Validity of Penalty under section 271(1)(c) if Assessee has not offeree interest income for tax due to wrong interpretations of the provisions of the Act

Short Overview : Assessee had not offered interest income for tax due to wrong interpretations of the provisions of the Act and not on account of deliberate concealment of income or furnishing of inaccurate particulars of such income and after examining chronology of events and documents on record, Tribunal was therefore, satisfied that the explanation furnished by assessee was bona fide and acceptable the same was covered under Explanation (B) to section 271(1)(c).

The assessee had received interest on NRE deposit in the financial year 2007-08. The assessee had claimed exemption under section 10(4)(ii) for this interest. The assessee had claimed this exemption as the assessee was under the bona fide impression that she was a non-resident under the provisions of Foreign Exchange Management Act, 1999 (FEMA). Thus, the exemption under section 10(4)(ii) was allowed to a Taxpayer who was a non-resident as per provisions of FEMA.

 It is held that :  Assessee had not offered interest income for tax due to wrong interpretations of the provisions of the Act and not on account of deliberate concealment of income or furnishing inaccurate particulars of such income. The assessee was under bona fide impression that she is a ‘person resident outside India’ as defined under FEMA. The explanation furnished by the assessee in not disclosing the interest income in the return appears to be quite genuine. The Tribunal also did not agree with the findings of the authorities below that the explanation furnished by the assessee was not covered by clause (B) of Explanation-1 to section 271(1)(c). Therefore, while concurring with the findings of the Coordinate Bench, this Bench also set aside the impugned order and allow the appeal of the assessee. After examining chronology of events and documents on record, Tribunal was therefore, satisfied that the explanation furnished by assessee was bona fide and acceptable.

Decision: In assessee’s favour.

Followed: ITAT in ITA No. 2313/Mds/2013 in the case of Ramaswamy Senthivel v. Asstt. CIT, dated 25-9-2014.

IN THE ITAT, MUMBAI BENCH

SANDEEP GOSAIN, J.M. & G. MANJUNATHA, A.M.

Sunita Shreegopal Barasia v. Asstt. CIT

I.T.A. No. 4909/Mum/2015

27 August, 2019

Appellant by: Nitesh Joshi T., Sunil S. Jhunjhunwala, ARs

Respondent by: Vijay Kumar Soni, DR

Per Sandeep Gosain, J.M.

The present Appeal filed by the assessee is against the order of learned Commissioner (Appeal)-30, Mumbai dated 31-7-2015 for assessment year 2008-09 on the grounds mentioned herein below :–

(1) The learned Commissioner (Appeals) erred in confirming the penalty of Rs. 25,00,000 levied under section 271(1)(c) of the Income Tax Act, 1961.

(2) The learned Commissioner (Appeals) erred in holding that the appellant has furnished inaccurate particulars of income.

(3) The learned Commissioner (Appeals) erred in not considering appellant’s claim of bona fide belief that she was a Non-Resident under FEMA.

(4) The appellant submits that the penalty levied is excessive and unreasonable.

(5) The Appellants crave leave to alter, amend and/or add any other ground of appeal.

2. At the very outset, learned AR appearing on behalf of the assessee drawn our attention to Letter, dated 26-7-2019 filed for seeking admission of additional ground, which are reproduced below :–

6. The Penalty Notice dated 28-12-2010 issued under section 271(1)(c) read with section 274 of the Income Tax Act, 1961 did not specify whether the Notice is issued for concealing the particulars of income or furnishing inaccurate particulars of such income and therefore, it is bad in law and the order passed pursuant thereto is void.

7. The learned Commissioner (Appeals) erred in holding that the penalty is rightly imposed for furnishing inaccurate particulars of income when the assessing officer has levied the penalty on the ground of concealment of particulars of income.

3. Learned AR submitted before us that before learned Commissioner (Appeals), it was contended that penalty order passed by the assessing officer was bad in law as the notice issued under section 274 of the Act did not specify whether the Notice is issued for concealing the particulars of income or furnishing inaccurate particulars of income. The copy of said Notice, dated 28-12-2010 has also been enclosed as Annexure-II, therefore, it is bad in law and the order passed pursuant thereto is void. It was further submitted that inadvertently, the assessee had not raised legal ground that the penalty Notice, dated 28-12-2010 issued under section 271(1)(c) read with section 274 of the Act is bad in law. Since, it is a legal ground, thus the assessee can take the same at any stage of hearing. It was further submitted that the additional ground is purely question of law and no new facts are required to be brought on record. Therefore, applicant be allowed to raise additional grounds.

