2022 (8) TMI 846 - AT - Income Tax

Penalty u/s 271(1)(c) - Disallowance u/s 40(a)(ia) - whether the assessee has concealed the particulars of its income or has furnished inaccurate particulars of income so as to make aware the assessee under which of the limb of section 271(1)(c)? - HELD THAT - AO at the time of initiating the penalty proceedings during framing assessment order has failed to apply his mind as he was not clear enough as to whether he is initiating the penalty proceedings for furnishing inaccurate particulars of income or for concealing the particulars of income rather invoked both the limbs of section 271(1)(c) of the Act. AO has not applied his mind before initiating the penalty proceedings rather borrowed his satisfaction from the tax audit report and proceeded to initiate and levy the penalty which is not sustainable in the eyes of law. When we examine penalty notice issued by the AO u/s 274 read with section 271(1)(c) it is again vague and ambiguous being not specific as to whether the assessee has concealed the particulars of its income or has furnished inaccurate particulars of income so as to make aware the assessee under which of the limb of section 271(1)(c) of the Act it is going to be penalized. Since the AO has not issued a valid notice by framing a specific charge to be initiated against the assessee rather invoked both the limbs of section 271(1)(c) of the Act for furnishing inaccurate particulars of income or for concealing the particulars of income no penalty can be imposed on the basis of the same. Hon ble Bombay High Court in the case of Mohd. Farhan A. Shaikh 2021 (3) TMI 608 - BOMBAY HIGH COURT has decided the identical issue as to initiating the penalty proceedings on the basis of invalid notice and held that penalty levied on the basis invalid notice issued under section 274 read with section 271(1)(c) of the Act is not sustainable and is liable to be set aside. As contended for the assessee that when the assessee company has suffered huge losses no penalty under section 271(1)(c) of the Act can be levied and relied upon the order passed by Hon ble Gujarat High Court and order passed by the co-ordinate Bench of the Tribunal in the cases cited as National Textiles 2000 (10) TMI 19 - GUJARAT HIGH COURT , Qpro Infotech Ltd. 2016 (7) TMI 757 - ITAT MUMBAI and ACITvs. Manish Organics India Ltd. 2011 (11) TMI 165 - ITAT AHMEDABAD Ratio of the order passed by co-ordinate Bench of the Tribunal is that when the disallowance made by the AO has not been contested by the assessee as it had incurred huge losses, which were not even available for carrying forward and set off in future years, no motive can be attributed to the assessee to make a bogus or inflated claims while filing the return of income as the entire process is revenue neutral. So in this case also when the assessee company is suffering huge losses no motive can be attributed to it. When there is no intention of the assessee to gain by making inadmissible claim penalty proceedings are not attracted as it appears to be a bonafide mistake. Even otherwise Assessing Officer has not brought on record any evidence if the assessee has claimed bogus, false or ingenuine expenses rather blindly relied upon the tax audit report without recording his satisfaction and as such penalty levied by AO is not sustainable. We are of the considered view that penalty levied by AO has been rightly deleted by CIT(A), hence finding no illegality of perversity in the impugned order passed by Ld. CIT(A). Present appeal filed by the Revenue is hereby dismissed.

Summary

Issues:
1. Validity of penalty under section 271(1)(c) of the Act for inadmissible expenses.
2. Proper application of penalty provisions by the Assessing Officer.
3. Adequacy of notice issued by the Assessing Officer for penalty proceedings.
4. Justifiability of penalty imposition on a company with substantial losses.

Issue 1: Validity of penalty for inadmissible expenses:
The Appellate Tribunal ITAT Mumbai dealt with the case where the Revenue sought to set aside the order deleting the penalty levied under section 271(1)(c) of the Act by the Assessing Officer. The Tribunal considered the Revenue's contention that the assessee repeatedly ignored the Tax Auditor's findings on inadmissible expenses for the relevant assessment year. However, the Tribunal held that the mere claiming of inadmissible expenses, even if accepted by the assessee, does not automatically amount to concealment or furnishing inaccurate particulars of income. The Tribunal cited the principle established in the case of CIT vs. Reliance Petroproducts, emphasizing that incorrect claims do not necessarily constitute inaccurate particulars. The Tribunal concluded that the Revenue failed to prove deliberate concealment or furnishing of inaccurate particulars by the assessee.

Issue 2: Proper application of penalty provisions:
The Tribunal noted that the Assessing Officer initiated penalty proceedings based on the tax audit report without clear application of mind. The AO invoked both limbs of section 271(1)(c) without specifying whether the penalty was for concealment or furnishing inaccurate particulars. This lack of clarity in the penalty notice rendered it vague and ambiguous, leading to a violation of procedural requirements. The Tribunal emphasized that the penalty provisions must be applied with precision and clarity to ensure fairness and legality in imposing penalties. The Tribunal held that the penalty imposition by the Assessing Officer was not sustainable due to the procedural irregularities and lack of clear charges.

Issue 3: Adequacy of penalty notice:
The Tribunal highlighted that the penalty notice issued by the Assessing Officer lacked specificity regarding the grounds for penalty imposition. By failing to clearly indicate whether the penalty was for concealment or furnishing inaccurate particulars, the notice did not meet the legal requirements for informing the assessee of the charges against them. The Tribunal referenced a Bombay High Court case to support the view that penalties based on vague or invalid notices are not legally tenable. The Tribunal concluded that the ambiguous penalty notice further undermined the validity of the penalty proceedings initiated by the Assessing Officer.

Issue 4: Justifiability of penalty on a company with substantial losses:
The Tribunal considered the argument that imposing a penalty on a company with significant losses may lack justification. Citing precedents, the Tribunal noted that when an assessee incurs substantial losses with no benefit for future years, attributing a motive for making incorrect claims becomes questionable. The Tribunal emphasized that penalties under section 271(1)(c) require a deliberate act of concealment or furnishing inaccurate particulars, which was not evident in the case of the assessee. The Tribunal held that in the absence of evidence supporting deliberate misconduct, the penalty imposition on a company facing substantial losses was not warranted. The Tribunal upheld the decision of the CIT(A) to delete the penalty, concluding that the penalty levied by the Assessing Officer was rightfully overturned.

In conclusion, the Appellate Tribunal ITAT Mumbai dismissed the Revenue's appeal, upholding the decision to delete the penalty imposed under section 271(1)(c) of the Act on the assessee. The Tribunal emphasized the importance of clear application of penalty provisions, adequacy of penalty notices, and the necessity of proving deliberate concealment or furnishing inaccurate particulars to justify penalty imposition.