TMI Blog2018 (3) TMI 1597X X X X Extracts X X X X X X X X Extracts X X X X ..... 03.2016, which in itself arises from the order passed by the A.O under Sec. 271(1)(c) of the Income tax Act, 1961 (for short Act ), dated 26.09.2014. The assessee had raised before us the following grounds of appeal:- 1. CONFIRMATION OF PENALTY LEVIED U/S 271(1)(c) OF THE I.T. ACT, 1961 OF ₹ 12,14,140/- 1. The Learned CIT(A) erred in conf irming penalty u/s 271(l)(c) of the I.T. Act of ₹ 12,14,140/- being @ 100% of tax on disallowance of interest expenses u/s 57 of ₹ 39,29,247/-. 2. The Learned CIT(A) ought not to have confirmed penalty u/s 271(1)(c) of the I.T. Act of ₹ 12,14,140/-. 3. The penalty confirmed u/s 271(1)(c) of ₹ 12,14,140/- requires to be deleted. The appellant craves leave to add amend, alter or modify the ground or grounds of appeal before the hearing. The assessee had further assailed before us the validity of the penalty imposed under Sec. 271(1)(c) by raising the following additional grounds of appeal: II. INITIATION OF PENALTY U/S 271(1)(c) IS BAD IN LAW: 1. The initiation of penalty u/s 271(1)(c) under both the limb for furnishing of inaccurate particulars of income and concealment of income is bad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome shown loss from other sources of ₹ 37,55,217/-. The A.O after perusing the computation of income of the assessee observed that the assessee had claimed net loss of ₹ 39,29,243/- on account of interest paid to parties, which was adjusted by him against the interest income from bank and NSC of ₹ 1,72,014/. It was further observed by the A.O that the balance loss of ₹ 37,55,217/- [i.e ₹ 39,29,243/- (-) ₹ 1,72,014/-] was adjusted by the assessee against his income from business. The A.O called upon the assessee to justify the allowability of excess claim of deduction under Sec. 57 on the basis of supporting documentary evidence. The assessee in his reply submitted that he had during the year under consideration raised an interest bearing loan from M/s Laxmi Corporation on which interest of ₹ 76,84,062/- was paid. The assessee claimed that the aforesaid interest bearing borrowed funds were utilized by him for giving loans to certain parties from whom interest of ₹ 45,94,819/- was received. It was thus the claim of the assessee that as there was a clear nexus between the loan taken from M/s Laxmi Corporation and the interest bearing l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that as he had furnished complete details as regards the interest received and interest paid on the borrowed funds, therefore, no penalty under Sec.271(1)(c) on rejection of his claim for deduction under Sec. 57(iii) was liable to be imposed. However, the A.O not persuaded to be in agreement with the aforesaid explanation of the assessee imposed penalty of ₹ 12,14,140/- under Sec. 271(1)(c) for furnishing of inaccurate particulars of income as regards his claim of deduction of ₹ 39,29,247/- under Sec. 57(iii) of the Act. 7. Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) after deliberating on the facts of the case observed that the assessee who had borrowed funds of ₹ 11 crores from M/s Laxmi Coporation had however utilized only an amount of ₹ 2.75 crores for earning of income from other sources. It was observed by the CIT(A) that though only part of the borrowed funds were utilized by the assessee for earning of the interest income, but however, the deduction was wrongly claimed in respect of the interest expenditure on the entire amount of the borrowed funds of ₹ 11 crores. The CIT(A) observed that as the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was not put to notice in clear terms of the default/defaults for which he was called upon to show cause as to why penalty under Sec. 271(1)(c) may not be imposed on him, therefore, there was no occasion for him to defend his case and establish that no penalty under the aforesaid statutory provision was called for in his hands. The ld. A.R submitted that the A.O dispensing with the statutory requirement of putting the assessee to notice as regards the default/defaults for which penalty was sought to be imposed on him, had thereafter vide his order dated 26.09.2014 levied a penalty of ₹ 12,14,140/- under Sec. 271(1)(c) for furnishing of inaccurate particulars of income. It was thus the contention of the ld. A.R that as the specific default/defaults for which the A.O sought to impose penalty in the hands of the assessee had not been earmarked and pointed out by the A.O in the Show cause notice, therefore, the assessee had remained unaware of the default/defaults for which he was called upon to explain as to why penalty may not be imposed in his hands. The ld. A.R submitted that as the penalty had been imposed in the hands of the assessee for furnishing of inaccurate particul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the receipt of this notice and show cause why an order imposing a penalty on you should not be made under section 271 of the Income-tax Act, 1961. If you do not wish to avail yourself of this opportunity of being heard in person or through authorised representative you may show cause in writing on or before the said date which will be considered before any such order is made under section 271(1)(c). Sd//- Place : Mumbai (Rupesh Aggarwal) Date : 05/03/2014 DY. Commissioner of Income-tax-10(2) Mumbai We find substantial force in the contention of the ld. A.R that as the aforesaid Show cause notice was issued by the A.O in the standard proforma, viz. Form I.T.N.S-29 without clearly and specifically pointing out the default/defaults, therefore, it can safely be concluded that the assessee was never informed of the default/defaults as regards which he was called upon to put forth an explanation as to why penalty under Sec. 271(1)(c) may not be imposed on him. We are of the considered view