Case Law Details
Virtual Software & Training Vs ITO (Delhi High Court)
Delhi High Court has held that issuance of notice under section 274 r.w.s. 271(1)(c) of the Act without specifying the limb under which the penalty proceeding has been initiated is bad in law.
Facts-
In the instant case the Assessee by filing its return of income on 31.10.2001 declared an income of Rs. 13,32,019/- which was selected for scrutiny and during the assessment proceedings the AO observed that by virtue of acquisition agreement dated 16.02.2000, the Assessee has transferred its business of software development to M/s Suri Capital and leasing Ltd. in lieu of 45 lakh shares of face value of Rs. 10 each. The Assessee furnished an agreement of transfer of software business, as per Article 3 of which the Assessee himself admitted that this is a slump sale. Consequently the AO treated the transaction as slump sale under the provisions of Section 50B of the Act and accordingly completed the assessment u/s 143(3) on 31.3.2004 at an income of Rs. 3,15,60,109/-.
AO in due course of time initiated penalty proceedings u/s 271(1)(c) of the Act for furnishing of inaccurate particulars of income and consequently issued notice dated 30-122008 u/s 274 of the Act and ultimately vide penalty order dated 29.11.2017 imposed penalty to the tune of Rs. 1,19,85,719/- @ 100% of the tax sought to be evaded on account of slump sale which is declared as undisclosed income.
Conclusion-
It is also a well-accepted proposition that the aforesaid two limbs of section 271(1)(c) of the Act carry different meanings. Therefore, it is imperative for AO to specify the relevant limb so as to make the Assessee aware as to what is the charge made against him so that he can respond accordingly.
Held that as AO has issued the notice under section 274 r.w.s. 271(1)(c) of the Act without specifying the limb under which the penalty proceeding has been initiated and proceeded with, apparently goes to prove that notice in this case has been issued in a stereotyped manner without applying mind which are bad in law, hence cannot be considered valid notice sufficient to impose penalty u/s 271(1)(c) of the Act and therefore we are of the considered view that under these circumstances, the penalty is not leviable
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
The Assessee has preferred the instant appeal against the order dated 01.03.2019, passed by the Ld. Commissioner of Income tax (Appeals)-28, New Delhi (in short “Ld. Commissioner”) u/s 271(1)(c) of the Income Tax Act, 1961 (in short “the Act”), pertaining to the assessment year 2001-02.
2. In the instant case the Assessee by filing its return of income on 31.10.2001 declared an income of Rs. 13,32,019/- which was selected for scrutiny and during the assessment proceedings the AO observed that by virtue of acquisition agreement dated 16.02.2000, the Assessee has transferred its business of software development to M/s Suri Capital and leasing Ltd. in lieu of 45 lakh shares of face value of Rs. 10 each. The Assessee furnished an agreement of transfer of software business, as per Article 3 of which the Assessee himself admitted that this is a slump sale. Consequently the AO treated the transaction as slump sale under the provisions of Section 50B of the Act and accordingly completed the assessment u/s 143(3) on 31.3.2004 at an income of Rs. 3,15,60,109/-.
3. Against the said order of the AO, the Assessee preferred first appeal which was dismissed by the learned CIT(Appeals) vide order dated 18.1.2005 whereby the determination of transaction as slump sale by the AO was upheld. Thereafter the Assessee approached the Hon’ble ITAT, who vide order dated 20.7.2007 though affirmed the view of the AO qua holding the transaction as slump sale but restored the matter to the file of the AO to determine the market value of shares of the transferee company on the date of the transfer. In compliance to the order of the Hon’ble ITAT, the AO reassessed the case on 3.12.2008 and determined the income to the tune of Rs. 3,04,06,460/-.
4. Against the said assessment order dated 3.12.2008 passed by the AO, the Assessee filed the appeal before the learned CIT(Appeals) and on disposal thereafter before the Hon’ble Tribunal, where also the Assessee remained un-succeeded.
5. On disposal of appeals by the learned CIT(Appeals) and the Hon’ble Tribunal, the AO in due course of time initiated penalty proceedings u/s 271(1)(c) of the Act for furnishing of inaccurate particulars of income and consequently issued notice dated 30-122008 u/s 274 of the Act and ultimately vide penalty order dated 29.11.2017 imposed penalty to the tune of Rs. 1,19,85,719/- @ 100% of the tax sought to be evaded on account of slump sale which is declared as undisclosed income.
6. The Assessee being aggrieved challenged the said penalty before the learned Commissioner, who vide impugned order, affirmed the levy of penalty of Rs. 1,19,85,719/- which is under challenge before us.
7. The Assessee by raising ground no. 1 claimed that on the facts and circumstances of the case and in law, the learned CIT(A) erred in not appreciating that notice issued u/s 274 read with Section 271(1)(c) of the Act was bad in law as it was in standard proforma without specifying the default for which the Assessee is charged under section 271(1)(c) of the Act. Levy of penalty on the basis of Notice which does not meet the requirement of law, is illegal and is liable to be deleted.
