Penalty u/s. 271(1)(c) not sustained as notice failed to specify particular limb: ITAT Mumbai

Priority Jewels Private Limited Vs CIT Appeals (ITAT Mumbai)

ITAT Mumbai held that notice issued u/s. 274 r.w.s. 271(1)(c) of the Income Tax Act without specifying the particular limb is unsustainable in law. Accordingly, the penalty imposed u/s. 271(1)(c) is not sustainable.

Facts- The assessment was completed u/s. 143(3) of the Act and the total income sought to be evadedamount to Rs 33,10,243/- related to the disputed purchases. The penalty proceedings was initiated u/s. 271(1)(c) of the Act and the notice u/s. 274 r.w.s. 271(1)(c) was duly issued and served. After hearing the same, the penalty was levied @100% of the tax sought to be evaded amount to Rs.10,74,010/-. CIT(A) upheld the penalty order. Being aggrieved, the present appeal is filed.

Conclusion- AO has issued the notice without mentioning the specific limb in the notice issued under section 274 read with section 271((1)(c) of the Act. In the assessment order also, the particular limb was not mentioned.

Held that the notice u/s 274/271(1)(c) of the Act is not carrying the specific limb as well as in assessment order also. Therefore, this is a case where both the parts of the offences i.e., concealment of income as well as furnishing of inaccurate particulars of income were involved. Finally, respectfully following the binding judicial precedents as cited aforesaid, we are of the considered opinion that the impugned penalty is not sustainable on legal grounds. Hence, by deleting the same, we allow the appeal of the assessee.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

Instant appeal of the assessee was filed against the order of the Learned National Faceless Appeals (NFAC), Delhi [for brevity, ‘Ld.CIT(A)’] passed under section 250 of the Income-tax Act, 1961 (in short, ‘the Act’), for Assessment Year 2012-13, date of order16.04.2024. The impugned order was emanated from the order of the Deputy Commissioner of Income-tax, Circle 10(3)(2), Mumbai (the Ld.AO) passed under section 271(1)(c) of the Act, dt of order 31/07/2018.

2. The assessee has taken the following grounds of appeal: –

“Being aggrieved by the order of the Learned Commissioner of Income Tax (Appeals) -NFAC, ITD, New Delhi dated 16.04.2024, this appeal is submitted on the following grounds, which are independent of and without prejudice to one another.

1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred, both in law and on facts, in not following procedure narrated under section 250 of the Income Tax Act, 1961 relating to procedure in appeal.

1.1 On the facts and circumstances of the case and in law, the Learned CIT (A) erred in following the procedure in appeal as mentioned in section 250 of the Income Tax Act ,1961 (herein after called as ‘the acf) which is summarized as follows:

: Section 250 – Procedure in Appeal Bare Act

(1) The Commissioner (Appeals) shall fix a day and place for the hearing of the appeal and shall give notice of the same to the appellant and to the Assessing W­- Officer against whose order the appeal is preferred.

? f^ -” -. _

; (2) The following shall have the right to be heard at the hearing of the appeal-

(a) the appellant, either in person or by an authorised representative^

(b) the Assessing Officer, either in person or by a representative.

(3) The Commissioner (Appeals) shall have the power to adjourn the hearing of the appeal from time to time.

(4) The Commissioner (Appeals) may, before disposing of any appeal, make such further inquiry as he thinks fit, or may direct the Assessing Officer to make further inquiry and report the result of the same to the Commissioner (Appeals).

(5) The Commissioner (Appeals) may, at the hearing of an appeal, allow the appellant to go into any ground of appeal not specified in the grounds of appeal, if the Commissioner (Appeals) is satisfied that the omission of that ground from the form of appeal was not willful or unreasonable.

(6) The order of the Commissioner (Appeals) disposing of the appeal shall be in writing and shall state the points for determination, the decision thereon and the; “reason for the decision.

(6A) In every appeal, the Commissioner (Appeals), where it is possible, may hear and decide such appeal within a period of one year from the end of the financial year in which such appeal is filed before him under section (1) of section 246A.

(7) On the disposal of the appeal, the Commissioner (Appeals) shall communicate the order passed by him to the assesses and to the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner.

1.2 On the facts and in the circumstances of the case and in law, the GIT (Appeals) erred in not providing opportunity of being heard to the appellant company or its authorized representative throughout the appellate proceedings which is against the procedure narrated in section 250 of the act. The decision of appeal without giving sufficient opportunity of being heard to appellant is violation of principles of natural justice. Therefore, the decision of appeal stands invalid and order passed u/s. 250 of the act stands invalid.

