2017 (8) TMI 722 - AT - Income Tax

Levy of penalty u/s.271(1)(c)- Booking bogus purchases - CIT(A) observed that, no addition was made by the AO while computing assessment, that the returned income and assessed income remained same, that the assessee was found to be debiting bogus expenditure in his books of account, that closing WIP was akin to the loss incurred by assessee during the year - Held that - Penalty can be imposed only on the ground on which proceedings were initiated. Similar views have been expressed in the case of Baisetty Revathi(2017 (7) TMI 776 - ANDHRA PRADESH HIGH COURT). Considering the above, we reverse the order of the FAA and decide the effective ground of appeal in favour of the assessee.

Summary

Issues Involved:
1. Levy of penalty under Section 271(1)(c) of the Income-tax Act, 1961.
2. Allegation of furnishing inaccurate particulars of income.
3. Non-striking off of irrelevant portions in the penalty notice.

Detailed Analysis:

1. Levy of Penalty under Section 271(1)(c):
The case revolves around the levy of penalty under Section 271(1)(c) of the Income-tax Act, 1961, which deals with penalties for concealing income or furnishing inaccurate particulars of income. The assessee-company, engaged in Real Estate Development, was subjected to a search and seizure operation. The Assessing Officer (AO) found that the company had debited bogus bills in its books, which inflated the cost of construction carried forward as work-in-progress (WIP). Despite the books being closed at the time of search, the assessee reduced the opening WIP in the subsequent assessment year to reflect the bogus purchases. The AO initiated penalty proceedings, concluding that the assessee had furnished inaccurate particulars of income and levied a penalty of ?57.36 lakhs.

2. Allegation of Furnishing Inaccurate Particulars of Income:
The First Appellate Authority (FAA) upheld the AO's decision, noting that the Kanakia Group, to which the assessee belonged, had admitted to bogus purchases. The FAA observed that the assessee had obtained accommodation entries to jack up expenses and reduce taxable profits and WIP. The FAA referred to Explanation 5A to Section 271(1)(c), justifying the penalty on the grounds that the assessee had debited bogus expenditure in its books, which was akin to incurring a loss as envisaged under Explanation 4 to Section 271(1)(c).

3. Non-Striking Off of Irrelevant Portions in the Penalty Notice:
During the hearing, the Authorized Representative (AR) argued that no penalty could be levied for concealment of income as there was no change in the returned income. The AR highlighted that the AO had not struck off the irrelevant portion in the penalty notice, thus failing to specify whether the penalty was for furnishing inaccurate particulars or concealing income. This argument was supported by several case laws, including Meherjee Kasinath Holding Pvt. Ltd., Samson Perinchery, and Baisetty Revathi, which emphasized the importance of clarity in penalty notices.

The tribunal deliberated on these arguments and referred to the case of Meharjee Cassinath Holdings Private Ltd., where the issue of non-striking off the relevant portion of the penalty notice was extensively discussed. The tribunal noted that the notice issued by the AO in a standard proforma without striking off the irrelevant clause indicated non-application of mind, making the penalty notice legally untenable. This view was supported by the Hon'ble Supreme Court's decision in Dilip N. Shroff and the Hon'ble Bombay High Court's decision in Samson Perinchery, which held that penalty could only be imposed on the specific ground mentioned in the penalty notice.

Conclusion:
Respecting the precedents and considering the AO's failure to strike off the relevant portion in the penalty notice, the tribunal held that the penalty levied by the AO and confirmed by the FAA was not as per law. Consequently, the tribunal reversed the FAA's order and decided the issue in favor of the assessee, allowing the appeals for both assessment years. The order was pronounced in the open court on 9th August 2017.