TaxTMI 
TaxTMI 
TaxTMI 
2024 (3) TMI 1491
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....egal and is opposed to law. The learned Commissioner (Appeals) erred in law and on facts in confirming the action of learned assessing officer in levying penalty under section 270A(9) of the Act . 2. The learned CIT(A) ought to have seen that the assessing officer erred in levying penalty for under-reported income and such under reported income is a consequence of misreporting is not based on facts of appellants case. 3. The learned Commissioner Of Income (Appeals)-20 ought to have seen that penalty proceedings is independent of assessment proceedings nd therefore penalty is not leviable merely on the ground that certain additions have been made in the assessment proceedings. 4. The learned assessing officer erred in levying penalty merely by stating that conditions (c) and (d) of section 270(A) is attracted without substantiating the same with the facts of appellant's case. The burden of proving the allegation lies on the Assessing officer who has miserably failed to discharge the burden of proof. 5. The learned CIT(A)-20 ought to have seen that the penalty proceedings is deemed to have been initiated only with the issue of notice under sect....
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....und to be in order the income offered by the appellant by estimating disallowance of portion of marketing expense over a period. The AO has neither established or even alleged that the said income offered by the appellant as not substantiated by any evidence neither alleged in the assessment order that there has been false entries in the books of account which would attract sub (9) of section 270(A). 10.The learned CIT(A) ought to have seen that the discretion to impose penalty must be exercised judicially. The learned CIT(A) failed to see that addition made in the assessment order is on ad hoc basis, based on estimated disallowances of portion of marketing expense and based on surrender of income not backed by any incriminating material and would therefore not attract "under reporting as a consequence of misreporting" warranting levy of penalty under section (9) of section 2 70 (A). 11.The learned CIT(A) failed to see that in the instant case addition is made by the assessing officer merely based on income surrendered by the appellant and not based on any incriminating material warranting levy of penalty. Neither the appellant nor the investigation team had any e....
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....132(4) of the Act, from Shri S.D.Rami Reddy, was reproduced as under: "Q.17. While answering to Q.6, in your sworn statement recorded under section 132(4) dated 9.12.2018, while asking the modus operandi of generating unaccounted cash, you have stated that you will raise bogus bills for which you pay them through banking channels and receive cash from them. Please go through your statement and clarify about generation of unaccounted cash. Ans. Sir, we have not raised any bogus bills from our suppliers of gift articles to generate unaccounted cash. However, we received back one third of the invoice value on an average in the form of cash from our gift article suppliers. Since this amounts to inflation of the expenditure in our books of account, we undertake to withdraw of claim towards expenditure in the respective years. Q:18. Please furnish the quantity of cash generated invoice-wise and party -wise with details of suppliers? Ans. Sir I don't have the invoice-wise and party -wise details of cash generated. However, I am here by submitting year-wise details of cash generated on this account as under - S.No. Financial Year Amount in C....
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....021 for both the assessment years, penalty proceedings were initiated u/s 270A of the Act, and notice u/s.274 r.w.s.270A of the Act dated 26.07.2021 was issued and called upon the assessee to explain 'as to why' an order imposing penalty should not be made u/s.270A of the Act, for 'under reporting of income and under reporting as a consequence of misreporting of income'. In response to the show cause notice, the assessee vide letter dated 07.08.2021 filed detailed explanation and argued that show cause notice issued u/s.274 r.w.s.270A of the Act, is invalid, because, the AO has not specified any charge, for which, penalty u/s.270A of the Act, was initiated whether it is for 'under reporting of income and under reporting as a consequence of misreporting of income'. The assessee had also challenged levy of penalty u/s.270A of the Act, on additional income offered by the assessee towards estimated disallowance of marketing expenses being 'gift articles' purchased on the basis of statement recorded from the Director of the assessee company during the course of search and argued that the AO has not made out a case of 'under reporting of income and under reporting as a consequence of mis....