1.3 The appellant wishes to submit the snapshot of the Income Tax Portal’s e-proceeding facility tab as ‘exhibit A’ wherein it can be seen that no opportunity of hearing is given to appellant bv the learned CITCA). This approach of leaned CIT (A¹! signifies the pre-determined mindset to upheld the decision of the learned Assessing Officer which is merely based on assumptions and estimations which is not tenable in the eves of law and consequently whole of the appellate proceedings stands invalid.

2. On the facts and circumstances of the case and in law, the Ld. CIT (A) erred, both in law and on facts, in confirming the time barred order passed by the learned AO u/s. 271(l)(c) of the act by violating conditions prevailed in section 275 of the act.

2.1 On the facts and circumstances of the case and in law, the Learned CIT (A) erred in confirming the imposition of penalty proceedings u/s. 27l(l)(c) of the act by the Assessing Officer when the conditions laid down under section 275 of the Act have been violated which relates to “Bar of Limitation for Imposing Penalties.”

2.2 On the facts and in the circumstances of the case and in law, the Learned CIT (A) erred in confirming the imposition of penalty proceedings by the Id. assessing wide order dated 31.07.2018 which is barred by limitation as per section 275 of the act. The relevant extract of section 275 of the act is narrated below for your good selves ready reference. Section 275: Bar of Limitation for Imposing Penalties Bare Act

(1) No order imposing a penalty under this Chapter shall be passed:

(a) in a case where the relevant assessment or other order is the subject-matter of an appeal to the Commissioner (Appeals) under section 246 or section 246A or an appeal to the Appellate Tribunal under section 253, after the expiry of the financial year in upholding proceedings, in the course of which action for the imposition of penalty has been initiated, are completed, or six months from the end of the month in which the order of the Commissioner (Appeals) or, as the case may be, the Appellate Tribunal is received by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, whichever period expires later:

Provided that in a case where the relevant assessment or other order is the subject matter of an appeal to the Commissioner (Appeals) under section 246 or section246A, and the Commissioner (Appeals) passes the order on. or after the 1st day of June, 2003 disposing of such appeal, an order imposing penalty shall be passed before the expiry of the financial year in which the proceedings, in the course of which action for imposition of penalty has been initiated, are completed, or within one year from the end of the financial year in which the order of the Commissioner(Appeals) is received by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, whichever is later;

(b) in a case where the relevant assessment or other order is the subject-matter of revision under section 263 or section 264, after the expiry of six months from the end of the month in which such order of revision is passed;

(c) in any other case, after the expiry of the financial year in which the proceedings, in the course of which action for the imposition of penalty has beeninitiated, are completed, or six months from the end of the month in which action for imposition of penalty is initiated, whichever period expires later,

(1A) In a case where the relevant assessment or other order is the subject-matter of ;; s.: on appeal to the Commissioner (Appeals) under section 246 or section 246A or an appeal to the Appellate Tribunal under section 253 or an appeal to the High Court under section 260A or an appeal to the Supreme Court under section 261 or revision under section 263 or section 264 and an order imposing or enhancing or reducing or cancelling penalty or dropping the proceedings for the imposition of penalty is passed before the order of the Commissioner (Appeals) or the Appellate Tribunal or the High Court or the Supreme Court is received by the Principal Chief Commissioner or Chief Commissioner or the Principal Commissioner or Commissioner or the order of revision under section 263 or section 264 is passed, an order imposing or enhancing or reducing or cancelling penalty or dropping the proceedings for the imposition of penalty may be passed on the basis of assessment as revised by giving effect to such order of the Commissioner (Appeals) or, the Appellate Tribunal or the High Court, or the Supreme Court or order of revision under section 263 or section 264:

Provided that no order of imposing or enhancing or reducing or cancelling penalty or dropping the proceedings for the imposition of penalty shall be passed.

(a) unless the assessee has been heard or has been given a reasonable opportunity of being heard.

(b) after the expiry of six months from the end of the month in which the order of the Commissioner (Appeals) or the Appellate Tribunal or the High Court or the Supreme Court is received by the Principal Chief Commissioner or Chief Commissioner or the Principal Commissioner or Commissioner or the order of revision under section 263 or section 264 is passed;

Provided further that the provisions of sub-section (2) of section 274 shall apply in respect of the order imposing or enhancing or reducing penalty under this sub­section.

(2) The provisions of this section as they stood immediately before their amendment by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), shall apply to and in relation, to any action initiated for the imposition of penalty on or before the 31st day of March, 1989.

Explanation- In computing the period of limitation for the purposes of this section,

(i) the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129;

(ii) any period during which the immunity granted under section 245H remained in force; and

(iii) any period during which a proceeding under this Chapter for the levy of penalty is stayed by an order or injunction of any court, shall be excluded.

2.3. On the facts and in the circumstances of the case and in law, the Learned CIT (A) erred in confirming the imposition of penalty u/s. 271 (l) (c) of the act by learned AO wide order passed on 31.07.2018. Under section 275(l) (a) of the act, the time limit for completion of the proceedings are six months from the end of the month in which the order of the CIT (A), or as the case may be of Appellate Tribunal is received by the Chief Commissioner or Commissioner.

Therefore, in the instant facts of the case, the Ld. ITAT has pronounced, its order dated 13.10.2017 as per section 253 of the act which in fact would have certainly been received bv the Chief Commissioner or Commissioner bv the end of December .2017. The order imposing penalty u/s. 271(l)(c) of the act on 31.0 7.20.18 bv the Ld. AO after receiving ITAT order certainly latest bv December 2017 stands barred bv limitation as per section 275d)(a) and therefore where penalty proceedings initiated are liable to be dropped.

3. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred, both in law and on facts, in confirming the order passed u/s. 271(l)(c) of the act by learned AO without giving sufficient time for the compliance of Show Cause Notices under the act.

3.1. On the facts and in the circumstances of the case and in law, the learned assessing officer was not justified to impose penalty u/s. 271(l)(c) of the act without giving sufficient time to the appellant to produce the facts before AO to defend the levy. The time period given in the notices is below seven days which is too short and it was not possible to gather the facts and defend the levy imposed by the learned AO.

3.2. On the facts and in the circumstances of the case and in law, the learned assessing officer has violated mandatory provision under the IT Act, 1961 for giving the insufficient period for responding to the show cause notices. The insufficient time for compliance is against principle of natural justice and therefore, the notices stands invalid notices.

The proceedings based on invalid notices is not sustainable and liable to quash, Reference has been made of counting no. of days of compliance and sufficient time period by keeping reliance on the Hon’ble SC Judgement in case of Pioneer Motors (Private) Ltd. vs. The Municipal Council, Nagrecoil: AIR 1967 SC 684, wherein it has, inter-alia, been laid down as under:

“The words “not being less than one month “do imply that clear one month’s notice was necessary to be given, that is, both the first day and the last day of the month had to be excluded. To put it in the language used by Maxwell on Interpretation of Statutes, 10th Edition, p. 351:-

“..when……. ‘not less than’ so many days are to intervene, both the terminal days are excluded from the computation.”

Reliance has also been placed on the decisions with respect to in-sufficient time period of below 7 days in the case of:

Rajasthan High Court in case of Bijendra Singh Vs PCCIT, WP 6852/2022 dated 04.01.2024 has allowed the plea of assesse for insufficient period of compliance. Kerala High Court in case of KoyambrathPuthiyapurayil Mohammed Kunhi v/s. ITO, Writ Petition Citation WP(C) NO. 28069 OF 2023.

Therefore, in the instant facts of the case, the Ld. AO had issued SON u/8. 2 71flVc) of the act dated 24.0 7.201 8 bv mentioning in the subject that the SON u/s. 211(1) (c) of the act for the AY 2010-11. The negligence and non-application of mind bv the learned AO can be seen that the Assessment vear for which penalty proceedings initiated itself 2010-11 instead of AY 2012-13 under consideration.

Furthermore, the time period given for the compliance was merely of three davsi.e. 2 7.07.2018 which is very less time to gather the facts and defend the lew as whv the lew has been imposed and under which charge it has been imposed was not mentioned in the SON issued bv the learned AO. The insufficient tjrpe period given by the learned AO is against the principle of natural Justice and such SON are liable to be called invalid notices.

4. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred, both in law and on facts, in confirming the imposition of penalty by Ld. AO u/s. 271(l)(c ) of the act where the additions has been made on estimate basis.

4.1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in confirming the imposition of penalty made by the learned assessing officer who erred in imposing the penalty of Rs. 10, 74,01 0/- u/s. 271(1) {c) of the act where the addition made to the total income of the appellant on the basis of the estimation of gross profits with an incomparable entity. It is a well-established principle of law that the penalty u/s. 271(l)(c ) cannot be levied where addition has been made on estimate basis.

4.2. On the facts and in the circumstances of the case and hi law, the Ld. CIT(A) erred in confirming the penalty proceedings made by the assessing officer who erred in imposing penalty when the addition is made on estimate basis because there was neither concealment of income nor that the appellant had furnished inaccurate particulars of the income.

