Penalty U/s. 271(1)(c) not sustainable if specific charge not mentioned

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

These two appeals are filed by the assessee against the different orders of the Learned Commissioner (Appeals)-32, Mumbai dated 30-8-2012 for the Assessment Years 2005-06 & 2006-07 in sustaining the penalty levied under section 271(1)(c) of the Act.

2. The learned Counsel for the assessee at the outset submits that assessee has raised additional grounds of appeal questioning the validity of the penalty order passed under section 271(1)(c) of the Act as since the notice under section 274 row with section 271(1)(c) of the Act was issued in a mechanical manner without specifying any charge for which the penalty was proposed to levy. He submits that since the additional ground raised by the assessee is a legal ground the same may be admitted and be adjudicated upon.

3. Learned Departmental Representative submits that as this ground was not raised before the lower authorities and it was raised only for the first time before the Tribunal the same may not be admitted.

4. On hearing both the parties and on perusal of the additional grounds raised by the assessee we find that the additional grounds were raised questioning the validity of the penalty order passed under section 271(1)(c) of the Act is bad in law and not sustainable for the reason that the notice was issued mechanically without specifying any charge. Since, the additional ground is a legal matter and the very basis for levying penalty was questioned, we admit the additional grounds.

5. Learned Counsel for the assessee referring to the Assessment Order for the Assessment Years 2005-06 & 2006-07 submits that the assessing officer has not mentioned on what charge the penalty was initiated. Learned Counsel for the assessee submits that the assessing officer simply stated that he is satisfied that the income of the assessee falls within the purview of the section 271(1)(c) of the Act and therefore penalty proceedings under section 271(1)(c) row with Explanation thereon are initiated in respect of the undisclosed income of the assessee.

6. Similarly referring to the penalty order passed under section 271(1)(c) of the Act for these two Assessment Years learned Counsel for the assessee submits that assessing officer simply stated that he is satisfied that the additional income falls within the purview of the section 271(1)(c) of the Act, but no charge was specified. Therefore, he submits that in none of these orders the assessing officer mentioned clearly on what charge the penalty was imposed i.e. either for furnishing of inaccurate particulars or for the concealment of income. Learned Counsel for the assessee therefore submits that in the absence of specific charge mentioned in the penalty notice or in the Assessment Order the penalty levied under section 271(1)(c) of the Act is not sustainable in law. He placed reliance on the decision of the Coordinate Benches in the cases of Meherjee Cassinath Holdings Private Limited v. ACIT in ITA.No. 2555/Mum/2012 dated 28-4-2017 and M/s. Orbit Enterprises v. ITO (2017) 60 ITR (Trib) 251. Learned Counsel for the assessee submits that this view of the Coordinate Benches has been approved by the High Court of Judicature at Hyderabad for the state of Telangana and Andhra Pradesh in ITTA. No.684 of 2016 dated 13-7-2017 in the case of PCIT v. Smt. Baisetty Revathi. Copy of the order is placed on record.

7. The learned Departmental Representative strongly supported the orders of the lower authorities.

8. We have heard the rival submissions, perused the orders of the authorities below. In this case as could be seen from the assessment orders as well as the penalty orders that the assessing officer has not specified the charge on which he has imposed the penalty under section 271(1)(c) of the Act. The Assessment Order as well as the penalty order only show that the Income Tax Officer is satisfied that the income of the assessee falls within the purview of section 271(1)(c) of the Act. The assessing officer did not even mention that the assessee either concealed his income or furnished inaccurate particulars of such income. The issue of whether the penalty levied under section 271(1)(c) of the Act is sustainable in law in the absence of specific charge in the notice issued under section 274 row with section 271(1)(c) of the Act has been considered in various decisions and the Coordinate Bench of Mumbai Tribunal recently in the case of M/s Orbit Enterprises v. ITO (2017) 60 ITR (Trib) 251 held as under:

“Section 271(1)(c) postulates that penalty prescribed therein can be levied on existence of any of the two situations, namely for concealment of particulars of income or for furnishing inaccurate particulars of such income. “Concealment of particulars of income and “furnishing of inaccurate particulars of income” referred to in Section 271(1)(c) denote two different connotations. Therefore, it is imperative for the assessing officer to make the assessee aware in the notice issued under section 274 read with section 271(1)(c) as to which of the two limbs are being put up against him for the purposes of levy of penalty under section 271(1)(c). Unless the assessee is made aware of the specific charge against him, it would be violative of the principles of natural justice inasmuch as the assessee would not be in a position to put up his defense appropriately. The assessing officer recorded that the penalty proceedings under section 271(1)(c) were initiated for concealment of income while in the notice issued under section 274 read with section 271(1)(c), both the limbs of section 271(1)(c) were left intact in the standard printed notice, as the irrelevant clause had not been struck off. This contradiction in the Assessment Order vis-à-vis the penalty notice issued under section 274 read with section 271(1)(c) on the same date clearly brought out a confusion on the part of the assessing officer, and a situation where the assessee was not aware about the clear and crystallized charge being made against him, thus violating the principles of natural justice. Therefore, the notice issued by the assessing officer under section 274 read with section 271(1)(c) was untenable and suffered from the infirmity of non-application of mind by the assessing officer.

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13. At this point, we may also make a reference to the judgment of the Hon’ble Patna High Court relied by the learned Commissioner-Departmental Representative before us. The issue before the Hon’ble Patna High Court was relating to levy of penalty for shortfall in the payment of advance tax paid as compared with the tax finally assessed as payable, but in the notice issued under section 274 row with section 273(b) of the Act it was incorrectly mentioned that assessee had failed to file its estimate of advance tax. The Hon’ble Patna High Court held that mention of such incorrect charge would not render the penalty proceedings void-ab-initio. The aforesaid parity of reasoning has been relied upon by the learned Commissioner-Departmental Representative before us to state that non-striking off of the irrelevant portion of the notice under section 274 row with section 271(1)(c) of the Act does not render the proceedings invalid. In our view, the said decision does not help the case of the Revenue qua the issue before us. Firstly, the Hon’ble Patna High Court itself noted that it was a case of mere “wrong labelling of the section or some mistake in the charge framed against the assessee” which does not prejudice the assessee. Secondly, non-striking off of the irrelevant clause in the notice under section 274 row with section 271(1)(c) of the Act has been completely differently understood by the various High Courts, including that by the Hon’ble Jurisdictional High Court of Bombay. In the case of Shri Samson Perinchery (supra), the Hon’ble Bombay High Court noted that the order imposing penalty under section 271(1)(c) of the Act has to be made only on the ground on which the penalty proceedings have been initiated. In the case of Shri Samson Perinchery (supra), the Revenue had put up an argument to the effect that there is no difference between furnishing of inaccurate particulars of income and concealment of income. The aforesaid argument has been specifically rejected by the Hon’ble High Court by referring to the judgment of the Hon’ble Supreme Court in the case of T. Ashok Pai (2007) 292 ITR 11 (SC). It was further noted that the judgment in the case of T. Ashok Pai (supra) has been relied upon by the Hon’ble Karnataka High Court in the case of Manjunatha Cotton and Ginning Factory & Ors. (2013) 359 ITR 565 (Karn.). The Hon’ble High Court approved the proposition that once the two limbs contained in the notice under section 274 row with section 271(1)(c) of the Act, namely concealment of income and furnishing of inaccurate particulars of income are understood to be carrying different meanings/connotations, non-striking off of the irrelevant clause or striking off one of the limbs and imposing penalty on the other limb is not as per law. Thirdly, it may be noted that the issue before the Hon’ble High Court was incorrect mentioning of charge in the show cause notice, but the case before us is of non-mentioning of the charge at all. Therefore, for all the above reasons, non-striking off of the irrelevant clause in the notice issued under section 274 row with section 271(1)(c) of the Act cannot be said to be a mere wrong labelling of the section or some mistake of the nature that was before the Hon’ble Patna High Court in the case of Mithila Motors (P.) Limited (supra). Therefore, the judgment of the Hon’ble Patna High Court does not help the case of the Revenue before us.”

