NO Penalty under section 271(1)(c) if notice issued by AO without specifying grounds of penalty
Short Overview : Where AO had issued the notice of penalty without specifying the grounds on which the same was imposed, imposition of penalty was unjustified, because this being a mandatory requirement could not be construed as a mere technical error.
AO had imposed penalty under section 271(1)(c) on the assessee, who assailed the same contending that notice issued under section 274 did not specify the grounds on which penalty was imposed, i.e., whether for concealment of income or for furnishing inaccurate particulars. Revenue rejected contention of assessee holding that penalty could not be deleted merely because of a technical error in the show cause notice.
it is held that : From the perusal of the notice, it was very much obvious that AO did not specify the grounds on which penalty was imposed. AO was required to specify that on which limb of section 271(1)(c), the penalty proceedings were initiated, i.e., whether for concealment of particulars of income or for furnishing of inaccurate particulars of income. The notice in fact was in standard pro forma without the irrelevant clauses therein being struck off. Thus, penalty was deleted.
Decision: In assessee’s favour.
IN THE ITAT, BANGALORE BENCH
B.R. BASKARAN, A.M. & PAVAN KUMAR GADALE, J.M.
Jayalakshmi v. ITO
30 April, 2019
Appellant by: V. Srinivasan, Advocate.
Respondent by: P.V. Pradeep Kumar, Addl. CIT(DR)
Pavan Kumar Gadale, J.M.
The assessee has filed appeal against the order of the Commissioner (Appeals) passed under section 271(1)(c) and 250 of the Income Tax Act, 1961 [‘the Act’].
2. The assessee has raised the following grounds of appeal :–
1. “The orders of the authorities below in so far as levying penalty under section 271(1)(c) of the Act against the appellant are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case.
2. The learned Commissioner (Appeals) is not justified in upholding the penalty of Rs. 68,468 levied under section 271(1)(c) of the Act in respect of the addition made towards unexplained purchases of Rs. 3,10,420 sustained by the Hon’ble Commissioner (Appeals) under the facts and in the circumstances of the appellant’s case.
3. The learned Commissioner (Appeals) failed to appreciate that the appellant has neither concealed any income nor furnished inaccurate particulars of income in respect of the above addition made to warrant levy of penalty and therefore, the penalty levied under section 271(1)(c) of the Act requires to be cancelled.
4. Without prejudice to the above, the penalty levied is highly excessive and liable to be reduced substantially.
5. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs.”
3. The assessee has also raised the additional grounds as under:
1. “The order of penalty passed under section 271(1)(c) of the Act is bad in law as the notice issued under section 274 read with section 271 of the Act is not discernable as to whether the penalty proceedings is initiated for furnishing of inaccurate particulars of income or concealment of income under the facts and in the circumstances of the appellant’s case and therefore, the impugned order passed deserves to be cancelled.
2. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered.”
4. Brief facts of the case are that the assessee is engaged in the business of trading in granites blocks and processing of granites, whereas the financial year 2004-05 is the first year of business and the return of income for the assessment year 2005-06 was filed on 17-1-2006 declaring loss of Rs. 2,61,530 and the return of income was processed under section 143(1) of the Act. Subsequently the case was selected for scrutiny and notice under section 143(2) and 142(1) of the Act were issued. In compliance, the learned AR appeared from time to time and produced books of account and bank account details.
The assessing officer (AO), on verifying the financial statements and Books of account found that the assessee has obtained loan from Karnataka Bank Ltd. and withdrawals from the Bank were used for some other business purpose but were reflected as cash receipts in the cash book.
