Where show-cause notice under section 274 to assessee was defective as it did not spell out grounds on which penalty was sought to be imposed, order imposing penalty was invalid and, consequently, penalty imposed was to be cancelled
IN THE ITAT BANGALORE BENCH ‘A’
H. Lakshminarayana
v.
Income-tax Officer
AND JASON P. BOAZ, ACCOUNTANT MEMBER
IT APPEAL NOS. 992 TO 996 (BANG.) OF 2014
[ASSESSMENT YEARS 2004-05 TO 2008-09]
JULY 3, 2015
Mrs. Sheetal Borkar for the Appellant. P. Dhivahar for the Respondent.
ORDER
1. I.T.A. Nos. 992 to 996/Bang/14 are the appeals against the common order dated April 16, 2014 of the Commissioner of Income-tax (Appeals)-I, Bangalore relating to the assessment years 2004-05 to 2008-09.
2. In all these appeals, the assessee has challenged the order of the Commissioner of Income-tax (Appeals) confirming the orders of the Assessing Officer imposing penalty under section 271(1)(c) of the Income-tax Act, 1961 (Act) on the assessee.
3. The facts and circumstances under which penalty under section 271(1)(c) of the Act was imposed by the Assessing Officer on the assessee are as follows.
4. The assessee is an individual. In the course of the assessment proceedings for the assessment year 2004-05, it transpired that the assessee had deposited monies in a cumulative deposit scheme with the National Co-operative Bank Ltd. and the same had not been disclosed in the returns of income filed by the assessee. The deposits had been made in the previous year relevant to the assessment year 2004-05. This deposit earned interest income in the assessment year 2004-05 and the subsequent assessment years 2005-06 to 2008-09. The interest so earned by the assessee had not been offered to tax by the assessee in the returns of income filed for the assessment years 2004-05 to 2008-09. Similarly, the assessee also did not declare interest received on savings bank account for the assessment years 2004-05 to 2008-09.
5. The assessee filed revised returns of income offering the value of fixed deposits in the assessment year 2004-05 as well as interest accrued on fixed deposits and savings bank account for the assessment years 2004-05 to 2008-09. The following table would explain the income originally offered and the income offered in the revised return filed for the various assessment years :
| Assessment year | 2004-05 | 2005-06 | 2006-07 | 2007-08 | 2008-09 |
| Date of filing of return of income | 29/10/04 | 30/10/05 | 30/10/05 | 30/10/07 | 28/09/08 |
| Income declared (in Rs.) | 4,46,878 | 3,41,916 | 2,94,883 | 1,06,990 | 6,71,860 |
| Revised (belated return filed) | 02/07/10 | 02/07/10 | 02/07/10 | 02/07/10 | 02/07/10 |
| Additional income declared (in Rs.) | 13,66,704 | 3,25,392 | 15,42,099 | 4,15,766 | 5,62,361 |
| Date of assessment order | 21/07/10 | 21/07/10 | 21/07/10 | 21/07/10 | 21/07/10 |
| Total | 18,06,180 | 7,24,350 | 19,17,950 | 9,90,890 | 14,17,770 |
6. In respect of the additions made in the assessment proceedings for all the aforesaid assessment years, the Assessing Officer imposed penalty under section 271(1)(c) of the Act on the assessee, which was confirmed by the Commissioner of Income-tax (Appeals). Aggrieved by the orders of the Commissioner of Income-tax (Appeals), the assessee has preferred appeals before the Tribunal.
7. We have heard the submissions of learned counsel for the assessee and the learned Departmental representative. A technical objection with regard to validity of the order passed under section 271(1)(c) of the Act was raised by the assessee in the form of an additional ground filed before the Tribunal. The said additional ground filed by the assessee for all the assessment years in these appeals, is common and it reads as follows :
| “1. | The Assessing Officer having issued the notice under section 274 read with section 271(1)(c) of the Act in a mechanical manner, the penalty order passed under section 271(1)(c) of the Act is not sustainable in the eye of law. | |
| 2. | The appellant begs to submit that the decision of the jurisdictional High Court in the case of CIT v. Manjunatha Cotton and Ginning Factory [2013] 359 ITR 565 (Karn) is squarely applicable and therefore the impugned order of the authorities below is required to be set aside.” |
8. The additional ground being a pure question of law which can be decided on the basis of facts available on record is admitted for adjudication keeping in view the decision of the Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383.
9. We deem it appropriate to consider the objections raised by the assessee on the validity of the orders imposing penalty on the ground that the show-cause notice issued under section 274 of the Act was defective for all the assessment years involved in these appeals.
10. On the above objections, we have heard the parties at length. A copy of the show-cause notice issued under section 274 of the Act for the assessment years involved in these appeals, is placed at pages 1 to 5 of the assessee’s paper book, the same is given as annexures-I to V to this order.
11. Learned counsel for the assessee submitted before us that the show-cause notice issued under section 274 of the Act does not specify as to whether penalty proceeding is being initiated for concealing particulars of income or furnishing inaccurate particulars of income or for any other reason as irrelevant columns of the printed form of notice under section 274 have not been struck off by the Assessing Officer.
12. Learned counsel for the assessee drew our attention to the decision of the Hon’ble Karnataka High Court in the case ofCIT v. Manjunatha Cotton & Ginning Factory [2013] 359 ITR 565 , wherein the Hon’ble High Court has held that notice under section 274 of the Act should specifically state as to whether penalty is being proposed to be imposed for concealment of particulars of income or for furnishing inaccurate particulars of income. The Hon’ble High Court has further laid down that certain printed form where all the grounds given in section 271 are given would not satisfy the requirement of law. The court has also held that initiating penalty proceedings on one limb and find the assessee guilty in another limb is bad in law. It was submitted that in the present case, the aforesaid decision will squarely apply and all the orders imposing penalty have to be held as bad in law and liable to be quashed.
13. The learned Departmental representative relied on the order of the Commissioner of Income-tax (Appeals) wherein the Commissioner of Income-tax (Appeals) has expressed his opinion that the assessee was fully aware of the charge against him and he cannot take shelter on technical grounds.
14. We have heard the rival submissions. The Hon’ble Karnataka High Court in the case of Manjunatha Cotton & Ginning Factory (supra) has laid down the following principles to be followed in the matter of imposing penalty under section 271(1)(c) of the Act. (page 599) :
“Notice under section 274
59. As the provision stands, the penalty proceedings can be initiated on various grounds set out 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 section 274 makes it clear that the 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 form where all the grounds mentioned in section 271 are mentioned would not satisfy the 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 per cent. to 300 per cent. 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, the 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 of 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 the 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 the 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 T. Ashok Pai v. CIT reported in [2007] 292 ITR 11 (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 CIT v. Manu Engineering Works reported in [1980] 122 ITR 306 (Guj) and the Delhi High Court in the case of CIT v. Virgo Marketing P. Ltd. reported in [2008] 171 Taxman 156 (Delhi), 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. Therefore, 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.”
15. The final conclusion of the Hon’ble court was as follows (page 602) :
“63. In the light of what is stated above, what emerges is as under :
| (a) | Penalty under section 271(1)(c) is a civil liability. | |
| (b) | Mens rea is not an essential element for imposing penalty for breach of civil obligations or liabilities. | |
| (c) | Willful concealment is not an essential ingredient for attracting civil liability. | |
| (d) | Existence of conditions stipulated in section 271(1)(c) is a sine qua non for initiation of penalty proceedings under section 271. | |
| (e) | The existence of such conditions should be discernible from the assessment order or the order of the appellate authority or revisional authority. | |
| (f) | Even if there is no specific finding regarding the existence of the conditions mentioned in section 271(1)(c), at least the facts set out in Explanation 1(A) and 1(B) it should be discernible from the said order which would by a legal fiction constitute concealment because of deeming provision. | |
| (g) | Even if these conditions do not exist in the assessment order passed, at least, a direction to initiate proceedings under section 271(1)(c) is a sine qua non for the Assessing Officer to initiate the proceedings because of the deeming provision contained in Explanation 1(B). | |
| (h) | The said deeming provisions are not applicable to the orders passed by the Commissioner of Income-tax (Appeals) and the Commissioner. | |
| (i) | The imposition of penalty is not automatic. | |
| (j) | Imposition of penalty even if the tax liability is admitted is not automatic. | |
| (k) | Even if the assessee has not challenged the order of assessment levying tax and interest and has paid tax and interest that by itself would not be sufficient for the authorities either to initiate penalty proceedings or impose penalty, unless it is discernible from the assessment order that, it is on account of such unearthing or enquiry concluded by the authorities it has resulted in payment of such tax or such tax liability came to be admitted and if not it would have escaped from tax net and as opined by the Assessing Officer in the assessment order. | |
| (l) | Only when no explanation is offered or the explanation offered is found to be false or when the assessee fails to prove that the explanation offered is not bona fide, an order imposing penalty could be passed. | |
| (m) | If the explanation offered, even though not substantiated by the assessee, but is found to be bona fide and all facts relating to the same and material to the computation of his total income have been disclosed by him, no penalty could be imposed. | |
| (n) | The direction referred to in Explanation 1(B) to section 271 of the Act should be clear and without any ambiguity. | |
| (o) | If the Assessing Officer has not recorded any satisfaction or has not issued any direction to initiate penalty proceedings, in appeal, if the appellate authority records satisfaction, then the penalty proceedings have to be initiated by the appellate authority and not the assessing authority. | |
| (p) | Notice under section 274 of the Act should specifically state the grounds 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 grounds mentioned in section 271 are mentioned would not satisfy the requirement of law. | |
| (r) | The assessee should know the grounds which he has to meet specifically. Otherwise, the 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 one limb and finding the assessee guilty of another limb is bad in law. | |
| (t) | The penalty proceedings are distinct from the assessment proceedings. The proceedings for imposition of penalty though emanate from proceedings of assessment, it is independent and separate aspect of the proceedings. | |
| (u) | The findings recorded in the assessment proceedings in so far as ‘concealment of income’ and ‘furnishing of incorrect particulars’ would not operate as res judicata in the penalty proceedings. It is open to the assessee to contest the said proceedings on merits. However, the validity of the assessment or reassessment in pursuance of which penalty is levied, cannot be the subject matter of penalty proceedings. The assessment or reassessment cannot be declared as invalid in the penalty proceedings.” |
16. It is clear from the aforesaid decision that on the facts of the present case that the show-cause notice under section 274 of the Act is defective as it does not spell out the grounds on which penalty is sought to be imposed. In our view, the aforesaid defect cannot be said to be curable under section 292BB of the Act, as the defect cannot be said to be a notice which is in substance and effect in conformity with or according to the intent and purpose of the Act. Following the decision of the Hon’ble Karnataka High Court, we hold that the orders imposing penalty in all the assessment years have to be held invalid and consequently penalty imposed is cancelled.
17. Since the appeals are decided on the technical ground, the grounds raised on merits are not being gone into.
18. In the result, the appeals are allowed.