Penalty U/s 271(1)(c)-Unspecified charge in notice can be made good with a clear-cut finding in penalty order – ITAT explains Law on non-striking off clauses in Notice u/s 274
ABCAUS Case Law Citation:
ABCAUS 2678 (2018) (12) ITAT
Important Case Laws Cited/relied upon:
CIT vs. SSA’S Emerald Meadows (2016) 242 Taxman 180 (SC)
CIT vs. M/s Manjunatha Cotton & Ginning Factory & Ors. 359 ITR 565 (Kar.)
HPCL Mittal Energy Ltd. vs. ACIT
Smt. Shipra Jain and Ors. vs. ACIT
In the instant appeal, the assessee challenged the order of CIT(A) in confirming the levy of penalty u/s 271(1)(c) of the Income Tax Act, 1961 (the Act).
The assessee had declared long term capital gains after claiming deduction U/s 54 of the Act. During the course of assessment proceedings, on perusal of information furnished by the assessee, the Assessing Officer observed that the assessee claimed deduction U/s 54 on account of investment made towards purchase of shop against sale of shop.
The assessee submitted that he was under bona fide belief that the exemption was allowable not only for residential house but on all type of properties and has wrongly claimed exemption which he surrendered and filed a revised computation and paid the tax payable.
The AO however held that if the assessment proceedings were not initiated u/s 143(3) of the Act, the income would have remained untaxed and it was held that the assessee had deliberately concealed his income. Also the penalty proceedings u/s 271(1)(c) of the Act were initiated separately for filing of inaccurate of particulars of income/concealment of income by way of issue of notice U/s 271(1)(c) of the Act.
In the penalty notice u/s 274 r.w.s. 271(1)(c) of the Act it was stated that
“in the course of proceedings before me, it appears to me that you have concealed particulars of income or furnished inaccurate particulars of income and a show cause was issued as to why the order imposing aforesaid penalty should not be made as per provisions of the Income Tax Act.”
However, in the penalty order, the AO held that the assessee was found guilty of furnishing inaccurate particulars of income.
The case of the assessee was that the AO initiated the penalty proceedings in order U/s 143(3) by stating that show cause notice U/s 271(1)(c) r.w.s 274 of the Act was issued for concealment of income/furnishing inaccurate particular of income.
It was submitted that the notice did not specify whether the charge is for concealment of income or for both. Whereas in the penalty order, it was stated that assessee was found guilty of furnishing inaccurate particulars of income. Thus, on such vague notice issued U/s 271(1)(c) and finding given in the penalty order, penalty was not levible.
To sum up, ot was contended that in the absence of any specific charge against the assessee in the penalty notice and subsequently in the penalty order, consequent penalty imposed by AO was illegal and bad in law.
The Tribunal ibserved that the contention of the assessee in context of issue of vague notice and vague findings giving in the penalty order, the ITAT had dealt with the issue at length in context of various authorities / decisions including those which had been relied upon by the assessee.
Unspecified charge in Penalty notice u/s 271(1)(c)
The ITAT explained the law on the issue of vague notice and vague findings giving in the penalty order as under:
Explanation 5A to section 271(1)(c) is a deeming provision and subject to fulfilling the requisite conditions, it deems the assessee to have concealed the particulars of his income or furnished inaccurate particulars of such income similar to what has been provided in clause (c) to section 271(1) of the Act. In search cases as well, the legislature has thus envisaged applicability of one or both of these charges. It is settled position now as held by catena of judicial pronouncements that the otice initiating the penalty proceedings should specify the charge against the assessee and even where the charge is uncertain at the time of initiation of penalty proceedings, subsequently during the penalty proceedings, the AO must get decisive, which should be reflected in the penalty order, as to whether the assessee is guilty of ‘concealment of particulars of income’ or ‘furnishing of inaccurate particulars of such income’.
There are broadly two different stages having bearing on the imposition of penalty, namely, assessment and penalty. At the assessment stage, the AO has to record a satisfaction in the assessment order as to whether the additions/disallowances, on which penalty is likely to be imposed, represent concealment of particulars of income or furnishing of inaccurate particulars of income. There can be two sub-stages in penalty proceedings requiring the AO to record such satisfaction, viz., at the time of initiating the penalty proceedings and at the time of passing the penalty order.