5. The assessee filed letter dated 24-12-2007 referred at para.3.1.1. of the assessment order. Whereas the assessing officer, considering the facts and the details of cash purchases and the provisions of section 40(A)(3) read with rule 6DD made disallowance under section 40A(3) and also unaccounted purchases and assessed the total income of Rs. 7,69,300 vide order under section 143(3) dated 31-12-2007. But the assessment order was set aside under section 263 order and the assessing officer, as per the directions of the CIT under section 263, passed the assessment order under section 143(3) read with section 263 of the Act dated 28-12-2010. On appeal to the Commissioner (Appeals), the Commissioner (Appeals) deleted the addition of Rs. 8,18,902 whereas in respect of unaccounted cash purchases, the Commissioner (Appeals) has sustained the addition to the extent of Rs. 3,10,420. Subsequently, the assessing officer has initiated penalty proceedings and issued notice under section 274 read with section 271(1)(c) of the Act.
6. The assessing officer is of the opinion that the Commissioner (Appeals) has sustained the addition of unaccounted purchases of Rs. 3,10,420 and the assessee has set up granite factory and started production in the financial year 2004-05. The assessee being lady, with the help of manager and husband of the assessee, the factory operations are managed. There is no proper maintenance of records and the books of account are maintained on the basis of payments. During the period May 2004 to October 2004, no purchases were recorded in the books of account and also no payments. Whereas assessing officer made an addition on technical ground of non-maintenance of proper records and also the first year of operations. In the penalty proceedings, assessing officer has not accepted the assessee’s explanations and came to unilateral conclusion that the assessee has suppressed the closing stock which reduces the income and purchases are made outside the books of account. Finally, assessing officer, considering the fact of addition in the assessment proceedings, levied penalty of 100% i.e. of Rs. 68,468 and passed the order dated 30-3-2013. On appeal, the Commissioner (Appeals) found that none appeared on the date of hearing and based on written submissions filed on record, the Commissioner (Appeals) has confirmed the penalty and dismissed the assessee’s appeal.
7. Aggrieved by the order, the assessee has filed appeal before the Tribunal. Before us, the learned AR submitted that the Commissioner (Appeals) is not justified in upholding the penalty and argued on the additional ground that the assessing officer has not applied his mind and referred to the copy of the notice under section 274 read with section 271(1)(c) of the Act dated 31-12-2007 where the assessing officer has initiated penalty proceedings for concealment of income and furnishing of inaccurate particulars of income. Further, the learned AR emphasized that addition in assessment proceedings shall not give rise to automatic levy of penalty as the circumstances and reasonable cause has been explained and prayed for quashing of notice issued under section 274 read with section 271(1)(c) of the Act and relied on judicial decision. Contra, learned DR relied on the orders of the lower authorities.
8. We heard the rival submissions and perused the material on record. The only disputed issue prima facie is in respect of levy of penalty under section 271(1)(c) of the Act. The contention of the learned AR is that the assessing officer has passed the penalty order without application of mind and referred to page 39 & 40 of the paper book where notice under section 274 read with section 271(1)(c) dated 31-12-2007 is enclosed. On perusal of the notice at page 40, as demonstrated by the learned AR, the assessing officer has initiated penalty proceedings both for concealment of particulars of income and furnishing of inaccurate particulars of such income. We are of the opinion that penalty proceedings are attract ed only where the assessee has concealed the particulars of income or furnished inaccurate particulars of such income. It is well accepted proposition that the aforesaid two limbs of section 271(1)(c) of the Act carry different meaning and the assessing officer should be clear as to the limb under which penalty is being levied.
When the assessing officer proposes to invoke the first limb being concealment of income, notice has to be appropriately marked.
But in the present case, as demonstrated before us, we found that the assessing officer has marked the concealment of particulars of income and furnishing of inaccurate particulars of income. It is imperative and clear that the assessing officer is not sure on which limb the penalty is being levied. Therefore, we considering the facts and legal position and passing of penalty order under section 271(1)(c), found that there is no application of mind by the assessing officer as he has marked both limbs of notice which is bad in law. Accordingly, we set aside the order of the Commissioner (Appeals) and cancel the penalty order dated 31-12-2007 and allow the grounds of appeal of the assessee.
9. In the result, the assessee’s appeal is allowed.