Penalty cannot be imposed in respect of income surrendered without linking to incriminating documents

Relevant Extract of the Judgment

3. The relevant facts are that a search & seizure operation was conducted at the premises of the assessee and its group company on 18.02.2011. In response to the notice issued under sec. 153A, the assessee furnished return of income along with year-wise bifurcation of Rs.10 crores surrendered by the assessee immediately after the completion of search. The Assessing Officer framed assessments under 153A accepting the returns of income filed for the assessment years under consideration. The Assessing Officer thereafter initiated penalty proceedings under sec. 271(1)(c) of the Income-tax Act, 1961 and levied the penalty for the assessment years under consideration. The aggrieved assessee approached the first appellate authority but could not succeed. The action of the learned CIT(Appeals) in upholding the penalty levied by the Assessing Officer for these assessment years has been questioned by the assessee before the ITAT.

Penalty under Section 271(1)(c) of Income TAx Act, 1961 cannot be imposed if Assessing Officer does not specify whether the penalty is for “concealment of income” or for “furnishing inaccurate particulars

7. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. The learned counsel for the assessee drew out attention to the show cause notice issued u/s. 274 of the Act before imposing penalty and submitted that the said notice doe s not specify as to whether the assessee is guilty of having “furnished inaccurate particulars of income” or of having “concealed particulars of such income”. He pointed out that show cause notice does not strike out the irrelevant portion viz., “furnished inaccurate particulars of income” or “concealed particulars of such income”. He further drew attention to the assessment order also stating that there is no charge specified in the assessment order itself. He drew our attention to a decision of the Hon’ble’ Karnataka High Court in the case of CIT v. Manjunatha Cotton & Ginning Factory (2013) 218 Taxman 423 (Kar.) wherein it was held that if the show cause notice u/s. 274 of the Act does not specify as to the exact charge viz., whether the charge is that the assessee has “furnished inaccurate particulars of income” or “concealed particulars of income” by striking out the irrelevant portion of pointed show cause notice, then the imposition of penalty on the basis of such invalid show cause notice cannot be sustained. To examine this argument of the ld. AR we firstly examine facts for assessment year 2006- 2007, The assessment under section 153A (1) (b) of the income tax act was framed on 28/03/2013 wherein returned income under section 153A is accepted as assessed income. While initiating the penalty proceedings under section 271 (1) (C), Ld. assessing officer in assessment order has stated that the assessee has not disclosed this income is Suo Moto but for the search this income would not have been unearthed. Hence he was satisfied that the penalty under section 271 (1) (C) read with expression 5A of the income tax act has to be initiated for which notice under section 271 (1) (C) is being issued separately. Then he went on to say that :-

“ However as discussed above, I am satisfied that the assessee is liable for facing penalty proceedings under section 271 (1) ( c) of the income tax act 1961 read with explanation 5A thereto, with regards to the addition of Rs. 2535000/- as detailed above and accordingly penalty proceedings are being initiated separately for the issue of notice under section 274 of the act.”

Further at the end of the assessment order it has been stated that in respect of income is disclosed to tax/additions made a separate notice under section 274 read with section 271 (1) ( c ) is issued in respect of all the disclosures/additions above. The first contention raised by Ld. authorized representative is that in the notice issued there is no reference about whether the show cause is for furnishing of inaccurate particulars of income or concealment of income. Therefore he submitted that when the charge made against the assessee is twin charge the notice is not a valid notice for levy of the penalty. Even if the para No. 8 of the penalty order is seen where it is mentioned as under :-

“8. The provisions of section 271 (1) (C) read with explanation 5A are clearly attracted as the assessee has concealed particulars, furnished inaccurate particulars of its income for the previous year 2005 – 06.”

