Pr CIT vs. Baisetty Revathi (Andhra Pradesh High Court)

The High Court had to consider the following questions of law in an appeal filed by the Revenue:

‘1. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in deleting the penalty levied u/s. 271(1)(c) of the Income-tax Act, 1961?

2. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in deleting the penalty levied u/s. 271(1)(c) by the Assessing officer without taking into consideration provisions of Section 271(1B) of Income-tax Act, 1961 and judicial pronouncement of Hon’ble Supreme Court of India in the case of MAK Data Pvt. Ltd., Vs. CIT 358 ITR 593, wherein, it was specifically held that the A.O has to satisfy whether penalty proceedings be initiated or not during the assessment proceedings and the A.O is not required to record his satisfaction in a particular manner or reduce it into writing?’

HELD by the High Court dismissing the appeal:

(i) A copy of the proforma notice under Section 271 read with Section 274 of the Act of 1961 addressed to the assessee on 22.03.2013 is produced. Perusal thereof reflects that the irrelevant contents therein, which had no application to the assessee, were struck out leaving only one clause which reads as under:

‘Whereas in the course of proceedings before me for the Assessment Year 2010-11 it appears to me that you have concealed the particulars of your income or furnished inaccurate particulars of such income.’

(ii) It would be apposite at this stage to consider the judgment of the Karnataka High Court in M/s.MANJUNATHA COTTON AND GINNING FACTORY [2013] 359ITR 565 (KAR). Therein, a Division Bench of the Karnataka High Court observed that Section 271 of the Act of 1961 is a specific provision providing for imposition of penalties and is a complete code in itself regulating the procedure for such imposition. The Bench therefore held that penalty proceedings have to be conducted in accordance therewith, subject always to the rules of natural justice. It was pointed out that Section 271 makes appropriate provision for levying penalties on an assessee in different eventualities and one such eventuality is for concealment of income or furnishing of inaccurate particulars of such income. It was held that for starting the penalty proceedings, the condition precedent is that the Assessing Officer must be satisfied that a person has either concealed particulars of his income or furnished inaccurate particulars of such income. The person who is accused of the conditions mentioned in Section 271 should be made aware of the grounds on which imposition of penalty is proposed as he has a right to contest such proceedings and should have a full opportunity to meet the case of the revenue so as to show that the conditions stipulated in Section 271(1)(c) do not exist and that he is not liable to pay the penalty. It was further held that the practice of the revenue in sending a printed form where all the grounds mentioned in Section 271 are mentioned would not satisfy the requirement of law when the consequence of the assessee not rebutting the initial presumption is serious in nature and he has to pay a penalty ranging from 100% to 300% of the tax liability. As the provisions of Section 271(1)(c) have to be strictly construed, the Bench mandated that the notice issued should set out the grounds which the assessee has to meet specifically, otherwise the principles of natural justice would be offended as the show-cause notice would be vague. Dealing with concealment of particulars of income or furnishing of inaccurate particulars of income, the Bench observed that some cases may attract both the offences and in some, there may be overlapping of both, but in such cases initiation of the penalty proceedings must be specifically for both the offences. Drawing up penalty proceedings for one offence and finding the assessee guilty of another or finding him guilty for either, the one or the other, was held to be unsustainable in law.

(iii) In COMMISSIONER OF INCOME TAX, GUJARAT-III V/s. MANU ENGINEERING WORKS [1980] 122ITR 306 (GUJ), a Division Bench of the Gujarat High Court observed that the Assessing Officer must give a positive finding as to whether there is concealment of income by the assessee or whether any inaccurate particulars of such income had been furnished by the assessee. In the event there was no such clear-cut finding, the penalty order was held liable to be struck down.

(iv) Smt. Kiranmayee, learned counsel, placed reliance on the judgment of the Supreme Court in K.P.MADHUSUDHANAN V/s. COMMISSIONER OF INCOME TAX, COCHIN (2001) 6 SCC 665 = AIR 2001 SC 2704 = 2001 Law Suit (SC) 1093. Therein, the Supreme Court held that it is not necessary for the Assessing Officer, while issuing a notice under Section 271(1)(c), to expressly invoke Explanation 1(B) appended to the provision. It is however relevant to note that Explanation 1(B) merely adverts to a case of failure of an assessee to substantiate the explanation offered whereby the amount added or disallowed while computing the total income of such person for the purposes of the penalty provision shall be deemed to represent the income in respect of which particulars had been concealed. The Supreme Court observed that the statutory provision included the ‘Explanation’ and once the assessee was put on notice, no express invocation of the ‘Explanation’ is necessary. This judgment has no application to the case on hand as what we are concerned with presently is whether the assessee is required to be put on notice as to whether she is to be penalized for concealment of particulars of income or for furnishing inaccurate particulars of income. These are two different acts. Concealment of income is an act of omission while furnishing of inaccurate particulars of income is an act of commission. The consequences of such acts, being penal in nature, an assessee has to be informed as to what exactly is the charge against him so that he may respond thereto.

(v) No doubt, in the present case, the assessee seems to have submitted her explanation on merits without raising a doubt as to what was the precise allegation leveled against her. However, we are more concerned with the principle involved and not just the isolated case of its application against the assessee. Further, the penalty order demonstrates that the Assessing Officer was not even certain as to what was the finding on the strength of which he imposed the penalty. This is clear from the fact that the Assessing Officer recorded that he was satisfied that the assessee had concealed/furnished inaccurate particulars of income.

(vi) In the absence of a clear finding by the Assessing Officer himself, the benefit of doubt cannot be given to the revenue merely because the assessee did not complain of vagueness in the show-cause notice earlier.

(vii) Reliance placed by the revenue upon MAK DATA PRIVATE LIMITED V/s. COMMISSIONER OF INCOME TAX-II (2014) 1 SCC 674 = 358 ITR 593, is of no assistance as the Supreme Court merely observed therein that the Assessing Officer is not required to record his satisfaction in a particular manner while imposing the penalty or reduce it to writing. That is not the controversy in the case on hand.

(viii) On principle, when penalty proceedings are sought to be initiated by the revenue under Section 271(1)(c) of the Act of 1961, the specific ground which forms the foundation therefor has to be spelt out in clear terms. Otherwise, an assessee would not have proper opportunity to put forth his defence. When the proceedings are penal in nature, resulting in imposition of penalty ranging from 100% to 300% of the tax liability, the charge must be unequivocal and unambiguous. When the charge is either concealment of particulars of income or furnishing of inaccurate particulars thereof, the revenue must specify as to which one of the two is sought to be pressed into service and cannot be permitted to club both by interjecting an ‘or’ between the two, as in the present case. This ambiguity in the show-cause notice is further compounded presently by the confused finding of the Assessing Officer that he was satisfied that the assessee was guilty of both.