TMI Blog2023 (4) TMI 98X X X X Extracts X X X X X X X X Extracts X X X X ..... he inappropriate part and a vague notice showing tentative nature of default in the form of either/or has been issued to the Assessee. The penalty proceedings sans strike off in the penalty notice and also in the assessment order thus is wholly unsustainable in law. We thus find apparent merit in the plea of the assessee - in the absence of satisfaction qua the nature of default committed, the initiation of penalty proceedings itself is a complete non-starter and consequent imposition of penalty is clearly vitiated in law. The imposition of penalty in question is thus liable to be quashed and set aside on this ground alone. Non fulfillment of prerequisites before invoking Explanation-5A to Section 271(1)(c) of the Act - In the present case, the penalty flows from a mere disclosure in the course of statement recorded under Section 132(4) of the Act at the time of search operation. No averments are found in the assessment order or in the penalty order to the effect that any asset as specified in Explanation 5A(i) has been found or income is based on entry in any books of account or other documents or transaction referred under clause (ii) to Explanation 5A which can be said t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst the assessee is totally vague and unintelligible qua the nature of default and thus totally unsustainable in law. To reiterate, it is not known whether the satisfaction is qua concealment of particulars or towards furnishing inaccurate particulars of income . While drawing the satisfaction, the charge against the assessee is not known. Coupled with this, similar to other appeals supra, the notice issued under Section 274 r.w. Section 271(1B) is vague and non-descript and does not meet the requirement of law. Addition towards wrong claim of speculative loss as business loss - HELD THAT:- AO has changed the character of the loss from business loss to speculative loss both of which are assessable under the same head of income, i.e., income from business / profession notwithstanding restrictive rules applicable for set off of speculative losses. While it is the case of the assessee that the loss has arisen from the activity of hedging and thus do not fall within the sweep of deeming fiction of S. 43(5) - AO disputed the claim of the Assessee on the ground that assessee is only a broker and does not require any hedging. On this point of difference, the loss has been rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asionally as per need based requirements. All the relevant facts were placed on record in this regard. Thus, the penalty cannot be visited on the bona fide claim of the assessee. The disallowance in the assessment proceedings, we find merit in the plea. The penalty has been levied on the ground of disallowance of rent expenses due to non usage of such guest house. In the light of the decision rendered in Reliance Petro Products [ 2010 (3) TMI 80 - SUPREME COURT] penalty under Section 271(1)(c) on such alleged wrong claim is totally unjustified. The penalty is thus reversed and cancelled on merits. The exercise of power for initiating penalty under Section 271(1)(c) is dependent upon a categorical satisfaction of the AO in the course of the assessment proceedings towards the nature of alleged default which is clearly absent in the present case and consequently the penalty proceedings initiated without requisite satisfaction is a nullity. The consequent penalty order thus requires to be quashed at the threshold. 49. The action of the CIT(A) thus requires to be reversed and the penalty imposed in question is required to be quashed both on merits as well as on the legal groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 153A, it is noticed that the Assessing Officer in paragraph 3 of the assessment order has admitted that the disclosure made under Section 132(4) of Rs.65 lakh was duly included in the return of income and assessed without any demur. The Assessing Officer however observed that without search, such disclosure would not have come and therefore, he is satisfied that assessee is liable to pay penalty under Section 271(1)(c) of the Act. The penalty notice under S. 274 r.w.s 271(1)(c) were issued and impugned penalty order dated 24.08.2015 was framed for the Assessment Year 2008-09 in question wherein Explanation-5A to Section 271(1)(c) was invoked to levy penalty under Section 271(1)(c) of the Act in question. 7. In the first appeal by the assessee, the CIT(A) denied any relief and confirmed the action of the Assessing Officer towards imposition of penalty under Section 271(1)(c) r.w. Explanation-5A thereto of the Act. 8. Further, aggrieved, the assessee preferred appeal before the Tribunal. 