Income Tax Appellate Tribunal - Hyderabad
Satish Babu Bethi Reddy, Hyd, Hyderabad vs Addl.Cit, Circle-7, Hyd, Hyderabad on 24 February, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "A" (SMC), HYDERABAD
BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
I.T.A. No. 890/HYD/2016
Assessment Year: 2006-07
Sri Satishbabu Bethi Reddy, Addl. Commissioner of
HYDERABAD Vs Income Tax,
[PAN: AHTPB0696H] Range-7,
HYDERABAD
(Appellant) (Respondent)
For Assessee : Shri K.A. Sai Prasad, AR
For Revenue : Smt Suman Malik, DR
Date of Hearing : 31-01-2017
Date of Pronouncement : 24-02-2017
ORDER
This is an appeal by assessee against the order of the Commissioner of Income Tax (Appeals)-10, Hyderabad, dated 20-01-2016 for the AY. 2006-07, confirming the penalty u/s. 271(1)(c) of the Income Tax Act [Act] of Rs. 1,90,834/-.
2. Assessee has raised the following grounds:
"1. The learned Commissioner of Income tax(Appeals), in the facts and circumstances of the case, is not justified in confirming the penalty u/s. 271(1)(c) of Rs. 1,90,834/-, levied by the Addl. Commissioner of Income tax, Range-7, Hyderabad.
2. The learned Commissioner of Income tax(Appeals) did not appreciate the fact that the addition, on which the penalty is levied, is only an agreed and estimated disallowance of expenditure and did not consider the several decisions cited by the appellant.
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I.T.A. No. 890/Hyd/2016 Sri Satishbabu Bethi Reddy
3. The decision of the Supreme Court in the case of MAK Data (P) Ltd (358 ITR 593), cited by the learned Commissioner of Income tax (Appeals) is in a different context and not at all applicable to the facts of the appellant's case".
Ground No. 4 is general in nature.
3. Brief facts of the case are that assessee is an individual, is a commission agent for two real estate companies. For the services rendered by him he received a gross commission of Rs. 26,60,867/- for the AY. 2006-07 and filed his return of income on 30-03-2007 declaring an income of Rs. 9,03,067/-. Assessee could not produce the books of account before the Assessing Officer (AO). AO proposed disallowance of Rs. 5,00,000/- which was accepted by assessee. On that, penalty proceedings were initiated and penalty of Rs. 1,90,834/- was levied by the AO. In the penalty proceedings, the AO however, examined the receipts from the company and found out that assessee's receipts total to Rs. 41,17,527/- but did not initiate any proceedings nor gave any finding that the amount admitted by assessee as receipts were suppressed. However, he levied penalty U/s. 271(1)(c) on only the disallowance made by the AO out of the expenditure claims.
4. Assessee contended before the Ld.CIT(A) "6.... that the AO did not make any finding that the expenses claimed to be false or bogus. It is not the case of the AO that the addition has been made on account of furnishing of inaccurate particulars of income by assessee. There was no satisfaction recorded by the Ld.AO that assessee has connected the particulars of his income or furnished inaccurate particulars. A mere mention at the end of the assessment order that 'penalty proceedings will be initiated separately' does not meet the requirements of the Section 271(1)(c). Penalty cannot be imposed merely because assessee accepted assessment order levying tax and interest, unless it is discernible from assessment order that addition was on account of concealment.
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I.T.A. No. 890/Hyd/2016 Sri Satishbabu Bethi Reddy
7. It is further submitted that it is only an agreed disallowance on estimate basis and there is no finding of concealment or furnishing of inaccurate particulars. The assessee did agree for the proposed disallowance to purchase peace and avoid any litigation in the circumstances of the case."
4.1. Assessee relied on the following case law:
i. Dilip Kedia Vs. ACIT [40 taxman.com 102] (Hyderabad-Trib.); ii. CIT Vs. Manjunatha Cotton & Ginning Factory [35 taxmann.com 250] (Karnataka High Court);
iii. CIT Vs. Electrolux Kelvinator Ltd., [44 taxmann.com 369] (Delhi High Court);
iv. CIT Vs. Vatika Constructions (P) Ltd., [45 taxmann.com 471] (Delhi High Court);
5. Ld.CIT(A) however, has not answered the first contention at all and rejected the other contentions as under:
"5.8 In this case the assessee claimed huge expenditure and did not produce any evidence in support of the claim of expenditure. He did not offer any cogent and reliable explanation before the AO to the notice issued u/s. 271(1)(c) of the I.T Act. He merely stated that he was eager to unfetter the assets and to have peace with the department he agreed for the addition.
