Non striking off clause in penalty notice u/s 271(1)(c) do not invalidate it. ITAT deviates from the Judgment of Karnataka High Court follows jurisdictional High Court
In a recent judgment, ITAT Mumbai has upheld the penalty u/s 271(1)(c) dismissing the contention of the assessee regarding not striking off of the relevant clause of inaccurate particular or concealed income in the notice.
ABCAUS Case Law Citation:
ABCAUS 1134 (2017) (02) ITAT
Date/Month of Pronouncement: February, 2017
Brief Facts of the Case:
A survey action u/s 133A was conducted on the group cases of assessee wherein certain material was found and seized. After survey the assessee was served notice under section 153A(a). In response to the notice the assessee filed its return of income. During the assessment the AO made addition of Rs.47,000/- under section 69C. The addition was made by AO holding that the assessee has made expenses in cash and has not reflected this expenditure in its books of account. No explanation was offered by assessee for not reflecting such expenditure in books of accounts. The Assessee contended there was no intention on the part of assessee to hide or suppress the income. The explanation of assessee was not accepted by AO holding that the levy of penalty is a civil liability and wilful concealment is not an initial ingredient for attracting civil liability. The AO levied the penalty @ 100% for concealment of income. On appeal before CIT(A) the action of AO was confirmed.
Contentions of the Appellant Assessee:
It was argued that while initiating penalty in the assessment order the AO had not clearly specified as to whether the penalty is initiated on account of concealment of income or for furnishing inaccurate particular. It was stressed that in the notice issued u/s 274 r.w.s. 271(1)(c), the AO had not clearly strike out if the penalty was initiated for concealment of income or for furnishing inaccurate particular.
The assessee had placed reliance on the judgment of the Hon’ble Gujarat High Court wherein it was held that where no clear finding was recorded by AO if the assessee was guilty of concealing income and/or furnishing inaccurate particular of income, the Tribunal was justified in deleting penalty under section 271(1)(c) of the act.
Contention of the Respondent Revenue:
It was contended that the AO while framing assessment had initiated penalty on both the charges and the same was clearly reflected in the order that assessee furnished inaccurate particular and concealed income.
Observations made by the Tribunal:
In the present case, the Tribunal observed that the AO had clearly recorded that “assessee furnished inaccurate particulars and concealed the income”.
The Tribunal relied on the judgment of the jurisdictional Bombay High Court in CIT Vs Smt. Kaushalya (1992). In the said judgment, the Hon’ble Bombay High Court had held as under;
“mere not striking off specific limb cannot by itself invalidate notice issued under section 274 of the Act. The language of the section does not speak about the issuance of notice. All that is required is that the assessee be given an opportunity of show cause. The issuance of notice is an administrative device for informing the assessee about the proposal of levy of penalty in order to enable him to explain why it should not be levied against him. If it is taken for the sake of argument that mere mistake in the language in the notice for non-striking off of ‘inaccurate particular’ or marking on ‘concealment of income’ portion cannot by itself invalidate the notice. Entire facts and backgrounds thereof are to be kept in mind. Every concealment of fact may ultimately result in filing of or furnishing inaccurate particular.”
Appeal of the assessee were dismissed
Issuance of show cause notice u/s 274 for imposing penalty u/s 271(1)(c) for concealment or furnishing inaccurate particulars of income in a pre-printed form without striking off the relevant clause has been held as defective for non application of mind by the Assessing Officer in number of judgments delivered by various Tribunals (ITATs) based on the landmark judgment of Hon’ble the Karnataka High Court in the case of Manjunatha Cotten and Ginning Factory.
Subsequent to the above judgment of 2012, the Revenue in 2015, in the case of M/s SSA’s Emerald Meadows (ABCAUS 800 (2015) (11) HC) again agitated the issue of non-striking off the relevant clause in the notice issued u/s 274. Again, a Division Bench of Hon’ble the Karnataka High Court again taking note of the Manjunatha Case dismissed the appeal filed by the Revenue holding that no substantial question of law arose for determination by the Court.
