AI Drafter 
TaxTMI 
TaxTMI 
2024 (5) TMI 1107
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.... the penalty notice and subsequent proceedings and hence the same is invalid and illegal. 2. Without prejudice, on the facts and in law, the Hon'ble CIT (A) erred in confirming the penalty under Section 271(1)(c) of the Act without appreciating the fact that penalty cannot be levied when income is determined on estimate basis." 03. The brief facts of the case shows that assessee is an individual who filed his return of income on 15th September, 2009, at the total income of Rs.530,780/-. The original assessment was made under Section 143(3) of the Act on 28th November, 2011, at total income of Rs.625,180/-. Subsequently, based on the information received from the Director General of Income Tax, Investigation, Mumbai assessee was found to have obtained accommodation entries of bogus purchase bills amounting to Rs.92,47,095/-. On hearing, reassessment order under Section 143(3) read with section 147 of the Act was passed on 19th march, 2015, determining the total income of the assessee at Rs.17,81,070/- by making addition of 12.5% of alleged bogus purchases. Reassessment order was challenged before the learned CIT (A) unsuccessfully and consequently, before the ITAT. A....
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....) is sustainable or not. 08. As the facts and circumstances leading to the addition in both these appeals are similar, the learned Authorized Representative Ms. Ridhisha Jain, submitted a detailed written submission contesting the first ground of appeal stating that both the penalty orders are not sustainable in law for the reason that in the notice under Section 274 read with section 271 of the Act issued for A.Y. 2009-10 placed at page no. 11 of the Paper Book at 19th March, 2015, and penalty notice issued under Section 274 read with section 271(1)(c) of the Act for A.Y. 2010-11 issued on 31st December, 2015, placed at page no.11 of the Paper Book does not strike off any one of the twin charges against the assessee and therefore, such penalty notices are bad in law and therefore, the penalty orders passed by the lower authorities are not sustainable. She relied upon the full Bench decision of the Hon'ble Bombay High Court in case of Mohamad Farah Mohd. Farhan A. Shaikh v. ACIT (2021) 434 ITR 1 (FB) (Bom) (HC). She referred to question no.1 at page no.56 and submitted that the issue is decided in favour of the assessee. 09. She also submitted that when the addition was m....
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...., the notices under Section 274 read with section 271(1)(c) of the Act placed in the paper book clearly shows that the learned Assessing Officer has not struck off any of the alternative twin charges. Therefore, it was contended that the issue is squarely covered in favour of the assessee by the decision of the Full Bench of Hon'ble Bombay High Court in [2021] 125 taxmann.com 253 (Bombay)/[2021] 280 Taxman 334 (Bombay) wherein in answer to question no.1, it held as under:- "Answers: Question No. 1: If the assessment order clearly records satisfaction for imposing penalty on one or the other, or both grounds mentioned in Section 271(1)(c), does a mere defect in the notice-not striking off the irrelevant matter-vitiate the penalty proceedings? 181. It does. The primary burden lies on the Revenue. In the assessment proceedings, it forms an opinion, prima facie or otherwise, to launch penalty proceedings against the assessee. But that translates into action only through the statutory notice under section 271(1)(c), read with section 274 of IT Act. True, the assessment proceedings form the basis for the penalty proceedings, but they are not composite proce....
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....e Court while observing on the test of real prejudice, observed that there is no such thing as "technical infringement of natural justice", as what is necessarily to be seen is that there must have been caused some real prejudice to the complainant. It was observed that the requirements of natural justice must depend inter alia as involved in the facts and circumstances of the case and the nature of the inquiry, etc. The relevant observations of the Supreme Court are required to be noted which read thus:- "26. Even in the application of the doctrine of fair play there must be real flexibility. There must also have been caused some real prejudice to the complainant; there is no such thing as a merely technical infringement of natural justice. The requirements of natural justice must depend on the circumstances of the case, the nature of the inquiry, the rules under which the tribunal is acting, the subject matter to be dealt with and so forth. Can the Courts supplement the statutory procedures with requirements over and above those specified? In order to ensure a fair hearing, Courts can insist and require additional steps as long a such steps would not frustrate the appare....