9. We have dispassionately considered the rival submissions and material placed before us and adverted to. The solitary issue that arises for consideration is whether the Assessing Officer w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations, it is incumbent upon the AO to satisfy himself before initiation of penalty proceedings that the case of the assessee falls either under the first limb or under the second limb. A mandatory presence of the requisite satisfaction of the AO before initiating the penalty proceedings has been affirmed by the courts. A reference is made to CIT v. S.V. Angidi Chettiar (1962) 44 ITR 739 (SC); D.M. Manasvi v. CIT [1973 AIR 22] (SC); CIT v. Manjunatha Cotton and Ginning Factory [359 ITR 565] [Kar.] in this regard. 9.2.2 Hence, in the backdrop of judicial pronouncements, satisfaction of the AO vis a vis the nature of default is a sine qua non and required to be indicated by express assertion to this effect in the course of assessment proceedings. Conventionally, to comply with the requirement of law, the satisfaction towards exact nature of default committed by Assessee is recorded in the assessment order and in the penalty notice issued in this regard by striking off the inapplicable portion in the notice u/s 274 r.w.s. 271(1)(c) of the Act. 9.2.3 Significantly Section 271(1B) was inserted by Finance Act, 2008 with retrospective effect from 1-4-1989 which also addresses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y applicable. 9.2.5 The constitutionality of the above amendment was challenged in the Hon ble Delhi High Court in the case of Madhushree Gupta v. UOI [WP (C) No. 5059 of 2008]. While contemplating on the constitutionality of the said amendment, the Hon ble High Court interpreted the provisions of section 271(1B) in conjunction with section 271(1)(c) and made very important observations as noted hereunder: The contra-submission of the learned ASG that prima facie satisfaction of the Assessing Officer need not be reflected at the stage of initiation but only at the stage of imposition of penalty is in the teeth of Section 271(1)(c) of the Act. Section 271(1)(c) has to be read in consonance of Section 271(1B). The presence of prima facie satisfaction for initiation of penalty proceedings was and remains a jurisdictional fact which cannot be wished away as the provision stands even today, i.e., post amendment. If an interpretation such as the one proposed by the Revenue is accepted then, in our view, the impugned provision will fall foul of Article 14 of the Constitution as it will then be impregnated with the vice of arbitrariness. The Assessing Officer would in such a situat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lty proceedings u/s 271(1)(c) are initiated separately do not comply with the meaning of the word direction as contemplated in amended section 271(1B) of the Act. 9.2.8 In view of the above judicial pronouncements, both pre and post insertion of S. 271(1B), the position of law emerges is that for initiation of penalty proceedings, the assessment order must categorically record the specific charge or default alleged. Failing to do so or where the allegation of default committed is vague or non specific, the so called deemed satisfaction contemplated under S. 271(1B) can not be validated in law. 9.3 On facts, as quoted in the assessment order in the present case, the averments concerning directions and consequent deemed satisfaction of the AO under S. 271(1B) reads as Hence, I am satisfied that penalty u/s 271(1)(c) of the Income Tax Act has to be initiated for which notice u/s 274 r.w.s. 271(1)(c) is being issued separately . Manifest as it is, the AO has most casually initiated the penalty proceedings without choosing to specify any limb. Clearly, the act of the AO is vitiated by the non application of mind about the nature of default and, in consequence, vitiates the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the time of search operation. No averments are found in the assessment order or in the penalty order to the effect that any asset as specified in Explanation 5A(i) has been found or income is based on entry in any books of account or other documents or transaction referred under clause (ii) to Explanation 5A which can be said to correspond with such declaration. 10.1 On appraisal, we find force in the plea of the assessee for non applicability of Explanation-5A in the peculiar facts of the case. It is trite that the Explanation 5A being penal in nature requires strict construction. The prerequisites towards applicability of Explanation-5A has not been demonstrated by the Revenue either in the penalty order or the first appellate order thereon. 10.2 Thus, the imposition of penalty under the shelter of Explanation 5A is clearly without sanction of law. 11. In conclusion, we find merit in the plea of the assessee on both counts. Consequently, the order of the CIT(A) is set aside and the penalty order seeking to impose penalty in question stands quashed. 