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....ee company is engaged in business of manufacture and sale of IMFL products and is one of the prime suppliers to M/s. TASMAC. b) The modus operandi of the business is, assessee indulges in suppression of real income by means of inflation of expenses, particularly under the head purchase of gift articles and other business promotion expenses. Further, the payments were made to suppliers by transferring by way of cheques/RTGS. Later, the Vendor/suppliers withdrew cash and handed over to the assessee - M/s. Enrica Enterprises Pvt Ltd. By this modus operandi the assessee has generated unaccounted cash over a period of years. Further, Mr.Rami Reddy, director of M/s. EEPL decides the quantum of amount to be generated in cash from various suppliers. The close aide of the group were actively involved in assisting for safe keeping the cash. The huge sum of cash seized during the search action were such safely kept cash meant for meeting out certain expenditures. In his self-incriminating statement u/s 132(4) of the IT Act 1961, Mr.Rami Reddy, has claimed to have resorted into the activity of withdrawing, by way of cash, a portion of his RTGS payments towards supply of gift ....
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.... e) Further, assessee has stated in its reply dated 29.07.2021 that, "it has not been specified in the notice as to what constituted Under-Reporting as per sub-section (2) of sec. 270A and Under-Reporting in consequence of misreporting of income as per sub-section (90 of sec. 270A of the Act. It is to be clarified that the penalty has been initiated u/s 270A of the Income Tax Act, 1961 for misreporting of income which is evidently seen from the notice u/s 274 read with section 270A of the Income Tax Act, 1961, dated 26.07.2021 For, further clarification the relevant section is reproduced here. 270A. Penalty for under reporting and misreporting of income .- (1) The Assessing Officer or the Commissioner (Appeals) or the Principal Commissioner or Commissioner may, during the course of any proceedings under this Act, direct that any person who has under-reported his income shall be liable to pay a penalty in addition to tax, if any, on the under-reported income. 9) The cases of misreporting of income referred to in sub-section (8) shall be the following, namely- (a) misrepresentation or suppression of facts; (b) failure to record investments in the....
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.... manner or reduce it into writing .... The principle laid down by this court has correctly been followed by the Revenue and we find no illegality in the Department initiating penalty proceedings in the instant case ... " g) It is also evident from the search proceedings and the sworn statements that, assessee, has deliberately and knowingly appropriated huge amount of cash from the business and stored in the residential premises of the employees and relatives. Therefore, it is crystal clear that the proceedings were initiated for misreporting of income. VI. Accordingly, penalty is levied u/s 270A of the Income Tax Act, 1961, for under- reporting as a consequence of mis-reporting of income. The penalty amount is worked out as under: Additional income brought to tax: 15,79,00,000 Tax on additional income: 4,73,70,000 Add: Surcharge 56,84,400 NT Tax payable : 5,30,54,400 Add: Education Cess 15,91,632 Net Tax Payable: 5,46, 46,032 Penalty Levied 10,92,92,064 Accordingly, penalty of Rs. 10,92,92,064/- is levied and the assessee is directed to pay the same as per the demand notice enclosed. 7. Being aggrieve....
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..... Therefore, opined that it is a clear case of 'under reporting of income and under reporting as a consequence of misreporting of income' as per sub-section (9) of Sec.270A of the Act. Therefore, there is no error in the reasons given by the AO to impose penalty u/s.270A of the Act, and thus, rejected arguments of the assessee and upheld penalty levied by the AO. The relevant finings of the Ld.CIT(A) are as under: 7. Decision: 7.1 I have gone through the assessment order u/s 153A r.w.s. 143(3), order u/s.270A, Grounds of appeal and written submissions of the appellant, judicial precedents relied on by it. 7.2 Ground of appeal No 1&2: Above are general grounds which do not require separate adjudication. 7.3 Ground of appeal No 3: 7.3.1 The appellant has contested this appeal on technical ground that in the penalty notice sent both limbs of 'Under-reporting of Income* and 'Underreporting of Income as a consequence of misreporting of Income' were retained. Facts leading to penalty have been carefully considered by me. It is a case where appellant company has been making wrong entries of marketing Expenditure by inflatin....