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....g, a fair deal, to the person whose rights are going to be affected. [See A.K.Roy v. Union of India 1982 (1) S.C.C.271) and Swadeshi Cotton Mills v. Union (1981 (1) S.C.C.664)]. As pointed out by this Court in A.K.Kraipak L Ors. v. Union of India & Ors. (1969 (2) S.C.C.262), the dividing line between quasi-judicial function and administrative function [affecting the rights of a party] has become quite thin and almost indistinguishable a fact also emphasized by House of Lords in C.C.C.U. v. Civil Service Union [supra] where the principles of natural justice and a fair hearing were treated as synonymous. Whichever the Cases it is from the standpoint of fair hearing - applying the test of prejudice, as it may be called - that any and every complaint of violation of the rule of audi alteram partem should be examined. Indeed, there may be situations where observance of the requirement of prior notice/no hearing may defeat the very proceeding - which may result in grave prejudice to public interest. It is for this reason that the rule of post-decisional hearing as a sufficient compliance with natural justice was evolved in some of the cases, e.g., Liberty Oil Mills v. Union of India (198....
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....quiry; the complaint should be examined on the touch-stone of prejudice as aforesaid. 29. The matter can be looked at from the angle of justice or of natural justice also. The object of the principles of natural justice - which are now understood as synonymous with the obligation to provide a fair hearing - is to ensure that justice is done, that there is no failure of justice and that every person whose rights are going to be affected by the proposed action gets a fair hearing. The said objective can be tested with reference to sub-clause (iii) concerned herein. It says that copies of statements of witnesses should be furnished to the delinquent officer "not later than three days before the commencement of the examination of the witnesses by the Inquiring Authority". Now take a case - not the one before us where the copies of statements are supplied only two days before the commencement of examination of witnesses instead of three days. The delinquent officer does not object; he does not say that two days are not sufficient for him to prepare himself for cross-examining the witnesesses. The eqnuiry is concluded and he is punished. Is the entire enquiry and the punishment ....
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....ohan [1980 (4) SCC 379], a three Judge Bench of this Court while following the principle in Ridge v. Baldwin stated that if upon admitted or indisputable facts only one conclusion was possible, then in such a case that principle of natural justice was in its self prejudice would not apply. Thus, every case would have to be examined on its own merits and keeping in view the statutory rules applying to such departmental proceedings. The Court in S.L. Kapoor (supra) held as under: "18. In Ridge v. Baldwin [1964 AC 40, 68 : 1963 2 All ER 66, 73] One of the arguments was that even if the appellant have been heard by the Watch Committee nothing that he could have said could have made any difference. The House of Lords observed at (p. 68): "It may be convenient at this point to deal with an argument that, even if as a general rule a watch committee must hear a constable in its own defence before dismissing him this case was so clear that nothing that the appellant could have said could have made any difference. It is at least very doubtful whether that could be accepted as an excuse. But, even if it could, the watch committee would, in my view, fail on the facts. It may well be t....
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....es in any of these classes merely on the basis of apprehended prejudice." (emphasis supplied) 44. It is well settled that in judging the validity of an adjudicatory order, when the complaint is of non compliance of the principles of natural justice or in cases where the attack is not on the ground of bias, a distinction is required to be drawn between cases of no notice or no hearing, and cases of no fair hearing or no adequate hearing. If the defect is of the former category, it will automatically make the order invalid but if the defect is of a latter category, it will have to be further examined whether the defect has resulted in prejudice and failure of justice and it is only when such a conclusion is reached that the order may be declared invalid. (See. Municipal Corporation v. Inderjit Singh AIR 2009 SC 195; P.D. Agrawal v. State Bank Of India AIR 2006 SC 2064; Haryana Financial Corporation v. Kailash Chandra Ahuja [2008] 9 SCC 33; Union of India v. Mustafa & Najibai Trading Co. 1998 taxmann.com 667 (SC)/AIR 1998 SC 2526. Some of these decisions can be discussed. 45. In the above context the Supreme Court in Inderjit Singh (supra) observed thus:- ....
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....tion 111 of the Act is a penalty in rem which attaches to the goods which are the subject matter of the proceedings for confiscation and if it is found that the goods are liable to be confiscated under section 111 of the Act, they can be confiscated without ascertaining their real owner. Moreover, in so far as the rule of audi alteram partem is concerned, the position is well settled that an order passed in disregard of the said principle would not be invalidated if it can be shown that as a result of denial of the opportunity contemplated by the said rule the person seeking to challenge the order has not suffered any prejudice. Since section 124 of the Act incorporates the said principle of natural justice, failure to give the notice to the owner of goods would not, by itself, invalidate an order of confiscation. What has to be seen is whether the owner of the goods has suffered prejudice on account of the failure on the part of the officer passing the order for confiscation of goods. The owner of goods ordered to be confiscated cannot be said to have suffered any prejudice in a case where notice has been given to the person responsible for the alleged contravention on which the o....
