2013 (7) TMI 620 - HC - Income Tax

Penalty under Section 271(1)(c) dismissed due to no concealment and defective notice in income tax case

Commissioner of Income Tax and another Versus Manjunatha Cotton and ginning factory, Manjunath Ginning and pressing, Veerabhadrappa Sangappa and Co., V.S. Lad and sons, G.M. Export

The HC upheld the Tribunal's decision that there was no concealment of income by the assessee, rejecting penalty imposition under Section 271(1)(c). The ... Concealment of income - imposition of penalty - Whether the Tribunal was correct in holding that there was no concealment of income and there was no cessation of liability but it was on assesses agreement additions have been made and therefore no penalty is attracted despite there being no evidence to substantiate such a conclusion and consequently recorded a perverse finding - Held that:- The conduct of the assessee cannot be construed as malafide - the Tribunal was justified in setting aside the orders passed by the Appellate Authority as well as the Assessing Authority - In so far as the imposition of penalty is concerned it is not in accordance with law - No fault could be found with the Tribunal for deleting the penalty - merely because the assessee agreed for addition and accordingly assessment order was passed on the basis of this addition and when the assessee has paid the tax and the interest thereon in the absence of any material on record to show the concealment of income - it cannot be inferred that the said addition is on account of concealment - the assessee has offered the explanation - The said explanation is not found to be false - On the contrary it is held to be bonafide - the entry found in the rough cash book could have been reflected in the accounts for the said financial year in which the survey took place as the last date for closing the account was still not over - the assessee agreed to pay tax and did not challenge the assessment order – decided in favor of assesse. Validity of notice u/s 271(1)(c) - Whether the notice issued under Section 271(1)(c) in the printed form without specifically mentioning whether the proceedings are initiated on the ground of concealment of income or on account of furnishing of inaccurate particulars is valid and legal and the proceedings initiated by the Assessing Authority was legal and valid – Held that:- The Tribunal was justified in holding that the entire proceedings are vitiated as the notice issued is not in accordance with law – thus justified in interfering with the order passed by the Appellate Authority as well as the Assessing Authority and in setting aside the same - Existence of conditions stipulated in Section 271(1)(c) is a sine qua non for initiation of penalty proceedings under Section 271 - Even if there is no specific finding regarding the existence of the conditions mentioned in Section 271(1)(c), at least the facts set out in Explanation 1(A) & (B) it should be discernible from the said order which would by a legal fiction constitute concealment because of deeming provision – decided in favour of assessee. Penalty proceedings - Whether the Tribunal was justified in holding that the basis for initiation of the penalty proceedings is the satisfaction of the Appellate Authority in coming to a conclusion based totally on a different ground other than the ground on which the Assessing Authority had passed the assessment order and the proceedings initiated by the Assessing Authority was legal and valid – Held that:- the subject matter of the penalty proceedings is the order of the Appellate Authority and not the order passed by the Assessing Authority – the penalty proceedings are initiated by the Assessing Authority initially on the basis of his assessment order - the Appellate Authority deleted the additions made under Section 69 of the Act by the Assessing Authority - he sustained additions under new grounds under valuation of the closing stock - the finding recorded by the Appellate Authority - the Assessing Authority in the penalty proceedings took note of the Appellate order and suitably amended the penalty proceedings and proceeded further in the matter and then imposed penalty – decided in favour of assesse. When the two fact finding authorities have concurrently held that the explanation offered by the assessee is not false, though the assessee has failed to conclusively prove the explanation offered, does a case is made out for interference – Held that:- The explanation offered by the assessee is not false and it is a bonafide one though the assessee has failed to conclusively prove the explanation offered – there was no justification to interfere with the well considered order passed by the Tribunal – decided in favour of assesse. 1. ISSUES PRESENTED and CONSIDERED 1. Whether penalty under Section 271(1)(c) of the Income Tax Act, 1961 can be levied when the assessee has admitted additional income as agreed additions without evidence of concealment or cessation of liability during the relevant year. 2. Whether a notice under Section 271(1)(c) issued in a printed proforma without specifically indicating the grounds (concealment or furnishing inaccurate particulars) is valid and legal. 3. Whether penalty proceedings initiated by the Assessing Officer are valid when the basis for penalty shifts due to appellate authority's different grounds for additions. 