TMI Blog2018 (2) TMI 1141X X X X Extracts X X X X X X X X Extracts X X X X ..... essee before the lower authorities, it is revealed that the said expenditure was incurred on purchase of raw materials which were utilised during the year. It was noticed that the said expenditure was transferred to Research and Development expenditure head and, therefore, it constituted a claim u/s 35(2AB). The discussion in the assessment order as well as the assertions in the written submission before the lower authorities reveal that the search party advised that the claim u/s 35(2AB) may not be sustainable. Though no specific reasons have been brought out on record, but be that as it may, there is no finding as to why the claim for deduction of cost of raw materials was improper given the fact that there is no adverse finding that the raw materials were not consumed for the purpose of business. Thus, no reason to impose penalty on such disallowance also. we, therefore, hold that having regard to the facts and circumstances and the manner in which the amounts have been assessed to tax, does not justify the assertions of the Revenue that it constitutes furnishing of inaccurate particulars of income within the meaning of Sec. 271(1)(c) of the Act. - Decided in favour of assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and in the circumstance of the case and in law, the CIT(A) erred in not appreciating that expenses disallowed by the Appellant were all genuine expenses fully supported by bills and vouchers, paid by account payee cheques and were accounted in the books of accounts and, therefore, no penalty should be levied for the disallowance of such expenses. 8. On the facts and in the circumstance of the case and in law, the CIT(A) erred in not appreciating that expenses disallowed by the Appellant were on debatable issue and therefore, penalty under section 271(1)(c) of the Act cannot be levied for the same. 3. Although the appellant-assessee has raised multiple Grounds of appeal, the sum and substance of the dispute arises from the action of the Assessing Officer in levying penalty u/s 271(1)(c) of the Act amounting to ₹ 7,36,12,079/-. At the time of hearing, varied arguments have been raised, which we shall deal hereinafter, but before that it is appropriate to note, in slight detail, the background and manner in which the penalty u/s 271(1)(c) of the Act has been imposed by the Assessing Officer. 4. The appellant is a company incorporated under the provisions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22,68,82,660/- and he levied a penalty of ₹ 7,36,12,079/- equivalent to 100% of the tax sought to be evaded on the aforesaid income. This levy has also been affirmed by the CIT(A), against which assessee is in appeal before us. 6. Before us, the learned representative for the appellant has assailed the levy of penalty on the point of jurisdiction as well as on merits. Firstly, it is canvassed that the notice dated 30.03.2015 issued u/s 274 r.w.s. 271(1)(c) of the Act initiating the penalty proceedings is vague as it does not specify the charge for which the notice was issued to the assessee. According to the appellant, the notice does not specify whether the penalty action is initiated for concealment of particulars of income or furnishing inaccurate particulars of income , and therefore the notice initiating the penalty proceedings is bad in law. On merits, it is canvassed by the learned representative that no penalty is leviable u/s 271(1)(c) of the Act merely because the amount was offered in the statement recorded u/s 132(4) without establishing that the attendant facts and circumstances of the case justify the inference of furnishing of inaccurate particulars of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of income and concealment of income. The ld. CIT-DR also referred to the discussion in para 7.2.2 of the order of CIT(A) wherein it is pointed out that the notice u/s 274 r.w.s. 271(1)(c) was issued alongwith assessment order finalised u/s 143(3) r.w.s. 153 of the Act dated 30.03.2015, and in the assessment order penalty has been initiated for furnishing of inaccurate particulars and concealment of income, and according to the ld. CIT-DR, if the assessment order is read along the notice and the subsequent penalty order, it is quite clear that the jurisdiction to levy penalty has been assumed for furnishing of inaccurate particulars of income and it has been ultimately levied for the same reason. It is pointed out that even if non-striking-off of the irrelevant portion in the notice is to be taken as a mistake, the same would not invalidate the notice or the subsequent penalty proceedings. 