2018 (1) TMI 236 - AT - Income Tax

Penalty u/s 271(1)(c) - disallowance of reimbursement of selling and distribution expenses on the ground that the assessee has concealed particulars of income and also furnished inaccurate particulars of income - striking off of irrelevant portion of notice - Held that - AO levied the penalty on both the charges, i.e. for concealing the particulars of income and furnishing inaccurate particulars of income. Right from the assessment stages to levy of penalty, the AO has initiated penalty on both charges which is not the case as per the provisions of section 271(1)(c) as the two charges, i.e. concealment of particulars of income or furnishing of inaccurate particulars of income are two different connotations. The issue of notice u/s 274 r.w.s. 271(1)(c) goes to the root of the matter of assuming jurisdiction to levy penalty u/s 271(1)(c), therefore, before issuance of notice, the AO has to arrive at a satisfaction as to whether penalty proceedings are initiated for concealment of particulars of income or furnishing of inaccurate particulars of income. The AO cannot take both the charges for levying penalty by stating that the assessee has concealed particulars of income and also furnished inaccurate particulars of income. We are of the considered view that penalty proceedings initiated u/s 271(1)(c) is void ab initio and liable to be quashed as the AO has issued vague notice u/s 274 r.w.s. 271(1)(c) without striking off of irrelevant portion of notice which is a clear case of non application of mind by the AO before initiation of penalty proceedings. We further notice that from the assessment stage to levy of penalty, the AO has initiated penalty on both charges, i.e. concealment of particulars of income and also furnishing of inaccurate particulars of income which is not so in the case of penalty u/s 271(1)(c) of the Act. Therefore, we are of the considered view that the penalty proceedings initiated by the AO is bad in law and hence, we quash the penalty proceedings and delete the penalty levied u/s 271(1)(c) of the Act. - Decided in favour of assessee

Issues Involved:
1. Concealment of income and default within the meaning of Section 271(1)(c).
2. Classification of reimbursement of expenses as income.
3. Establishment of deduction claims leading to alleged concealment.
4. Validity of penalty due to shortcomings in proof for deduction claims.
5. Timeliness and validity of the penalty order.

Detailed Analysis:

1. Concealment of Income and Default within Section 271(1)(c):
The core issue revolves around whether the assessee concealed income or furnished inaccurate particulars of income within the meaning of Section 271(1)(c). The CIT(A) and AO concluded that the assessee concealed income, leading to a penalty of ?1,70,00,000. However, the assessee argued that the disallowance of expenses does not amount to concealment.

2. Classification of Reimbursement of Expenses as Income:
The assessee contended that the amount received from SAGEM was a reimbursement for sales promotion expenses and should be deductible from expenses incurred. The CIT(A) disagreed, treating it as income to be reflected on the income side of the Profit & Loss Account. The main argument from the assessee was that the treatment of this receipt did not impact the profit for the year.

3. Establishment of Deduction Claims Leading to Alleged Concealment:
The CIT(A) concluded that the deduction of ?4,77,58,412 was not fully substantiated, leading to the claim of concealment. The assessee argued that the net amount spent was ?1,80,86,421, and the denial of deduction should not be considered as concealment.

4. Validity of Penalty Due to Shortcomings in Proof for Deduction Claims:
The assessee contended that the penalty was levied due to shortcomings in proof required for claiming deduction, which should not attract a penalty for concealment. The CIT(A) upheld the penalty, stating that the reduction in actual profit due to disallowance amounted to furnishing inaccurate particulars of income.

5. Timeliness and Validity of the Penalty Order:
The assessee argued that the penalty order was barred by limitation and void ab initio as the notice issued under Section 274 r.w.s. 271(1)(c) was not in accordance with law. The Tribunal admitted this additional ground, noting that the AO issued a vague notice without specifying whether the penalty was for furnishing inaccurate particulars or concealment of income.

Tribunal’s Findings:
The Tribunal found that the AO initiated penalty proceedings on both charges—concealment of particulars of income and furnishing inaccurate particulars of income—without specifying the exact charge. This approach was contrary to the provisions of Section 271(1)(c), which requires a clear distinction between the two charges. The Tribunal emphasized that initiating penalty proceedings on one ground and levying penalty on another violates the principles of natural justice.

The Tribunal relied on several case laws, including the decision of the Hon’ble Karnataka High Court in CIT vs. Manjunatha Cotton & Ginning Factory and the Hon’ble Supreme Court in CIT vs. SSA’s Emerald Meadows, which underscored the necessity of specifying the exact charge in the penalty notice.

Conclusion:
The Tribunal concluded that the penalty proceedings were void ab initio due to the AO’s failure to specify the exact charge in the penalty notice. The penalty levied under Section 271(1)(c) was quashed, and the appeal filed by the assessee was allowed. The order was pronounced in the open court on 29th December 2017.

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