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....eged by the AO is not attracted in its case. It is noticed from submissions-made by the appellant that the AO has queried about marketing expenditure; during assessment proceedings. The appellant replied that all purchase invoices were available with department. Thereafter it appears that the AO has not pursued the matter of seeking further evidence from the appellant to prove genuineness of expenditure claimed as the appellant itself admitted inflation of Expenditure. As per provisions of section 270A (2)(a) underreporting of income is 'difference between income assessed u/s 143(3) rws 153A and income determined u/s 143(1)'. Therefore, in the return of Income originally filed appellant has claimed expenditure not substantiated by evidence. Recording of false entry in books of account / non-entry of cash received are both undisputed admitted facts. Having accepted inflation of expenditure, claiming purchase invoices available with department prove genuineness of expenditure is incorrect. 7.3.5 Similarly appellant mentioned that there is no finding in the assessment order that there have, been false entries in the books of account, hence 270A (9) (d) is not attracte....
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....appellant there is no other evidence available with..the department. 7.3.9 The AO made enquiries during assessment proceedings with suppliers of gift articles to appellant company and some of the suppliers have agreed that the appellant company took back some cash from them (Para 2, page 8 of Assessment order). Copy of letter of one of suppliers of appellant company wherein supplier has agreed that he has withdrawn cash as required by appellant company available on assessment record is reproduced as under: 7.3.10 Hence it is incorrect to say no evidence is available with AO with regard to inflation of expenditure hence false entry made in books of accounts by the appellant company. Since the appellant company has admitted undisclosed income in the return of Income filed, the AO has not expanded scope of enquiries once sufficient evidence regarding modus operandi was found. When unaccounted cash generated is not recorded in books and inflation of expenditure has not been disputed, the appellant can't argue its case do not attract 270A (9) (d). 7.3.11 Further I have come across cases where it is held that minor defect in the notice issued cannot be the ....
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....s not adjudicated applicability of provisions of section 270A (6) to the facts of case for the year and consequently incorrectly levied penalty @ 200%, The question to be determined is whether it was required on part of AO to verify applicability of 270A(6). 7.4.2 Section 270A(2) defines 'under-reported income'. Section 270A (6) spells out instances of exceptions to under-reporting of Income. Section 270A(9) defines 'misreporting of Income*. Verification of penalty order under consideration shows that the AO has clearly mentioned in the penalty order that it is a case of misreporting income and attracts clauses (c) & (d) of section 270A(9) vide page 14 of order . In this context it is relevant to refer to provisions of section 270A (8) which is reproduced as under: (8) Notwithstanding anything contained in sub-section (6) or subsection (7), where under-reported income is in consequence of any misreporting thereof by any person, the penalty referred to in subsection (1) shall be equal to two hundred per cent of the amount of tax payable on underreported income. 7.4.3 Therefore, provisions of section 270A (8) say that as far as a case where '....
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.... Managing Director stated that he is offering income on estimate basis. He has clarity with regard to unaccounted cash generated by inflation of expenditure each year. Though he said he can't product invoice-wise cash generated, he is clear about total quantum of unaccounted cash generated each year. Amounts admitted for each year are not some random round figures. That itself shows that disclosure made by the appellant is not on estimate basis but basing on actual unaccounted cash generated each year, Shri D. Rami Reddy in his sworn statement dated 04-02-2019 while replying to question No: 17 stated that the appellant receives I/3rd of invoice value as cash back from suppliers. Therefore 1/3rd of invoice value of gift articles recorded as marketing expenses for the year would give unaccounted cash generated by the appellant Coming to issue why entire unaccounted cash generated could not be found during search, the AO has mentioned in penalty order that unaccounted cash generated was admittedly used by appellant company to meet some inadmissible expenditure outside books. 7.4.5 In view of detailed discussion made above, I am of the opinion that appellant's....
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.... (b) where the total income determined under clause (a) of sub-section fl) of section 143 or assessed/reassessed or recomputed in a preceding order is a toss, the amount of tax calculated on the under-reported income as if it were the total income; (c) in any other case determined in accordance with the formula - (X-Y) where, X = the amount of tax calculated on the under-reported income as increased by the ""total income determined under clause (a) of subsection (1) of section 143 or total income assessed, reassessed or recomputed in a preceding order as if it were the total income; and Y = the amount of tax calculated on the total income determined under clause {a} of sub-section (1) of section 143 or total income assessed, reassessed or recomputed in a preceding order. 7.6.3 The above section divides the cases into two categories, 1. Where No Return of Income has been filed and Income has been assessed for the first time. Clause (a) & (b) of 270A (10) are wrt computation of tax payable in those cases, 2. In all other cases, tax payable is to be computed as per provisions of section 270A (10) (C). The present ....
