinion, cannot be allowed as expenditure for earning long term capital gain. However, to maintain corporate status of the assessee, it may require to spend some expenditure. We, therefore, find merit in the submission of Ld Counsel for the assessee that the matter may be set aside to the file of the A.O with a direction to allow reasonable expenditure which may be allowed as revenue expenditure. Accordingly, we restore this issue to the file of the A.O with a direction to determine such reasonable expenditure and allow the same as revenue in nature. The ground raised by the Revenue is accordingly partly allowed for statistical purposes.”

Thus, the assessing officer was directed to determine reasonable expenditure that is required to be incurred for maintaining corporate structure of the assessee and allow the same as revenue expenditure.

3. In the set aside proceedings, the assessee submitted before the AO that it was formed by Ex-president of BSE, who was a Chartered Accountant. It was submitted that salary was paid to the Managing director and a very senior Government officers. It was further submitted that expenses were incurred on Electricity, Telephone, office and depreciation. Accordingly it was submitted that all these expenses should be allowed as business expenditure. The AO, however, allowed expenses relating to filing fee, professional tax, audit fee and bank charges. Accordingly he disallowed following expenses:-

The Ld CIT(A) confirmed the order of the AO by observing that the assessee has failed to furnish the details of expenses. Aggrieved, the assessee has filed this appeal.

4. The Ld A.R submitted that the assessing officer has failed to implement the directions of ITAT. He submitted that the salary was paid to directors and other staffs. He submitted that the Companies Act mandates that a company shall have minimum two directors and accordingly contended that the salary paid to directors amounting to Rs.7,32,505/- should be considered as expenditure incurred in maintaining corporate status. He submitted that the assessee has acquired stock exchange membership card during the year under consideration, which shows that it was in the process of fulfilling its objects by starting share trading activities. Hence the assessee was required to employ other staffs and hence the salary paid to them should also be considered as expenses incurred for maintaining corporate structure. He further submitted that other expenses like office expenses, stock exchange expenses etc. are expenses related to the corporate activities only.

5. On the contrary, the Ld D.R submitted that the assessee has earned only capital gain during the year under consideration and hence the AO was justified in disallowing other expenses

6. I have heard rival contentions and perused the record. I notice that the assessee has generated only capital gains on sale of shares during the year under consideration. It has acquired stock exchange card during the year under consideration, i.e., the business activities of the assessee was not commenced during the year under consideration. Since the present assessee is a company, which is required to incur certain expenses to maintain its corporate status, the Tribunal held that such type of expenses should be treated as revenue expenditure and should be allowed.

7. The Ld A.R argued that the expenses have been incurred by the assessee on account of commercial expediency and also to maintain corporate structure of the assessee. I notice that the Tribunal has directed the AO to determine the expenses relating to maintaining corporate structure and hence, I am of the view, the question of commercial expediency cannot be examined at this stage.

8. The salary expenses of Rs.13.37 lakhs consists of salary paid to directors amounting to Rs.7.32 lakhs and salary paid to staff Rs.6.04 lakhs. I notice that the assessee has carried on mainly investment activities during the year under consideration. In the submissions made before the AO, the assessee has submitted that its Managing Director is a Chartered Accountant and further it has employed retired Government officers. Though the Ld A.R furnished breakup details of salary expenditure, yet he has furnished the names of the persons to whom it was paid. The Ld A.R submitted that the minimum two directors are required to be appointed as per the provisions of Companies Act. The directors administer a company through Board Meetings and it is only the working directors who are given salary. Hence, in my view, the purpose of mandating appointment of minimum two directors is different and the same cannot support the case of giving salary to directors.

9. I have earlier noticed that the assessee has generated income only by way of capital gains out of its investment activities. In that case, the natural corollary is that the services of the directors and employees have been mainly used in connection with the investment activities only. At the same, it is also true that the directors and employees would have contributed in connection with the corporate activities related to maintaining corporate structure. In this view of the matter, I am of the view that 25% of salary expenses incurred on directors as well as other staffs can be considered as having been incurred in connection with maintaining corporate structure. Accordingly I modify the order passed by Ld CIT(A) on this issue and direct the AO to treat 25% of the salary expenses as revenue expenses incurred in maintaining corporate structure.

10. The assessee has not given details of office expenses of Rs.3,121/-. Hence, in my view, 50% thereof may be considered as incurred in maintaining corporate structure and allowed. I order accordingly.

11. Interest expenditure, demat charges and security transaction charges cannot be considered as expenses relating to maintaining corporate structure. Accordingly I confirm the disallowance of the same.

12. The assessee has not explained the nature of Stock exchange expenses and legal expenses. Hence I have no other option but to confirm their disallowance.