From above it is apparent that even at the time of initiation of penalty proceedings as well as at the time of levy of penalty, the Ld. assessing officer is not sure whether he is levying penalty for furnishing of inaccurate particulars of its in income or concealment of the income. The learned counsel for the assessee drew out attention to the show cause notice issued u/s. 274 of the Act before imposing penalty and submitted that the said notice doe s not specify as to whether the assessee is guilty of having “furnished inaccurate particulars of income” or of having “concealed particulars of such income”. He pointed out that the pointed show cause notice does not strike out the irrelevant portion viz., “furnished inaccurate particulars of income” or “concealed particulars of such income”. He drew our attention to a decision of the Hon’ble’ Karnataka High Court in the case of CIT v. Manjunatha Cotton & Ginning Factory (2013) 218 Taxman 423 (Kar.) wherein it was held that if the show cause notice u/s. 274 of the Act does not specify as to the exact charge viz., whether the charge is that the assessee has “furnished inaccurate particulars of income” or “concealed particulars of income” by striking out the irrelevant portion of pointed show cause notice, then the imposition of penalty on the basis of such invalid show cause notice cannot be sustained. The Hon’ble Karnataka High Court in the case of CIT & Anr. v. Manjunatha Cotton and Ginning Factory, 359 ITR 565 (Karn), has held that notice u/s. 274 of the Act should specifically state as to whether penalty is being proposed to be imposed for concealment of particulars of income or for furnishing inaccurate particulars of income. The Hon’ble High court has further laid down that certain printed form where all the grounds given in section 271 are given would not satisfy the requirement of law. The Court has also held that initiating penalty proceedings on one limb and find the assessee guilty in another limb is bad in law. It was submitted that in the present case, the aforesaid decision will squarely apply and all the orders imposing penalty have to be held as bad in law and liable to be quashed. The Hon’ble Karnataka High Court in the case of CIT & Anr. v. Manjunatha Cotton and Ginning Factory (supra) has laid down the following principles to be followed in the matter of imposing penalty u/s.271(1)(c) of the Act.

“63. In the light of what is stated above, what emerges is as under :

(a) Penalty under section 271(1)(c) is a civil liability.

(b) Mens rea is not an essential element for imposing penalty for breach of civil obligations or liabilities.

(c) Willful concealment is not an essential ingredient for attracting civil

(d) Existence of conditions stipulated in section 271(1)(c) is a sine qua non for initiation of penalty proceedings under section 271.

(e) The existence of such conditions should be discernible from the assessment  order or the order of the appellate authority or the revisional authority.

(f) Even if there is no specific finding regarding the existence of the conditions  mentioned in section 271(1)(c), at least the facts set out in Explanation 1(A) and  1(B) it should be discernible from the said order which would by a legal fiction  constitute concealment because of deeming provision.

(g) Even if these conditions do not exist in the assessment order passed, at least, a direction to initiate proceedings under section 271(1)(c) is a sine qua non for the Assessing Officer to initiate the proceedings because of the deeming provision contained in sub-section (1 B).

(h) The said deeming provisions are not applicable to the orders passed by the Commissioner of Income-tax (Appeals) and the Commis sioner.

(i) The imposition of penalty is not automatic.

(j) The imposition of penalty even if the tax liability is admitted is not

(k) Even if the assessee has not challenged the order of assessment levying tax and interest and has paid tax and interest that by itself would not be sufficient for the authorities either to initiate penalty proceedings or impose penalty, unless it is discernible from the assessment order that, it is on account of such unearthing or enquiry concluded by the authorities it has resulted in payment of such tax or such tax liability came to be admit ted and if not it would have escaped from tax net and as opined by the Assessing Officer in the assessment order.

(l) Only when no explanation is offered or the explanation offered is found to be false or when the assessee fails to prove that the explanation offered is not bona fide, an order imposing penalty could be passed.

(m) If the explanation offered, even though not substantiated by the assessee, but is found to be bona fide and all facts relating to the same and material to the computation of his total income have been disclosed by him, no penalty could be imposed.

(n) The direction referred to in Explanation 1(B) to section 271 of the Act should be clear and without any ambiguity.

(o) If the Assessing Officer has not recorded any satisfaction or has not issued any direction to initiate penalty proceedings, in appeal, if the appellate authority records satisfaction, then the penalty proceedings have to be initiated by the appellate authority and not the assessing authority.

(p) Notice under section 274 of the Act should specifically state the grounds  mentioned in section 271(1)(c), i.e., whether it is for concealment of income or  for furnishing of incorrect particulars of income

(q) Sending printed form where all the grounds mentioned in section 271 are mentioned would not satisfy the requirement of law.

(r) The assessee should know the grounds which he has to meet specifically.  Otherwise, the principles of natural justice is offended. On the basis of such  proceedings, no penalty could be imposed to the assessee.

(s) Taking up of penalty proceedings on one limb and finding the assessee guilty of another limb is bad in law.

(t) The penalty proceedings are distinct from the assessment proceedings. The proceedings for imposition of penalty though emanate from proceedings of assessment, it is independent and separate aspect of the proceedings.

(u) The findings recorded in the assessment proceedings in so far as “concealment of income” and “furnishing of incorrect particulars” would not operate as res judicata in the penalty proceedings. It is open to the assessee to contest the said proceedings on the merits. However, the validity of the assessment or reassessment in pursuance of which penalty is levied, cannot be the subject matter of penalty proceedings. The assessment or reassessment cannot be declared as invalid in the penalty proceedings.”

