2025 (5) TMI 512 - AT - Income Tax

Penalty u/s 271(1)(c) - allegation of Non specification of clear charge - AO disallowed claim of expenditure on Pushkar land and on Suchna Kendra Land towards boundary wall pillars rcad work etc and made addition for the same - whether penalty proceedings had been initiated i.e. whether for concealment particulars of income or furnishing of inaccurate particulars of income? - HELD THAT - AO in the assessment order initiated Penalty for fumishing inaccurate particulars. Whereas notice issued u/s 274 r.w.s. 271(1)(c) of the Income Tax Act do not state the clear grounds / directions to initiate penalty proceedings. The reasons for issuance of notice u/s. 148 for which no addition were made and all the purchases and sales of land as alleged to have been recorded and details were submitted during reassessment proceedings and which were accepted by the ld. AO. Merely because the assessee makes a claim of expenditure which was not accepted by the revenue that itself would not amount to furnishing inaccurate particulars regarding income of the assessee and no penalty uls 271(1)(c) can be levied. See Reliance Petroproducts (P) Ltd 2010 (3) TMI 80 - SUPREME COURT Thus no reason to sustain the penalty and therefore the same is directed to be deleted. Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the judgment include:

- Whether the penalty imposed under section 271(1)(c) of the Income Tax Act, 1961, is valid and sustainable in the facts of the case.

- Whether the show cause notice (SCN) issued under section 274 read with 271(1)(c) was legally valid, specifically whether it clearly specified the limb of section 271(1)(c) under which penalty proceedings were initiated-concealment of particulars of income or furnishing inaccurate particulars of income.

- Whether the additions made by the Assessing Officer (AO) regarding unexplained investment in construction of boundary walls on two plots of land were justified and supported by evidence.

- Whether the assessee had furnished inaccurate particulars of income or concealed income warranting penalty under section 271(1)(c).

- Whether the penalty proceedings were initiated without jurisdiction or on vague grounds, violating principles of natural justice.

- Whether the evidence submitted by the assessee, including contractor bills, affidavits, and site inspection report, were properly considered or wrongly rejected by the authorities below.

- Whether the penalty imposed is sustainable in light of settled legal principles and precedents, particularly the distinction between assessment and penalty proceedings and the requirement of mens rea (intentional concealment or furnishing inaccurate particulars).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity and Jurisdiction of Penalty Proceedings under Section 271(1)(c)

Legal Framework and Precedents: Section 271(1)(c) of the Income Tax Act provides for penalty for concealment of particulars of income or furnishing inaccurate particulars of income. The penalty proceedings are quasi-criminal in nature, and the burden lies on the Revenue to prove intentional concealment or furnishing of inaccurate particulars. The Supreme Court in CIT vs. Reliance Petroproducts (2010) held that mere claim disallowed in assessment does not attract penalty unless there is proof of furnishing inaccurate particulars.

Court's Interpretation and Reasoning: The Court emphasized the settled principle that assessment and penalty proceedings are separate and distinct. The AO cannot rely solely on findings in the assessment order to impose penalty without independent material showing concealment or furnishing of inaccurate particulars. The Court noted that the AO failed to bring any positive material to establish mens rea.

Key Evidence and Findings: The AO disallowed expenses claimed on construction of boundary walls amounting to Rs. 2,03,925 and Rs. 3,75,917 on two plots, treating them as unexplained investments. However, the assessee submitted contractor bills, affidavits, and an inspection report by Ward Inspector confirming the existence of boundary walls. The AO rejected these evidences on suspicion, without confronting the contractor or giving the assessee opportunity to cross-examine.

Application of Law to Facts: The Court found that the AO proceeded on mere suspicion and ignored uncontroverted documentary and factual evidence supporting the genuineness of the expenditure. The Court held that no addition or penalty can be sustained on suspicion alone, relying on Dhakeshwari Cotton Mills (1954) and other precedents.

Treatment of Competing Arguments: The Revenue argued that the assessee failed to substantiate the expenditure, photographs on sale deeds did not show boundary walls, and payments were mostly in cash below Rs. 20,000 without banking evidence. The assessee countered by submitting affidavits clarifying payment dates, contractor bills, and inspection reports. The Court found the Revenue's reliance on photographs and cash payments insufficient to discredit the evidence.

Conclusions: The Court concluded that the penalty cannot be sustained in absence of proof of concealment or furnishing inaccurate particulars. The AO failed to discharge the burden of proof. The penalty imposed was therefore not valid on merits.

Issue 2: Validity of Show Cause Notice under Section 274 r.w.s 271(1)(c)

Legal Framework and Precedents: The show cause notice initiating penalty proceedings must clearly specify the ground of penalty, i.e., whether it is for concealment of particulars of income or furnishing inaccurate particulars. This principle was upheld by the Karnataka High Court in CIT v. Manjunatha Cotton and Ginning Factory (359 ITR 565) and reiterated in other judgments including the Supreme Court and High Courts. Vague notices that do not specify the limb offend principles of natural justice and are liable to be quashed.

Court's Interpretation and Reasoning: The Court observed that the SCN issued in this case used the phrase "inaccurate particulars of income were furnished by the assessee and concealed the income" without striking off the inapplicable limb, thus failing to provide clarity. The Court noted that penalty proceedings initiated on one limb and penalty imposed on another is bad in law.

Key Evidence and Findings: The assessment order recorded initiation of penalty proceedings for furnishing inaccurate particulars, but the SCN was ambiguous. The assessee challenged the SCN on this ground, relying on judicial precedents.