5.9 Even on agreed decisions penalty is leviable as held by the Hon'ble Supreme Court of India in the case of MAK Data Pvt Ltd vs. CIT. Hence, this argument is devoid of any merit. As per the decision of Hon'ble Supreme Court in the case of MAK Data (P) Ltd (358 ITR 593), wherein it was held that surrender of income is not voluntary, in the sense that the offer of surrender was made in view of the detection made by the AO. Assessee has to offer its explanation for concealment of particulars of income or furnishing of inaccurate particulars of income. Explanation to 271(1)(c) raises a presumption of concealment by difference in income assessed by the AO between the reported and assessed income. The burden is on the assessee to show otherwise by cogent and reliable evidence only then the initial onus placed by the explanation has been discharged by the assessee, the onus shifts to revenue that amount in question constitute the income and not otherwise.
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I.T.A. No. 890/Hyd/2016 Sri Satishbabu Bethi Reddy 5.1. However, Ld.CIT(A) while extracting the submissions in para 3, however, has extracted the submissions pertaining to another assessee wherein the gross receipts were Rs. 70,53,606/- and income returned was Rs. 14,70,986/-. It seems, there were common submissions with another case Sri Venkata Ratnam Meka and the submissions of that assessee were extracted.
6. Assessee has raised the additional ground as under:
"In the absence of specific charge raised by the Assessing Officer in the notice u/s. 274 r.w.s. 271(1)(c), the levy of penalty u/s. 271(1)(c) is not valid".
Ld. Counsel has stated that this issue was contended before the Ld.CIT(A) in written submissions but was not adjudicated by Ld.CIT(A) hence raised an additional ground. Ld.DR has objected and submitted that the same should not be admitted.
6.1. Having considered the rival contentions, as assessee has contested the issue before the Ld.CIT(A), as can be seen from the extract of submissions stated above, the additional ground is purely legal in nature, therefore admitted.
7. After considering the rival contentions, I am of the opinion that the levy of penalty on the mere disallowance of expenditure cannot be sustained. AO has not made out a case of concealment or furnishing of inaccurate particulars in the order. The order of the AO is as under:
Unverifiable expenditure:
The assessee has not maintained regular books of accounts. On account of the non maintenance of regular books of accounts, a total roundsum addition of Rs. 5,00,000/- is made to the income returned which is accepted by the assessee as unverifiable expenditure.
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I.T.A. No. 890/Hyd/2016 Sri Satishbabu Bethi Reddy 7.1. Just because assessee has not produced the books of account and expenditure claim is unverifiable, it cannot be stated that assessee has concealed particulars of income or furnished inaccurate particulars. As seen from the order, AO has not disallowed any specific expenditure, but made a roundsum disallowance of Rs. 5 Lakhs. He did not even bother to name the nature of expenditure disallowed. In these circumstances, the mere disallowance of expenditure does not attract levy of penalty.
7.2. Assessee claimed before the AO that the notice does not specify the nature of offence calling for penalty. Assessee has raised an additional ground contesting that the notice issued does not specify whether the proceedings were initiated for 'concealment of penalty' or 'for furnishing inaccurate particulars'. The copy of the notice placed on record do indicate that it is a printed proforma, without striking-off the relevant columns and simply signed by the AO which was served on assessee. On similar facts, the Hon'ble Karnataka High Court in the case of Manjunatha Cotton & Ginning Factory [359 ITR 565] has held that the practice of the department sending a printed form where all the grounds mentioned in 271 are mentioned would not satisfy the requirement of law when the consequence of assessee not rebutting the initial presumption is serious in nature and he had to pay penalty from 10% to 300% of tax liability. As the said provisions have to be held to be strictly construed, notice u/s. 274 should satisfy the grounds which he has to meet specifically. Otherwise, the principles of natural justice are offended, if the show cause notice is vague. On the basis of such proceedings, no penalty could be imposed on assessee.
