Penalty notice without specific charges when assessee had no confusion as to if it was for concealment or inaccurate particulars as appeared from his reply. Penalty Upheld by ITAT
ABCAUS Case Law Citation:
ABCAUS 1207 (2017) (04) ITAT
The assessee was aggrieved by order passed by the CIT(A) in confirming the penalty imposed by the Assessing Officer (‘AO’) under section 271(1)(c) of the Income Tax Act, 1961 (‘the Act’).
Assessment Year : 2008-09
Date/Month of Pronouncement: April, 2017
Important Case Laws Cited/relied upon:
- New Sorathia Engineering Co. (282-ITR-642) (Gujarat) • Amrut Tubewell Co. (275-CTR-86) (Gujarat) • Jyoti Ltd. (216-Taxman-64) (Gujarat) • Whiteford India Ltd. (219-Taxman-98) (Gujarat) • Mukeshchandra Lakdawala (4-ITR (Trib)-307) (Ahmedabad) • Sandhya Gadkari Sharma (181-TTJ-462) (Mumbai Tribunal) • Siddharaj Developers P.Ltd.(ITA No.185/Ahd/2008) • Union Electric Corporation (281-ITR-266) (Gujarat) • Oriental Power Cable Ltd. (219-CTR-62) (Rajasthan) • SSP Pvt. Ltd. (302-ITR-43) (Punjab & Haryana) • Price Waterhouse Coopers P.Ltd., 348 ITR 306
Brief Facts of the Case:
The appellant assessee was an individual and had filed his return of income electronically. The case of the assessee was selected for scrutiny assessment and notice under section 143(2) was issued and served upon the assessee. On scrutiny of accounts, the AO noticed that the assessee had claimed the benefit of housing loan interest expenditure of Rs. 18,77,520/- u/s 24(b) of the Act under the head ‘income from house property’. The interest was related to two flats which were purchased by the assessee’s wife and later transferred to the assessee vide her “Vasiatnama” giving ownership of flats to the assessee.
The assessee had claimed that these flats were possessed by him and not rented out. According to the AO for self-acquired property the assessee could not have claimed interest expenditure exceeding Rs. 1.50 lakhs as contemplated in section 24(b) of the Act. When the assessee wa confronted on this aspect, he did not file any reply, but ultimately had accepted the disallowance of Rs.17,27,520/- out of the claim of Rs.18,77,520/-. Consequently, the AO allowed the deduction to the extent of Rs.1.50 lakhs on account of interest expenditure and disallowed the balance.
Similarly, the assessee had received a refund from Income Tax Department amounting to Rs.13,40,740/-. The said refund also contained the interest component of Rs.32,700/-. The assessee had failed to include this interest component, and accordingly, it was added to the income of the assessee.
The AO initiated penalty proceedings on the ground that the assessee had furnished inaccurate particulars of his income. Accordingly, he issued a show cause notice to the assessee. However, being not satisfied with the contentions of the assessee, the AO held that the assessee had furnished inaccurate particulars of his income. Accordingly, the AO imposed penalty of Rs. 5,28,066/-, which was 100% equivalent to the tax sought to be evaded to by the assessee.
The assessee aggrieved with the penalty appealed to the CIT(A) but without any success. Hence the assessee was in appeal before the Tribunal (‘ITAT’).
Contentions of the Appellant:
The assessee raised two fold submissions.
- It was submitted that there was no clarity as to whether penalty was imposed for furnishing inaccurate particulars of income or concealment of particulars of income. Since the AO had failed to specify the charge against the assessee, therefore, penalty is not imposable upon the assessee.
- It was pointed out that there was an inadvertent mistake and the assessee made the claim under a bona fide belief that whole interest is allowable.