4. On the other hand learned DR submitted that the application dated 26-7-2019 is misconceived and is liable to be dismissed.

5. After having heard the counsels on this application, we are of the view that since the additional ground raised by the assessee is purely legal in nature and it is a settled that legal pleas can be taken at any stage of hearing and all the necessary facts required for adjudication are already on the record and thus, no new evidence is required to be brought on record. Even otherwise, this ground goes to the roots of the case, therefore keeping in view the principle laid down by Hon’ble Supreme Court in the case of NTPC v. CIT (1998) 229 ITR 383 (SC) : 1998 TaxPub(DT) 0342 (SC), Jute Corporation of India v. CIT (1991) 187 ITR 688 (SC) : 1991 TaxPub(DT) 0505 (SC) and Ahmedabad Electricity Ltd. v. CIT (1993) 199 ITR 351 (Bom) (FB) : 1993 TaxPub(DT) 0430 (Bom-HC), we allow the application dated 26-7-2019 and admit the additional grounds mentioned above for adjudicating on merits.

6. The brief facts of the case are that assessee is an individual deriving income from house property and other sources. The return of income for the year under appeal was filed on 31-7-2008 declaring total income of Rs. 43,12,063. Thereafter assessment under section 143(3) was completed by the learned assessing officer on 28-12-2010 determining the total income at Rs. 2,62,21,860.

7. Aggrieved by the order of assessing officer, assessee preferred appeal before learned Commissioner (Appeals) and learned Commissioner (Appeals) after considering the case of both the parties dismissed the appeal of the assessee.

8. Now before us, the assessee has preferred the present appeal by raising the above grounds.

9. Since the assessee has raised legal grounds, thereby challenging the legality of the notice for levying penalty under section 271(1)(c) read with section 274 of the Income Tax Act, therefore we have decided to adjudicate these grounds firstly, which have been raised by the assessee by way of additional grounds.

Additional ground Nos. 6 & 7

10. The additional grounds Nos. 6 & 7 raised by the assessee are inter connected and inter related and relates to challenging the Penalty Notice dated 28-12-2010 issued under section 271(1)(c) read with section 274 of the Income Tax Act, 1961, therefore we thought it fit to dispose of the same by this common order.

11. Learned AR submitted that as the notice under section 274 does not specify the charge against the assessee and the same is invalid and thereby the penalty order is liable to be quashed as without jurisdiction. In support the assessee seeks to rely on judgment of Hon’ble Karnataka High Court in case of Manjunatha (2014) 359 ITR 565 (Kar) : 2014 TaxPub(DT) 0202 (Karn-HC) and the assessee specifically seeks to draw attention to pages 600 to 603 of the said judgment. The said judgment has been followed in various subsequent judgments. In case of SSA Emerald before the Hon’ble Karnataka High Court, question of law 3 read as follows :–

“(3) Whether on facts and in the circumstances of the case, the Tribunal was justified in deciding the appeals against the Revenue on the basis of notice issued under section 274 without taking into consideration the assessment order when assessing officer was specified that the assessee has concealed particulars of income?”

12. As per learned AR, in the case of Baisetty Revathi before the Hon’ble Andhra Pradesh High Court, the department had relied on judgment of Hon’ble Supreme Court in case of K.P. Madhusudhan, (2001) 251 ITR 99 (SC) : 2001 TaxPub(DT) 1585 (SC) and the same was distinguished and penalty was deleted following ratio laid down in case of Manjunatha (supra). The relevant of the said judgment is reproduced below :–

“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(3) 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.”