13. In view of the foregoing discussions, I direct the AO to compute the expenses allowable as per the discussions made supra.

14. The next ground urged by the assessee relates to the tax computed by the assessee. The Ld A.R submitted that the assessing officer has computed tax on the capital gain arising in off-market transactions at regular rate, whereas they have to be taxed at concessional rate. I set aside this issue to the file of the AO to examine the claim of the assessee.

15. In the result, the appeal of the assessee is partly allowed.”

2.2. If the observation made in the assessment order, leading to addition made to the total income, conclusion drawn in the impugned order, material available on record, assertions made by the ld. respective counsel, if kept in juxtaposition and analyzed, so far as facts are concerned, has been deliberated by the Tribunal and part relied was granted to the assessee. The addition was made towards various expenses on the basis of which penalty were imposed. The Tribunal while deliberating upon the quantum addition, found that the assessee generated only capital gains on sale of shares and also acquired Stock Exchange Card. The assessee was also found to incur certain expenses to maintain its corporate status and due to commercial expediency maintained the corporate structure and thus the Tribunal directed the Assessing Officer to determine the expenses relating to maintain to corporate structure. The assessee also incurred salary expenses paid to directors and staffs. In para-8 of the quantum order, there is a finding that the assessee furnished break up/details of salary expenditure along with the names to whom it was paid. In para-9 of the order of the Tribunal, it was observed as under:-

“9. I have earlier noticed that the assessee has generated income only by way of capital gains out of its investment activities. In that case, the natural corollary is that the services of the directors and employees have been mainly used in connection with the investment activities only. At the same, it is also true that the directors and employees would have contributed in connection with the corporate activities related to maintaining corporate structure. In this view of the matter, I am of the view that 25% of salary expenses incurred on directors as well as other staffs can be considered as having been incurred in connection with maintaining corporate structure. Accordingly I modify the order passed by Ld CIT(A) on this issue and direct the AO to treat 25% of the salary expenses as revenue expenses incurred in maintaining corporate structure.”

2.3. So far as, claim is concerned, the decision from Hon’ble Apex Court in Reliance Petro Products, comes to the rescue of the assessee, wherein, it was held that even if a wrong claim is made then no penalty will be leviable under section 271(1)(c) of the Act because the assessee furnished the particulars for such claim. The decision of the Tribunal in the case of M/s Tata Communication Transformation Services Ltd. vs DCIT (ITA No.3108/Mum/2016), order dated 21/02/2018 clearly comes to the rescue of the assessee. The relevant portion of the same is reproduced hereunder:-

“This appeal filed by the assessee is directed against order of the Commissioner of Income Tax (Appeals)-14, Mumbai dated 23.02.2016 and it pertains to assessment year 2010-11. The assessee has raised the following grounds of appeal:

“Being aggrieved by the order dated 23 February, 2016 passed under section 250 of the Income- tax Act, 1961 (hereinafter referred to as the Act), by the Honble Commissioner of Income Tax (Appeals)-14, Mumbai, [hereinafter referred to as the Honble CIT(A)], the Appellant submits the following Grounds of Appeal for your sympathetic consideration which are independent of and without prejudice to one another:

1. On the facts and circumstances of the case and in law, the Honble CIT (A) has erred in ex-parte by the learned AO i.e. without giving any opportunity of presenting its case and of being heard to the Appellant, which is in violation of the principles of natural justice.

2. upholding the penalty order on the premise that no appeal was filed against the addition made by the learned AO in the assessment order, thereby ignoring the fact that the issue of subjecting the same income to tax twice, was a fit case for rectification under section 154 of the Act and proceeding to uphold the levy of penalty even without waiting for the disposal of the rectification application filed by the Appellant.

3. upholding the penalty order passed by the learned AO levying penalty of Rs. 22,62,959/- u/s 271(1)(c) on the premise that the Appellant had furnished inaccurate particulars and concealed the income.

4. confirming the penalty levied under Section 271(1)(c) of the Act, without appreciating the fact that the additions made by the learned AO of Rs 66,57,721/- on the basis of which penalty is imposed were already made by the Appellant to the extent of Rs. 62,95,961/- in its return of income and the differential value being caused due to different method adopted for allocation / absorption of fixed overheads in case of a sales order executed by its Domestic Tariff Unit.

The Appellant sincerely prays that the levy of penalty being invalid and bad in law may kindly be directed to be deleted.

The Appellant craves leave to add, alter, omit or substitute any or all of the above grounds of appeal, at anytime before or at the time of the appeal hearing.”

