2016 (2) TMI 128 - HC - Income Tax

Penalty u/ss 271(1)(c), 274 and 271(1B) quashed for lack of jurisdiction; full disclosure favored assessee

HC held the penalty order under Section 271(1)(c) invalid for want of jurisdiction, as no proper notice under Section 274 read with Section 271(1)(b) was ... Validity of penalty order under Section 271(1)(c) - failure to comply with a notice - Held that:- Assessing Officer had no jurisdiction to pass the penalty order under Section 271(1)(c) of the Act without issuing a proper notice as required under law and moreover, when the particulars are disclosed in the return of income. Assessing Officer has not applied his mind at the time of issuing notice under Section 274 R/W Section 271(1)(b) of the Act. This view is fortified by the order passed under Section 271(1)(c) of the Act. No direction is coming forth in the assessments order for levying penalty which is mandatory as per Section 271(1B) of the Act. Considering the relevant factors, appellate commissioner has rightly allowed the appeal of the assessee setting-aside the order passed by the Assessing Officer which has been reversed by the ITAT on the ground that the assessee deliberately evaded the payment of tax by declaring the capital expenditure as revenue expenditure in the ‘financial expenses’. In our considered opinion, for the reasons stated above, the order passed by the ITAT is not sustainable. Accordingly, we set aside the order of the ITAT and restore the order passed by the CIT(A) answering the substantial questions of law in favour of the assessee and against the revenue. Issues:1. Jurisdiction of Assessing Officer to levy penalty under Section 271(1)(c) when notice was issued under Section 271(1)(b).2. Compliance with Section 271(1)(c) requirements by Assessing Officer.3. Nature of expenditure claimed and penalty imposition under Section 271(1)(c).Issue 1: Jurisdiction of Assessing Officer:The appeal challenged the ITAT's order upholding the penalty under Section 271(1)(c) of the Income Tax Act, despite the notice being issued under Section 271(1)(b). The appellant argued that the Assessing Officer failed to comply with the mandatory requirement of recording satisfaction for penalty under Section 271(1)(c). The appellant contended that the penalty was wrongly imposed as the notice did not align with the penalty section applied. Citing the case of Commissioner of Income-Tax v. Manjunatha Cotton and Ginning Factory, the appellant emphasized that penalty under Section 271(1)(c) should only apply in cases of concealment or inaccurate particulars, which were not present in this instance.Issue 2: Compliance with Section 271(1)(c) Requirements:The appellant further argued that the Assessing Officer did not have grounds to levy the penalty under Section 271(1)(c) as the particulars were disclosed in the return of income. The appellant highlighted that the notice issued did not meet the requirements of law, as it did not specify the grounds for penalty under Section 271(1)(c). Referring to the judgment in Manjunatha Cotton and Ginning's case, the appellant asserted that the Assessing Officer's failure to apply his mind while issuing the notice indicated a lack of jurisdiction to pass the penalty order.Issue 3: Nature of Expenditure and Penalty Imposition:The dispute also revolved around the nature of the expenditure claimed by the appellant as revenue expenditure under 'financial expenses.' The Assessing Officer disallowed the deduction, considering it capital expenditure. The appellant argued that penalty under Section 271(1)(c) was unjustified since there was no concealment or inaccurate particulars in the declaration made by the assessee. The Assessing Officer's decision to impose the penalty was challenged on the grounds that the expenditure was clearly stated in the return of income, and there was no deliberate attempt to evade tax.In conclusion, the High Court set aside the ITAT's order and restored the order passed by the CIT(A) in favor of the appellant. The court found that the Assessing Officer did not comply with the legal requirements in issuing the penalty notice under Section 271(1)(c) and that the penalty imposition was not justified based on the facts of the case.