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....inciples of law under the Indian jurisprudence as also under the English Law, reiterated the principles that the recent trend, however, is of the test of prejudice. The following observations of the Court are required to be noted:- "31. At the same time, however, effect of violation of the rule of audi alteram partem has to be considered. Even if hearing is not afforded to the person who is sought to be affected or penalised, can it not be argued that "notice would have served no purpose" or "hearing could not have made difference" or "the person could not have offered any defence whatsoever". In this connection, it is interesting to note that under the English law, it was held few years before that non-compliance with principles of natural justice would make the order null and void and no further inquiry was necessary. 32. In the celebrated decision of Ridge v. Baldwin [1964 AC 40 : (1963) 2 WLR 935 : (1963) 2 All ER 66 (HL)] it was contended that an opportunity of hearing to the delinquent would have served no purpose. Negativing the contention, however, Lord Reid stated: (All ER p. 73 F- G) "It may be convenient at this point to deal with an argument that, even....
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....All ER p. 1283a-b) "... it was argued that to have afforded a hearing to the appellant before dismissing him would have been a useless formality because whatever he might have said could have made no difference. If that could be clearly demonstrated it might be a good answer." (emphasis supplied) Lord Guest agreed with the above statement, went further and stated: (All ER p.1291b-c) "... A great many arguments might have been put forward but if none of them had any chance of success then I can see no good reason why the respondents should have given the appellant a hearing, nor can I see that he was prejudiced in any way." (emphasis supplied) 38. In Jankinath Sarangi v. State of Orissa [(1969) 3 SCC 392] it was contended that natural justice was violated inasmuch as the petitioner was not allowed to lead evidence and the material gathered behind his back was used in determining his guilt. Dealing with the contention, the Court stated: (SCC p. 394, para 5) "5. ... We have to look to what actual prejudice has been caused to a person by the supposed denial to him of a particular right." (emphasis supplied....
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..... (See R. v. University of Cambridge [(1723) 1 Str 557 : 93 ER 698] .) But we are also aware that the principles of natural justice are not rigid or immutable and hence they cannot be imprisoned in a straitjacket. They must yield to and change with exigencies of situations. They must be confined within their limits and cannot be allowed to run wild. It has been stated: ' "To do a great right" after all, it is permissible sometimes "to do a little wrong".' [Per Mukharji, C.J. in Charan Lal Sahu v. Union of India [(1990) 1 SCC 613] (Bhopal Gas Disaster), SCC p. 705, para 124.] While interpreting legal provisions, a court of law cannot be unmindful of the hard realities of life. In our opinion, the approach of the Court in dealing with such cases should be pragmatic rather than pedantic, realistic rather than doctrinaire, functional rather than formal and practical rather than 'precedential'." (emphasis supplied) 42. Recently, in P.D. Agrawal v. SBI [(2006) 8 SCC 776 : (2007) 1 SCC (L&S) 43] this Court restated the principles of natural justice and indicated that they are flexible and in the recent times, they had undergone a "sea change". If....
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....d in cases which may directly affect the livelihood of a person, who would face a termination from service. In our case, we are concerned with a penalty under the IT Act which is a civil penalty in regard to which the above principles which are salutary would apply with full force as they concern statutory adjudication. 51. Thus, the principles of law as laid down by the Supreme Court are clear, that mere breach of principles of natural justice is not in itself a prejudice and in fact it is de facto prejudice which is required to be proved. Applying such principles to the facts of the present case, it is clear that the notice issued to the assessee by the Assessing Officer under section 271(1)(c) itself not being disputed by the assessee, to be in any manner in breach of the principles of natural justice, much less on the ground that it does not clarify as to which limb of the provisions was attracted, no fault could be found in the Assessing Officer proceeding to pass an order on such notice. In our opinion, accepting such a plea as urged on behalf of the assessee would amount to accepting a place of technical infringement of natural justice, as even remotely it was not t....
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....plicable ground or to cancel the inapplicable ground in the notice under section 271 of the IT Act, does not vitiate the penalty proceedings, where the satisfaction for initiation of penalty proceedings is correctly recorded and reflected in the assessment order made by the Assessing Officer (AO) and duly communicated to the Assessee. 5. On perusal of both the sets of decisions, we find that there is a conflict between the view taken by us in Goa Dourado Promotions (supra) and Kaushalya (supra). In Goa Dourado Promotions (supra), the substantial question of law as to whether the ITAT erred in holding the penalty proceedings fatal for mere failure of the AO to tick the relevant box in the show cause notice, was answered against the Appellant-Revenue and in favour of the Respondent-Assessee relying upon the Samson Perinchery (supra) and New Era Sova Mine (supra). As noticed above, the Division Bench in Kaushalya (supra) has held that such failure to strike off the relevant portion of the printed notice or to tick mark the applicable portion in the printed notice, is not fatal, particularly where no prejudice has been demonstrated by the Assessee. Thus, there appears to be a ....
