2018 (2) TMI 1141 - AT - Income Tax

Penalty u/s 271(1)(c) - non-striking-off of irrelevant portion in the notice issued u/s 274 r.w.s. 271(1)(c) - claim u/s 35(2AB)- Held that - In view of the parity of reasoning flowing from the judgment in the case of Shri Samson Perinchery (2017 (1) TMI 1292 - BOMBAY HIGH COURT) we are unable to accept the stand of the CIT(A) that the mistake in issue of notice does not invalidate the penalty proceedings. Therefore, on this aspect, we upheld the stand of the assessee. Accordingly, the notice issued by the Assessing Officer u/s 274 r.w.s. 271(1)(c) dated 30.03.2015 is untenable as it is ambiguous, thus, suffering from the vice of non-application of mind having regard to the ratio in the case of Dilip N. Shroff (2007 (5) TMI 198 - SUPREME Court) and also the judgment in the case of Smt. Baisetty Revathi (2017 (7) TMI 776 - ANDHRA PRADESH HIGH COURT). Thus, on this count itself, the penalty imposed u/s 271(1)(c) of the Act is liable to be deleted. Addition on which penalty has been levied is the denial of deduction u/s 35(2AB) - As per the written submission of the assessee before the lower authorities, it is revealed that the said expenditure was incurred on purchase of raw materials which were utilised during the year. It was noticed that the said expenditure was transferred to Research and Development expenditure head and, therefore, it constituted a claim u/s 35(2AB). The discussion in the assessment order as well as the assertions in the written submission before the lower authorities reveal that the search party advised that the claim u/s 35(2AB) may not be sustainable. Though no specific reasons have been brought out on record, but be that as it may, there is no finding as to why the claim for deduction of cost of raw materials was improper given the fact that there is no adverse finding that the raw materials were not consumed for the purpose of business. Thus, no reason to impose penalty on such disallowance also. we, therefore, hold that having regard to the facts and circumstances and the manner in which the amounts have been assessed to tax, does not justify the assertions of the Revenue that it constitutes furnishing of inaccurate particulars of income within the meaning of Sec. 271(1)(c) of the Act. - Decided in favour of assessee.

Issues Involved:
1. Validity of the penalty order under section 271(1)(c) of the Income Tax Act, 1961.
2. Applicability of section 292B of the Act.
3. Confirmation of the penalty amounting to ?7,36,12,079/- under section 271(1)(c) of the Act.
4. Applicability of Explanation 5A to section 271.
5. Difference between returned income and assessed income.
6. Concept of "tax sought to be evaded."
7. Genuine nature of disallowed expenses.
8. Debatable nature of disallowed expenses.

Detailed Analysis:

1. Validity of the Penalty Order Under Section 271(1)(c):
The appellant contended that the penalty order was invalid due to the jurisdictional conditions for the levy of penalty not being satisfied. The tribunal examined the notice issued under section 274 r.w.s. 271(1)(c) of the Act and found it to be vague as it did not specify whether the penalty was for "concealment of particulars of income" or "furnishing inaccurate particulars of income." The tribunal cited various judicial pronouncements, including the Hon'ble Supreme Court's decision in Dilip N. Shroff (161 Taxman 218) and the Hon'ble Andhra Pradesh High Court's judgment in Smt. Baisetty Revathi, which emphasized the necessity for clear and specific charges in penalty notices. Consequently, the tribunal concluded that the penalty notice suffered from non-application of mind and was invalid.

2. Applicability of Section 292B:
The CIT(A) relied on section 292B to confirm the penalty order, arguing that any mistake in the notice would not invalidate the proceedings. However, the tribunal disagreed, referencing the Hon'ble Bombay High Court's decision in Shri Samson Perinchery, which held that non-striking off the irrelevant portion in the notice makes it invalid. The tribunal upheld that the mistake in the notice could not be overlooked, rendering the penalty proceedings invalid.

3. Confirmation of the Penalty Amounting to ?7,36,12,079/-:
The tribunal examined the background and manner in which the penalty was imposed. The appellant had declared additional income post-search and seizure action, which was included in the return filed in response to the notice under section 153A. The Assessing Officer levied a penalty for furnishing inaccurate particulars of income and concealment of income. However, the tribunal found that the notice initiating the penalty was ambiguous and invalid, leading to the conclusion that the penalty could not be confirmed.

4. Applicability of Explanation 5A to Section 271:
The tribunal considered whether Explanation 5A to section 271(1)(c) applied, which deems certain incomes as concealed if not declared in the original return but declared post-search. The tribunal acknowledged the presumption of concealment but emphasized that the penalty proceedings are independent of the assessment proceedings. The tribunal concluded that the presumption under Explanation 5A was not conclusive for imposing the penalty, especially given the debatable nature of the disallowed expenses.

5. Difference Between Returned Income and Assessed Income:
The appellant argued that there was no difference between the returned income and the assessed income, as the final tax liability remained the same due to MAT provisions. The tribunal noted that the penalty was linked to the additional income declared post-search, which did not impact the final tax liability. This argument further supported the appellant's case against the penalty.

6. Concept of "Tax Sought to Be Evaded":
The tribunal examined whether there was any "tax sought to be evaded" given that no additional tax was payable post-assessment. The tribunal referenced the decision in CIT v Nalwa Sons Investment Ltd. (2010) 194 Taxman 387, which held that if no additional tax is payable, the concept of "tax sought to be evaded" does not apply. This reinforced the tribunal's decision to delete the penalty.

7. Genuine Nature of Disallowed Expenses:
The tribunal reviewed the nature of the disallowed expenses, including payments to doctors, personal expenses, and purchases from hawala dealers. It found that the expenses were genuine and supported by documentation. The tribunal emphasized that the disallowances were debatable and not indicative of furnishing inaccurate particulars of income.

8. Debatable Nature of Disallowed Expenses:
The tribunal acknowledged that the disallowed expenses were on debatable issues, such as the applicability of CBDT Circular No. 5/2012 and the treatment of purchases from hawala dealers. Given the precedents and the arguable nature of the claims, the tribunal concluded that the penalty under section 271(1)(c) was not warranted.

Conclusion:
The tribunal allowed the appeal, holding that the penalty notice was invalid due to non-application of mind, the disallowed expenses were genuine and debatable, and there was no "tax sought to be evaded." The penalty of ?7,36,12,079/- under section 271(1)(c) was deleted.

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