The Revenue challenged the judgment of the Karnataka High Court in in the case of M/s SSA’s Emerald Meadows before the Hon’ble Supreme Court by way of Special Leave Petition. However the Hon’ble Supreme Court in 2016 dismissed the SLP of the Income tax Department (ABCAUS 979A 2016 (08) SC) on the count of being devoid of any merit.
The aforesaid judgment(s) of the Karnataka High Court has been followed by many Tribunals by quashing the penalty proceedings on this count only. to quote a few:
|ITAT Kolkatta ABCAUS 799 (2015) (11) ITAT|
|ITAT Bangalore ABCAUS 780 (2015) (08) ITAT|
|ITAT Hyderabad ABCAUS 1095A (2017) (01) ITAT|
|ITAT Mumbai ABCAUS 982A (2016) (08) ITAT|
|ITAT Pune (2016) ABCAUS 1088A (2016) (12) ITAT|
It is to be noted that as per the aforesaid judgment of the ITAT Mumbai (ABCAUS 1134 (2017) (02) ITAT), there is no reference to the Judgment of Karnataka High Court in Manjunatha Cotten and Ginning Factory or M/s SSA’s Emerald Meadows. Neither the assessee seems to have brought the above judgments to the notice of the Tribunal.
However, ITAT Pune in a recent judgment while dealing with an identical issue, has dealt with all the above said judgments of the Hon’ble Karnataka and Bombay High Court.
The ITAT clarified that in the facts of the case before the Hon’ble Bombay High Court, the Hon’ble High Court had quashed the penalty levied for assessment year 1967-68. In respect of other two years where there was non-striking of inaccurate portion, the Hon’ble High Court held that the same would not invalidate the notice issued under section 274 in view of the fact that the assessment orders were also made and reasons for issuing notice under section 274 r.w.s. 271(1)(c) were recorded by the Assessing Officer and since the assessee fully knew in detail the exact charge of Department against him, it could not be said that either there was non-application of mind by the ITO or so-called ambiguity wording in the notice impaired or prejudiced the right of assessee of reasonable opportunity of being heard. It was in this background the Bombay High Court held that mere mistake in the language used or mere non-striking of inappropriate portion could not itself be invalidated the notice and the entire factual background would fall for consideration in the matter and no one aspect would be decisive.
In respect of assessment year 1967-68, even the Bombay High Court had acknowledged that there could exist a case where vagueness and ambiguity in the notice could demonstrate non-application of mind by the authority and / or ultimate prejudice to the right of opportunity of hearing contemplated under section 274. The show cause notice for assessment year 1967-68 was issued even before the assessment order was made and where the assessee had no knowledge of exact charge of Department against him as in the notice not only there was use of word ‘or’ between the group of cases but there was use of word ‘deliberately’ also. The Hon’ble High Court held that notice clearly demonstrated non-application of mind on the part of Assessing Officer and the vagueness and ambiguity in the notice had also prejudiced the right of reasonable opportunity to the assessee since he did not know of exact charges he had to face.
The Hon’ble Bombay High Court had clearly held that where there is vagueness and ambiguity in the notice issued which could demonstrate non application of mind by the authority which in turn, would ultimately prejudice the right of opportunity of hearing of the assessee as contemplated under section 274, then such notice is invalid.
Effect of SLP dismissal in the case of M/s SSA’s Emerald Meadows:
It is notable that while dismissing the SLP of the Revenue against the judgment of the Hon’ble Karnataka High Court in the case of M/s SSA’s Emerald Meadows it was stated by their Lordships that they did not find any merit in the petition.
In the case of Indian Oil Corporation Ltd. Vs. State of Bihar and Ors. AIR 1986 SC 1780, the Hon’ble Supreme Court explained the implication of the dismissal of SLP.