4. Whether penalty can be imposed when fact-finding authorities concurrently hold the assessee's explanation is bona fide, though not conclusively proved. 5. The scope and interpretation of Section 271(1)(c) including Explanation 1 regarding concealment of income or furnishing inaccurate particulars. 6. The requirement of satisfaction by the Assessing Officer or Commissioner (Appeals) as a condition precedent for initiation of penalty proceedings under Section 271(1)(c). 7. The nature of penalty under Section 271(1)(c) as civil liability and the role of mens rea in its imposition. 8. The procedural requirements under Section 274 for issuing notice before penalty imposition and the necessity of clear grounds in such notice. 9. The independence of penalty proceedings from assessment proceedings and the scope of judicial review in penalty matters. 10. The applicability and interpretation of the deeming provision under Section 271(1B) relating to satisfaction for initiation of penalty proceedings. 11. The authority competent to initiate and impose penalty under Section 271(1)(c) in assessment and appellate proceedings. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Levy of penalty under Section 271(1)(c) where assessee admits additional income as agreed additions - Legal Framework: Section 271(1)(c) penalizes concealment of income or furnishing inaccurate particulars. Explanation 1 clarifies that penalty arises if explanation offered is false or not bona fide and all material facts are not disclosed. - Court Reasoning: Mere admission of additional income or filing revised returns does not ipso facto amount to concealment. The Tribunal found no evidence that cessation of liability occurred in the relevant year. The explanation that the entries were in a rough cash book and pending regularization was accepted as bona fide. - Findings: No malafide intention or concealment was established. The assessee's conduct of paying tax and interest and not challenging assessment indicated cooperation, not concealment. - Application: The penalty cannot be levied solely on agreed additions without proof of concealment or furnishing inaccurate particulars. The Tribunal's deletion of penalty was upheld. - Conclusion: Penalty under Section 271(1)(c) was not attracted in absence of concealment or false explanation. Issue 2: Validity of notice under Section 271(1)(c) issued in printed proforma without specifying grounds - Legal Framework: Section 274 requires that notice imposing penalty must specify grounds and give reasonable opportunity to be heard. The grounds under Section 271(1)(c) include concealment or furnishing inaccurate particulars, which are distinct. - Court Reasoning: Use of printed proforma with all grounds mentioned without striking out irrelevant grounds shows non-application of mind and renders notice vague and invalid. - Findings: The notice must clearly specify whether penalty is for concealment or furnishing inaccurate particulars to enable assessee to meet the case. - Application: Vague notices offend principles of natural justice and cannot sustain penalty orders. - Conclusion: Notices under Section 274 must be specific and clear; failure invalidates penalty proceedings. Issue 3: Validity of penalty proceedings initiated on one ground but penalty imposed on another - Legal Framework: Penalty proceedings must be initiated and imposed on the same grounds on which satisfaction is recorded. The authority initiating penalty must be the one satisfied of concealment or furnishing inaccurate particulars. - Court Reasoning: Where appellate authority sustains additions on new grounds different from those on which Assessing Officer initiated penalty proceedings, penalty must be initiated afresh by appellate authority. - Findings: In the case, Assessing Officer continued penalty proceedings based on appellate authority's order without initiating new proceedings, violating procedure. - Application: Penalty imposed on grounds not specified in initiation notice or by wrong authority is invalid. - Conclusion: Penalty proceedings must be congruent with grounds of initiation and initiated by the authority recording satisfaction. Issue 4: Penalty when explanation is bona fide though not conclusively proved - Legal Framework: Explanation 1 to Section 271(1)(c) allows discretion not to impose penalty if explanation is bona fide and all material facts are disclosed, even if not fully substantiated. - Court Reasoning: Both assessing and appellate authorities found explanation bona fide. The Tribunal held that penalty cannot be imposed on mere failure to conclusively prove explanation if bona fides are established. - Findings: No malafide intention or concealment was found. The assessee's conduct and explanations were accepted as genuine. - Application: Penalty is not automatic; bona fide explanations mitigate penalty liability. - Conclusion: Penalty was rightly deleted where explanation was bona fide. Issue 5: Interpretation of Section 271(1)(c) and Explanation 1 - Legal Framework: Section 271(1)(c) penalizes concealment or furnishing inaccurate particulars. Explanation 1 provides that penalty arises if explanation is false, not offered, or not bona fide with full disclosure. - Court Reasoning: The provision creates a strict liability civil penalty. Mens rea is not essential. Explanation 1 is a complete code indicating when penalty is leviable. - Findings: Conditions precedent for penalty include