9. We also find that the Hon’ble High Court of Telangana and Andhra Pradesh in the case of PCIT v. Smt Baisetty Revathi (supra) considered a similar issue and held as under:-

“Perusal of the order reflects that the assessee did not raise the issue of invalidity of the penalty notice before the Commissioner. In her second appeal before the Income-tax Appellate Tribunal, Visakhapatnam Bench, Visakhapatnam, in ITA No. 599/Vizag/2014, the assessee, for the first time, raised the issue that the show-cause notice under Section 271(1)(c) did not specify as to whether it was prompted by concealment of particulars of income or furnishing of inaccurate particulars of income. Dealing with this contention, the Tribunal placed reliance on the judgment of the Karnataka High Court in The CIT & The ITO v. M/S.Manjunatha Cotton And Ginning Factory and opined that unless the show-cause notice is clear as to whether the penalty proposed to be imposed is for concealment of particulars of income or for furnishing inaccurate particulars of income, no penalty could be imposed, as such a notice would be defective. The Tribunal took note of the fact that in the penalty order; the assessing officer had not given a conclusive finding as to whether the penalty imposed was for concealment of particulars of income or for furnishing inaccurate particulars of income and accordingly held imposition of the penalty to be invalid.

Smt.M.Kiranmayee, learned counsel representing Sri J.V.Prasad, learned senior standing counsel for the revenue, would argue that the assessee never raised the issue as to ambiguity in the show-cause notice before any of the lower authorities and that this indicated she was fully aware as to what was the allegation leveled against her. Learned counsel would point out that in her reply to the show-cause notice, the assessee sought to explain the lapses on her part which evidenced her awareness as to the exact allegations made against her in the said show-cause notice. Learned counsel would therefore argue that raising the issue of lack of clarity in the show cause notice for the first time before the Tribunal was an afterthought and that the Tribunal ought not to have given the assessee the benefit of doubt in this regard.

Per contra, Sri R.Raghunandan, learned senior counsel representing Sri T.Bala Mohan Reddy, learned counsel for the assessee, would rely upon the decisions of the Karnataka and Gujarat High Courts and assert that when penal proceedings are initiated under Section 271(1)(c) of the Act of 1961, an assessee must be made aware in no uncertain terms as to what is the specific allegation which forms the basis for the proposed penalty.

A copy of the proforma notice under Section 271 read with Section 274 of the Act of 1961 addressed to the assessee on 22-3-2013 is produced. Perusal thereof reflects that the irrelevant contents therein, which had no application to the assessee, were struck out leaving only one clause which reads as under:

‘Whereas in the course of proceedings before me for the Assessment Year 2010-11 it appears to me that you have concealed the particulars of your income or furnished inaccurate particulars of such income.’

It would be apposite at this stage to consider the judgment of the Karnataka High Court in M/s. Manjunatha Cotton And Ginning Factory. Therein, a Division Bench of the Karnataka High Court observed that Section 271 of the Act of 1961 is a specific provision providing for imposition of penalties and is a complete code in itself regulating the procedure for such imposition. The Bench therefore held that penalty proceedings have to be conducted in accordance therewith, subject always to the rules of natural justice. It was pointed out that Section 271 makes appropriate provision for levying penalties on an assessee in different eventualities and one such eventuality is for concealment of income or furnishing of inaccurate particulars of such income. It was held that for starting the penalty proceedings, the condition precedent is that the assessing officer must be satisfied that a person has either concealed particulars of his income or furnished inaccurate particulars of such income. The person who is accused of the conditions mentioned in Section 271 should be made aware of the grounds on which imposition of penalty is proposed as he has a right to contest such proceedings and should have a full opportunity to meet the case of the revenue so as to show that the conditions stipulated in Section 271(1)(c) do not exist and that he is not liable to pay the penalty. It was further held that the practice of the revenue in sending a printed form where all the grounds mentioned in Section 271 are mentioned would not satisfy the requirement of law when the consequence of the assessee not rebutting the initial presumption is serious in nature and he has to pay a penalty ranging from 100% to 300% of the tax liability. As the provisions of Section 271(1)(c) have to be strictly construed, the Bench mandated that the notice issued should set out the grounds which the assessee has to meet specifically, otherwise the principles of natural justice would be offended as the show-cause notice would be vague. Dealing with concealment of particulars of income or furnishing of inaccurate particulars of income, the Bench observed that some cases may attract both the offences and in some, there may be overlapping of both, but in such cases initiation of the penalty proceedings must be specifically for both the offences. Drawing up penalty proceedings for one offence and finding the assessee guilty of another or finding him guilty for either, the one or the other, was held to be unsustainable in law.