Observations made by the Tribunal:
The Tribunal observed that one of the important features of section Section 271(1)(c) is deeming provisions regarding concealment of income. The section not only covered the situation in which the assessee has concealed the income or furnished inaccurate particulars, in certain situation, even without there being anything to indicate so, statutory deeming fiction for concealment of income comes into play. This deeming fiction, by way of Explanation I to section 271(1)(c) postulates two situations; (a) first whether in respect of any facts material to the computation of the total income under the provisions of the Act, the assessee fails to offer an explanation or the explanation offered by the assessee is found to be false by the Assessing Officer or CIT(Appeal); and, (b) where in respect of any fact, material to the computation of total income under the provisions of the Act, the assessee is not able to substantiate the explanation and the assessee fails, to prove that such explanation is bona fide and that the assessee had disclosed all the facts relating to the same and material to the computation of the total income. Under first situation, the deeming fiction would come to play if the assessee failed to give any explanation with respect to any fact material to the computation of total income or by action of the Assessing Officer or the CIT(Appeals) by giving a categorical finding to the effect that explanation given by the assessee is false. In the second situation, the deeming fiction would come to play by the failure of the assessee to substantiate his explanation in respect of any fact material to the computation of total income and in addition to this the assessee is not able to prove that such explanation was given bona fide and all the facts relating to the same and material to the computation of the total income have been disclosed by the assessee. These two situations provided in Explanation 1 appended to section 271(1)(c) makes it clear that that when this deeming fiction comes into play in the above two situations then the related addition or disallowance in computing the total income of the assessee for the purpose of section 271(1)(c) would be deemed to be representing the income in respect of which inaccurate particulars have been furnished.
Penalty Notice without specific charges for which penalty is to be levied against the assessee
The ITAT observed that in the assessment order while recording satisfaction for initiation of penalty, the AO had recorded a categorical satisfaction that the assessee has furnished inaccurate particulars of income.
Further, it was observed that show cause notice had been replied by the assessee and perusal of the reply indicated that the assessee was duly confronted with specific charges of furnishing inaccurate particulars. Moreover, from the reply of the assessee it was not discernable that there was any confusion in his mind as to the charges alleged while preparing his defense. Therefore, the judgments relied by the assessee could not bring any benefit on facts.
Bona fide mistake
With repect to the decision of the Hon’ble Supreme Court in the case of Price Waterhouse Coopers which was relied upon by the assessee, the Tribunal found that the Hon’ble Supreme Court had considered explanation of the assessee as to what has operated in the mind of assessee while filing return which led the assessee to commit mistake.
The ITAT noted that in that case, according to the assessee, in the audit report under section 44AB there was a specific mention that provision for gratuity will not be allowable. However, while filing return, this provision was not added back in the total income of the assessee. When the assessee was confronted to explain how this mistake has happened, then it was disclosed that there were around 1000 employees. The assessee has separate accounts department which maintains day-to-day accounts, pay-roll etc. There were certain employees who were taken in the role for an anticipated work. They were not members of an approved gratuity fund created for other employees of the assessee. Under these circumstances, in the audit report, the provision pertaining to gratuity for those employees was referred as not admissible as a deduction. However, in the computation of income, this amount was not added back. It was an error committed by the clerk or an employee, who has made the computation. The Hon’ble Supreme Court had held that it was an human error because in the audit report specific mention of section 40A(7) was made wherein it was alleged that the provision made for gratuity is not allowable as deduction under these circumstances. The Hon’ble Supreme Court considered that there was no intention to conceal its income.
The Tribunal observed that in the present case, nothing similar to that sort had been pointed out. The assessee was asked to explain what had operated in his minds when he had filed the return or what led the assessee to include the total interest expenditure as allowable expenditure. Neither it had been alleged that on advice of tax consultant, it was claimed as allowable expenditure, nor was the case of the assessee that without verification of the facts, he has signed the return under a bona fide mistake, which was prepared by the clerk in the tax consultant office. Thus the ITAT observed that under these circumstances, the assessee could not draw benefit of the proposition laid down in the decision of the Apex Court.
It was held that the Revenue authorities had appreciated the facts in right perspective and there was no reason to interfere in the finding of the CIT(A). Appeal of the assessee was dismissed.
Regarding the contention of the assessee for non-specific charges in the show cause notice u/s 274, it appears the landmark judgment of the Hon’ble Karanatak High Court in Manjunatha Cotton & Ginning Factory which was followed in SSA’s Emerald Medows wherein the SLP of the Revenue was dismissed by the Apex Court was neither relied upon by the assessee not brought to the knowledge of the Tribunal.