More so an estimate was an opinion which was taken subsequently. When the difference of opinions leads to any addition, it cannot turn into a penalty under section 271 (1) (c) of the Act. As per the facts of the case under appeal. Ld. CIT (appeals) had reduced the estimated addition by one percentage point, so the percentage of estimated addition varied at different stages bv different authorities. Therefore, the penalty levied bv the Ld. AO violated the principles laid down under the law and pronounced by authorities.

The reliance has been placed on below pronouncements –

The Hon’ble Gujarat High Court in the case of CIT vs. Savani Handling and Transport Company appeal No. 2187/2009 has held that when estimate of profits made by the different authorities vary, this cannot be the ground for levy of penalty. In the absence of a specific finding of concealment or furnishing of inaccurate particulars of income, penalty under section 271 (1) (c) cannot be attracted.

Moreover, Hon’ble ITAT in the case of Fortune Technocomps (P) ltd. If A SIS/2016 held that penalty under section 271 (1) (c) cannot, be levied when the addition is sustained by the first appellate authority on estimate basis.

5. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred, both in law and on facts, in confirming the imposition of penalty by Ld. AO u/s. 271(l)(c ) of the act where the estimated additions of gross profit has been made on purchases claimed by the appellant which cannot be treated as inaccurate particulars.

5.1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the imposition of penalty u/s. 271(1) (c) of the act by the learned AO where the parent order passed by the learned AO treating the purchases made by the appellant as inflated and hence added back the differential gross profit margin after comparing with another entity. Merely because the appellant had claimed the purchase expenditure. which was not accepted by the revenue authorities that by itself would not, attract the penalty under section 271(1) (c ).

5.2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred, both in law and on facts, in upholding the imposition of penalty u/s. 271(1) (C) of the act where the learned AO has treated the claim of purchase expenditure of the appellant as unexplained expenditure which is per se not the fact. Further the appellant has discharged the primary onus by furnishing reply on 30.0 7.2018 stating that the penalty is not leviable as all the relevant particulars has been submitted by the appellant during the proceedings at various levels and same has been apprehended by various judiciary pronouncement of higher courts that supports the appellant contention.

It is obvious that the appellant having furnished all the details of its expenditure as well as income in its return , it is upto the authorities to accept the appellant claim or to reject it. But merely because the appellant had claimed an expenditure which was not acceptable by the revenue, that by itself would not attract the penalty u/s. 271(1) (c ) of the act.

The same has been ruled out by the Jammu and Kashmir High Court in the case of Principal Commissioner of Income Tax vs. ManzoorAhmad WalvirlTA No. 04/2016 It is thus obvious that the respondent-assessee having furnished all the details of its expenditure as well as income in its return, it was upto the authorities to accept his claim or to reject it. But merely because the respondent- assessee had claimed an expenditure which was not accepted by the revenue, that by itself would not attract the penalty of Section 271 (l) (c). Similar decision also held in Calcutta High Court in the case of Paharpur Colling Towers Ltd. vs. Commissioner of Income Tax ITA 42 of 2006.”

3. The brief facts of the case are that the assessment was completed under section 143(3) of the Act and the total income sought to be evadedamount to Rs 33,10,243/-related to the disputed purchases. The penalty proceedings was initiated under section 271(1)(c) of the Act and the notice under section 274 read with section 271(1)(c) was duly issued and served. After hearing the same, the penalty was levied @100% of the tax sought to be evaded amount to Rs.10,74,010/-. The aggrieved assessee filed an appeal before the Ld.CIT(A) and submitted all the relevant documents. But Ld. CIT(A) upheld the penalty order. Being aggrieved, the assessee filed an appeal before us.

4. The Ld.AR submitted a written submission which is kept in the record (APB). The Ld.AR first invited our attention in the notice issued by the Ld.AO under section 274 read with section 271(1)(c) of the Act dated 28/03/20 15. The copy of the notice is reproduced as below:-

To,
PRIORITY JEWELS PVT. LTD.
PLOT NO 121, STREET NO 15/18, MIDC, MAROL, ANDHERI EAST, MUMBAI 400093 PAN: AAECP4118K
Pen/5 0/Pg. 136/14-1 5

NOTICE UNDER SECTION 274 READ WITH SECTION 271 (l) (c )OF THE INCOME-TAX ACT, 1961.