12. In the result, the appeal of the assessee is allowed. ITA No.939/Del/2019 (Assessment Year 2009-10) : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt on the fulfillment of conditions enumerated in Explanation-5A. No specific reference to any asset or documents, which may label the alleged concealment of income, is found. The addition and consequent penalty appears to be on the basis of surrender made alone. It is true that Explanation-5A provides an exception and departure to the general rule that a concealment is committed vis- -vis the return filed and the Explanation 5A can be invoked towards undisclosed income found in the course of search despite its subsequent inclusion in ROI subject however to the fulfillment of specific conditions. 13.3 The conditions provided in Explanation-5A are not shown to have been satisfied in any manner. Hence, in parity with ITA No.2631/Del/2018, Assessment Year 2008-09 in identical fact situation, the plea of the assessee succeeds. The first appellate order is set aside and the Assessing Officer is directed to delete the penalty in question. 14. In the result, the appeal of the assessee is allowed. ITA No.940/Del/2019 Assessment Year 2010-11 15. The factual matrix in AY 2010-11 is also identical to penalty appeals in AY 2008-09 and 2009-10 (supra). 15.1 As per the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty on disallowance under Section 35D of the Act. While framing the assessment order, the Assessing Officer inter alia observed that further also satisfied that the assessee has concealed his income or filed inaccurate particulars to the extent as discussed in paragraphs 4, 5, 6 and 7 and thereby liable for initiation of penalty under Section 271(1)(c) of the Act. Thus, in the light of understanding on law developed in ITA No. 2631/D/2019 (supra), it is apparent from the directions of the Assessing Officer towards deemed satisfaction of default against the assessee is totally vague and unintelligible qua the nature of default and thus totally unsustainable in law. To reiterate, it is not known whether the satisfaction is qua concealment of particulars or towards furnishing inaccurate particulars of income . While drawing the satisfaction, the charge against the assessee is not known. 18.2 Coupled with this, similar to other appeals supra, the notice issued under Section 274 r.w. Section 271(1B) is vague and non-descript and does not meet the requirement of law. 19. Hence, the penalty order framed without requisite satisfaction towards nature of default at the time of ini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laimed as business loss. The Assessing Officer however treated the loss on forward trading to be speculative losses while framing the assessment under Section 153A of the Act. In effect, loss was treated as speculative loss by virtue of legal fiction of S. 43(5) of the Act instead of business loss and consequently the set off of such loss was not allowed against the normal business income as per the scheme of the Act. Having made the addition/disallowances, the Assessing Officer observed that I am satisfied that the assessee has concealed income or filed inaccurate particulars as discussed in paragraphs 4, 5, 6 and 7 and thereby liable for initiation of penalty under Section 271(1)(c) of the Act. A penalty notice under Section 274 r.w. Section 271(1)(c) was issued and penalty @ 100% on such additions were made. 28. Aggrieved, the assessee preferred appeal before the CIT(A). The CIT(A) referred to the judicial pronouncements and observed that mere treatment and re-classification of claim towards business loss as speculative loss by the Assessing Officer did not automatically warrant inference on concealment of income as alleged. The operative paragraph of the order of the CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) was not sustainable as mere treatment of business loss as speculation loss by the Assessing Officer did not automatically warrant inference of concealment of income and there was nothing on record to show that in furnishing its return of income, the assessee had either concealed its income or had furnished any inaccurate particulars of income. Similarly in the case of CIT -vs.- Bhartesh Jain [323 ITR 358 (Delhi)], the Hon'ble Delhi High Court held that mere treatment of business loss as speculation loss would not justify levy of penalty under section 271(1) (c). Keeping in view the ratio of the judicial pronouncements relied upon by the learned counsel for the Assessee, which decisions are squarely applicable in the present case, we find no infirmity in the impugned order of the Id. CIT(Appeals) cancelling the penalty imposed by the Assessing Officer under section 271(1)(c) and upholding the same, we dismiss this appeal filed by the Revenue. In view of the facts of the case in this regard and the judicial pronouncements relied upon on this issue, the penalty on addition related to disallowance of deduction claimed under Section 35D of the Act is confirmed. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even on merits. 