that as both of the two defaults contemplated in Sec. 271(1)(c), viz. concealment of income and furnishing of inaccurate particulars of income are separate and distinct default ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f them, is not merely an idle formality, but rather, is a statutory obligation cast upon him, which we are afraid had not been discharged in the present case as required under the law. We find that though the A.O while framing the assessment had recorded his satisfaction that the penalty proceedings were separately being initiated for furnishing inaccurate particulars of income and concealment of income, but however, by pointing out in the Show cause notice that the assessee appears to have concealed the particulars of his income or furnished inaccurate particulars of such income, had thus failed to come forth with a clear and a specific charge for which the assessee was being called upon to explain as to why penalty may not be imposed on him under Sec. 271(1)(c). We are of the considered view that the blatant failure on the part of the A.O to specifically and clearly put the assessee to notice as regards the default/defaults for which penalty was sought to be imposed clearly militates against the mandate of affording of a reasonable opportunity of being heard to the assessee as contemplated under Sec. 274(1) of the Act. We may herein observe that as held by the Hon ble Supreme C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind by the A.O, had observed as under:- 83. It is of some significance that in the standard proforma used by the Assessing Officer in issuing a notice despite the fact that the same postulates that inappropriate words and paragraphs were to be deleted, but the same had not been done. Thus, the Assessing Officer himself was not sure as to whether he had proceeded on the basis that the assessee had concealed his income or he has furnished inaccurate particulars. Even before us, the learned Additional Solicitor General while placing reliance on the order of assessment laid emphasis that he had dealt with both the situations. 84. The impugned order, therefore, suffers from non-application of mind. It was also bound to comply with the principles of natural justice [See Malabar Industrial Co. Ltd. Vs. CIT (2000) 2 SCC 718]. We are of the considered view that now when as per the settled position of law as observed by us hereinabove, the two defaults, viz. concealment of income and furnishing of inaccurate particulars of income are separate and distinct defaults, therefore, in case the A.O sought to have proceeded against the assessee for both of the said defaults, then it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Meherjee Cassinath Holdings Pvt. Ltd.(supra) had observed as under:- 8. We have carefully considered the rival submissions. Sec. 271(1)(c) of the Act empowers the Assessing Officer to impose penalty to the extent specified if, in the course of any proceedings under the Act, he is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income. In other words, what Sec. 271(1)(c) of the Act postulates is that the penalty can be levied on the existence of any of the two situations, namely, for concealing the particulars of income or for furnishing inaccurate particulars of income. Therefore, it is obvious from the phraseology of Sec. 271(1)(c) of the Act that the imposition of penalty is invited only when the conditions prescribed u/s 271(1)(c) of the Act exist, It is also a well accepted proposition that 'concealment of the particulars of income' and 'furnishing of inaccurate particulars of income' referred to in Sec. 271(1)(c) of the Act denote different connotations. In fact, this distinction has been appreciated even at the level of Hon ble Supreme Court not only in the case of Dilip N. Shroff (supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and having regard to the parity of reasoning laid down by the Hon ble Supreme Court in the case of 0/lip 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 Id. 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/s27)4(c) of the Act for furnishing of inaccurate particulars of income in our considered opinion, the attempt of the Id. CIT-DR to demonstrate application of mind by the Assessing Officer is no defence inasmuch as the Hon'ble Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndication 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 AG 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 AG, 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 proceedings for the assessment year 1967-68 seems to be fully j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, in view of the aforesaid discussion, in our view, the notice issued by the Assessing Officer u/s 274 r.w.s. 271(1)(c) of the Act dated 10.12.2010 is untenable as it suffers from the vice of non- application of mind having regard to the ratio of the judgment of the Hon ble Supreme Court in the case of Dilip N. Shroff (supra) as well as the judgment of the Hon'ble Bombay High Court in the case of Shri Samson Perinchery (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. Since the penalty has been deleted on the preliminary point, the other arguments raised by the appellant are not being dealt with . 12. We have given a thoughtful consideration to the issue before us, and after deliberating on the facts are of the considered view that now when the A.O after recording his satisfaction had initiated the penalty proceedings in the body of the assessment order for furnishing inaccurate particulars and concealment of income, therefore, putting the assessee to notice and calling upon him to explain as to why penalty may not be imposed on him under Sec. 271(1)(c) for concealment of income or furnishing of ina ..... X X X X Extracts X X X X X X X X Extracts X X X X
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