2. The assessee has filed a petition for admission of additional grounds on 11.12.2017. The additional grounds raised by the assessee are as follows:

“1: 0 Re.: Levy of penalty u/s. 271(1)(c):

1 : 1 The Commissioner of Income-tax (Appeals) has erred in upholding the penalty levied by the Assessing Officer u/s. 271(I)(c) of the Income-tax Act, 1961 on the Appellant.

2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject it has neither concealed any income nor furnished inaccurate particulars of income and hence no penalty whatsoever can be levied on it u/s.271(1)(c) of the Income-tax Act, 1961 and the Commissioner of Income-tax (Appeals) ought to have held as such.

1 : 3 The Appellant submits that the impugned Order levying penalty u/s.271(1)(c) of the Income-tax Act, 1961 be struck down.

2: 0 Re : General:

2 : 1 The Appellant craves leave to add, alter, amend, substitute and/or modify in any manner whatsoever all or any of the foregoing grounds of appeal at or before the hearing of the appeal.”

3. The brief facts of the case are that in this case return of income was filed declaring total income of  Rs.7,55,19,904/-. The assessment was completed under section 143(3) on 04.03.14 determining the total income at Rs.8,21,77,620/- inter-cilia making additions towards disallowance of corporate revenue on which exemption under section 10A/10AA was claimed amounting to Rs.66,57,7211-. Subsequently, penalty proceedings under section 271(1)(c) has been initiated for furnishing of inaccurate particulars of income. Accordingly, notice under section 274 r.w.s. 271(1)(c) was issued on 12.03.14. The assessee neither appeared before the AO nor filed any explanation. Therefore, the AO held that the assessee has no explanation to offer and also has no objection for the proposed levy of penalty. Accordingly, considering the facts of the case and also by relying upon the decision of Hon’ble Supreme Court in the case of Union of India vs. Dharmendra Textile Processors & others (2008) 306 ITR 277 levied penalty of Rs.22,62,959/- under section 271(1)(c) of the Act.

4. Aggrieved by the penalty order, the assessee preferred an appeal before the Ld. CIT(A). Before the Ld. CIT(A), the assessee has filed an elaborate written submissions. The assessee further contended that the AO was erred in levying penalty for disallowance of corporate revenue for computation of deduction claimed under section 10A/10AA on the ground that the assessee has furnished inaccurate particulars of income which attracts penalty under section 271(1)(c) of the Act, without appreciating the fact that though the assessee has filed revised computation working out correct disallowance of corporate revenue for computing deduction under section 10A/10AA this cannot be considered as furnishing of inaccurate particulars of income. The assessee has taken up a legal plea in as much as the notice issued by the AO under section 274 r.w.s. 271(1)(c) is invalid as the AO has not strike off inappropriate portion which is not applicable to the facts of the assessee’s case, therefore, it is a case of non application of mind by the AO and hence, penalty proceedings are bad in law and liable to be quashed. The Ld. CIT(A), after considering the relevant submissions of the assessee, observed that the assessee failed to bring on record any fault on the part of the AO while computing the disallowance except for the issue of double addition against which rectification application is already filed as contended, therefore, in my opinion the case falls under the provisions of section 271(1)(c) of the Act, as the claim of exemption under section 10A/10AA should have been less than that claimed and penalty imposed by the AO is therefore confirmed. In so far as issue of notice, the Ld. CIT(A) observed that it is noted from the assessment order that the AO has initiated penalty proceedings for furnishing of inaccurate particulars of income and concealment of income under section 271(1)(c) of the Act. Therefore, the argument of the assessee regarding the notice not specifying the details is not acceptable. With these observations the Ld. CIT(A) confirmed the penalty levied by the AO. Aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us.

5. The Ld. A.R. for the assessee, at the outset, submitted that the issue is squarely covered in favour of the assessee by the decision of Hon’ble Bombay High Court in the case of Shri Samson Perinchery vs. ACIT, (2017) ACIT 392 ITR 4 and also the decision of Mumbai ITAT in the case of M/s. Cenzar Industries Ltd. vs. ITO in ITA No.1970/M/2015 dated 29.12.17 wherein the issue of vague notice has been discussed in the light of various case laws including the decision of Hon’ble Karnataka High Court in the case of CIT vs. Manjunatha Cotton & Ginning Factory 359 ITR 565 (Karn.) wherein it was categorically held that satisfaction of the existence of the grounds mentioned in section 271(1)(c) when it is a sine qua non initiation of proceedings, the penalty proceedings should be confined only to those grounds and the said grounds should be specifically stated so that the assessee would have the opportunity to have made those grounds. The Ld. A.R. further referred to the copy of notice issued by the AO under section 274 r.w.s. 271(1)(c), submitted that the AO has issued printed form of notice without striking off irrelevant portion, therefore, it is a clear case of non application of mind from the AO whether penalty has been initiated for furnishing of inaccurate particulars of income or concealment of particulars of income. The Ld. A.R. further referred to the penalty order passed by the AO and submitted that though the AO has stated that penalty proceedings are initiated for furnishing of inaccurate particulars of income, in his order at paragraph No.1 in the concluding paragraphs he has not specifically mentioned whether penalty has been levied for concealment of particulars of income or furnishing of inaccurate particulars of income. Therefore, the penalty order passed by the AO consequent to invalid or vague notice cannot survive and hence the order passed by the AO should be quashed.

