2024 (3) TMI 1491 - AT - Income Tax

Penalty under s.270A(9) quashed as mandatory imposition invalid; vague s.274 notice and no reasonable hearing

ITAT CHENNAI - AT quashed penalty under s.270A(9), holding penalty is not mandatory and cannot be imposed without a discernible, specific satisfaction in ... Penalty u/s 270A(9) - assessee has ‘under reporting of income and under reporting as a consequence of misreporting of income’ - mandation to provide reasonable opportunity to explain case - argument of non specification of clear charge - additions has been made towards additional income offered during the course of search on estimated disallowance of marketing expenses. During the course of search, the Department has found huge unaccounted cash which resulted in generation of unaccounted cash by inflating marketing expenses, and this fact has been gathered during the course of search, which is evident from the statement recorded from the Director of the assessee company, where, they have clearly admitted inflation of expenditure under the head ‘marketing expenses’. HELD THAT:- Penalty u/s.270A of the Act, is not mandatory in nature, the AO is required to give an opportunity to the assessee to show cause ‘as to why’ penalty should not be levied in terms of sec.274 of the Act. Admittedly, the AO issued notice u/s.274 r.w.s.270A. Sec.274 of the Act deals with the procedure for levy of penalty, wherein, it directs that no order imposing penalty shall be made unless the assessee has been heard or has been given a reasonable opportunity of hearing. Thus, it is evident that the penalty u/s.270A of the Act, cannot be imposed unless the assessee has given a reasonable opportunity and the assessee is being heard. Once, the AO is bound to act to hear the assessee and give reasonable opportunity to explain its case, then, there is no mandatory requirement of imposing penalty, because the opportunity of hearing is not a mere formality, but it is to adhere to the principle of natural justice. Therefore, in our considered view, the penalty u/s.270A of the Act, is not mandatory and it is based on the facts and merits placed before the AO. AO has stated that ‘under reporting of income and under reporting as a consequence of misreporting of income’ - Notice u/s. 274 r.w.s.270A of the Act, is not a valid notice for the reason that the AO did not specify the satisfaction as to whether assessee had either ‘under reporting of income’ or ‘misreporting of income’. In absence of proper notice, which is mandatory, the AO cannot impose penalty, because, it is a clear violation of principles of natural justice, because, issuing a vague notice without specifying the charge under which limb the proposed penalty proceedings is initiated, would vitiate the entire proceedings, because, the assessee was not given an opportunity to explain its case on specific charge. Therefore, in our considered view, penalty levied on the basis of invalid or vague notice is invalid and void ab initio. The concepts of ‘under reporting of income’ and ‘misreporting of income’ are two different charges with very clear boundaries. ‘Under reporting of income’ and ‘misreporting of income’ shall not be used interchangeably nor are they synonymous, but each operates under strict definition and do not overlap each other. Since, ‘under reporting of income’ and ‘misreporting of income’ are two concepts and separate charges, the AO before initiating penalty proceedings should specifically arrive at a satisfaction to the effect that, for which charge, he has initiated penalty Sec.270A of the Act. A view has been taken in the case of CIT v. Manjunatha Cotton & Ginning Factory [2013 (7) TMI 620 - KARNATAKA HIGH COURT] where the issue of show cause notice and consequent penalty proceedings has been dealt in detail and held that penalty proceedings consequent to vague and invalid notice becomes invalid and liable to be quashed. The Hon’ble Supreme Court has [2016 (8) TMI 1145 - SC ORDER] upheld the decision of the Hon’ble Karnataka High Court in the case of CIT v. SSA’s Emerald Meadows [2015 (11) TMI 1620 - KARNATAKA HIGH COURT]. From the ratio of above case laws, it is undisputedly clear that satisfaction of the AO should be discernable from the show cause notice issued by the AO u/s.274 r.w.s.270A of the Act. In absence of any particular charge for which, the assessee is directed to pay penalty u/s 270A of the Act, entire penalty proceedings becomes invalid and liable to be quashed. Show cause notice issued by the AO u/s.274 r.w.s.270A of the Act, is vogue, non specific to charge and thus, is illegal and liable to be quashed. Thus, we quashed the order passed by the AO imposing penalty u/s.270A(9) of the Act. As regards Clause-(d ) of sub-section 9 of section 270A of the Act, which speaks about failure to record investment in the books of accounts. In our considered view, it is not a case of any investment which is not recorded in the books of accounts. Therefore, said Clause is not applicable. In our considered view, the AO is completely erred in invoking said section and levied penalty u/s.270A of the Act. As regards sub-Clause (e) to section 270A(9) of the Act, invoked by the Ld.CIT(A), in our considered view, there is no allegation from the AO regarding failure to record any receipt in books of accounts of the assessee having a bearing on total income in so far as estimated disallowance of proportionate marketing expenses. The additional income has been quantified by the Revenue on the basis of estimated disallowance of marketing expenses and such estimation is ad hoc without there being any specific findings with regard to year for which the assessee has inflated expenditure. There cannot be any reasons for uniformity in inflation of expenditure for all assessment years as alleged by the AO. Further, it cannot be uniformly 1/3rd of total expenditure incurred under the head was inflated and further, it cannot be the case of receipt of 1/3rd amount from all suppliers. In absence of any findings as to quantification of inflated expenditure qua each assessment year with reference to total purchase from each party, amount of inflated expenditure, actual cash received back by the assessee. in our considered view, merely because addition was made on the basis of voluntary surrender of income by the assessee, penalty for ‘under reporting of income’ or ‘misreporting of income’ cannot be fastened on the assessee. Therefore, we are of the considered view that even on merits, penalty levied by the AO u/s 270A of the Act, cannot be sustained. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the notice issued under section 274 read with section 270A (hereafter 'the show-cause notice') is vitiated for failure to specify the limb under which penalty is proposed (i.e. whether for 'under-reporting of income' under ss.270A(2)-(6) or for 'under-reporting as a consequence of misreporting' under ss.270A(8)-(9)). 2. Whether penalty under section 270A(9) (misreporting) can be sustained where the assessment under section 153A/143(3) accepted the additional income voluntarily offered in revised returns (i.e. whether admitted/voluntary disclosures and assessment findings defeat invocation of misreporting clauses (notably 270A(9)(c), (d) and (e))). 3. Whether the Assessing Officer was obliged to examine applicability of section 270A(6) (exceptions to under-reporting) before invoking the higher penalty in consequence of misreporting under section 270A(8), and relatedly whether once misreporting is held to be attracted AO need investigate s.270A(6). 4. Whether the AO computed tax/penalty in accordance with the computation formula in section 270A(10)(c) (i.e. proper base for tax on under-reported income when preceding order exists) before levying penalty at the rate prescribed under s.270A(8). 5. Whether, on the facts (consisting of cash seized during search, sworn statement admitting generation of unaccounted cash by alleged inflation of marketing expenditure, and limited supplier replies), there is sufficient incriminating/corroborative material to attract the particular clauses of s.270A(9) relied upon by Revenue. 6. Whether assessment proceedings findings are conclusive for penalty and to what extent assessment material may be relied upon in penalty proceedings (i.e. independence of penalty proceedings). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of show-cause notice for failure to specify limb (s.274 r.w.s.270A) Legal framework: Section 274 requires that no order imposing penalty shall be made unless the assessee has been heard; the show-cause notice must disclose the charge and the satisfaction on which penalty is proposed. Section 270A contains two distinct limbs: (a) under-reporting (ss.270A(2)-(6)) and (b) under-reporting as a consequence of misreporting (ss.270A(8)-(9)), each with different ingredients and penalty consequences. Precedent treatment: High Court and Supreme Court authorities (including decisions dealing with s.271(1)(c) and the substituted s.270A regime) have held that a mechanically printed or vague notice that does not identify the specific charge/limb attracts