satisfaction of concealment or inaccurate particulars and failure of explanation. - Application: Authorities must apply Explanation 1 to determine penalty liability; mere additions or estimates do not automatically attract penalty. - Conclusion: Explanation 1 clarifies and limits penalty imposition under Section 271(1)(c). Issue 6: Requirement of satisfaction by Assessing Officer or Commissioner (Appeals) before penalty initiation - Legal Framework: Section 271(1)(c) requires satisfaction by the authority in the course of proceedings that concealment or inaccurate particulars exist before penalty can be imposed. - Court Reasoning: Satisfaction must be recorded in writing, preferably in assessment or appellate order. Section 271(1B) creates a deeming provision for Assessing Officer's satisfaction if order directs penalty initiation. - Findings: Absence of recorded satisfaction or direction invalidates penalty proceedings. Satisfaction must be clear and unambiguous. - Application: Authorities must record satisfaction in orders to validly initiate penalty proceedings. - Conclusion: Recorded satisfaction is sine qua non for penalty proceedings. Issue 7: Nature of penalty under Section 271(1)(c) and role of mens rea - Legal Framework: Penalty under Section 271(1)(c) is a civil liability, not criminal. Mens rea (wilful concealment) is not essential for civil penalty but is essential for prosecution under Section 276C. - Court Reasoning: Supreme Court decisions clarified that penalty under Section 271(1)(c) is strict liability civil penalty. Wilful concealment is not necessary; gross neglect or failure to substantiate explanation suffices. - Findings: Distinction between civil penalty and criminal prosecution is critical. - Application: Absence of mens rea does not preclude penalty but conditions under Section 271(1)(c) must be met. - Conclusion: Mens rea is not essential for penalty under Section 271(1)(c). Issue 8: Procedural requirements under Section 274 for notice before penalty imposition - Legal Framework: Section 274 mandates reasonable opportunity of hearing and clear notice specifying grounds for penalty. - Court Reasoning: Notice must specify whether penalty is for concealment or furnishing inaccurate particulars. Vague or omnibus notices violate natural justice. - Findings: Printed notices without striking out irrelevant grounds are invalid. - Application: Proper notice is procedural safeguard and prerequisite for valid penalty order. - Conclusion: Notice under Section 274 must be specific and clear. Issue 9: Independence of penalty proceedings from assessment proceedings - Legal Framework: Penalty proceedings are distinct and independent from assessment. Assessment validity cannot be challenged in penalty proceedings. - Court Reasoning: Penalty proceedings may follow assessment but require separate satisfaction and notice. Assessee can produce fresh evidence in penalty proceedings. - Findings: Penalty proceedings must be conducted on their own merits. - Application: Findings in assessment do not operate as res judicata in penalty proceedings. - Conclusion: Penalty proceedings are independent and require fresh satisfaction. Issue 10: Applicability and interpretation of deeming provision under Section 271(1B) - Legal Framework: Section 271(1B) deems satisfaction of Assessing Officer if assessment order contains direction for penalty initiation. - Court Reasoning: Deeming provision applies only to Assessing Officer, not appellate or revisional authorities. Direction must be clear and unambiguous. - Findings: Merely stating penalty proceedings are initiated is insufficient; direction must require positive compliance. - Application: Deeming provision facilitates penalty initiation but does not replace need for satisfaction. - Conclusion: Deeming provision aids jurisdiction but requires clear direction in assessment order. Issue 11: Authority competent to initiate and impose penalty under Section 271(1)(c) - Legal Framework: Assessing Officer, Commissioner (Appeals), or Commissioner in revisional proceedings can initiate penalty if satisfied of concealment or inaccurate particulars. - Court Reasoning: Authority recording satisfaction in the course of proceedings must initiate and impose penalty. Commissioner (Appeals) cannot delegate penalty imposition to Assessing Officer. - Findings: Initiation and imposition must be by same authority recording satisfaction. - Application: Procedural compliance requires correct authority to initiate and levy penalty. - Conclusion: Penalty proceedings must be initiated and completed by authority satisfied of concealment or inaccurate particulars. 3. CONCLUSIONS ON APPEALS BASED ON ISSUES - Appeals involving admitted additional income without evidence of concealment were dismissed as penalty was not attracted. - Appeals challenging penalty proceedings initiated by vague or printed form notices without clear grounds were allowed in favour of assessee. - Appeals where penalty was imposed on grounds different from those on which proceedings were initiated were dismissed, confirming invalidity of such penalty. - Appeals where explanation was held bona fide by fact-finding authorities were dismissed, confirming no penalty liability. - Overall, the Court emphasized strict adherence to procedural safeguards, clear recording of satisfaction, specificity in notices, and independent consideration of penalty proceedings.