Veena Estate Pvt. Ltd. Vs CIT (Bombay High Court)
Bombay High Court held that plea of defect in the notice cannot be accepted as it had caused no prejudice to the assessee and the assessee “clearly understood” what was the purport and import of notice issued under section 274 read with Section 271 of the Act.
Facts- The question involved herein is as to whether an alleged defect in the notice issued to the appellant under Section 271(1)(c) read with Section 274 of the Act, in regard to which the appellant had never raised an objection from the very inception, that is since last 30 years (from 19 August, 1993), can now be permitted to be raised, in the absence of any prejudice being caused to the appellant – assessee.
This appeal u/s. 260A of the Income-tax Act, 1961 is filed by the appellant/assessee, being aggrieved by the judgment and order dated 30 October, 2001 passed by ITAT whereby the respondent/Revenue’s appeal against the order passed by CIT(A) has been allowed. Earlier the CIT(A) by its order dated 05 February, 1996, as impugned before the Tribunal, had set aside the penalty of Rs.33,34,096/- imposed on the appellant/assessee u/s. 271(1)(c) of the I.T. Act.
Conclusion- Held that in the facts of the case, the assessee’s objection in regard to any defect in the notice could not be entertained in the appeal, as such an objection, can never be a question of law in the assessee’s case, as it was purely a question of fact. It was observed that the assessee at no earlier point of time had raised a plea that on account of a defect in the notice, that the assessee was put to any prejudice. The Court observed that such violation will not result in nullifying the orders passed by statutory authorities. It was observed that on facts, the Court could safely conclude that even assuming that there was defect in the notice, it had caused no prejudice to the assessee and the assessee “clearly understood” what was the purport and import of notice issued under section 274 read with Section 271 of the Act. The principles of natural justice cannot be read in abstract.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. A short but interesting question has arisen in the present proceedings though not raised as a question of law, however, in the context of the appellant’s contention that the proceedings would stand covered by a decision of this Court in the case of Ventura Textile Ltd. vs. Commissioner of Income Tax, Mumbai City-II1. The question is as to whether an alleged defect in the notice issued to the appellant under Section 271(1)(c) read with Section 274 of the Act, in regard to which the appellant had never raised an objection from the very inception, that is since last 30 years (from 19 August, 1993), can now be permitted to be raised, in the absence of any prejudice being caused to the appellant – assessee.
2. This appeal under section 260A of the Income-tax Act, 1961 (for short “T. Act”) is filed by the appellant/assessee, being aggrieved by the judgment and order dated 30 October, 2001 passed by the Income-tax Appellate Tribunal (for short “ITAT”) whereby the respondent/Revenue’s appeal against the order passed by the Commissioner of Income-tax (Appeals) (for short “CIT(A)”) has been allowed. Earlier the CIT(A) by its order dated 05 February, 1996, as impugned before the Tribunal, had set aside the penalty of Rs.33,34,096/- imposed on the appellant/assessee under section 271(1)(c) of the I.T. Act.
3. At the outset, we may observe that by an order dated 14 September, 2004, the present appeal came to be admitted by a co-ordinate Bench of this Court on the following substantial question of law:
“Whether the Tribunal erred on the facts and in the circumstances of the case and in law in reversing the order of the CIT(A) and confirming the penalty of Rs.33,34,096/- (Rupees Thirty three lacs Thirty four thousand Ninety six only) levied by the Assessing Officer under section 271(1)(c) of the Act.
4. The appeal was pending hearing, when before us, an oral application on behalf of the appellant was made contending that the appeal stands covered by the decision rendered by a co-ordinate Bench of this Court in Ventura Textile Ltd. (supra) and for such reason the appeal needs to be allowed. This Court at such stage considered the rival contentions of the parties including the submissions as advanced by learned amicus curiae, who was earlier appointed by a co-ordinate Bench of this Court vide order dated 17 December, 2021, recording questions which would be required to be considered if the plea as urged on behalf of the appellant was to be accepted. The Court, accordingly, passed the following order on 13 July, 2023:-
“1. This appeal was circulated before us on behalf of the appellant contending that the issue in regard to the alleged defect in the notice issued under Section 271(1)(c) of the Income-tax Act, 1961 (for short, “the Act”) would stand covered by the decision of a co-ordinate Bench of this Court in Ventura Textiles Ltd. vs. Commissioner of Income Tax, Mumbai City-II, [2020] 117 taxmann.com 182 (Bombay).