8. At the outset it was argued by the learned counsel for the Assessee that in the instant case notice dated 30.12.2008 issued by the AO u/s 274 read with Section 271(1)© of the Act is vague having not specified particular limb of the penalty and, therefore, the penalty is not leviable. The Assessee in support of its contention also relied upon various judgments of the Hon’ble Apex Court and the High Courts.
9. On the contrary the Ld. DR supported the orders passed by the authorities below and submitted that order under challenge does not suffer from any perversity, impropriety and/or illegality and hence needs no interference .
10. Heard the parties and perused the material available on record. In the instant case, the AO initiated the penalty under section 271(1)(c) of the Act for furnishing inaccurate particulars of Income and thereafter issued the notice referred to above u/s 274 read with 271(1)(c) of the Act without specifying any particular limb of the penalty and finally imposed the penalty for furnishing inaccurate particulars of income. The Assessee by way of raising ground no. 1, which is legal in nature, challenged the Imposition of penalty mainly on the basis of notice itself, therefore we deem it appropriate to decide the legal issue involved in the instant case first, before dwelling into the merits of the case.
11. The Hon’ble Apex Court in case of M/s. SSA’s Emerald Meadows, (2016) 73 taxmann.com 248(SC) dismissed the Special Leave Petition filed by the Revenue against the judgment rendered by Hon’ble High Court of Karnataka whereby identical issue was decided in favour of the Assessee. Operative part of the judgment in case of M/s. SSA’s Emerald Meadows (supra) decided by Hon’ble High Court of Karnataka is reproduced below:-
“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 inspite the amendment of Section 271(1 B) 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 upon the decision of the Division Bench of this Court rendered In the case of COMMISSIONER or INCOME TAX –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.”
12. The Hon’ble Karnataka High Court in the case of Manjunatha Cotton & Ginning Factory, 359 ITR 565 (Kar) observed where the Assessing Officer proposed to invoke first limb being concealment, then the notice has to be appropriately marked. The Hon’ble High Court also held that the standard proforma of notice under section 274 of the Act without striking of the irrelevant clause would lead to an inference of non-application of mind by the Assessing Officer and levy of penalty would suffers from non-application of mind.
13. Even the Hon’ble High Court of Delhi in the case of M/s. Sahara India Life Insurance Company Ltd. 432 ITR 84 (Del.) while following the cases referred above, held as under:
“21. The Respondent had challenged the upholding of the penalty imposed under Section 271(1)(c) of the Act, which was accepted by the ITAT. It followed the decision of the Karnataka High Court in CIT v. Manjunatha Cotton & Ginning Factory 359 ITR 565 (Kar) and observed that the notice issued by the AO would be bad in law if it did not specify which limb of Section 271(l)(c) the penalty proceedings had been initiated under i.e. whether for concealment of particulars of income or for furnishing of inaccurate particulars of income. The Karnataka High Court had followed the above judgment in the subsequent order in Commissioner of Income Tax v. SSA’s Emerald Meadows (2016) 73 Taxman.com 241(Kar), the appeal against which was dismissed by the Supreme Court of India in SLP No: 11485 of 2016 by order dated 5th August, 2016.
22. On this issue again this Court is unable to find any error having been committed by the ITAT. No substantial question of law arises. Thus, notice under Section 271(1)(c) r.w.s. 274 of the Act itself is bad in law. We, therefore, set-aside the order of the CIT(A) and direct the Assessing Officer to cancel the penalty so levied.”
14. The penalty provisions of section 271(1)(c) of the Act are attracted, where the Assessee has concealed the particulars of income or furnished inaccurate particulars of such income. It is also a well-accepted proposition that the aforesaid two limbs of section 271(1)(c) of the Act carry different meanings. Therefore, it is imperative for the Assessing Officer to specify the relevant limb so as to make the Assessee aware as to what is the charge made against him so that he can respond accordingly.
15. In the background of the aforesaid legal position and, having regard to the manner in which the Assessing Officer has issued the notice referred above under section 274 r.w.s. 271(1)(c) of the Act without specifying the limb under which the penalty proceeding has been initiated and proceeded with, apparently goes to prove that notice in this case has been issued in a stereotyped manner without applying mind which are bad in law, hence cannot be considered valid notice sufficient to impose penalty u/s 271(1)(c) of the Act and therefore we are of the considered view that under these circumstances, the penalty is not leviable as held by the various Courts including the Hon’ble Apex Court and hence, we have no hesitation to delete the penalty under consideration, levied by the AO and affirmed by the Ld. Commissioner .
16. As we have decided the legal issue in favour of the Assessee and deleted the penalty, therefore not dwelling into the merits of the case as the same would become academic exercise only.
17. In the result, the appeal filed by the Assessee is allowed.
Order pronounced in the open court on 28.12.2022.
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