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....ground was specified in the show cause notice issued u/s.274 r.w.s.270A of the Act. Therefore, he submitted that order passed by the AO imposing penalty u/s.270A(9) of the Act, consequent to vague notice is invalid, unlawful and liable to be quashed. The Ld. Counsel for the assessee further submitted that levy of penalty u/s.270A of the Act, is not mandatory in every case, where, there is difference between assessed/re-assessed income and the return of income. This is very important, if you go by the wording in Sec.270A of the Act, where the expression used is 'may'. Therefore, the AO is vested with the power either to levy or not to levy penalty u/s.270A of the Act. Therefore, before issuing penalty, the AO is required to arrive at a clear satisfaction to the effect that under which limb the assessee is charged for tax evasion i.e. it is for 'under reporting of income and under reporting as a consequence of misreporting of income'. In the present case, if you go by the findings of the AO, there are no findings with regard to 'under reporting of income and under reporting as a consequence of misreporting of income'. Further, show cause notice issued by the AO is also not clear unde....
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....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'. Further, during the course of assessment proceedings, enquiries are conducted with suppliers of 'gift articles', where, they have confirmed, refund of 1/3rd of amount of supplies to the assessee in cash at times. Form the above, it is very clear that the assessee has 'under reporting of income and under reporting as a consequence of misreporting of income' in respect of marketing expenses, and thus, the case of the assessee clearly falls under sub-clauses (c) & (d) of Sec.270A(9) of the Act, and thus, the AO has rightly levied penalty u/s.270A of the Act, and their orders should be upheld. 12. We have heard both the parties, perused the materials available on record and....
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....filed return of income in response to notice u/s.153A of the Act, for both the assessment years and offered additional income admitted during the course of search in respect of disallowance of marketing expenses and paid taxes. The AO has also accepted return of income filed by the assessee in response to notice u/s.153A of the Act, without any further addition and also recorded a clear finding in the assessment order that after going through the circumstances in its entirety, the income offered by the assessee, including estimated disallowance of portion of marketing expenses, is found to be in order and accepted. In other words, there is no separate addition towards marketing expenses, but the assessment has been completed by accepting additional income offered by the assessee towards estimated disallowance of marketing expenses for both the assessment years. 14. In light of above factual back ground, if we examine the order passed by the AO imposing penalty u/s.270A(9) of the Act, it is necessary to refer to provisions of Sec.270A of the Act, and the reasons given by the AO to impose penalty u/s.270A(9) of the Act. The provisions of Sec.270A of the Act, deals with penalty for....
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....posing penalty u/s.270A of the Act, is an appealable order u/s.246A of the Act before the First Appellate Authority. If penalty u/s.270A of the Act, has been mandatory, there have not been any provision of appeal u/s.246A of the Act. Since, the order imposing penalty Sec.270A of the Act, is an appealable order, then, it cannot be said that penalty u/s.270A of the Act, is not mandatory in nature. Since, 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 of the Act. 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 o....
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....ly 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. In the present case, if you go by the assessment order passed by the AO, there is no satisfaction in respect of initiation of penalty proceedings u/s.270A of the Act, whether it is for 'under reporting of income and under reporting as a consequence of misreporting of income' thereof which is clearly evident from the assessment order passed by the AO, where, the AO simply referred to initiation of penalty proceedings u/s.270A of the Act. Further, said lapse is even continued while issuing show cause notice u/s.274 r.w.s.270A of the Act, where, the AO simply specified 'under reporting of income and under reporting as a consequence of misreporting of income', without specifying for which charge the assessee is directed to pay penalty u/s.270A of the Act. There is no whisper as to which limb of Sec.270A of the Act,....