It was clarified that the effect of a non-speaking order of dismissal of a special leave petition, without anything more indicating the grounds or reasons of its dismissal must, by necessary implication, be taken to be that this Court had decided only that it was not a fit case where special leave should be granted. This conclusion may have been reached by this Court due to several reasons. When the order passed by this Court was not a speaking one, it is not correct to assume that this Court had necessarily decided implicitly all the questions in relation to the merits of the award, which was under challenge before this Court in the special leave petition.
It was further clarified that it is not the policy of Supreme Court to entertain special leave petitions and grant leave under Article 136 of the Constitution except in those cases where some substantial question of law of general or public importance is involved or there is manifest injustice resulting from the impugned order or judgment.
The dismissal of a special leave petition in limine by a non-speaking order does not therefore justify any inference that by necessary implication the contentions raised in the special leave petition on the merits of the case have been rejected by this Court. It may also be observed that having regard to the very heavy backlog of work in this Court and the necessity to restrict the intake of fresh cases by strictly following the criteria aforementioned, it has very often been the practice of this Court to grant special leave in cases where the party cannot claim effective relief by approaching the concerned High Court under Article 226 of the Constitution.
Again, the Hon’ble Supreme Court in the case of Kunhayammed & Ors. Vs. State of Kerala & ANR dealt with the issue of dismissal of SLP in details and stated that while hearing the petition for special leave to appeal, the Court is called upon to see whether the petitioner should be granted such leave or not. While hearing such petition, the Court does not exercise its appellate jurisdiction; but it merely exercises its discretionary jurisdiction to grant or not to grant leave to appeal. The petitioner still remains outside the gate of entry though aspiring to enter the appellate arena of Supreme Court. Whether he enters or not would depend on the fate of his petition for special leave.
If leave to appeal is granted the appellate jurisdiction of the Court stands invoked; the gate for entry in appellate arena is opened. The petitioner is in and the respondent may also be called upon to face him, though in an appropriate case, in spite of having granted leave to appeal, the court may dismiss the appeal without noticing the respondent.
The Hon’ble Apex Court summing up the conclusion stated as under:
- An order refusing special leave to appeal may be a nonspeaking order or a speaking one. In either case it does not attract the doctrine of merger. An order refusing special leave to appeal does not stand substituted in place of the order under challenge. All that it means is that the Court was not inclined to exercise its discretion so as to allow the appeal being filed.
- If the order refusing leave to appeal is a speaking order, i.e. gives reasons for refusing the grant of leave, then the order has two implications. Firstly, the statement of law contained in the order is a declaration of law by the Supreme Court within the meaning of Article 141 of the Constitution. Secondly, other than the declaration of law, whatever is stated in the order are the findings recorded by the Supreme Court which would bind the parties thereto and also the court, tribunal or authority in any proceedings subsequent thereto by way of judicial discipline, the Supreme Court being the apex court of the country. But, this does not amount to saying that the order of the court, tribunal or authority below has stood merged in the order of the Supreme Court rejecting special leave petition or that the order of the Supreme Court is the only order binding as res judicata in subsequent proceedings between the parties.
In the instant case of Kunhayammed & Ors (supra), the Hon’ble Supreme Court while disposing off the appeal stated that the prayer contained in the petition seeking leave to appeal by the State of Kerala against the High Court of Kerala was found devoid of any merits and hence dismissed. The order was a non- speaking and unreasoned order. All that can be spelled out is that the Court was not convinced of the need for exercising its appellate jurisdiction. The order of the High Court did not merge in the order passed by Supreme Court so it was available to be reviewed by the High Court.
In view of the various judgments of the Hon’ble Supreme Court, the dismissal of SLP in the case of SSA’s Emerald Meadows appears to be non-speaking order. Therefore it does not justify inference that by necessary implication the contentions raised in the SLP have been rejected by the Supreme Court.