illegality; printed notices without striking inapplicable portions or without setting out the AO's satisfaction have been held to vitiate proceedings. Interpretation and reasoning: The Court examined the show-cause notice and found it merely recited both expressions ('under-reporting' and 'under-reporting as a consequence of misreporting') without indicating which limb the AO had satisfied and proposed to invoke. Given that the two limbs have separate legal definitions and consequences, a notice that does not disclose which limb and the factual basis for that satisfaction prevents meaningful opportunity to the assessee to rebut the specific charge. Ratio vs. Obiter: Ratio - a show-cause notice under s.274 read with s.270A must specify the precise limb and the factual satisfaction on which penalty is proposed; vague notices are void. Obiter - reliance on comparative jurisprudence underscoring principles of natural justice. Conclusion: The show-cause notice was held invalid for non-specification of the limb and reasons; penalty proceedings founded on that notice are quashed for want of application of mind and breach of natural justice. Issue 2 - Sustainabilty of penalty under s.270A(9) where assessment accepted voluntary disclosures Legal framework: s.270A(9) lists instances of 'misreporting' (misrepresentation/suppression, unsubstantiated expenditure, false entries, failure to record receipts etc.). Penalty is discretionary (AO 'may' impose) and penalty proceedings are distinct from assessment proceedings; assessment findings may be evidence but do not automatically mandate penalty. Precedent treatment: Authorities recognise that voluntary disclosure does not per se immunise against penalty; however, for misreporting to be attracted there must be cogent material satisfying the specific clauses of s.270A(9). Courts have required the AO's satisfaction to be supported by material and to be disclosed. Interpretation and reasoning: On facts the AO accepted the revised returns and recorded that the income offered including estimated disallowance of marketing expense was 'found to be in order and accepted' in the assessment order. The Court noted that the admitted additional income arose from a sworn statement and ad-hoc yearwise allocation; no incriminating documents linking specific seized cash to particular years or suppliers' invoices corroborating quantum were unearthed in search. While cash seizure and the director's statement are evidence, the AO had not demonstrated year-wise or invoice-wise linkage or independent corroboration sufficient to establish misreporting under the specific clauses of s.270A(9). Where the assessment accepts the voluntarily offered amounts and there is no further incriminating material, penalising for misreporting requires more specific proof than the mere existence of a disclosure based on a sworn statement. Ratio vs. Obiter: Ratio - acceptance of voluntary disclosures in assessment, coupled with lack of corroborative incriminating material and absence of specific findings on misreporting, negates sustainment of s.270A(9) penalty on merits. Obiter - discussion on limits of extrapolation from search-seized cash to multiple assessment years without identifying evidence. Conclusion: Even on merits the penalty could not be sustained - the AO did not establish misreporting under the statutory sub-clauses with adequate corroboration; therefore penalty was unsustainable on merits as well as for procedural vice (Issue 1). Issue 3 - Obligation to examine s.270A(6) once misreporting (s.270A(9)) is invoked (interaction of ss.270A(6), (8), (9)) Legal framework: s.270A(6) enumerates exceptions to under-reporting where penalty may not attach; s.270A(8) provides that where under-reported income is in consequence of misreporting (as defined in s.270A(9)), the higher 200% penalty applies notwithstanding subs.(6)/(7). Interpretation and reasoning: The Tribunal held that where AO records a finding of misreporting under s.270A(9), s.270A(8) operates to render s.270A(6) inapplicable; hence the AO was not obliged to apply s.270A(6) once misreporting is held attracted. This reasoning was applied to dismiss the ground that AO failed to consider s.270A(6). Ratio vs. Obiter: Ratio - s.270A(8) displaces the need to consider s.270A(6) if misreporting as per s.270A(9) is rightly found to be attracted; the AO need not separately demonstrate non-applicability of s.270A(6) in such cases. Conclusion: No obligation lay on AO to apply s.270A(6) once s.270A(9) misreporting was held to be attracted; however this is contingent on correct initial satisfaction of misreporting (which was found faulty here for other reasons). Issue 4 - Correct computation per s.270A(10)(c) Legal framework: s.270A(10) prescribes the method to calculate 'tax payable in respect of the under-reported income' with special formulae where preceding orders exist; clause (c) applies where return was filed and prior preceding order exists. Interpretation and reasoning: The Tribunal found AO had erred in computing tax/penalty - AO apparently computed tax solely on the admitted additional income of a year instead of applying the formula under s.270A(10)(c) (X-Y) where X = tax on (under-reported income + preceding order total) and Y = tax on preceding order total. The Tribunal directed recomputation under s.270A(10)(c), granting partial relief on quantum (CIT(A) had partly allowed ground 7). Ratio vs. Obiter: Ratio - where preceding order exists, AO must compute tax on under-reported income per s.270A(10)(c) before applying the percentage penalty mandated by s.270A(8); incorrect computation warrants adjustment. Conclusion: AO's computation was incorrect; reassessment of penalty amount per s.270A(10)(c) was required (and partly remedied at appellate stage). Issue 5 - Sufficiency of evidence/corroboration to attract specific s.270A(9) clauses Legal framework: Clauses (c), (d) and (e) of s.270A(9) require specific factual predicates: expenditure claimed not substantiated by evidence; false entries in books; failure to record receipts affecting total income. Interpretation and reasoning: The Tribunal scrutinised search record, seized cash, sworn statement and supplier replies. It held that while statements and cash seizure are relevant, the AO did not identify invoices/bills or yearwise corroboration linking seized cash to specific assessment years or purchases; the admitted additional income was accepted in assessment as in order. Consequently, the essential ingredients of s.270A(9)(c)/(d)/(e) (i.e. corroborated false entries, unrecorded receipts linked to years) were not established to the statutory standard. Ratio vs. Obiter: Ratio - invocation of specific clauses of s.270A(9) demands factual identification/corroboration (yearwise/invoicewise linkage or other incriminating material); mere seizure and a generalized sworn admission without corroborative documentary material is insufficient to sustain misreporting penalty. Conclusion: The factual matrix did not satisfy the statutory ingredients of the specific misreporting clauses relied upon; penalty unsustainable on merits. Issue 6 - Independence of penalty proceedings from assessment Legal framework and precedent: Assessment findings may be evidence in penalty proceedings but do not automatically mandate penalty; penalty is discretionary and requires independent satisfaction (see established jurisprudence). Interpretation and reasoning: The Tribunal restated that assessment and penalty are separate proceedings; AO must independently arrive at satisfaction for levy of penalty. Here, assessment accepted the voluntarily offered income and AO did not separately and cogently establish misreporting beyond that acceptance. Ratio vs. Obiter: Ratio - penalty cannot be mechanically imposed merely because assessment included additional income; independent factual satisfaction is necessary in penalty proceedings. Conclusion: AO's reliance on assessment acceptance without independent findings and corroboration rendered the penalty unsustainable in law. OVERALL CONCLUSIONS 1. Procedural infirmity: The show-cause notice under s.274 r.w.s.270A was vague and failed to disclose the specific limb or the AO's satisfaction - this breach of natural justice vitiated penalty proceedings and required quashing. 2. On merits, the AO failed to establish misreporting under the specific clauses of s.270A(9) with adequate corroborative material; acceptance of the voluntary disclosure in assessment and lack of invoice/yearwise linkage rendered the misreporting finding unsustainable. 3. Where misreporting is rightly found, s.270A(8) displaces s.270A(6); however, that doctrinal point is inapplicable because the primary misreporting satisfaction itself was unsupported here. 4. AO erred in computing tax/penalty without applying the formula under s.270A(10)(c); recalculation was directed where relevant. 5. Result: Penalty orders under s.270A(9) were quashed for both assessment years on procedural and substantive grounds (quash for invalid notice and unsustainable merits), with direction for recomputation where statutory formula had been incorrectly applied.