Application of Law to Facts: The Court held that the defect in the SCN was a violation of principles of natural justice. The assessee was not made aware of the specific charge to meet. The Court relied on binding precedents to hold that such vagueness renders the penalty proceedings invalid.

Treatment of Competing Arguments: The Revenue contended that the initiation recorded in the assessment order sufficed to inform the assessee and that the defect in the SCN did not cause prejudice. The Court rejected this, emphasizing the primacy of the SCN in giving notice and the requirement of strict compliance.

Conclusions: The Court held the SCN invalid for want of clarity and quashed the penalty proceedings on this legal ground.

Issue 3: Justification of Additions Made for Unexplained Investment in Boundary Walls

Legal Framework and Precedents: Additions under section 69 (unexplained investments) require that the investment be unexplained or unsupported by evidence. The burden lies on the Revenue to disprove the genuineness of the expenditure. The Supreme Court in Mehta Parikh & Co. v. CIT (1956) held that evidence submitted by the assessee must be objectively tested and not rejected on mere suspicion.

Court's Interpretation and Reasoning: The Court analyzed the factual findings of the AO, CIT(A), and ITAT. It noted that the AO disallowed the boundary wall expenses due to lack of documentary proof and suspicious payments. The CIT(A) and ITAT confirmed the additions, rejecting contractor bills and affidavits on grounds of non-admission or suspicion.

Key Evidence and Findings: The assessee produced contractor bills, affidavits from the contractor and the wife of the assessee, and a site inspection report confirming the existence of the boundary walls. The AO and CIT(A) rejected these evidences without adequate reasoning or opportunity for cross-examination.

Application of Law to Facts: The Court found that the authorities below erred in ignoring credible and uncontroverted evidence. It emphasized that the AO must discharge the onus of disproving the genuineness of the expenditure rather than rejecting evidence on conjecture. The Court also noted that absence of mention of boundary walls in sale deeds or their non-visibility in photographs is not conclusive proof of non-existence.

Treatment of Competing Arguments: The Revenue relied on lack of documentary proof, timing of payments, and photographs. The assessee relied on affidavits, contractor bills, and inspection reports. The Court found the assessee's evidence more reliable and the Revenue's objections insufficient.

Conclusions: The Court concluded that the additions for unexplained investment in boundary walls were not justified and should be deleted.

Issue 4: Applicability of Penalty Where Disallowance is Based on Difference of Opinion

Legal Framework and Precedents: The Supreme Court in Reliance Petroproducts held that mere disallowance of a claim does not attract penalty unless there is proof of furnishing inaccurate particulars or concealment. Difference of opinion on claim cannot be basis for penalty. The burden of proof in penalty proceedings is higher than in assessment.

Court's Interpretation and Reasoning: The Court reiterated that penalty cannot be levied for bona fide claims rejected in assessment. The AO must prove intentional concealment or furnishing inaccurate particulars. The Court found that in this case, the additions were disputed and the assessee had made bona fide claims supported by evidence.

Key Evidence and Findings: The assessee's submissions and evidences were rejected on technical grounds or suspicion. The Court found no direct evidence of concealment or inaccurate particulars.

Application of Law to Facts: The Court applied the principle that difference of opinion does not attract penalty and held that penalty was not sustainable.

Treatment of Competing Arguments: The Revenue argued that the assessee failed to substantiate claims and thus penalty was justified. The Court rejected this view in absence of proof of mens rea.

Conclusions: The penalty was held to be not valid on merits.

Issue 5: Admission of Additional Evidence under Rule 46A

Legal Framework and Precedents: Rule 46A of the Income Tax Rules allows admission of additional evidence before appellate authorities under certain conditions. The Court noted that affidavits submitted by the assessee were not admitted by CIT(A) on grounds of non-compliance with Rule 46A and being self-serving.

Court's Interpretation and Reasoning: The Court found that the affidavits clarified discrepancies in contractor bills and supported the assessee's claim. The rejection of such evidence without proper consideration was an error.

Key Evidence and Findings: Affidavit by the contractor clarified payment dates; affidavit by the wife confirmed existence of boundary wall at time of purchase. These were relevant and should have been admitted.

Application of Law to Facts: The Court held that the appellate authority has wide powers to admit evidence and should have considered the affidavits, especially given the factual disputes.

Treatment of Competing Arguments: The Revenue contended the affidavits were self-serving and belated. The Court found the reasons for rejection insufficient.

Conclusions: The rejection of affidavits was improper and contributed to erroneous findings.

3. SIGNIFICANT HOLDINGS

- "Mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee."

- "No addition can be made merely on suspicion. Suspicion however strong cannot take place of reality."

- "Notice issued under section 274 must specifically state the grounds on which penalty is proposed to be imposed, failing which it is vague and violates principles of natural justice."

- "Penalty proceedings are separate and distinct from assessment proceedings and require independent proof of concealment or furnishing inaccurate particulars."

- "Where penalty proceedings are initiated on one limb of section 271(1)(c) and penalty imposed on another limb, the penalty is not valid."

- "The burden lies on the Revenue to establish the mens rea for penalty; mere disallowance of claim does not suffice."

- "Appellate authorities have wide powers to admit additional evidence under Rule 46A, especially when it goes to the root of the matter."

- The penalty imposed under section 271(1)(c) was quashed on grounds of defective SCN and lack of evidence of concealment or inaccurate particulars.

- Additions made for unexplained investment in boundary walls were not justified and liable to be deleted.