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It is clear from the aforesaid decision that on the facts of the present case that the show cause notice u/s. 274 of the Act is defective as it does not spell out the grounds on which the penalty is sought to be imposed. Even The assessment order is also silent on this aspect. Therefore in the complete assessment proceedings as well as penalty proceedings against the assessee that whether it has furnished inaccurate particulars of income or has concealed particulars of income. The provisions of penalty proceedings cannot be distinctly applied in assessments related to search and other regular assessment. Therefore the principles laid down by the decision of Hon’ble Karnataka High Court also squarely applies to the facts of the present case even though exploration 5A of section 271(1)(C) is invoked. Similar view has been taken by other coordinate benches in following decisions:-

1) DCIT Central circle versus Shaym Sundar Dhanuka 1869 – 1 870/KOL/201 3

2) Champa Goel Vs ACIT ITA No 696/Chd/2012

3) Nisheeth Kumar Jain versus ACIT ITA 961 – 964/KOL/2013

4) Harishkumar Sarogi V DCIT ITA No 1222-1226/Kol/2011 & 1496- 1499/Kol/201 1

Following the decision of the Hon’ble Karnataka High Court, we hold that the orders imposing penalty in all the assessment years have to be held as invalid and consequently penalty imposed is cancelled.

Penalty under Section 271(1)(c) of Income Tax Act, 1961 cannot be imposed in respect of income surrendered by the assessee if the AO does not link the income to incriminating documents

Secondly these facts are undisclosed that assessments for the assessment years under consideration have been framed under sec. 153A of the Act accepting the returns of income on the surrendered amounts filed by the assessee in response to the notice issued under sec. 153A of the Act as under :-

In the present case the income is offered by appellant on ad hoc basis without co-relating the amount of year wise disclosure without any corroborating evidence. The above disclosure has been accepted by Ld. assessing officer without referring to any incriminating material pertaining to respective years. Ld. assessing officer as well as the 1st appellate authority has also not referred to any material based on which disclosure is made and assessed by the Ld. assessing officer. In view of this it is apparent that disclosure is without any material but merely on the statement of appellant. In our view, there may be several reasons for making surrender by an assessee and merely on this basis an inference beyond doubt cannot be drawn that there was concealment of particulars of income or furnishing inaccurate particulars thereof on the part of the assessee towards the surrendered income to attract penal provisions under sec. 271(1)(c) of the Act. In the present case, vide letter on 22.2.2011 i.e. immediately after the completion of search, the assessee has offered a lump sum surrender of Rs.10 crores well before issuance of any summons, notice, questionnaire from the investigation wing of the Revenue, with this submission that the surrender was made to buy peace of mind as well as a gesture of cooperation towards the department and subject to the condition that no penal action under any provisions of the Income-tax Act, 1961 would be taken against the assessee. Further Hon’ble Gujarat High Court in case of Kirit Dayabhai patel V ACIT (ITA 1181 of 2010) has held as under

“13. Considering the facts and circumstances of the case and also considering the decisions relied upon by learned senior advocate for the appellant, we are of the considered opinion that the view taken by the Tribunal is erroneous. The CIT(A) rightly held that it is not relevant whether any return of income was filed by the assessee prior to the date of search and whether any income was undisclosed in that return of income. In view of specific provision of Section 153A of the I.T. Act, the return of income filed in response to notice under Section 153(a) of the I.T. Act is to be considered as return filed under Section 139 of the Act, as the Assessing Officer has made assessment on the said return and therefore, the return is to be considered for the purpose of penalty under Section 271 (1)(c ) of the I .T. Act and the penalty is to be levied on the income assessed over and above the income returned under Section 153A, if any.”

Similar are the facts in the case of Sajal Exports (India) vs. ACIT (supra) wherein the Assessing Officer had completed the assessment under sec. 153A by accepting the additional income so offered by the assessee, the Assessing Officer initiated penalty proceedings under sec. 271(1)(c) of the Act and levied penalty relying upon the Explanation-5A to section 271(1)(c) of the Act, the Learned CIT(Appeals) also upheld the penalty. The ITAT deleted the penalty with this observation as

“the very fact that the partner of the assessee agreed to offer a lump sum figure of Rs. 12 crores shows that there is no one to one relationship between the documents found and the income surrendered, i.e., it was a lump sum surrender to take care of all the deficiencies, if any. In respect of the year under consideration also, the additional income surrendered by the assessee has not been linked by the Assessing Officer to any of the seized documents. What we notice from the discussion made in the penalty order is that there were some documents evidencing payment of salary and loans in cash. With regard to the same, the employee of the assessee admitted that the salary and loans have been paid in cash. The partners of the assessee firm also after consulting the employees, admitted the same. However, there is no discussion about the quantum of salary/loan paid in cash out of which, how much was accounted and how much was unaccounted, so that one can decipher about the undisclosed income, if any, that can be gathered from those documents”.