13. In the case of Mrs. Indrani Pillai before the Hon’ble Mumbai Bench of the Income Tax Appellate Tribunal, the judgment of Hon’ble Bombay High Court in case of Maharaj Garage was relied on by the department and the same was distinguished. The operative portion of the said the judgment is reproduced below :–

“The ratio laid down in the aforesaid decision squarely applies to the facts of the present case. As far as the judgment of the Hon’ble Jurisdictional High Court in Maharaj Garage (supra) relied upon by the learned Departmental Representative, on a careful reading of the said judgment, we are of the view that it will have no application to the facts of the case. As could be seen, the basic issue arising out of the reference application which fell for consideration of the Hon’ble Jurisdictional High Court was, while granting previous approval by Inspecting Assistant Commissioner of Income Tax as per provisions of section 271(1)(c)(iii) of the Act whether the assessee was required to be given an opportunity of being heard. While considering this issue, the Hon’ble Jurisdictional High Court observed that provisions of section 271(1)(c)(iii) does not attract rule of presumption of mens rea as the penalty imposable under the said provision is for the breach of civil obligation. The observations of the Hon’ble Court against issuance of show cause notice appears to be in the context of quantum of penalty proposed to be imposed and not with reference to the doing away with the issuance of show cause notice as contemplated under section 274 of the Act. Therefore, the judgment of the Hon’ble Court cannot be read out of context or in a manner to mean that there is no need for mentioning the specific limb of section 271(1)(c) of the Act for which the penalty was intended to be imposed, as such issue never came up for consideration before the Hon’ble High Court. That being the case, the aforesaid decision cannot be applied for rebutting the proposition that in the absence of recording of satisfaction regarding the exact nature of offence, no penalty under section 271(1)(c) can be imposed. In view of the aforesaid, we delete the penalty imposed.”

14. On the other hand learned DR relied on the order of lower authorities and contended that the penalty in this case was correctly levied considering the facts of the case.

15. We have heard arguments on this issue and a perusal of the notice issued under section 274 read with section 271 of the Act dated 28-12-2010 reveals that the assessing officer has not deleted the inappropriate words and parts of the notice, whereby it is not clear as to the default committed by the assessee, i.e., whether it is concealment of particulars of income or furnishing of inaccurate particulars of income that the penalty under section 271(1)(c) of the Act is sought to be levied. In this regard, we find that the Hon’ble High Court of Karnataka in its order in the case of M/s. Manjunatah Cotton & Ginning Factory in ITA No. 2546 of 2005, dated 13-12-2012 : 2014 TaxPub(DT) 0202 (Karn-HC), relied on by the assessee, has held that such a notice, as has also been issued in the case on hand, is invalid and the consequential penalty proceedings are also not valid. The relevant portion of their Lordships judgment at paras 59 to 62 thereof are extracted hereunder for reference :–

“59. As the provision stands, the penalty proceedings can be initiated on various ground set therein. If the order passed by the Authority categorically records a finding regarding the existence of any said grounds mentioned therein and then penalty proceedings is initiated, in the notice to be issued under section 274, they could conveniently refer to the said order which contains the satisfaction of the authority which has passed the order.

However, if the existence of the conditions could not be discerned from the said order and if it is a case of relying on deeming provision contained in Explanation-1 or in Explanation-1(B), then though penalty proceedings are in the nature of civil liability, in fact, it is penal in nature. In either event, the person who is accused of the conditions mentioned in section 271 should be made known about the grounds on which they intend imposing penalty on him as the section 274 makes it clear that assessee has a right to contest such proceedings and should have full opportunity to meet the case of the Department and show that the conditions stipulated in section 271(1)(c) do not exist as such he is not liable to pay penalty. The practice of the Department sending a printed farm where all the ground mentioned in section 271 are mentioned would not satisfy requirement of law when the consequences of the assessee not rebutting the initial presumption is serious in nature and he had to pay penalty from 100% to 300% of the tax liability. As the said provisions have to be held to be strictly construed, notice issued under section 274 should satisfy the grounds which he has to meet specifically.

Otherwise, principles of natural justice is offended if the show cause notice is vague. On the basis of such proceedings, no penalty could be imposed on the assessee.

60. Clause (c) deals with two specific offences, that is to say, concealing particulars of income or furnishing inaccurate particulars of income. No doubt, the facts of some cases may attract both the offences and in some cases there may be overlapping of the two offences but in such cases the initiation of the penalty proceedings also must be for both the offences. But drawing up penalty proceedings for one offence and finding the assessee guilty of another offence or finding him guilty for either the one or the other cannot be sustained in law. It is needless to point out satisfaction of the existence of the grounds mentioned in section 271(1)(c) when it is a sine qua non-for initiation or proceedings, the penalty proceedings should be confined only to those grounds and the said grounds have to be specifically stated so that the assessee would have the opportunity to meet those grounds. After, he places his version and tries to substantiate his claim, if at all, penalty is to be imposed, it should be imposed only on the grounds on which he is called upon to answer. It is not open to the authority, at the time of imposing penalty to impose penalty on the grounds other than what assessee was called upon to meet. Otherwise though the initiation of penalty proceedings may be valid and legal, the final order imposing penalty would offend principles of natural justice and cannot be sustained. Thus once the proceedings are initiated on one ground, the penalty should also be imposed on the same ground. Where the basis of the initiation of penalty proceedings is not identical with the ground on which the penalty was imposed, the imposition of penalty is not valid. The validity of the order of penalty must be determined with reference to the information, facts and materials in the hands of the authority imposing the penalty at the time the order was passed and further discovery of facts subsequent to the imposition of penalty cannot validate the order of penalty which, when passed, was not sustainable.

61. The assessing officer is empowered under the Act to initiate penalty proceedings once he is satisfied in the course of any proceedings that there is concealment of income or furnishing of inaccurate particulars of total income under clause (c). Concealment, furnishing inaccurate particulars of income are different. Thus the assessing officer while issuing notice has to come to the conclusion that whether is it a case of concealment of income or is it a case of furnishing of inaccurate particulars. The Apex Court in the case of Ashok Pai (2007) 292 ITR 11 (SC) : 2007 TaxPub(DT) 1251 (SC) at page 19 has held that concealment of income and furnishing inaccurate particulars of income carry different connotations, The Gujarat High Court in the case of Manu Engineering (1980) 122 ITR 306 (Guj) : 1980 TaxPub(DT) 0483 (Guj-HC) and the Delhi High Court in the case of Virgo Marketing (2008) 171 Taxman 156 (Del) : 2008 TaxPub(DT) 1518 (Del-HC), has held that levy of penalty has to be clear as to the limb for which it is levied and the position being unclear penalty is not sustainable. Thom, when the assessing officer proposes to invoke the first limb being concealment, then the notice has to be appropriately marked. Similar is the case for furnishing inaccurate particulars of income. The standard proforma without striking of the relevant clauses will lead to an inference as to non-application of mind.”

16. The conclusion drawn therein by their Lordships at para 63 thereof and particularly at (p) to (s) thereof are as under :–

“63 ………………………………

(a) ………………………………

(p) Notice under section 274 of the Act should specifically state the ground 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 ground mentioned in section 271 are mentioned would not satisfy requirement of law.

(r) The assessee should know the grounds which he has to meet specifically. Otherwise, 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 the limb and finding the assessee guilty of another limb is bad in law.”

17. It may be mentioned that in this regard, no contrary decision of the Hon’ble Apex Court or the Hon’ble Bombay High Court has been brought to our notice or placed before us for consideration. Therefore, respectfully following the decision of the Hon’ble Karnataka High Court in the case of Manjunatha Cotton & Ginning Factory (2013) 359 ITR 565 (Kar) : 2014 TaxPub(DT) 0202 (Karn-HC), decision of Hon’ble Bombay High Court in the case of CIT v. Samson Perinchery dated 5-1-2017 : 2017 TaxPub(DT) 0672 (Bom-HC), we hold that the notice issued under section 274 read with section 271 of the Act dated 28-12-2010 for assessment year 2008-09 for initiating penalty proceedings under section 271(1)(c) of the Act in the case on hand is invalid and consequently, the penalty proceedings are also invalid. Therefore the penalty levied by assessing officer and upheld by the learned Commissioner (Appeals) is hereby dropped.

18. Apart from above, on the merits of the other grounds raised by the assessee, we find that as per the facts, the assessee had received interest on NRE deposit in the financial year 2007-08. The assessee had claimed exemption under section 10(4)(ii) of the Income Tax Act for this interest. The assessee had claimed this exemption as the assessee was under the bona fide impression that she is a non-resident under the provisions of Foreign Exchange Management Act, 1999 (FEMA). Thus, the exemption under section 10(4)(ii) of the Act was allowed to a Taxpayer who is a non-resident as per provisions of FEMA. In this respect, the assessee had relied upon the decision of the Coordinate Bench of ITAT in ITA No. 2313/Mds/2013 in the case of Ramaswamy Senthivel v. ACIT, dated 25-9-2014.