34. The penalty action of AO is unsustainable in law on both counts, i.e., lack of satisfaction at the time of initiation of penalty proceedings as well as absence of any concealment on merits. We thus see no error in the order of the CIT(A). Consequently, we decline to interfere with the order of the CIT(A). 35. In the result, the appeal of the Revenue is dismissed. ITA No.812/Del/2019 Assessment Year 2012-13 36. As per its grounds of appeal, the Revenue has challenged the order of the CIT(A) towards deletion of penalty under Section 271(1)(c) of the Act imposed on the assessee for wrongly claiming speculative loss of Rs.2,33,69,140/- as business loss. The CIT(A) has adjudicated the issue in favour of the assessee and reversed the penalty imposed as under: 5.3.1 (b) Addition of Rs. 2,33,69,140/- on account of disallowance of loss on forward commodity 5.3.2 During the year under consideration, the appellant had incurred a loss of Rs. 2,33,69,140/- on forward trading in commodities. The A treated the transaction as speculative loss and therefore did not allow the loss. This disallowance was upheld by CIT(A). Thereafter, AO imposed pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reatment of business loss as speculation loss would not justify levy of penalty under section 271(1)(c). Keeping in view the ratio of the judicial pronouncements relied upon by the learned counsel for the Assessee, which decisions are squarely applicable in the present case, we find no infirmity in the impugned order of the Id. CIT(Appeals) cancelling the penalty imposed by the Assessing Officer under section 271(1)(c) and upholding the same, we dismiss this appeal filed by the Revenue. In view of the facts of the case and the judicial pronouncements relied upon on this issue, the penalty on this addition cannot be sustained and hence deleted. 5.3.5 (c) Addition of Rs. 6,60,000/- made on account of ingenuine claim of guest house rent The appellant had claimed Rs. 6,60,000/- on account of rent paid for guest house which was disallowed by the A0 on the ground that same has never been used as guest house. The appellant neither during assessment proceedings not appellate proceedings filed any proof to prove the contention that the property for which rent of Rs. 6,60,000/- was in fact used as a guest house for the company during the year under consideration and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art of money has been utilized for setting up of new plants also and therefore, allowed the expenses proportionately. The Assessing Officer thus eventually disallowed Rs.5,77,02,769/- claimed as deduction under Section 35D of the Act. The Assessing Officer thereafter observed in the assessment order that I am satisfied that assessee has concealed his income or has filed inaccurate particulars to the extent of this amount and therefore liable for initiation of penalty under Section 271(1)(c) of the Act. 41. Aggrieved, the assessee preferred appeal before the CIT(A) for cancellation of penalty. The assessee however did not get any relief from the CIT(A). 42. Further aggrieved, the assessee preferred appeal before the Tribunal. 43. We have carefully considered the rival submissions and perused the first appellate order, penalty order and assessment order. 44. The challenge of the assessee to the imposition of penalty under Section 271(1)(c) are two fold (i) no requisite satisfaction was recorded by the Assessing Officer before initiation of penalty (ii) mere disallowance of expenses claimed is not justified where all the particulars in relation to claim of expenses were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t pass the test of S. 35D. In such circumstances, we see substantial merit on facts in the plea of the assessee towards inapplicability of Section 271(1)(c) of the Act on a highly debatable issue. 46. It is next observed that penalty has also been imposed towards rent expenses of guest houses on the ground that two houses are locked at the time of post search inquiry and have not been used as guest house. In defense, the assessee submitted that the guest house has been actually found to be taken on rent by the AO and claim of the expenses is not dependent on actual usage of the guest house. The guest house is used occasionally as per need based requirements. All the relevant facts were placed on record in this regard. Thus, the penalty cannot be visited on the bona fide claim of the assessee. 47. Notwithstanding the disallowance in the assessment proceedings, we find merit in the plea. The penalty has been levied on the ground of disallowance of rent expenses due to non usage of such guest house. In the light of the decision rendered in Reliance Petro Products (supra), penalty under Section 271(1)(c) on such alleged wrong claim is totally unjustified. The penalty is thus reve ..... X X X X Extracts X X X X X X X X Extracts X X X X
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