6. The Ld. D.R., on the other hand, strongly supported the order of the Ld. CIT(A). The Ld. D.R. further referring to the decision of Hon’ble Bombay High Court, Nagpur Bench in the case of MIs. Maharaj Garage & Company vs. CIT in Income Tax Reference No.2 1 of 2008 dated 22.08.17 submitted that the requirement of section 274 of the Income Tax Act for granting reasonable opportunity of being heard in the matter cannot be stretched to the extent of framing a specific charge or asking the assessee an explanation in respect of the quantum of penalty proposed to be imposed, as has been urged. The Ho&ble Bombay High Court has considered the issue of notice and held that there is no requirement of specific charge in the notice and if the assessee is aware of the quantum additions in the assessments proceedings, then it can be sufficient, even if the AO has not specifically mentioned the charge in the notice, still penalty can be levied under section 271(1)(c) of the Act.

7. We have heard both the parties, perused materials available on record and gone through the case laws cited by both the parties. The assessee has challenged penalty order passed by the AO under section 271(1)(c) on the ground that the AO has issued vague notice without striking off inappropriate portion in the notice whether the penalty has been levied for concealment of particulars of income or furnishing of inaccurate particulars of income, therefore, the penalty levied on such vague notice cannot survive. We find that the issue of notice under section 274 r.w.s 271(1)(c) has been dealt by this Tribunal in various cases including in the case of M/s. Cenzar Industries Ltd. vs. ITO in ITA No. 1970/M/2015 dated 29.12.17 wherein after considering the relevant facts and also relied upon various judicial precedents including the decision of Hon’ble Karnataka High Court in the case of CIT vs. Manjunatha Cotton & Ginning Factory (supra) and also the decision of Hon’ble Bombay High Court in the case of Shri Samson Perinchery vs. ACIT (supra), has held that penalty proceedings initiated under section 271(1)(c) is void ab initio and liable to be quashed, if the AO issued vague notice under section 274 r.w.s 271(1)(c) without striking off irrelevant portion of notice and also if the AO has not made a specific charge whether penalty proceeding is initiated for concealment of particulars of income or furnishing of inaccurate particulars of income. The relevant portion of order is extracted below:

“10. We have heard the rival submissions, perused the material available on record and also gone through the orders of authorities below. The AO has levied penalty u/s 271(1)(c) in respect of disallowance of reimbursement of selling and distribution expenses on the ground that the assessee has concealed particulars of income and also furnished inaccurate particulars of income. The AO has initiated penalty by issuing notice u/s 274 r.w.s. 271(1)(c) in a printed form without striking off of irrelevant portion which were not applicable to the facts of assessee’s case. The AO has issued notice which states that penalty has been initiated for concealment of particulars of income or furnishing of inaccurate particulars of income. In the assessment order, the AO has initiated penalty proceedings on both charges, i.e. for concealing the particulars of income and furnishing inaccurate particulars of income. The AO levied the penalty on both the charges, i.e. for concealing the particulars of income and furnishing inaccurate particulars of income. Right from the assessment stages to levy of penalty, the AO has initiated penalty on both charges which is not the case as per the provisions of section 271(1)(c) as the two charges, i.e. concealment of particulars of income or furnishing of inaccurate particulars of income are two different connotations. The issue of notice u/s 274 r.w.s. 271(1)(c) goes to the root of the matter of assuming jurisdiction to levy penalty u/s 271(1)(c), therefore, before issuance of notice, the AO has to arrive at a satisfaction as to whether penalty proceedings are initiated for concealment of particulars of income or furnishing of inaccurate particulars of income. The AO cannot take both the charges for levying penalty by stating that the assessee has concealed particulars of income and also furnished inaccurate particulars of income.