9. We have carefully considered the rival submissions. Before we proceed to appreciate the point sought to be raised, based on the notice issued u/s 274 r.w.s. 271(1)(c) of the Act, it would be appropriate to refer to the phraseology of Sec. 271(1)(c) of the Act. Notably, Sec. 271(1)(c) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opportunity to put forth his defence. When the proceedings are penal in nature, resulting in imposition of penalty ranging from 100% to 300% of the tax liability, the charge must be unequivocal and unambiguous. When the charge is either concealment of particulars of income or furnishing of inaccurate particulars thereof, the revenue must specify as to which one of the two is sought to be pressed into service and cannot be permitted to club both by interjecting an or between the two, as in the present case. This ambiguity in the show-cause notice is further compounded presently by the confused finding of the Assessing Officer that he was satisfied that the assessee was guilty of both. The aforesaid observations of the Hon'ble Andhra Pradesh High Court clearly fortify the decision of the Mumbai Bench of the Tribunal in the case of Meherjee Cassinath Holdings Private Limited (supra) wherein it has been held that non-striking-off of irrelevant portion in the notice issued u/s 274 r.w.s. 271(1)(c) of the Act is an error which makes the notice suffer from the vice of non-application of mind, and is to be treated as invalid. We are tempted to reproduce hereinafter the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lea of assessee is borne out of record and having regard to the parity of reasoning laid down by the Hon'ble Supreme Court in the case of Dilip N. Shroff (supra), the notice in the instant case does suffer from the vice of non-application of mind by the Assessing Officer. In fact, a similar proposition was also enunciated by the Hon'ble Karnataka High Court in the case of M/s. SSA s Emerald Meadows (supra) and against such a judgment, the Special Leave Petition filed by the Revenue has since been dismissed by the Hon'ble Supreme Court vide order dated 5.8.2016, a copy of which is also placed on record. 10. In fact, at the time of hearing, the ld. CIT-DR has not disputed the factual matrix, but sought to point out that there is due application of mind by the Assessing Officer which can be demonstrated from the discussion in the assessment order, wherein after discussing the reasons for the disallowance, he has recorded a satisfaction that penalty proceedings are initiated u/s 271(1)(c) of the Act for furnishing of inaccurate particulars of income. In our considered opinion, the attempt of the ld. CIT-DR to demonstrate application of mind by the Assessing Officer is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Iyer Vs. Union of India (supra), when there is no indication in the notice for what contravention the petitioner was called upon to show cause why a penalty should not be imposed. In the instant case, the AO did not specify the charge for which penalty proceedings were initiated and further he has issued a notice meant for calling the assessee to furnish the return of income. Hence, in the instant case, the assessing officer did not specify the charge for which the penalty proceedings were initiated and also issued an incorrect notice. Both the acts of the AO, in our view, clearly show that the AO did not apply his mind when he issued notice to the assessee and he was not sure as to what purpose the notice was issued. The Hon ble Bombay High Court has discussed about non-application of mind in the case of Kaushalya (supra) and observed as under:- ....The notice clearly demonstrated non-application of mind on the part of the Inspecting Assistant Commissioner. The vagueness and ambiguity in the notice had also prejudiced the right of reasonable opportunity of the assessee since he did not know what exact charge he had to face. In this back ground, quashing of the penalty pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 22,68,82,660/-. The relevant discussion at the end of each of the addition reveals an observation by the Assessing Officer to the effect that Penalty u/s 271(1)(c) is initiated for furnishing of inaccurate particulars and concealment of income . Even in the penultimate para of the assessment order, the Assessing Officer has directed that Issue notice u/s 274 r.w.s. 271(1)(c) of the Income Tax Act, 1961 for furnishing of inaccurate particulars concealment of income . Thus, the assessment order speaks of satisfaction of the Assessing Officer that assessee has fallen within the purview of Sec. 271(1)(c) of the Act on account of having furnished inaccurate particulars as well as concealment of income. In fact, he concludes in the penultimate para to issue notice u/s 274 r.w.s. 271(1)(c) of the Act for furnishing of inaccurate particulars and for concealment of income. Now, we may examine the notice issued by the Assessing Officer u/s 274 r.w.s. 271(1)(c) of the Act of even date, a copy of which is placed at page 3 of the Paper Book. The said notice is in a standard form and its relevant portion reads as under:- *have concealed the particulars of your income or ........ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbay High Court in the case of Shri Samson Perinchery (supra), we are unable to accept the stand of the CIT(A) that the mistake in issue of notice does not invalidate the penalty proceedings. Therefore, on this aspect, we upheld the stand of the assessee. Accordingly, in view of our aforesaid discussion, the notice issued by the Assessing Officer u/s 274 r.w.s. 271(1)(c) of the Act dated 30.03.2015 is untenable as it is ambiguous, thus, suffering from the vice of non-application of mind having regard to the ratio of the judgment of Hon'ble Supreme Court in the case of Dilip N. Shroff (supra) and also the judgment of the Hon'ble Andhra Pradesh High Court in the case of Smt. Baisetty Revathi (supra). Thus, on this count itself, the penalty imposed u/s 271(1)(c) of the Act is liable to be deleted. We hold so. 14. Since the