2. We have perused the observations of the Court in such decision and more particularly in paragraphs 20.1 and 20.2, whereby the Division Bench has observed that even if a question was not raised before the tribunal, the same can be raised before the High Court in the proceedings under Section 260-A of the Act, when the issue is on jurisdiction. In our opinion, there cannot be any quarrel on such proposition.
3. The question, however, would be whether an assessee can be permitted to raise a technical plea of vagueness in the notice when the same was never the case of the assessee before the tribunal. The assessee never complained that the notice under Section 271(1)(c) of the Act was never understood by it or the same was in any manner vague or defective and had caused any prejudice to the assessee. In fact, now merely relying on the said decision, it is for the first time being contended that this Court should label the notice to be defective in the proceedings of this appeal under Section 260-A of the Act, in the absence of any such plea before the forums below. In our prima facie opinion, the appellant needs to satisfy the Court whether the appellant can at all urge such contention in the proceedings of a Section 260-A appeal when admittedly such question of law is not raised in the present appeal.
4. In our opinion, in the facts of the present case, if the appellant intends an additional question to be framed in this regard, the same cannot be done without the appellant crossing the barrier of the test of specific prejudice, if any caused to it in responding to such notice issued under Section 271(1)(c) of the Act, is satisfied.
5. The question therefore would be that when the assessee never raised a plea that the assessee did not understand such notice issued to him and/ or acquiesced and conceded in the adjudication of such notice, without any plea of prejudice being taken at any point of time, then in such circumstances, can the assessee take a plea before the High Court calling upon it to take a view that although no prejudice on such count was earlier felt and suffered, merely because it is now technically noticed that there was a defect in the notice by non striking of the applicable option, it should be deemed to be presumed that a prejudice was caused to the assessee and therefore, on such count, the penalty proceedings be declared illegal.
6. In our opinion, although Ventura Textiles Ltd. (supra) has though considered such issue being raised as a jurisdictional question in the proceedings of 260-A of the Income Tax Act, however, as to what would be the position as would be reflected from the settled principles of law that there cannot be a plea of breach of principles of natural justice, unless the threshold test of a “factual prejudice” being caused is satisfied, for the Court to accept such plea, is not what has been expressly considered.
7. It was contended that the decision in Ventura Textiles Ltd. (supra) was also considered by the Full Bench of this Court in Farhan A. Shaikh v. Deputy Commissioner of Income Tax, Central Circle1, Belgaum2. We have perused the judgment of the Full Bench and more particularly paragraphs 85 to 90 and paragraphs 181 to 186, however, the issue which we have raised appears to have not been answered by the Full Bench, is what we note.
8. We would accordingly hear the parties on these issues on the adjourned date of hearing.
9. Stand over to 27 July, 2023 at 02.30 p.m.”
(emphasis supplied)
5. It is on the backdrop of the above order that the Court was required to hear the parties on the issue as recorded by us in the above order, than to hear the appeal on the substantial question of law as framed vide order dated 14 September, 2004.
6. As stated above, the present proceedings arise from the penalty proceedings as initiated against the appellant/assessee under section 271(1)(c) of the I.T. Act, whereby a penalty of Rs.33,34,096/- was levied and confirmed against the appellant. In the levy of penalty, the procedure as mandated by Section 274 of the I.T. Act was set into motion, inasmuch as, a show cause notice was issued to the assessee as to why the penalty be not imposed on the assessee under the provisions of Section 271(1)(c) of the IT Act. The assessee replied to the said notice and after considering such reply, and after the assessee was heard, such penalty came to be imposed on the assessee. It was not the assessee’s case that any ambiguity was found in the notice issued to the assessee under section 271(1)(c) read with 274 of the I.T. Act. It was also not its case that the assessee had not understood the contents of the notice and more particularity as to which of the two limbs of Section 271(1)(c) were pressed into service against the assessee in the facts and circumstances of the case. The assessee / appellant replied to both the limbs falling under Section 271(1)(c) of the Act. Accordingly, the assessee whole heartedly participated in such penalty proceedings without raising any objection on the nature of the notice. Thus, when the facts are such that the test of prejudice itself was not satisfied by the assessee, would it be permissible for the assessee to contend that without satisfying the test of prejudice, the penalty proceedings ought to be held to be vitiated is the question which would arise for our consideration.
