2017 (4) TMI 290 - AT - Income Tax

Penalty u/s 271(1)(c) - accommodation entries - post search enquiries - no independent enquiry - Held that - When the assessee has not been specifically made aware of the charges leveled against him as to whether there is a concealment of income or furnishing of inaccurate particulars of income on his part, the penalty u/s 271(1)(c) of the Act is not sustainable. Penalty proceedings are independent of assessment proceedings and that a mere confirmation of addition cannot be the sole ground to levy penalty. In the penalty orders, the AO has himself observed that the entire proceedings of assessments were based on a) post search enquiries b) statement of Shri Tarun Goyal, which have been the key factors to impose the penalty u/s 271(1)(c). In the present appeals, it is undisputed that no incriminating material was unearthed during assesssee s search u/s 132 of the Act, that no independent enquiry and examination took place during assessment proceedings qua Shri Tarun Goyal and Micro Infotech Ltd, that only post search enquiries were made the basis of the entire assessment and penalty proceedings/orders, that no cross examination of Shri Tarun Goyal took place, that no effort was made to find out the status of the supplier independently, that the assessee s contention that software purchase was genuine was discounted on the basis of preponderance of probabilities and inferences, that no material was brought on record to establish that cash found its way back to the coffers of the assessee. It is apparent that no independent inquiry was made from the concerned party by issuing notices u/s 133(6)/131 and the entire foundation is laid on post search enquiries, search and seizure operation of Shri Tarun Goyal and statement of Shri Tarun Goyal. On an overall consideration of all these facts, we are inclined to agree with the Ld. AR s argument that the present case may lie in the realm of facts not proved but cannot fall in the realm of facts disproved . Since the scales are different in penalty and quantum proceedings and penalty cannot be automatic to the confirmation of addition in the quantum proceedings, we are disinclined to agree with the contention of the department that the confirmation of the quantum by the ITAT would automatically result in confirmation of the penalty. - Decided in favour of assessee

Issues Involved:
1. Validity of penalty orders under Section 271(1)(c) of the Income Tax Act, 1961.
2. Adequacy of the assessee's explanation regarding software purchases.
3. Procedural fairness and natural justice in penalty proceedings.
4. Distinction between assessment proceedings and penalty proceedings.
5. Requirement of specific grounds for penalty initiation.

Detailed Analysis:

1. Validity of Penalty Orders under Section 271(1)(c):
The primary issue revolves around whether the penalty orders under Section 271(1)(c) were valid. The Tribunal observed that the notices issued under Section 274 were vague and mechanical, failing to specify whether the penalty was for "concealment of income" or "furnishing inaccurate particulars of income." This lack of specificity violated the principles established by the Hon’ble Karnataka High Court in the case of Manjunath Cotton Ginning Factory, which mandates clear communication of the grounds for penalty. The Tribunal concluded that the penalty orders were not sustainable because the exact limb under which the penalty was initiated was not specified.

2. Adequacy of the Assessee's Explanation Regarding Software Purchases:
The assessee's explanation regarding the purchase of software from M/s Macro Infotech Ltd. was scrutinized. The AO disallowed the depreciation claimed on the software, alleging that the purchases were bogus. The assessee argued that the software was used in its business and provided details of its transactions, including payments made through account payee cheques. However, the AO and the CIT(A) were not convinced, leading to the disallowance of depreciation and subsequent penalty imposition. The Tribunal noted that no incriminating material was found during the search of the assessee's premises, and the entire case was based on post-search enquiries and the statement of Shri Tarun Goyal, which lacked independent verification.

3. Procedural Fairness and Natural Justice in Penalty Proceedings:
The assessee contended that the penalty proceedings violated principles of natural justice, as there was no independent enquiry or cross-examination of Shri Tarun Goyal. The Tribunal agreed, emphasizing that the penalty proceedings must be conducted fairly and independently of the assessment proceedings. The lack of cross-examination and reliance solely on post-search enquiries and statements without independent verification were significant procedural lapses.

4. Distinction Between Assessment Proceedings and Penalty Proceedings:
The Tribunal reiterated that assessment and penalty proceedings are distinct and separate. Findings in assessment proceedings do not automatically justify penalty imposition. The Tribunal cited the Hon’ble Supreme Court's rulings in Hindustan Steel Ltd. v. State of Orissa and CIT v. Reliance Petroproducts (P.) Ltd., which underscore that penalty is not automatic and must be based on clear evidence of concealment or inaccurate particulars. The Tribunal found that the AO failed to establish a clear case of concealment or inaccurate particulars, relying instead on probabilities and inferences.

5. Requirement of Specific Grounds for Penalty Initiation:
The Tribunal emphasized that penalty notices must clearly specify the grounds for initiation, whether for concealment of income or furnishing inaccurate particulars. The Tribunal found that the notices issued were vague and did not meet this requirement, rendering the penalty orders invalid. This conclusion was supported by the Hon’ble Karnataka High Court's decision in SSA’s Emerald Meadows, where the Supreme Court dismissed the Department's SLP, reinforcing the need for specific grounds in penalty notices.

Conclusion:
The Tribunal concluded that the penalty orders under Section 271(1)(c) were invalid due to procedural lapses, lack of specific grounds in penalty notices, and failure to establish clear evidence of concealment or inaccurate particulars. The penalties for all three assessment years (2008-09, 2009-10, and 2010-11) were directed to be deleted. The judgment underscores the importance of procedural fairness and clear communication in penalty proceedings, distinguishing them from assessment proceedings.

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