rival counsels have also addressed the Bench on merits of the levy, we may also discuss the same hereinafter. On this aspect, the plea of the assessee is that, in any case, the additions in question are otherwise genuine claims duly supported by bills and vouchers and their disallowance does not merit levy of penalty u/s 271(1)(c) of the Act. In order to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entire expenditure can be construed to be incurred wholly and exclusively for the purposes of the business of the company. As per the appellant, in the past year all these expenses have been allowed even by the Department. It is explained that the CBDT issued a Circular no. 5/2012 dated 01.08.2012 based on the amendments in the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 on 10.12.2009 called the Indian Medical Council (Professional Conduct, etiquette and Ethics) (Amendment) Regulations, 2009 laying down that the expenditure incurred by pharmaceutical companies on Doctors is not allowable as business deduction, being prohibited in law. It is contended that the said circular is, in any case, not applicable for the assessment year under consideration as the previous year has ended prior to the date of circular, as also held by the Mumbai Bench of the Tribunal in the case of Syncom Formulations (I) Ltd., ITA Nos. 6429 6428/Mum/2012 dated 23.12.2015. Secondly, it is canvassed that the Mumbai Bench of the Tribunal in the case of PHL Pharma (P.) Ltd., ITA No. 4605/Mum/2014 dated 12.01.2017 in relation to Assessment Year 2010-11 has held that s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d under similar circumstances. 18. With regard to the denial of deduction u/s 35(2AB) of the Act, it was explained that in the course of search, the search party noted that the claim u/s 35(2AB) of the Act also comprised of expenditure on raw material consumed which was transferred to the head research and development expenditure. The learned representative pointed out that Sec. 35(2AB) of the Act envisages claim which is based not only on directly incurred expenses of research and development, but also in relation to raw material consumed so long as the same is relatable to the research and development. In any case, the learned representative pointed out that there is no denying the fact that the impugned expenditure on raw material was otherwise allowable as normal business expenditure and that there is no material to establish that the claim was false in any manner. 19. Lastly, with regard to the denial of depreciation, herein also the learned representative pointed out that there was complete documentation evidencing the purchases of capital goods, but merely because some of the purchases were from so-called hawala dealers, assessee offered to tax the same in the statem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ling to ₹ 22,68,82,660/-, which has been offered in the statement u/s 132(4) of the Act at the time of search and which was not declared in the return of income filed on 28.09.2012, prior to the date of search, but has been declared in the return filed after the date of search u/s 153A(1) of the Act constitutes an income for which inaccurate particulars have been filed. In our considered opinion, the presumption of concealment or furnishing of inaccurate particulars prescribed in Explanation 5A to Sec. 271(1) of the Act does come into play in the instant case, but the moot question is whether such deeming effect is conclusive for imposition of penalty u/s 271(1)(c) of the Act or not? It is quite well understood, and which has been emphasised by the Hon'ble Supreme Court in the case of Anantharam Veerasinghaiah Co. vs. CIT, 123 ITR 457 (SC) that the assessment proceedings and penalty proceedings are independent and the findings in the assessment order would not be conclusive for the purpose of levy of penalty u/s 271(1) of the Act though the same may be one of the relevant considerations. To put it differently, it is to be noted that the manner and the reasons for assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such like cases, the quantum proceedings have regularly come up before the Tribunal, which are generally being decided in the light of the ratio of the judgment of the Hon'ble Gujarat High Court in the case of Simit P. Sheth, 356 ITR 451 (Gujarat) wherein it is held that what is finally assessable is the amount relatable to profit on unexplained purchases and not the entire amount. Therefore, it is not a case where it can be said that there is any specific evidence furnished by the search party which showed clinchingly false purchases made by the assessee. Similar is the situation with regard to depreciation denied on purchase of capital assets from so-called hawala/suspicious dealers listed by the VAT authorities. On both these points, we do not find that there is material to say that assessee had furnished inaccurate particulars within the meaning of Sec. 271(1)(c) of the Act. The last addition on which penalty has been levied is the denial of deduction u/s 35(2AB) of the Act to the extent of ₹ 9,15,58,910/-. As per the written submission of the assessee before the lower authorities, it is revealed that the said expenditure was incurred on purchase of raw materials whi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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