7. The relevant facts are required to be adverted, which are as follows:-
The assessee is a company registered under the Companies Act, 1956. It was dealing with real estate and construction. The assessment year in question is 1984-85. The assessee had purchased a plot of land in 1982 at Agripada in Mumbai for Rs.25,00,000/-. A sum of Rs. 26,61,283/- was incurred towards development and construction. The balance in the account stood at Rs.51,61,282/-. On 19 September, 1983, a partnership in the name of M/s. Nirmal Enterprises was formed between the assessee and six others. The assessee revalued the land at Rs.1,04,53,500/-, being the market value as on 19 September, 1983, and introduced the same into the firm as its capital.
8. In respect of assessment year 1984-85, the assessee filed its return of income on 29 September, 1984 declaring “Nil” income. The Assessing Officer sought instructions from the Inspecting Assistant Commissioner (for short, “IAC”) under the then Section 144A as to whether any income or capital gain was assessable in the assessee’s hand, on the writing up of the value of the land, being the assessee’s stock-in-trade, and on the introduction of the same as the capital of the assessee in the partnership firm Nirmal Enterprises. In prusuance thereto, in its order dated 1 April, 1985, the IAC opined that on the basis of the decision of the Supreme Court in Hind Construction Ltd.3, no income could be said to have arisen to the assessee, either when it wrote up the value of the land or when the same was introduced into the firm as its capital. The Assessing Officer was accordingly instructed. Also, a note was made to the effect that the case has also been discussed with the concerned CIT, who was also of the same opinion.
9. On such instructions of the IAC, the Assessing Officer proceeded to complete the assessment. No profit or capital gain was assessed in respect of the capital contribution of the assessee into Nirmal Enterprises. The assessment was however made on an income of Rs.33,89,467/-, in respect of other transactions in the course of the assessee’s business, which was adjusted fully against the losses brought forward. The assessment was completed on 20 April, 1985 under Section 143(3) of the I.T. Act. Thereafter, proceedings were initiated under Section 263 of the I.T. Act by the CIT on the basis of the judgment of the Supreme Court in the case of Sunil Siddharthbai vs. CIT4, in which it was held by the Court that although there was a “transfer” involved when a partner brought in his asset in to the firm as his capital contribution, there arose no capital gains, due to the peculiar nature of a partner’s rights in the firm. The CIT, however, relied on certain observations made by the Supreme Court to the effect that if the formation of the partnership firm was a ruse or device to convert the personal asset of the partner into money, which would substantially remain available to him without any liability to tax on capital gains, it would be open to the taxing authorities to go behind the transaction. Also, the tax authorities were entitled to examine whether the formation of the partnership was genuine, and whether the conversion of the personal asset of the partner into partnership asset was a genuine contribution to the capital of the firm or a device to avoid tax liability. Even if the partnership is genuine, the tax authorities could examine whether there is a genuine attempt to contribute to the capital of the firm for the purpose of carrying on the partnership business or it is only a ruse or device to convert the personal asset into money substantially for the benefit of the assessee, while evading tax on capital gains. The CIT noted that if such circumstances existed, it would be open to the Department to disregard the apparent and tax the profits or capital gains. The CIT also relied on the judgment of the Supreme Court in the case of McDowell & Co. Ltd. vs. Commercial Tax Officer5 where the right of the income-tax authorities to pierce the veil or smokescreen created by dubious or colourable devices and tax the profits was upheld. The CIT noted that the Assessing Officer had not applied his mind to these aspects, when he completed the assessment. He had not attempted to verify whether the transfer of stock-in-trade worth more than Rs.50 lakhs, was an attempt to avoid tax through a colourable device nor did he verify whether there was a genuine intention to contribute to the capital of the firm. The CIT further noted from the deed of partnership, that although the assessee had contributed stock-in-trade worth more than Rs.1 crore, the other partners contributed nothing and that they had merely promised that they would bring in money as and when required. Despite this, the Assessing Officer did not evaluate whether the other partners were really capable of matching the contribution of the assessee. The Assessing Officer had also not gone into the question of genuineness of the firm. Under these circumstances, the CIT set aside the assessment and directed the Assessing Officer to make a fresh assessment in accordance with law after verification of the facts on the lines indicated above.
10. Accordingly, a fresh assessment order came to be passed. In the fresh assessment order, the Assessing Officer recorded his findings inter alia that the assessee had not only transferred the stock-in-trade at the market value, but had also withdrawn the profits arising therefrom, which were not disclosed and that the events were so arranged that the assessee had the enjoyment and benefits of the monies though the tax due thereon was not paid. In such view of the matter, he brought the sum of Rs.52,92,218/- to tax as profit on transfer of stock-in-trade to Nirmal Enterprises. Apparently, such amount was worked out as under:
