Safina Hotels Private Limited vs. CIT (Karnataka High Court)

DATE: January 25, 2016 (Date of pronouncement)
DATE: February 12, 2016 (Date of publication)
AY: 2001-02
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S. 271(1)(c)/ 271(1-B): If the notice is issued without application of mind (by striking out the relevant part in the notice), the penalty proceedings are invalid

The assessee filed a return of income claiming certain deductions as revenue expenditure disclosing the same under the head ‘financial expenses’ in the return of income filed by him. This return was taken for scrutiny and after adjudication, the Assessing Officer held that the claim made by the assessee as revenue expenditure is capital in nature and allowed the deduction claimed by the assessee. Having held so, separate proceedings were initiated under Section 271(1)(c) of the Act to levy penalty for willful concealment of the particulars of income and for furnishing inaccurate particulars of such income. In the printed proforma issued by the Assessing Officer under Section 274 read with Section 271 of the Act the Assessing Officer has deleted the paragraph relating to “have concealed the particulars of your income or furnished inaccurate particulars of such income” and has put a right mark on the printed form relating to the para “failure to comply with a notice under Section 22(4)/23(2) of the Indian Income-tax Act, 1922 or under Section 142(1)/143(2) of the Income Tax Act, 1961” which corresponds to Section 271(1)(b) of the Act. The High Court had to consider whether such a notice is proper in law. HELD by the High Court:

(i) It is clear that the notice is issued proposing to levy penalty under Section 271(1)(b) of the Act whereas the order is passed by the Assessing Officer under Section 271(1)(c) of the Act which clearly indicates that there was no application of mind by the Assessing Officer while issuing the notice under Section 274 of the Act. It is imperative from the order under Section 271(1)(c) of the Act that the Assessing Officer noticed that the assessee has declared the revenue expenditure in the financial expenses which was capital in nature. This is based on the verification of details of the return of income filed by the assessee. If so, there was no occasion for the Assessing Officer to come to a conclusion that there was concealment of the income by the assessee or the assessee has filed inaccurate particulars. The very particulars were available in the return of income;

(ii) This clearly indicates that the Assessing Officer had no jurisdiction to pass the penalty order under Section 271(1)(c) of the Act without issuing a proper notice as required under law and moreover, when the particulars are disclosed in the return of income;

(iii) As regards Section 271(1-B) of the Act, it clearly indicates that the assessment order should contain a direction for initiation of proceedings. Merely saying that the penalty proceedings have been initiated would not satisfy the requirement, a direction to initiate proceeding shall be clear and not be ambiguous;

(iv) In the light of the said judgment of the Co-ordinate Bench in CIT vs. Manjunatha Cotton And Ginning Factory 350 ITR 565 (Kar), we are of the considered view that the Assessing Officer has not applied his mind at the time of issuing notice under Section 274 R/W Section 271(1)(b) of the Act. This view is fortified by the order passed under Section 271(1)(c) of the Act. No direction is coming forth in the assessments order for levying penalty which is mandatory as per Section 271(1B) of the Act. Considering the relevant factors, appellate commissioner has rightly allowed the appeal of the assessee setting-aside the order passed by the Assessing Officer which has been reversed by the ITAT on the ground that the assessee deliberately evaded the payment of tax by declaring the capital expenditure as revenue expenditure in the ‘financial expenses’. In our considered opinion, for the reasons stated above, the order passed by the ITAT is not sustainable. Accordingly, we set aside the order of the ITAT and restore the order passed by the CIT(A) answering the substantial questions of law in favour of the assessee and against the revenue.

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