11. The provisions of section 271(1)(c) are very clear and there is no ambiguity. On a plain reading of section 271(1)(c), it is very clear that clause (c) deals with two specific offences, that is to say, concealment of particulars of income or furnishing of 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 initiating penalty proceedings for one offence and finding the assessee guilty of another offence or holding him guilty for either one or the other cannot be sustained in law. This legal proposition is clearly reiterated by the Honble Karnataka High Court in the case of Manjunatha Cotton & Ginning Factory Ltd (supra) wherein it was categorically held that satisfaction of the existence of the grounds mentioned in section 271(1)(c) when it is a sine qua non initiation of proceedings, the penalty proceedings should be confined only to those grounds and the said ground should be  specifically stated so that the assessee would have the opportunity to meet those grounds. Initiation of penalty on one ground and levying penalty on another ground would cause injustice to the assessee as the assessee was kept in blank to justify his case whether the AO sought to initiated penalty for concealment of particulars of income or furnishing of inaccurate particulars of income. If the proceedings are initiated on a specific charge, then, the assessee can justify its case by advancing arguments on the charge framed by the AO. Thus, once the proceedings are initiated on one ground, the penalty should also be imposed on the same ground. If penalty proceedings are initiated on one ground and levied penalty on different ground or penalty proceedings are initiated on two grounds, i.e. concealment of particulars of income and also furnishing of inaccurate particulars of income would definitely vitiate the entire penalty proceedings.

12. In this case, on perusal of the facts available on record it is abundantly clear that the AO has initiated penalty proceedings in the assessment order on both the grounds, i.e. concealment of particulars of income and also furnishing of inaccurate particulars of income. The AO also levied penalty on both the grounds of concealment of particulars of income and also furnishing of inaccurate particulars of income which is quite contrary to the provisions of section 271(1)(c) where it was categorically stated that both the charges are standing in a different footing and the AO has to initiate penalty proceedings for concealment of particulars of income or furnishing of inaccurate particulars of income. Initiation of penalty by injecting and in place of or would definitely go against the basic provisions of the Act. In this case, the AO has initiated penalty on both the grounds, which cannot be the case for initiation of penalty u/s 271(1)(c) of the Act. We further observe that it is not open to the authority, at the time of imposing penalty to impose penalty on the ground 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 violate principles of natural justice and cannot be sustained. The validity of order of penalty must be determined with reference to the information, facts and materials in the possession of the authority imposing 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. The AO is empowered under the Act to initiate penalty proceedings once he is satisfied in the course of any proceedings that there is concealment of income or furnishing of inaccurate particulars of total income. As already stated, facts of some cases may attract both the offences. In case, the AO has made multiple additions, one may relates to concealment of particulars of income and another may relate to furnishing of inaccurate particulars of income, but single addition made cannot lead to an inference of concealment of particulars of income and furnishing of inaccurate particulars. Therefore, we are of the considered view that before initiation of penalty proceedings, the  AO has to arrive at a correct satisfaction as to whether penalty is initiated for concealment of particulars of income or furnishing of inaccurate particulars of income. If the AO fails to initiate penalty proceedings by issuance of proper notice, then the whole penalty proceedings becomes vitiated and void ab initio.

13. Coming to the case laws relied upon by the assessee. The assessee has relied upon the decision of Honble Karnataka High Court in the case of Manjunatha Cotton & Ginning Factory vs CIT (supra), wherein the Honble High Court has categorically observed that sending printed form of notice where all the grounds mentioned in section 271(1)(c) are mentioned would not satisfy requirement of law. Notice issued u/s 274 of the Act should specifically state the ground mentioned in section 271(1)(c), i.e. whether it is for concealment of income or for furnishing of inaccurate particulars of income. The assessee should know the grounds which he has to meet specifically. Otherwise, principles of natural justice is offended. Initiating the penalty proceedings on one limb and holding the assessee guilty of another limb is bad in law. The relevant portion of the order is extracted below:-

The Assessing Officer is empowered under the Act to initiate penalty proceedings once he is satisfied in the course of any proceedings that there is concealment of income or furnishing of inaccurate particulars of total income are different. Thus, the Assessing Officer while issuing notice has to come to the conclusion that whether is it a case of concealment of income or is it as case of furnishing of inaccurate particulars. The apex court in the case of Ashok Pai reported (2007) 292 ITR 11 (SC) at page 19 has held that concealnment of income and furnishing inaccurate particulars of income carry different connotations. The Gujarat High Court in the case of Manu Engineering reported in 122 ITR 306 and the Delhi High Court in the case of Virgo Marketing P.Ltd., reported in 171 Taxman 156, has held that levy of penalty has to be clear as to the limb for which it is levied and the position being unclear penalty is not sustainable. Therefore, when the Assessing Officer proposes to invoke the first limb being concealment, then the notice has to be appropriately marked. Similar is the case for furnishing inaccurate particulars of income. The stand and proforma without striking of the relevant clauses will lead to an inference as to non-application of mind.

14. The assessee has relied upon decision of Honble Bombay High Court in the case of CIT vs Samson Perinchery in Income Tax Appeal No.1154 of 2014 & Ors order dated 5th January, 2017. The Hon’ble Bombay High Court after considering the ratio laid down by the Honble Karnataka High Court in the case of Manjunatha Cotton & Ginning Factory (supra) observed that the satisfaction of the AO with regard to only one of the two breaches mentioned in section 271(1)(c) of the Act for initiation of penalty proceedings will not warrant / permit penalty being imposed for the other breach. This is more so, as an Assessee would respond to the ground on which the penalty has been initiated / notice issued. It must, therefore, follow that the order imposing penalty has to be made only on the ground on which the penalty proceedings has been initiated and it cannot be on a fresh ground of which assessee has no notice. The relevant portion of the order is extracted below:-

“The above submission on the part of the Revenue is in the the decision of the Supreme Court in Ashok Pal v/s. CIT 292 ITR [relied upon in Manjunath Cotton & Ginning Factory (supra)] – wherein it is observed that concealment of income and furnishing of inaccurate particulars of income in Section 271(1)(c) of the Act, carry different meanings/ connotations. Therefore, the satisfaction of the Assessing Officer with regard to only one of the two breaches mentioned under Section 271(1)(c) of the Act, for initiation of penalty proceedings will not warrant/ permit penalty being imposed for the other breach. This is more so, as an Assessee would respond to the ground on which the penalty has been initiated / notice issued. It must, therefore, follow that the order imposing penalty has to be made only on the ground on which the penalty proceedings has been initiated and it cannot be on a fresh ground of which assessee has no notice.”

15. The assessee has also relied upon the decision of Hon’ble Supreme Court in the case of CIT vs SSAs Emerald Meadows (supra) wherein the Hon’ble Supreme Court dismissed SLP filed by the revenue by following the decision of the Karnataka High Court in the case of CIT vs Manjunatha Cotton & Ginning Factory (supra) by observing that notice issued u/s 274 r.w.s. 271(1)(c) was bad in law as it did not specify under which limb of section 271(1)(c), penalty proceedings had been initiated. Coming to the case laws relied upon by the Ld. DR. The Ld. DR relied upon the decision of Hon’ble Bombay High Court in the case of CIT vs Smt.Kaushalya (supra). We have gone through the case law relied upon by the Ld. DR in the light of the facts of the present case and find that the ITAT, Mumbai in the case of DCIT vs Dr. Santa Milind Davare in ITA No.1789/Mum/2014 dated 21-12-2016 has considered the decision rendered by Hon’ble Bombay High Court in the light of Supreme Court judgement in the case of Dilip N Shroff 291 ITR 519 (SC) and observed that there should be application of mind on the part of the AO at the time of issuing notice. Since the co-ordinate bench has already considered the judgement of Honble Bombay High Court, we are of the view that case law relied upon by the Ld.DR is not applicable to the facts of the present case.”

8. In so far as the judgment of the Hon’ble Judicial Bombay High Court in the case of M/s. Maharaj Garage & Company vs. CIT (supra) relied upon by the Ld. D.R., the co-ordinate bench of ITAT in the case of Indrani Sunil Pillai vs. ACIT in ITA No.1339/M/2016 dated 19.01.18 has considered the ratio of the Hon’ble Jurisdictional High Court in the case of M/s. Maharaj Garage & Company vs. CIT (supra) and held that the basic issue arising out of the reference application which tell for consideration of the Hon’ble Jurisdictional High Court was while granting previous approval by inspecting Assistant Commissioner as per provisions of section 271(l)(c)(iii) of the Act, whether the assessee was required to be given an opportunity of being heard. While considering the issue, the Hon’ble court observed that provisions of section 271(1)(c)(iii) does not attract rule of presumption of mensrea as the penalty imposed under the said provision is for the breach of civil obligation. The observations of the Hon’ble Court against issuance of show cause notice appear to be in the context of quantum of penalty proposed to be imposed and not with reference to the doing away with the issue of show cause notice as contemplated under section 274 of the Act.

9. In the view of the matter and consistent with the view taken by the coordinate bench in the case of MIs. Cenzar Industries Ltd. vs. ITO (supra), we are of the considered view that the penalty proceedings initiated by the AO by issue of notice under section 274 r.w.s 271(1)(c) without striking off the irrelevant portion of notice is a clear case of non application of mind by the AO, whether penalty has been initiated for concealment of particulars of income or furnishing of inaccurate particulars of income. We further noticed that the AO has issued printed form of notice without striking off irrelevant portion and also in the penalty order he does not specify under which charge penalty has been initiated. Therefore, we are of the considered view that the penalty proceeding initiated by the AO is bad in law and liable to be quashed. Hence, we quash the penalty proceedings and delete penalty levied by the AO under section 271(1)(c) of the Act.

10. In the result, appeal filed by the assessee is allowed.”

2.4. Identical ratio was laid down by Hon’ble jurisdictional High Court in CIT vs M/s L & T Finance Ltd. (ITA No.1363, 1358, 1359 of the 2015) order dated 04/06/2018, which is also reproduced hereunder:-

“1. These three Appeals under Section 260-A of the Income Tax Act, 1961 (the Act) challenge the common order dated 19th March, 2015 passed by the Income Tax Appellate Tribunal (the Tribunal). The impugned order is in respect of Assessment Years 1995-96, 1996-97 and 1997-98. Thus, the three appeals.

2. The Revenue has urged only the following identical re-framed question of law in all three appeals for our consideration :-

(i) Whether in the facts and circumstances of the case and in law, the Tribunal was justified in deleting the penalty levied under Section 271(1)(c) of the Act?

3. The respondent assessee had claimed depreciation in respect of the assets acquired / purchased from the lessee and given back on lease basis popularly called “sale and lease back”. In quantum proceedings, the Tribunal by order dated 30th April, 2014 has held the respondent assessee entitled to claim depreciation on the assets used on sale and lease back basis. This by following the decision of the Supreme Court in ICDS Ltd. Vs. Commissioner of Income Tax, 350 ITR 527.

4. Being aggrieved by the order dated 30th April, 2014 of the Tribunal in quantum proceedings, the Revenue had filed three appeals being Income Tax Appeal Nos.1625 of 2014, 1670 of 2014 and 1694 of 2014 in this Court. On 8th March, 2017 all the three appeals were admitted on identical substantial question of law, which reads as under :-

“1. Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in allowing depreciation on assets given on sale and lease back basis when the transactions were purely financial transactions?”

5. In the meantime, pending disposal of the quantum appeal by the Tribunal, the Deputy Commissioner of Income Tax imposed penalty under Section 271(1)(c) of the Act by three separate orders all dated 29th March, 2011 in respect of the Assessment Years 1995-96, 1996-97 and 1997-98. This by following the decision of the Delhi High Court in the case of Commissioner of Income Tax Vs. Zoom Communication Pvt. Ltd. 371 ITR 570. Finally, the Tribunal by the impugned order dated 19th March, 2015 allowed the respondent’s appeals in penalty proceedings. This by holding that on merits it had by its order dated 30th April, 2014 in quantum proceedings for all the three years, held that the respondent assessee is entitled to the claim of depreciation on its assets as claimed. Thus, deleted the penalty.

6. The Revenue seeks admission of these appeals from the impugned order dated 19th March, 2015 deleting penalty under Section 271(1)(c) of the Act on the ground that the appeals in the quantum proceedings have been admitted by this Court. It is a settled position in law that mere rejection of a claim made by the assessee would not ipso facto result in penalty under Section 271(1)(c) of the Act. In fact, in Commissioner of Income Tax Vs. Reliance Petroproducts Pvt. Ltd. 2010 (11) SCC 762, the Apex Court observed that “Merely because the assessee’s had claimed the expenditure, which claim was not accepted or not acceptable to the Revenue, that by itself would not in our opinion attract penalty under Section 271(1)(c)”.  Before penalty can be imposed under Section 271(1)(c) of the Act, the Revenue in terms thereof must be satisfied that the assessee had concealed particulars of income or furnished inaccurate particulars of his income. In case, where an assessee makes a In case, where an assessee makes a complete disclosure of facts it then cannot be said to have concealed the particulars of income or furnished inaccurate particulars of income. Thus, mere making a claim for benefit under a particular provision of law would not attract penalty under Section 271(1)(c) of the Act if there is absence of concealment and / or furnishing of inaccurate particulars of income. This has been so held by the Apex Court in Reliance Petroproducts Pvt. Ltd. (supra).

7. We called upon Mr. Suresh Kumar, learned Counsel appearing for the Revenue to show us a finding by the Authorities under the Act that there has been concealment of particulars of income or furnishing inaccurate particulars of income on the part of the respondent assessee. In fact, we perused the orders of the Assessing Officer imposing penalty as well as the order of the Commissioner of Income Tax (Appeals) [CIT(A)] upholding the penalty and also the impugned order of the Tribunal. In none of these orders there is any whisper of the alleged particulars of income which has been concealed or what particulars of income which have been filed is inaccurate. Mere using the words that there has concealment of income and / or furnishing inaccurate particulars of income would not in the absence of same being particularized, lead to imposition of penalty. It is only when the specified officer of the Revenue is satisfied that there has been concealment of particulars of income or furnishing inaccurate particulars of income that the occasion to explain the conduct in terms of Explanation-I to Section 271(1)(c) of the Act would arise.

8. In the facts of the present case, we are dealing with the assessments relating to Assessment Years 1995-96, 1996-97 and 1997-98. The position in law at that point of time was not clear. It is not a case of the Revenue that the respondent assessee has claimed depreciation in the face of a statutory provision or a binding decision of a Court, prohibiting the assessee from claiming depreciation in respect of the assets on sale and lease back basis. Till such time as the Apex Court rendered its decision in ICDS Ltd. (supra) in an Income Tax case, the position was not clear. Therefore, at the relevant time, when the assessee made a claim for depreciation, there was no statutory provision or a decision contrary to the stand taken by the assessee which has been shown to us. It is pertinent to note that in the order dated 30th April, 2014 in quantum proceedings, the Tribunal has read the decision in case of ICDS Ltd. (supra) of the Apex Court covering the issue in favour of the assessee even in case of finance lease. Thus, the issue in  respect of claim made is clearly debatable. It is further to be noted that it is not the case of the revenue in the absence of particularization that the basis of the claim was by suppression /concealment of income or filing of inaccurate particulars of income. Once suppression or filing of inaccurate particulars is absent, no penalty is imposable only for making a claim not acceptable to the Revenue.

9. Further, reliance by the impugned order dated 19th March, 2015 upon the decision of the Delhi High Court in Zoom Communication Pvt. Ltd. (supra) is based on the fact that the claim made by the assessee therein was without any foundation. Further, in the above case, it was pointed that it was apparent that the respondent therein was not acting bona fide while making claim for deduction. Moreover, the same had not been added back in the computation of income due to oversight. Thus, prima facie there was inaccurate filing of particulars of income. Moreover, the assessee in the above case was unable to explain to the satisfaction of the Authorities as to the circumstances which led to the mistake in having made a claim for deduction, which was not added back while computing the income. It was in these circumstances, the penalty upon an assessee under Section 271(1)(c) of the Act was upheld.

10. The present facts are completely different. The claim made by the respondent assessee was bona fide and not in the face of a statutory provision or any binding decision. In fact, the issue raised herein stands covered in favour of the respondent assessee by the decision of the Apex Court in Reliance Petro products Pvt. Ltd. (supra) where it has been observed that making of incorrect claim in law would not by itself amount to concealment of income or giving inaccurate particulars of income. The words concealment or giving inaccurate particulars of income have to be read strictly before the penalty provisions under Section 271(1)(c) of the Act can be invoked. In the present facts, the Revenue has not been able to show even remotely that there is any concealment of income or filing of inaccurate particulars of income.

11. In the aforesaid circumstances, the question as proposed stands concluded against the appellant revenue by the decision of the Apex Court in Reliance Petro products Pvt. Ltd. (supra). In the above view, the question as proposed does not give rise to any substantial question of law. Thus, not entertained.

12. Accordingly, all the three appeals are dismissed. No order as to costs”

2.5. Considering the aforementioned judicial pronouncements, facts of the case and as held by Hon’ble jurisdictional High Court that it is a settled position of law that mere rejection of claim, made by the assessee, would not ipso-facto, result in penalty imposed under section 271(1)(c) of the Act as was held by Hon’ble Apex Court also in CIT vs Reliance Petro Products Pvt. Ltd. (2010)(11) SCC 762(Supreme Court), wherein, the Hon’ble Apex Court observed that merely because the assessee’s had claimed the expenditure, which claim was not accepted or not acceptable to the Revenue, that by itself would not in our opinion attract penalty under Section 271(1)(c)”. Before penalty can be imposed under Section 271(1)(c) of the Act, the Revenue in terms thereof must be satisfied that the assessee had concealed particulars of income or furnished inaccurate particulars of his income. In case, where an assessee makes a complete disclosure of facts it  then cannot be said to have concealed the particulars of income or furnished inaccurate particulars of income. Thus, mere making a claim for benefit under a particular provision of law would not attract penalty under Section 271(1)(c) of the Act if there is absence of concealment and / or furnishing of inaccurate particulars of income. This has been so held by the Apex Court in Reliance Petro products Pvt. Ltd. (supra). Thus, considering the decision of the Coordinate Bench and respectfully following the aforesaid decisions, the penalty imposed under section 271(1)(c) of the Act is directed to be deleted.

Finally, the appeal of the assessee is allowed.

This Order was pronounced in the open court in the presence of ld. representatives from both sides at the conclusion of the hearing on 04/10/2018.