Specifying/Striking off limb of penalty section 271(1)(c) not applicable in cases of surrender by assessee-ITAT

Specifying limb of penalty section 271(1)(c) arises only when addition is made by the AO and not where assessee surrenders the income – ITAT

Prelude:
Issuance of show cause notice u/s 274 of the Income Tax Act, 1961 (the Act) for imposing penalty u/s 271(1)(c) of the Act for concealment or furnishing inaccurate particulars of income in a pre-printed form by merely placing a tick mark without striking off the irrelevant or not applicable 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 and subsequently in the case of M/s SSA’s Emerald Meadows (ABCAUS 800 (2015) (11) HC) where the Hon’ble Supreme Court 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 (Kolkata, Ahmadabad, Bangalore, Hyderabad, Mumbai, Pune, Delhi etc.) by quashing the penalty proceedings on this count only.

However in the present case, the ITAT distinguished the need for specifying the applicable limb of the section in cases where penalty proceeding is initiated for surrender of income as against where addition is made to the income of the assessee.

Penalty Notice without striking off the not applicable clause

Specifying limb of penalty

ABCAUS Case Law Citation:
ABCAUS 2167 (2018) (01) ITAT

The Challenge/Grievance:
This appeal (ITA) was filed by the assessee against the order of CIT (A) challeneging the penalty order passed as being void ab-initio.

Brief Facts of the Case:
The appellant assessee was subjected to a search and seizure action u/s 132 of the Act. During the course of search cash jewellery, stock-in-Trade, valuables documents, books of accounts, loose papers and other material found. As a result, during the course of search the assessee surrendered income of Rs. 10,000,00/- on account of investment/cash transactions in the property.

The assessee was called upon by notice u/s 153(A) to file his return of income which was filed by the assessee offering an amount of Rs. 10,000,00/- to tax under the head income from the other sources as surrendered by him from the course of search.

The Assessing Officer framed AY u/s 143(3) read with section 153(A) on the return income. The Assessing Officer while completing the Assessment has made no addition to the return income but recorded its satisfaction for initiating the penalty proceedings u/s 271(1)(c) in respect of surrendered amount of Rs. 10,000,00/-. Accordingly, AO issued the notice u/s 274 read with section 271 of the Act. Finally, the AO imposed the penalty.

The CIT(A) also upheld the penalty order. Aggrieved by the order of the CIT(A), the assessee was in appeal before the Tribunal.

Before the ITAT, the assessee raised an additional ground  for the first time alleging that the penalty order passed by the Assessing Officer u/s 271(1)(c) was bad in law as the AO had not struck off the irrelevant portion of the printed show cause notice viz., furnishing inaccurate particulars of income or concealed particulars of such income. It was pleaded that the order passed by the AO was against the principles of judicial consistency and therefore, bad in law. Despite the opposition of the Revenue to the admission of the additional ground for adjudication, it was admitted by the ITAT.

Contention made on behalf of the Appellant Assessee:
It was submitted that the notice issued u/s 274 of the Act should specifically state the grounds mentioned in section 271 (1)(c) i.e whether it is for concealment of income or furnishing of inaccurate particulars of income. The AO had issued a notice u/s 274 in printed Performa without specifying the applicable limb penalty committed by the assessee.

The assessee contended that the notice issued u/s 274 in the case of the assessee was liable to be quashed. In support of the contention he relied upon the decision of Hon’ble Karnataka High Court as well as the decision of Hon’ble Jurisdiction High Court.

Contentions made on behalf of the Respondent Revenue:
It was submitted that in this case, the penalty had been levied by the AO on the amount which was surrendered by the assessee during the course of search and therefore, there was no need to explain the ground on which the penalty was proposed to be levied by the Assessing Officer.

Observations made by the Tribunal:
The ITAT observed that it is incumbent upon the AO to specify the ground and default committed by the assessee on which the penalty was proposed to be levied u/s 271(1)(c). If an addition is made by the AO then said action of the AO may lead to either furnishing of inaccurate particulars of income by the assessee or concealment of the particulars of income and therefore in such a situation if the AO proposed to initiate the proceedings u/s 271(1)(c) then he is required to specify whether the assessee has committed the default of concealment of particulars of income or furnishing inaccurate particulars of income.

The ITAT noted that the Assessing Officer, in the show cause notice had not specifically stated as what default was committed by the assessee.

However, he ITAT opined that the question of the specifying the default arises only when the addition in the income of the assessee is made by the AO and consequently the AO proposed to initiate the proceedings for levy of penalty u/s 271(1)(c) in respect of such an addition made to the income of the assessee. Therefore, if the income of the assessee is assessed at higher amount than the return income then it is the duty of the AO to specify such addition/disallowance resulting increase of total income was on account of concealment of particulars of income or due to furnishing inaccurate particulars of income.

The ITAT observed that in the case of the assessee it was not a case of addition made by the AO but the assessee surrendered the income to tax and therefore the said surrender of income would not fall in the category of furnishing inaccurate particulars of income more so when the assessee did not file any return of income prior to the date of search. The assessee offered this amount to tax in the return of income and no further addition was made by the AO. Therefore the default in the nature of furnishing inaccurate particulars of income was ruled out.

The ITAT opined that on the facts of the case, the impugned notice could only be in the category of concealment of particulars of income as the assessee did not file any return of income prior to the date of search and time limit for filing the return of income u/s 139(1) was already expired much prior date of search. Accordingly, the amount surrendered during the course of search and seizure action and subsequently offered to tax in the return of income filed post search would fall in the category of concealment of particulars of income.

The ITAT opined that when there is only one possibility of default and not the possibility of either of two defaults then the requirement of specifying the default does not arise. The assessee himself surrendered and offered the said amount to tax. Therefore, it is best known to assessee what default he had committed such default. Accordingly in the peculiar facts of the case the decision relied upon by the assessee were not applicable.

Decision/ Conclusion/Held:
It was held that the income surrendered by the assessee on account of investment in properties was nothing but undisclosed income and therefore, the question of specifying the default by the AO did not arise as it was very well to none to the assessee that it was concealment of particulars of income. Accordingly the additional ground raised by the assessee was dismissed.

On merit as well the appeal was dismissed holding that the all the conditions as stipulated under explanation 5A were fulfilled in the case of the assessee and the penalty levied u/s 271(1)(c) was proper and sustainable. 

Specifying limb of penalty

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