2017 (8) TMI 368 - AT - Income Tax

Levy of penalty u/s. 271(1)(c) - non application of mind by AO - Held that - The notice issued by the Assessing Officer u/s 274 r.w.s. 271(1)(c) of the Act dated 10.12.2010 is untenable as it suffers from the vice of non-application of mind having regard to the ratio of the judgment of the Hon ble Supreme Court in the case of Dilip N. Shroff (2007 (5) TMI 198 - SUPREME Court) as well as the judgment of the Hon ble Bombay High Court in the case of Shri Samson Perinchery (2017 (1) TMI 1292 - BOMBAY HIGH COURT). Thus, on this count itself the penalty imposed u/s 271(1)(c) of the Act is liable to be deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Levy of penalty under Section 271(1)(c) of the Income Tax Act for furnishing inaccurate particulars of income.
2. Set off of brought forward losses against current year’s income in light of change in shareholding pattern.

Detailed Analysis:

1. Levy of Penalty under Section 271(1)(c):

The core issue revolves around the levy of penalty under Section 271(1)(c) for furnishing inaccurate particulars of income. The Assessee-company, engaged in Real Estate Development, was subjected to a search and seizure operation, revealing that it had purchased bogus bills amounting to ?85.49 lakhs. The Assessing Officer (AO) noted that these bogus bills were debited in the books, inflating the cost of construction carried forward as work-in-progress (WIP). The AO initiated penalty proceedings under Section 271(1)(c), asserting that the assessee had furnished inaccurate particulars of income by passing bogus entries in its books. Despite the assessee’s contention that the bogus purchases did not result in any addition of income, the AO levied a penalty of ?26.41 lakhs, concluding that the booking itself amounted to furnishing inaccurate particulars.

The First Appellate Authority (FAA) upheld the AO’s decision, noting that the Kanakia Group had surrendered total bogus purchases of ?38 crores, later enhanced to ?39.42 crores, with ?5.99 crores relating to the assessee company. The FAA observed that the assessee had obtained accommodation entries to jack up expenses and reduce taxable profits, constituting a clear case of falsification of books of account. Referring to Explanation 5A to Section 271(1)(c), the FAA concluded that the AO rightly levied the penalty.

During the hearing, the Authorized Representative (AR) argued that no addition was made to the income returned by the assessee, and thus no penalty for concealment of income could be levied. The AR also pointed out that the AO had not struck off the portion in the penalty notice to indicate whether the penalty was for furnishing inaccurate particulars or concealing income. The Departmental Representative (DR) countered that the penalty was levied in the year when expenses were claimed, and by booking bogus purchases, the assessee had impliedly evaded tax.

The Tribunal, referencing the case of Meharjee Cassinath Holdings Pvt. Ltd., emphasized that the notice issued under Section 274 r.w.s. 271(1)(c) must clearly specify the charge against the assessee. Non-striking off the irrelevant portion in the notice reflects non-application of mind by the AO, rendering the penalty proceedings invalid. Consequently, the Tribunal held that the penalty levied by the AO and confirmed by the FAA was not as per law, and reversed the order, deciding the issue in favor of the assessee.

2. Set Off of Brought Forward Losses:

The AO found that the assessee had set aside all brought forward losses to the extent of net profit, noting a change in the shareholding pattern, making Section 79 applicable. The assessee was not entitled to set off the carried forward loss against current year’s income. After the AO’s enquiry, the assessee furnished a revised computation of income, enhancing the taxable income to ?1.97 lakhs. The AO initiated penalty proceedings for furnishing inaccurate particulars and levied a penalty of ?81,541.

The FAA observed that the assessee, being a significantly large company with professional advisors, could not claim ignorance of the law. The FAA upheld the AO’s order, referencing cases like MAK Data, Zoom Communications Pvt. Ltd., and Lal Chand Tirath Ram, concluding that the mistake was neither inadvertent nor bonafide.

The Tribunal, considering the failure of the AO to strike off the relevant portion in the penalty notice, held that the penalty levied was not as per law. Respectfully following the precedent set in Meharjee Cassinath Holdings Pvt. Ltd., the Tribunal reversed the FAA’s order, deciding the issue in favor of the assessee.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, concluding that the penalty proceedings under Section 271(1)(c) were invalid due to the AO’s failure to specify the charge in the penalty notice, reflecting non-application of mind. The issue of set off of brought forward losses was also decided in favor of the assessee, reinforcing the need for clear and precise penalty notices.