2024 (4) TMI 838 - AT - Income Tax

Penalty under Section 271(1)(c) cannot be levied when charges are not made specific against assessee

ITAT Mumbai held that penalty u/s 271(1)(c) cannot be levied when charges are not made specific. The AO made ad hoc 50% disallowance of expenditure ... Penalty u/s 271(1)(c) - charge was not made specific - concealing income or furnishing inaccurate particulars - return of income was filed only in response to notice u/s 148 - as alleged assessee has concealed particulars of income by not filing the return of income and provided inaccurate particulars during the assessment by not proving the authenticity of the expenses and not disclosing the income - HELD THAT:- No doubt the assessee has submitted before us many judicial precedents wherein where there is an ad hoc disallowance of the expenditure; it is held that penalty cannot be levied. Though this cannot be a universal principle. We find that had the case is that the assessee is unable to substantiate the amount of expenditure; the learned assessing officer should have disallowed 100 % percent of such expenditure by giving a sufficient reason. By disallowing 50% and allowing 50% of that expenditure, the learned assessing officer is also not clear whether the assessee has concealed income or has furnished inaccurate particulars of income. In the assessment order the charge is not specific. In the penalty order, twin charges are invoked for the levy of the penalty. When there is no specific charge raised by the AO at the time of assessment as well as in the notice and assessee has not been confronted with the same specific charge for furnishing reply before the assessing officer, AO levying a penalty on both the charges, without proving that both the charges apply, is not proper. The various judicial precedents cited before us are also support the case of the assessee that in case of ad hoc disallowance penalty u/s 271(1)(c) does not survive unless there are specific reasons. Accordingly, we reverse the order of the lower authorities and direct the learned assessing officer to delete the penalty u/s 271(1)(c) - Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under section 271(1)(c) can be sustained where a reassessment results in ad hoc disallowance (50%) of claimed business expenditures for want of documentary substantiation. 2. Whether initiation and levy of penalty under section 271(1)(c) is permissible where the assessing officer did not record a specific satisfaction or specific charge of concealment/inaccurate particulars at the time of assessment or in the notice inviting penalty, and where the penalty order invokes 'twin charges'. 3. Whether non-filing of original return (resulting in reassessment under section 148) and filing of return only on notice suffices, by itself, to sustain penalty under section 271(1)(c) absent specific findings of concealment or inaccurate particulars. 4. Admissibility of reliance on judicial precedents holding that penalty cannot be levied for ad hoc disallowances unless specific reasons supporting concealment/inaccuracy are recorded. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Ad hoc disallowance and sustainment of penalty under section 271(1)(c) Legal framework: Section 271(1)(c) penalizes concealment of income or furnishing inaccurate particulars; disallowance under section 37(1) is a substantive assessment issue and may be ad hoc where evidence is lacking. Precedent Treatment: The Court considered precedents (relied upon by the assessee) that hold ad hoc disallowances, absent specific reasons pointing to concealment or inaccuracy, do not automatically sustain penalty under section 271(1)(c). Interpretation and reasoning: The assessing officer disallowed 50% of specified expenses for want of supporting documents rather than disallowing the entire claim with clear reasons indicating concealment or furnishing of inaccurate particulars. The Court reasoned that a 50% ad hoc disallowance creates ambiguity as to whether there was concealment/inaccuracy, because partial acceptance indicates some prima facie credibility to the claimed amounts. The AO's failure to record precise reasons for selecting 50% or to treat the disallowance as reflecting deliberate concealment undermines the basis for a penalty predicated on concealment or inaccurate particulars. Ratio vs. Obiter: Ratio - Where an assessing officer makes an ad hoc (partial) disallowance without clear reasons showing concealment or inaccurate particulars, penalty under section 271(1)(c) is not sustainable. Obiter - General observation that AO, if convinced of non-substantiation, should disallow 100% with reasons. Conclusion: Penalty cannot be sustained on the ground of ad hoc 50% disallowance absent specific findings that such disallowance reflects concealment or inaccurate particulars. Issue 2 - Requirement of specific charge and recording of satisfaction prior to levy of penalty; effect of 'twin charges' in penalty order Legal framework: Imposition of penalty under section 271(1)(c) requires that the assessing officer form a satisfaction that the assessee concealed particulars of income or furnished