(a) Recording of satisfaction at the assessment stage.
The first stage of imposition of penalty is recording of satisfaction by the AO in the assessment order as to whether the assessee concealed the particulars of income or furnished inaccurate particulars of income. There was a lot of litigation on this point. The assessees were contending before the appellate courts that the AO had not recorded proper satisfaction in the assessment order and hence the penalty should be deleted. On the other hand, the Department was contending that the satisfaction was properly recorded. Considering the magnitude of litigation on the point, the Finance Act, 2008, inserted sub-section (1B) to section 271, w.r.e.f. 1.4.1989, which provides that when an amount is added or disallowed in an assessment and the order contains a direction for initiation of penalty proceedings u/s. 271(l)(c), it shall be deemed to constitute satisfaction of the AO for initiation of the penalty proceedings.
Crux of the new provision is that a mere direction in the assessment order to initiate penalty proceedings under clause (c) is sufficient to conclude that the AO recorded proper satisfaction as to whether the additions/disallowances are ‘concealment of particulars of income’ or ‘furnishing of inaccurate particulars of income’ or both.
It is incorrect to argue that even after the insertion of sub-section (1B), the AO still needs to specifically record as to whether each item of addition/disallowance is a case of concealment of particulars of income or furnishing of inaccurate particulars of income.
Deeming ‘satisfaction’ under clause (c) in terms of sub-section (1B) means deeming ‘proper satisfaction’ and ‘proper satisfaction’ means getting satisfied as to whether it is a case of concealment of particulars of income or furnishing of inaccurate particulars of such income.
It cannot be conceived that a direction to initiate penalty proceedings in the assessment order is only ‘satisfaction’ and not ‘proper satisfaction’. This contention, if taken to a logical conclusion, would mean that after such a direction in the assessment order constituting his satisfaction, the AO should once again specifically record satisfaction with reference to each addition or disallowance as to whether it is a case of concealment or furnishing of inaccurate particulars. It is obviously an absurd proposition and goes against the unambiguous language of the provision.
Thus, it is overt that after insertion of sub-section (1B) to section 271, invariably, the AO should be deemed to have recorded proper satisfaction with reference to each addition/disallowance as to concealment or furnishing of inaccurate particulars, once a direction is contained in the assessment order to initiate penalty u/s. 271(l)(c) of the Act. Requiring the recording of separate satisfaction, once again, by the AO would militate against the deeming provision contained in sub-section (1B).
(b) Recording of satisfaction at the penalty stage
Penalty proceedings are separate from assessment proceedings, which get kicked with the issue of notice u/s. 274 and culminate in the penalty order u/s. 271(l)(c) of the Act.
Many a times, penalty initiated in the assessment order on one or more counts by means of notice u/s. 274, is not eventually imposed by the AO on getting satisfied with the explanation tendered by the assessee in the penalty proceedings. In any case, confronting the assessee with the charge against him is sine qua non for any valid penalty roceedings. It is only when the assessee is made aware of such a charge against him that he can present his side. Thus prescribing the charge in the penalty notice and penalty order is must. Absence of a charge in the penalty notice or not finding the assessee guilty of a clear offence in the penalty order, vitiates the penalty order.
The moot question is that what should be the nature of specification of a charge by the AO at the stage of initiation of penalty proceedings and at the time of passing the penalty order. Is the AO required to specify in the penalty notice/order as to whether it is a case of ‘concealment of particulars of income’; or ‘furnishing of inaccurate particulars of income’; or both of them, which can be expressed by using the word ‘and’ between the two expressions.
When the AO is satisfied that it is a clear-cut case of concealment of particulars of income, he must specify it so in the notice at the time of initiation of penalty proceedings and also in the penalty order.
The AO cannot initiate penalty on the charge of ‘concealment of particulars of income’, but ultimately find the assessee guilty in the penalty order of ‘furnishing inaccurate particulars of income’. In the same manner, he cannot be uncertain in the penalty order as to concealment or furnishing of inaccurate particulars of income by using slash between the two expressions. When the AO is satisfied that it is a clear-cut case of ‘furnishing of inaccurate particulars of income’, he must again specify it so in the notice at the time of initiation of penalty proceedings and also in the penalty order.
After initiating penalty on the charge of ‘furnishing of inaccurate particulars of income’, he cannot impose penalty by finding the assessee guilty of ‘concealment of particulars of income’. Again, AO cannot be uncertain in the penalty order as to concealment or furnishing of inaccurate particulars of income by using slash between the two expressions.
When the AO is satisfied that it is a clear-cut case of imposition of penalty u/s. 271(l)(c) of the Act on two or more additions/disallowances, one or more falling under the expression ‘concealment of particulars of income’ and the other under the ‘furnishing of inaccurate particulars of income’, he must specify it so by using the word ‘and’ between the two expressions in the notice at the time of initiation of penalty proceedings.
If AO remains convinced in the penalty proceedings that the penalty was rightly initiated on such counts and imposes penalty accordingly, he must specifically find the assessee guilty of ‘concealment of particulars of income’ and also ‘furnishing of inaccurate particulars of income’ in the penalty order.
If the charge is not levied in the above manner in all the three clear-cut situations discussed above in the penalty notice and also in the penalty order, the penalty order becomes unsustainable in law.
In Manjunatha Cotton and Ginning Factory case penalty was imposed by noting: ‘that the assessee had concealed its income and/or that it had furnished inaccurate particulars of such income’. Striking down the penalty, the Hon’ble High Court held that: ‘it was incumbent upon the IAC to come to a positive finding as to whether there was concealment of income by the assessee or whether any inaccurate particulars of such income had been furnished by the assessee. No such clear-cut finding was reached by the IAC and, on that ground alone, the order of penalty passed by the IAC was liable to be struck down.’
It is evident that when the AO is satisfied at the stage of initiation of penalty proceedings of a clear-cut charge against the assessee say, concealment of particulars of income, but imposes penalty by holding the assessee as guilty of the other charge (say, furnishing of inaccurate particulars of income) or an uncertain charge (concealment of particulars of income/furnishing of inaccurate particulars of income), the penalty cannot be sustained.
Another crucial factor to be kept in mind is that the satisfaction of the AO as to a clear-cut charge leveled by him in the penalty notice or the penalty order must concur with the actual default. If the clear-cut charge in the penalty notice or the penalty order is that of ‘concealment of particulars of income’, but it turns out to be a case of ‘furnishing of inaccurate particulars of such income’ or vice-versa, then also the penalty order cannot legally stand.
Apart from the above three situations in which the AO has clear-cut satisfaction, there can be another fourth situation as well. It may be when it is definitely a case of under-reporting of income by the assessee for which an addition/disallowance has been made, but the AO is not sure at the stage of initiation of penalty proceedings of the precise charge as to ‘concealment of particulars of income’ or “furnishing of inaccurate particulars of income’. In such circumstances, he may use slash between the two expressions at the time of initiation of penalty proceedings. However, during the penalty proceedings, he must get decisive, which should be reflected in the penalty order, as to whether the assessee is guilty of ‘concealment of particulars of income’ or ‘furnishing of inaccurate particulars of such income’. Uncertain charge at the time of initiation of penalty, must necessarily be substituted with a conclusive default at the time of passing the penalty order. If the penalty is initiated with doubt and also concluded with a doubt as to the concealment of particulars of income or furnishing of inaccurate particulars of such income etc., the penalty order is vitiated. If on the other hand, if the penalty is initiated with an uncertain charge of ‘concealment of particulars of income/furnishing of inaccurate particulars of income’ etc., but the assessee is ultimately found to be guilty of a specific charge of either ‘concealment of particulars of income’ or ‘furnishing of inaccurate particulars of income’, then no fault can be found in the penalty order.
The uncertain charge at the stage of initiation of penalty proceedings can be made good with a clear-cut charge in the penalty order. In any case, existence of a clear-cut charge in penalty order is a must so as to validate any penalty order.
In the instant case the Tribunal noted that the notice initiating the penalty proceedings was uncertain where the AO used the expression “concealment particulars of income or furnished inaccurate particulars of income”. However, during the penalty proceedings, he had given a decisive and clear finding as reflected in the penalty order that the assessee was guilty of furnishing inaccurate of particulars of income’ as the assessee, in its original computation had deliberately avoided disclosing true particulars and furnished inaccurate particulars by claiming wrong exemption u/s 54, which was as such not available to the assessee.
Accordingly, the Tribunal confirmed the order levying penalty u/s 271(1)(c).
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