The ITAT held that the Assessing Officer should make specific reference to the documents based upon which the undisclosed income was assessed by him and the validity of the order of penalty must be determined with reference to the information, facts and material in the hands of the authority imposing penalty at the time the order was passed. It was held that the Assessing Officer did not refer to any of the documents or material found during the course of search from which the impugned undisclosed income was found out, hence the tax authorities could not have placed reliance on Explanation-5A to sec. 271 of the Act without making specific reference to the documents, which reveal about concealment of income i.e. the conditions prescribed in the Explanation 5A has not been satisfied. Similar view as expressed by the ITAT in the case of Sejal Exports (India) (supra), discussed in the above paragraph, has been expressed by Delhi Bench of the ITAT in the case of Pawan Kumar Gupta vs. ACIT (supra). The ITAT in that case has held that concealment of income has to be seen with reference to addition brought to tax over and above the income returned by the assessee in response to the notice issued under sec. 153A and therefore, once return of income under sec. 153A is accepted by the Assessing Officer, it can neither be a case of concealment of income nor furnishing inaccurate particulars of such income. In the present case, it is evident from the assessment order that the Assessing Officer has reproduced in the assessment order, the surrender letter written by the assessee to the Joint Director of Income Tax (Investigation). On the basis of the said letter the Assessing Officer has noted that the assessee had made only a lump sum surrender of Rs. 10 crores and no bifurcation whatsoever based on seized documents or on the basis of financial years was submitted by the assessee. Regarding Annexures A-2, A-3, A-4, A-5, A-6, A-7 and A-9 which were diaries seized during the course of search contained certain payments made by the assessee company spreading out in different financial years starting from financial year 2006-07 to 201 0-11, the assessee explained that the notings in all the diaries are written merely for reference purpose only and there was no continuity in the entries that have been recorded in the diaries and that the said diaries contain many other figures which had no significance to the actual working of the assessee company. The assessee contended further that just to honour the surrender made during the course of search and in order to avoid unnecessary litigation the assessee had surrendered entries in these diaries in the past years also. The Assessing Officer has thereafter recorded that the above contention made by the assessee has been considered and found to be acceptable since the assessee has honoured the surrender made during the course of search.

The Assessing Officer has justified the levy of penalty under Section 271(1)(c) of the Act on the basis that the assessee had not disclosed the income suo motu but for the search, this income would not have been unearthed. It is thus evident from the assessment order itself that the additions in the assessments framed under section 1 53A of the Act have been made on the basis of the surrender made by the assessee without linking the additions surrendered with any incriminating documents or any corroborative evidence in support. We thus respectfully following the above cited decisions hold that the Assessing Officer was not justified in invoking the penal provisions under Section 271(1)(c) of the Act for the levy of penalty on the additions made by accepting the return of income filed by the assessee as in such a situation an inference beyond doubt cannot be drawn that there was concealment of particulars of income or furnishing of inaccurate particulars thereof on the part of the assessee towards the additions made by accepting the returns of income filed by the assessee. The Hon’ble Supreme Court in the case of CIT Vs. Suresh Chandra Mittal (supra) has been pleased to hold that once the revised returns have been regularized by Revenue the explanation of the assessee that he has declared additional income to buy peace and to come out of vexed litigation could be treated as bona fide and penalty under Section 271(1)(c) was not leviable, though the assessee had surrendered additional income by way of revised returns after persistent queries by the Assessing Officer. This decision also supports the case of present assessee, rather it is on better footing as the assessee in the present case had made surrender immediately after search and before issuance of any notice and had declared the surrendered income in the returns of income accepted by the Assessing Officer. Besides, the CBDT has time and again vide its Circulars No. 286 of 2003 and 286 of 2013 prohibited the assessing authorities to make assessment solely on the basis of confessional statements of the assessee and to concentrate on documentary evidence. The very purpose behind it is that in case of retraction from its statements by the assessee, the case of the Revenue should not fail. We thus while setting aside the orders of the authorities below direct the Assessing Officer to delete the penalty questioned in the above ground of the appeals for the assessment years under consideration. The ground is accordingly allowed.