inaccurate particulars; procedural fairness demands that the assessee be made aware of the specific charge to enable a meaningful response. Precedent Treatment: The Court applied settled principles emphasizing specificity of charge and requirement that the assessee be confronted with the precise allegations during assessment/penalty proceedings. Interpretation and reasoning: The record shows no specific satisfaction recorded in the assessment order; the penalty notice and penalty order proceeded to impose penalty on both bases (not filing original return and inaccuracy/concealment regarding expenses and small income), effectively invoking twin charges. The Court found that the assessing officer did not confront the assessee with a specific, singular charge during assessment or give opportunity to address that precise charge. Levying penalty on multiple unproven charges without proving applicability of each charge or giving specific notice is procedurally improper and undermines the penalty's validity. Ratio vs. Obiter: Ratio - Penalty under section 271(1)(c) is invalid where no specific satisfaction is recorded and where the assessee was not confronted with a clear, specific charge before levy, especially where the penalty order relies on multiple charges not separated or proven. Obiter - Emphasis that procedural fairness and specificity are essential elements of penalty proceedings. Conclusion: Penalty is set aside because the AO did not record a specific charge of concealment/inaccuracy at assessment stage and the penalty order impermissibly relied on dual/unclarified charges without proper confrontation. Issue 3 - Effect of non-filing of original return and reopening under section 148 on levy of penalty Legal framework: Reopening under section 148 and filing of return in response to notice are procedural; establishment of penalty under section 271(1)(c) requires independent satisfaction of concealment or furnishing of inaccurate particulars. Precedent Treatment: Authorities cited by the assessee and applied by the Court indicate that mere non-filing of original return or filing only after notice does not ipso facto authorize penalty unless concealment/inaccuracy is specifically proved. Interpretation and reasoning: The AO relied partly on non-filing of original return and the late filing post-section 148 notice as a basis for penalty. The Court observed that absence of original return, standing alone, does not conclusively establish concealment; the substantive basis for penalty must be founded on recorded satisfaction and evidence of concealment/inaccuracy. Since the AO did not make specific findings to that effect, the procedural fact of filing in response to notice cannot sustain the penalty. Ratio vs. Obiter: Ratio - Non-filing of return and filing only after notice cannot alone sustain section 271(1)(c) penalty absent a recorded, supported finding of concealment or inaccurate particulars. Obiter - The AO may legitimately probe expenditures during reassessment, but must record clear findings if intending to proceed for penalty. Conclusion: Penalty cannot be upheld solely on account of non-filing or late filing; requirement of recorded satisfaction and evidence of concealment/inaccuracy remains paramount. Issue 4 - Application of judicial precedents regarding ad hoc disallowance and penalty Legal framework: Judicial precedents constrain imposition of penalty where disallowances are ad hoc and where specific reasons for penalizing concealment are absent. Precedent Treatment: The Court found the precedents relied upon by the assessee supportive and applicable to the factual matrix: ad hoc partial disallowances do not automatically result in penalty unless supported by specific findings of concealment/inaccuracy. Interpretation and reasoning: Considering the factual scenario of partial disallowance, absence of specific charge, and lack of confrontation on a singular issue, the Court aligned with precedents that protect taxpayers from penalties imposed without specific, recorded findings. The Court rejected the Department's submission that reassessment and subsequent questioning cured procedural/recording deficiencies. Ratio vs. Obiter: Ratio - Existing precedents are followed: ad hoc disallowance without specific reasons of concealment will not support section 271(1)(c) penalty. Obiter - The Court noted that had the AO been satisfied of non-substantiation, a full disallowance with reasons would have been proper. Conclusion: Precedents support deletion of the penalty; the Court followed those authorities to reverse the penalty levy. Overall Disposition The Court allowed the appeal and directed deletion of the penalty under section 271(1)(c) of the Act of the specified amount, holding that the penalty was not sustainable because (a) the assessment contained an ad hoc 50% disallowance without clear findings of concealment or inaccurate particulars, (b) no specific satisfaction was recorded at assessment or in the penalty notice, and (c) the penalty order invoked twin charges without proper confrontation or proof. The Court relied on applicable precedents supporting these principles.