19. After hearing the counsels for both the parties and appreciating the facts, we found that the Coordinate Bench of ITAT in ITA No. 2313/Mds/2013 in the case of Ramaswamy Senthivel v. ACIT, dated 25-9-2014 had dealt with the identical ground, the operative portion of the order of Coordinate Benches is reproduced below :–

5. We have heard the submissions made by the representatives of both the sides, and have also perused the orders of the authorities below. The assessee has not disclosed interest from Fixed Deposits in his return of income for the assessment year under consideration.

The assessee had made investment in NRE Fixed Deposits from his NRE SB A/c in the year 2002.

During that period, the assessee was sent on a particular assignment by the employer company to US.

The assessee was allegedly under bona fide impression that since the deposits are made from NRE A/c, the interest income there from is exempt under section 10(4), even though the assessee had returned to India and was a resident in India. The FERA, 1973 has been repealed and has been replaced with FEMA, 1999. The corresponding provisions contain in section 2(q) defining ‘person resident outside India’ in FERA, 1973 are contained in section 2(w) of FEMA, 1999. The ‘person resident outside India’ and ‘persons resident in India’ as defined under FEMA, 1999 are re-produced as under :–

“(v) “person resident in India” means — (i) a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include — (A) a person who has gone out of India or who stays outside India, in either case — (a) for or on taking up employment outside India, or (b) for carrying on outside India a business or vocation outside India, or (c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period; (B) a person who has come to or stays in India, in either case, otherwise than — (a) for or on taking up employment in India, or (b) for carrying on in India a business or vocation in India, or (c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period; (ii) any person or body corporate registered or incorporated in India, (iii) an office, branch or agency in India owned or controlled by a person resident outside India, (iv) an office, branch or agency outside India owned or controlled by a person resident in India; (w) “person resident outside India” means a person who is not resident in India;”

6. As per the contentions of learned Counsel for the assessee, after returning back from USA, the assessee was not sure, whether he would stay in India or would be sent to another assignment abroad. Therefore, the assessee was allowed to retain NRE A/c till maturity. It is an admitted fact that the assessee was in the status of non-resident as per the provisions of FEMA (erstwhile FERA) during the years 2000-01, 2001-02 & 2002-03.

The assessee returned to India in April, 2003. The investment was made by the assessee in NRE Fixed Deposit A/c during January, February & March, 2002.

The bank also did not deduct tax at source on such interest income. This further gave impetus to the belief of the assessee that the interest income earned by the assessee is not taxable in view of the provisions of section 10(4) of the Act. It is equally un-denying the fact that ignorance of law is no excuse and the assessee cannot escape from tax liability if the deductor has failed to deduct tax at source.

7. In the present case, we find that the assessee has not offered interest income for tax due to wrong interpretations of the provisions of the Act and not on account of deliberate concealment of income or furnishing inaccurate particulars of such income. The assessee was under bona fide impression that he is a ‘person resident outside India’ as defined under FEMA. The explanation furnished by the assessee in not disclosing the interest income in the return appears to be quite genuine. We do not agree with the findings of the authorities below that the explanation furnished by the assessee is not covered by clause (B) of Explanation-1 to section 271(1)(c) of the Act. After examining chronology of events and documents on record, we are satisfied that the explanation furnished by assessee is bona fide and acceptable. Accordingly, we set aside the impugned order and allow the appeal of the assessee.

20. In the present case also, we find that the assessee has not offered interest income for tax due to wrong interpretations of the provisions of the Act and not on account of deliberate concealment of income or furnishing inaccurate particulars of such income. The assessee was under bona fide impression that she is a ‘person resident outside India’ as defined under FEMA.

The explanation furnished by the assessee in not disclosing the interest income in the return appears to be quite genuine. We also do not agree with the findings of the authorities below that the explanation furnished by the assessee is not covered by clause (B) of Explanation-1 to section 271(1)(c) of the Act. After examining chronology of events and documents on record, we are satisfied that the explanation furnished by assessee is bona fide and acceptable.

21. Therefore, while concurring with the findings of the Coordinate Bench, we also set aside the impugned order and allow the appeal of the assessee.

22. In the net result the appeal filed by the assessee stands allowed with no order as to cost.