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....of any W.P.(C) 7092/2022 Page 4 of 6 reason as in the penalty notice the Respondents have failed to specify the limb - "underreporting" or "misreporting" of income, under which the penalty proceedings had been initiated. 7. This Court also finds that there is not even a whisper as to which limb of Section 270A of the Act is attracted and how the ingredient of sub-section (9) of Section 270A is satisfied. In the absence of such particulars, the mere reference to the word "misreporting" by the Respondents in the assessment order to deny immunity from imposition of penalty and prosecution makes the impugned order manifestly arbitrary. 8. This Court is of the opinion that the entire edifice of the assessment order framed by Respondent No.1 was actually voluntary computation of income filed by the Petitioner to buy peace and avoid litigation, which fact has been duly noted and accepted in the assessment order as well and consequently, there is no question of any misreporting. 9. This Court is further of the view that the impugned action of Respondent No.1 is contrary to the avowed Legislative intent of Section 270AA of the Act to encourage/incentivize a taxpay....
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....d after considering its earlier decision in the case of Sudaram Finance Ltd. v. ACIT reported in [2018] 93 taxmann.com 250, held that issuing a printed form of notice without striking inapplicable portion in the notice and not charging the assessee for particular evasion vitiates the entire penalty proceedings, including the order passed by the AO imposing penalty u/s.271(1)(c) of the Act. A similar view has been taken by the Hon'ble Karnataka High Court in the case of CIT v. Manjunatha Cotton & Ginning Factory reported in [2013] 359 ITR 565, 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 upheld the decision of the Hon'ble Karnataka High Court in the case of CIT v. SSA's Emerald Meadows reported in [2016] 73 taxmann.com 241. 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 penalt....
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....unearthed during the course of search which shows the amount of cash received back by the assessee from any supplier. Further, cash seized during the course of search could not be identified with a particular assessment year either by the assessee or the investigation Team and further, the additional sum of Rs.58.72 Crs. (Rs.113.99 Crs. - Rs.55.27 Crs.) offered by the assessee was not identified with any Financial Year. This amount was estimated figure which did not belong to any year nor was it represented by asset or income that was unearthed in the search proceedings. Although, the department found unaccounted cash during the course of search in the residential premises of the directors and their associates, said cash was not directly linked to assessee and its business with any evidence. Assuming for a moment said cash belongs to appellant Company, but it was found during the course of search and at best it can be linked to year of search. However, it cannot be extrapolated or estimated to any other years without any reference to incriminating materials. The allocation of 1/3rd of marketing expenses on estimated basis is purely on the basis of admission of the assessee company ....
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....allowance. Further, the quantification made towards additional income was purely on ad hoc estimation basis by taking into account statement recorded from the assessee and disallowed 1/3rd of total expenditure incurred under the head 'marketing expenses'. There is no finding in the assessment order to the effect that the assessee had either 'misreported income' or 'under reporting of income'. Further, quantification of estimated disallowance was made on the basis of regular books of accounts maintained by the assessee, but not based on any unaccounted purchase bills etc,. Further, the assessee has disclosed total expenditure incurred under the head marketing expenses in the regular return of income filed for both assessment years. From the above, it is undisputedly clear that the appellant has not misrepresented facts with regard to marketing expenditure. Therefore, we are of the considered view that it is not a case of misrepresentation or suppression of facts based on any evidences, but admission of additional income is purely on the basis of statement recorded u/s.134 of the Act, without any reference to incriminating material found as a result of search. Therefore, in our consi....
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....iated. Further, the AO accepted income admitted by the assessee with categorical statement without any allegation against the income admitted or incorrectness of the books of accounts or evidence for the expenditure. In our considered view, income voluntarily admitted by the assessee does not constitute 'under reporting of income' or 'misreporting of income', and thus, in our considered view, penalty levied u/s.270A of the Act is unsustainable in law on merits, and thus, we quashed the order passed by the AO imposing penalty u/s.270A(9) of the Act. 25. In the result, appeal filed by the assessee in ITA No.1166/Chny/2023 for AY 2017-18 is allowed. ITA No.1167/Chny/2023 for AY 2018-19: 26. The facts and issues involved in this appeal are identical to the facts and issues which we had already been considered in ITA No.1166/Chny/2023 for the AY 2017-18. The reasons given by us in the preceding paragraphs Nos. 12 to 23 shall, mutatis mutandis, apply to this appeal, as well. Therefore, for similar reasons, we quashed the order passed by the AO imposing penalty u/s.270A(9) of the Act for Asst. Year 2018-19 also. 27. In the result, appeal filed by the assessee in ITA No.1167/Ch....