Whereas in the Course of proceeding before me for the assessment year 2012-13 is appears to me that you: –

*have without reasonable cause failed to furnish me return of income which you were required to furnish by a notice given under section 22 (l)/22 (2) 34 of the Indian Income-tax Act, 1922 or which you were required to furnish under section 139(1) or by a notice given under section 139(2)/148 of the Income Tax Act, 1961,

No,,….. Dated….. or have without reasonable cause failed to furnish it within the time allowed and
the manner required by the said section 139(1) or by such notice.

*have without reasonable cause failed to comply with a notice under section 22 (4)/23 (2) of the Indian Income-tax Act, 1922 or under secrionl42 (l)/143 (2) of the income-tax Act, 1961.

No……. dated….

* have concealed the particulars of your Income or……… furnished inaccurate particulars of such

Income.

You are hereby requested to appear before me at 2:30PM on 13.04.2015 and show cause why an order imposing a penalty on you should not be made under section 271 of the Income-tax Act 1961. If you do not wish to avail yourself of this opportunity of being heard in person or through authorizedrepresentative you may show cause in writing on or before the said date which will be considered before any such order is made under section.

(Seal)
(B. V.S SAIKRISHNA)
Assistant Commissioner of Income Tax
10(3)(2), Mumbai”

5. The Ld.AR further placed that the Ld.AO has not specified the limb under which the penalty was initiated, in the notice and alsoduring the finalization of the assessment order. The Ld.AO relied on the order of the Hon’ble Bombay High Court(Panaji Bench) in the case of Mohammed Farhan A Shaikh vs DCIT (2021) 434 ITR 1 (Bom [FB]). The Ld.AR specifically mentioned that –

“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(l)(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(l)(c), read with section 274 of Income-tax 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.

183. Therefore, we answer the first question to the effect that Goa Dourado Promotions and other cases have adopted an approach more in consonance with the statutory scheme. That means we must hold that Kaushalya does not lay down the correct proposition of law.

Question No. 2 : Has Kaushalya failed to discuss the aspect of “prejudice?”

184. Indeed, Kaushalya did discuss the aspect of prejudice. As we have already noted, Kaushalya noted that the assessment orders already contained the reasons why penalty should be initiated. So, the assessee, stresses Kaushalya, “fully knew in detail the exact charge of the Revenue against him”. For Kaushalya, the statutory notice suffered from neither non-application of mind nor any prejudice. According to it, “the so-called ambiguous wording in the notice (has not) impaired or prejudiced the right of the assessee to a reasonable opportunity of being heard”. It went on to observe that for sustaining the plea of natural justice on the ground of absence of opportunity, “it has to be established that prejudice is caused to the concerned person by the procedure followed”. Kaushalya closes the

185. Page No : 48

discussion by observing that the notice issuing “is an administrative device for informing the assessee about the proposal to levy penalty in order to enable him to explain as to why it should not be done”.

4. The Ld.DR vehemently argued and placed that the judgment of the Hon’ble Supreme Court in the case of State Bank of Patiala & Ors vs S.K. Sharma, AIR 1996 SUPREME COURT 1669date of order 27/03/1996.

5. We heard the rival submissions and considered the documents available in the record. The Ld.AO has issued the notice without mentioning the specific limb in the notice issued under section 274 read with section 271((1)(c) of the Act. In the assessment order also, the particular limb was not mentioned. The issue was duly agitated by the assessee before the Ld.CIT(A). The submission dated 15/03/2021 filed before the ld.CIT(A) is duly annexed in the paper book. But the CIT(A) was silent on the submission of the assessee. The issue is entirely legal and was decided by the Hon’ble Jurisdictional High Court in Mohammed Farhan A Shaikh(supra). The ld. DR relied on the case State Bank of Patiala(supra) is factually distinguishable. As held in various judicial pronouncements including the decision of Hon’ble Karnataka High Court in CIT V/s SAS’s Emerald Meadows (73 taxmann.com 241) against which Special Leave Petition (SLP) filed by the department stood dismissed by Hon’ble Supreme Court which is reported as73 taxmann.com 248. The notice u/s 274/271(1)(c) of the Act is not carrying the specific limb as well as in assessment order also. Therefore, this is a case where both the parts of the offences i.e., concealment of income as well as furnishing of inaccurate particulars of income were involved. Finally, respectfully following the binding judicial precedents as cited aforesaid, we are of the considered opinion that the impugned penalty is not sustainable on legal grounds. Hence, by deleting the same, we allow the appeal of the assessee.

6. In the result, the appeal of the assessee bearing ITA 3196/Mum/2024 is allowed.

Order pronounced in the open court on 12^th day of August, 2024.