In CIT, Gujarat-III v. Manu Engineering Works, a Division Bench of the Gujarat High Court observed that the assessing officer must give a positive finding as to whether there is concealment of income by the assessee or whether any inaccurate particulars of such income had been furnished by the assessee. In the event there was no such clear-cut finding, the penalty order was held liable to be struck down.

Smt. Kiranmayee, learned counsel, placed reliance on the judgment of the Supreme Court in K.P.Madhusudhanan v. CIT, Cochin. Therein, the Supreme Court held that it is not necessary for the assessing officer, while issuing a notice under Section 271(1)(c), to expressly invoke Explanation 1(B) appended to the provision. It is however relevant to note that Explanation 1(B) merely adverts to a case of failure of an assessee to substantiate the explanation offered whereby the amount added or disallowed while computing the total income of such person for the purposes of the penalty provision shall be deemed to represent the income in respect of which particulars had been concealed. The Supreme Court observed that the statutory provision included the ‘Explanation’ and once the assessee was put on notice, no express invocation of the ‘Explanation’ is necessary.

This judgment has no application to the case on hand as what we are concerned with presently is whether the assessee is required to be put on notice as to whether she is to be penalized for concealment of particulars of income or for furnishing inaccurate particulars of income. These are two different acts. Concealment of income is an act of omission while furnishing of inaccurate particulars of income is an act of commission. The consequences of such acts, being penal in nature, an assessee has to be informed as to what exactly is the charge against him so that he may respond thereto.

No doubt, in the present case, the assessee seems to have submitted her explanation on merits without raising a doubt as to what was the precise allegation leveled against her. However, we are more concerned with the principle involved and not just the isolated case of its application against the assessee. Further, the penalty order demonstrates that the assessing officer was not even certain as to what was the finding on the strength of which he imposed the penalty. This is clear from the fact that the assessing officer recorded that he was satisfied that the assessee had concealed/furnished inaccurate particulars of income. In the absence of a clear finding by the assessing officer himself, the benefit of doubt cannot be given to the revenue merely because the assessee did not complain of vagueness in the show-cause notice earlier.

Reliance placed by the revenue upon Mak Data Private Limited v. CIT-II, is of no assistance as the Supreme Court merely observed therein that the assessing officer is not required to record his satisfaction in a particular manner while imposing the penalty or reduce it to writing. That is not the controversy in the case on hand.

On principle, when penalty proceedings are sought to be initiated by the revenue under Section 271(1)(c) of the Act of 1961, the specific ground which forms the foundation therefor has to be spelt out in clear terms. Otherwise, an assessee would not have proper opportunity to put forth his defence. When the proceedings are penal in nature, resulting in imposition of penalty ranging from 100% to 300% of the tax liability, the charge must be unequivocal and unambiguous. When the charge is either concealment of particulars of income or furnishing of inaccurate particulars thereof, the revenue must specify as to which one of the two is sought to be pressed into service and cannot be permitted to club both by interjecting an ‘or’ between the two, as in the present case. This ambiguity in the show-cause notice is further compounded presently by the confused finding of the assessing officer that he was satisfied that the assessee was guilty of both.

We are therefore of the opinion that the order under appeal does not brook interference on any ground. We find no question of law, much less a substantial one, arising for consideration warranting admission of this appeal.”

10. Thus, respectfully following the said decisions we hold that the penalty orders passed by the assessing officer for the Assessment Years 2005-06 & 2006-07 are not sustainable in the absence of specific charge mentioned by the assessing officer for which the said penalty is imposed.

11. In the result, both the appeals of the assessee are allowed.