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....rder under section 153C of the IT Act had recorded satisfaction for initiation of penalty proceedings on the relevant grounds and there was no ambiguity as such involved. She pointed out that at no stage until the additional question of law was framed in these matters, the Assessee had even pleaded or demonstrated any prejudice. She pointed out that in fact, the Assessee having understood clearly that the penalty proceedings were initiated on the grounds reflected in the assessment order under section 143(3) or the order made under section 153C of the IT Act, had submitted their necessary responses in the matter. One of the Assessee's had also urged 'lenient treatment'. All these aspects have not been considered in the first set of decisions relied upon by Mr. Rivankar. There is, however, reference to these aspects in Kaushalya (supra), relied upon by Ms Razaq. 11. According to us, the issue which arises can be more advantageously decided by the Full Bench, now that we notice the conflict between the decisions relied upon Mr. Rivankar and the decision in Kaushalya (supra), not to mention the absence of discussion on the aspect of 'prejudice' in the decision....
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....r the other, or both limbs mentioned in section 271(1)(c) and whether a mere defect in the notice not striking off the relevant matter would vitiate the penalty proceedings. 55 to 58. The question before the Full Bench had arisen in view of the prior decision of the Division Bench in Kaushalya (supra), wherein the Division Bench of this Court was considering the challenge to an order imposing penalty. The Division Bench in Kaushalya (supra) in considering the plea that the notice issued to the assessee was defective, also considered the issue as to whether for accepting such a plea, the assessee was required to satisfy the test of any prejudice caused to the assessee, as in the absence of any prejudice, curing the defect of natural justice would not bring about any solution. In such context, the Division Bench in Kaushalya (supra) observed thus:- 56."... The assessment orders were already made and the reasons for issuing the notice under section 274 read with section 271(1)(c) were recorded by the Income-tax Officer. The assessee fully knew in detail the exact charge of the Department against him. In this background, it could not be said that ether there was non-a....
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....f reasonable opportunity of the assessee since he did not know what exact charges he had to face. In this background, quashing of the penalty proceedings for the assessment year 1967-68 seems to be fully justified." 59. The decisions rendered in Goa Coastal Resorts and Recreation (P.) Ltd. (supra) and Goa Dourado Promotions (P.) Ltd. (supra) and some of the other decision as relied by Ms. Vissanji, did not consider the issue of prejudice, which was the subject matter of consideration in Kaushalya (supra). The Court in such cases had simplicitor considered an issue in regard to the defect in the notice to hold that once the nature of notice itself is defective, then the situation is required to be remedied and penalty order on such defective notice cannot stand. However, in all the said decisions an issue in regard to prejudice was not placed for consideration of the Court, on the touchstone of the well settled principles of prejudice which would be applicable in given circumstances and as applied in the case of Kaushalya. It is this cleavage of opinion led the Division Bench of this Court at Goa in Mohd. Farhan A. Shaik (supra) to record such dichotomy and refer the questi....
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....se, to launch penalty proceedings against the assessee. But that translates into action only through the statutory notice under section 271(1)(c), read with section 274 of IT Act. True, the assessment proceedings form the basis for the penalty proceedings, but they are not composite proceedings to draw strength from each other. Nor can each cure the other's defect. A penalty proceeding is a corollary; nevertheless, it must stand on its own. These proceedings culminate under a different statutory scheme that remains distinct from the assessment proceedings. Therefore, the assessee must be informed of the grounds of the penalty proceedings only through statutory notice. An omnibus notice suffers from the vice of vagueness. 182. More particularly, a penal provision, even with civil consequences, must be construed strictly. And ambiguity, if any, must be resolved in the affected assessee's favour. 183. Therefore, we answer the first question to the effect that Goa Dourado Promotions and other cases have adopted an approach more in consonance with the statutory scheme. That means we must hold that Kaushalya does not lay down the correct proposition of law. ....