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I.T.A. No. 890/Hyd/2016 Sri Satishbabu Bethi Reddy 7.3. Similar issue has come up in the case of M/s. Nivee Property Developers Private Ltd., Vs. ACIT in ITA No. 951/Hyd/2016 (AY.
2005-06) dt. 11-11-2016. In that case, the Co-ordinate Bench (SMC) of Hyderabad has held as under:
"2. After hearing the rival contentions, we find that in the notice issued u/s 271(1)(c), the charge is not specified. In other words, the AO has not specifically stated whether the notice was issued for concealment of particulars of income or for furnishing inaccurate particulars of income. The Hon'ble Karnataka High Court in the case of CIT vs. Manjunatha Cotton & Ginning Factory reported in (2013) 35 taxmann.com 250 (Kar.) at Para 63 held as under:
"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) Wilful 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 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) & (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 Assessment Officer to initiate the proceedings because of the deeming provision contained in Section 1(B).
(h) The said deeming provisions are not applicable to the orders passed by the Commissioner of 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 authorities it has resulted in payment of :- 7 -:
I.T.A. No. 890/Hyd/2016 Sri Satishbabu Bethi Reddy 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 bonafide, an order imposing penalty could be passed.
(m) If the explanation offered, even though not substantiated by the assessee, but is found to be bonafide 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 IB 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 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 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 insofar 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".
Respectfully following the same, I quash the penalty levied u/s 271(1)(c) as bad in law".
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I.T.A. No. 890/Hyd/2016 Sri Satishbabu Bethi Reddy 7.4. Similarly in the case of Lalitkumar M Sakhala Vs. DCIT in ITA No. 938/Mum/2015 (AY. 2009-10) dt.10-08-2016, the Co-ordinate Bench of Mumbai (SMC) has held as under:
"4. Before me, the ld. counsel for the assessee stated that he has filed the explanation before the AO and the CIT(A) and also argued that in this case the AO has levied penalty for concealment u/s 271 (1) (c) of the Act, but without any specific charge i.e. the penalty for concealment of income or furnishing of inaccurate particulars of income. According to Ld. Counsel the AO himself is not convinced about the charge. The ld. counsel for the assessee drew my attention to the pages 2-3 of the assessee's paper book, wherein penalty notice u/s. 271(1)( c) r.w.s 274 of the Act dated 17- 11-2011 was issued by the AO to the assessee. The ld. counsel for the assessee stated before me that this issue is covered in favour of the assessee by the decision of the Hon'ble Karnataka High Court in the case of CIT Vs. Manjunatha Cotton and Ginning Factory (2013) 359 ITR 565 (Kar.). I find that the notice issued u/s. 274 r. w. s. 271 of the Act, dated 17-11- 2011, clearly reveals that the AO while issuing the notice has not strike off inappropriate words and accordingly, the purpose of the notice issued for levy of penalty is lost. Accordingly, it is not clear what default is committed by the assessee i.e. whether it is initiated for concealment of particulars of income or for furnishing of inaccurate particulars of income so that the penalty u/s. 271(1)( c) can be levied. I find that the Hon'ble Karnataka High Court in the case of Manjunatha Cotton and Ginning Factory (supra) has held as under:-
"58. It must be noticed that this finding recording concealment in the order to be passed by these authorities is only for the purpose of initiating. The said finding is not conclusive; it is in the nature of prima facie satisfaction, which authorizes them to initiate the penalty proceedings. Once a penalty proceedings is validly initiated, then under Section 274(1) an obligation is cast on the person initiating the proceedings to issue notice to the assessee. When such a notice is issued, it is open to the assessee to contest the accusation against him that he has concealed income or he has furnished inaccurate particulars. As there is an initial presumption of concealment, it is for the assessee to rebut the said presumption. The presumption found in Explanation 1 is a rebuttable presumption. If the authority, after hearing the assessee and looking into the material produced in the said proceedings before him is satisfied that though the income is undisclosed there was no intent to avoid tax and therefore, if he holds there is no concealment of income, then question of imposing penalty would not arise. It may be a case of not disclosing income without any intent to avoid tax; it may be a case of furnishing particulars without any intention to avoiding tax. Both stand on the same footing. It is only when the authority is satisfied that non-disclosure of income or furnishing inaccurate particulars was :- 9 -:
I.T.A. No. 890/Hyd/2016 Sri Satishbabu Bethi Reddy with the intention of evading tax, then it amount to concealment, it amounts to furnishing inaccurate particulars. Then, at his discretion, he may impose penalty as provided under the Act. Therefore, merely because the assessee accepted addition or deletion and did not challenge the assessment order by way of appeal, it cannot be concluded that such addition or deletion amounts to concealment of income or furnishing of inaccurate particulars. When a plea is taken that in order to avoid litigation and purchase peace, the tax levied is paid with interest, if the assessee is able to demonstrate his bona fides and if the authority is satisfied about his bonafides, then the question of imposing penalty would not arise. Similarly, in cases where though the tax was not actually due but still the assessee pays tax with a hope of claiming deductions in the subsequent years, if the assessee is able to demonstrate there was no liability to pay tax at all, merely if assessee pays tax and he does not challenge order, that would not constitute concealment of income so as to enable the authorities to impose penalty. Similarly, in cases, where the legal position is not well settled, when few High Courts and Tribunals have taken a view in favour of the assessee and some High Courts and Tribunals have taken a view in favour of the Revenue and on legal advice if an assessee relies on the said legal position for not disclosing the income and for non-payment of tax, certainly, that is a fact which should weigh in the penalty proceedings after the assessee has paid tax with interest before imposing penalty.
NOTICE UNDER SECTION 274
59. As the provision stands, the penalty proceedings can be initiated on various ground 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 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 form 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 :- 10 -:
I.T.A. No. 890/Hyd/2016 Sri Satishbabu Bethi Reddy 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 reported in 292 ITR 11 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 reported in 122 ITR 306 and the Delhi High Court in the case of VIRGO MARKETING reported in 171 Taxman 156, 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 :- 11 -:
I.T.A. No. 890/Hyd/2016 Sri Satishbabu Bethi Reddy 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."
5. In view of the facts of the case that there is no specific charge raised by the AO while issuing notice u/s 274 r. w. s. section 271 of the Act, as discussed above, the issue is covered by the decision of the Hon'ble Karnataka High Court in the case of Manjunatha Cotton and Ginning Factory (supra). Respectfully following the above, I allow the appeal of the assessee".
7.5. In the present case, the notice does not specify for what offence the proceedings are initiated. The decision of the Karnataka High Court (supra) and other cases stated above will equally apply to the facts of the case.
7.6. Recently Hon'ble High Court of Bombay in the case of CIT vs. Samson Perinchery (Bombay High Court) has held as under:
"S. 271(1)(c): Failure by the AO to specify in the s. 274 notice whether the penalty is being initiated for 'furnishing of inaccurate particulars of income' or for 'concealment of income' is fatal. It reflects non- application of mind and renders the levy of penalty invalid (Manjunatha Cotton 359 ITR 565 (Kar) followed)"
7.7. Even otherwise on merits also there is no scope for levy of penalty as considered above. Hence, both on principles of law and also on the facts, there is no scope for levy of penalty u/s 271(1)(c) on assessee. Considering the above, I have no hesitation in cancelling the penalty, allowing the grounds raised by assessee.
8. In the result, appeal of assessee is allowed.
Order pronounced in the open court on 24th February, 2017 Sd/-
(B. RAMAKOTAIAH) ACCOUNTANT MEMBER Hyderabad, Dated 24th February, 2017 TNMM :- 12 -:
I.T.A. No. 890/Hyd/2016 Sri Satishbabu Bethi Reddy Copy to :
1. Sri Satishbabu Bethi Reddy, Hyderabad. C/o. Ch.
Parthasarathy & Co., 1-1-298/2/B/3, 1st Floor, Sowbhagya Avenue, St.No.1, Ashok Nagar, Hyderabad.
2. Addl. Commissioner of Income Tax, Range-7, Hyderabad.
3. Commissioner of Income Tax(Appeals)-10, Hyderabad.
4. The Commissioner of Income Tax (IT & TP), Hyderabad.
5. D.R. ITAT, Hyderabad.
6. Guard File.