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....ceedings would not stand vitiated in the present case. 62. On the contrary, we find much substance in the contention as urged by Mr. Devvrat Singh that it was imperative for the assessee to make out a case of prejudice which neither at the threshold before the authorities below nor in the present proceedings, was ever canvassed. It is difficult to accept the assessee's contention of the penalty proceedings being rendered invalid for want of a defective notice in the absence of the basic and fundamental supporting facts of such case, either being urged by the assessee or if not so urged, by satisfying the Court in regard to the prejudice. In fact, there is no case on prejudice which is sought to be urged before us. Even considering the arguments as advanced by Mr. Agrawal, the learned amicus, even assuming that the provisions are fundamental in nature and mandatory, it is not the case that no notice was served on the assessee. Moreover, this is a case where notice was served on the assessee which was understood by the assessee in the perspective it was issued, that both the limbs had stood attracted; and it was accordingly contested/responded by the assessee. If this be....
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....on prejudice being pointed out to the Court except for bald plea of defect in the notice, in our opinion, such plea as made by the assessee cannot be accepted, so as to derail and/or render nugatory, the adjudication proceeding before the Assessing Officer and further adjudication proceeding before the (CIT) and the Tribunal, where the assessee had not even imagined that a plea on the defect in the notice was required to be taken. It is an elementary rule that a litigant cannot be permitted to assume inconsistent positions and to the detriment of the opposite party. If the party has taken up a particular position not only at the early stage of the proceedings but even before the appellate forums, it is not open to a party to appropriate and reprobate and resile from such position. When a question of fact namely whether a prejudice was at all caused, was not raised before the forums below, the parties were estopped from urging it before the appellate forum. Even otherwise and considering the well settled position in law, even a legal right which may accrue to a party can be waived. Such party would be later on estopped/precluded from raising any question on a breach of a right which....
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....f natural justice and plea would be a realistic plea which can be proved on the principle of prejudice. 66. In the decisions of the Division Bench as referred by the Full Bench, in the facts of each of these cases, it was held that the Assessing Officer failing to tick mark the limb of section 271(1)(c) of the IT Act being attracted, the penalty proceedings stood vitiated however, as observed by the Division Bench in its referral order dated 28 February, 2020 in Mohd. Farhan A. Shaik (supra) in none of these decisions, except in Kaushalya, the test of prejudice was applied. 67. We may also refer to the decision of the Division Bench of the Madras High Court in Sundaram Finance Ltd. v. Asstt. CIT [2018] 93 taxmann.com 250/403 ITR 407 in which interpreting the provisions of section 271(1)(c) read with provisions of section 274, the Court observed that in the facts of the case, the assessee's objection in regard to any defect in the notice could not be entertained in the appeal, as such an objection, can never be a question of law in the assessee's case, as it was purely a question of fact. It was observed that the assessee at no earlier point of time had rai....
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....ral justice cannot be read in abstract and the assessee, being a limited company, having wide network in various financial services, should definitely be precluded from raising such a plea at this belated stage." 68. We may observe that although there are other decisions which are cited on behalf of the parties, we do not intend to burden this judgment as the principles of law as discussed in the said judgments are well settled. However, considering the view which we have taken and more particularly the principles of prejudice to be satisfied in making a grievance on breach of principles of natural justice even in the context of a defective notice being well settled, as laid down in the decisions of the Supreme Court as noted by us above, we do not discuss these decisions to avoid prolix. 69. In the light of the above discussion, we reject the contention as urged on behalf of the assessee that the proceedings would stand covered by the decision of this Court in Ventura Textiles Ltd. (supra). To answer the question of law as initially framed, the proceedings would be required to be heard by the regular Court." 014. Further In case of Ventura Textiles Ltd. s [202....
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....ot on the issue that whether assessee has been prejudiced by the non striking of the one of twin limbs on which penalty can be levied. There is no quarrel that such is a jurisdictional issue and can be raised at any time. This Decision was also considered by the Honourable High court in case of Veena Textiles limited. [Supra] 016. Thus , In view of the above facts and binding decision of Honourable Bombay High court in case of Veena Textiles [Supra] , we hold that non striking of any limb in notice u/s 274 rws 271 (1) (c) of the Act does not come to rescue of the assessee. Hence, Ground No 1 is dismissed. 017. However in Ground no 2 assessee has also raised an issue that when the addition is sustained based on estimates penalty u/s 271 (1) c) is not sustainable. On similar facts, she relied up on coordinate bench decisions in (i) M/S ETCO PROFILES PVT. LTD. VERSUS ASSISTANT COMMISSIONER OF INCOME TAX CC-35, MUMBAI I.T.A. No. 5351/Mum/2012 and (ii) Mum Gems [2023] 155 taxmann.com 1. 018. In case of ETCO Profiles Private Limited [ Supra] facts were that search and seizure operations in Etco group and it was noticed that the assessee herein had made purchases worth Rs. 3.43 c....