2019 (12) TMI 140 - AT - Income Tax

Penalty u/s 271(1)(c) - Defective notice - recording of satisfaction before initiation of penalty proceedings or any time during proceedings - HELD THAT - Show cause notice issued by the AO u/s 274 r.w.s. 271(1)(C) we find that although, the assessee has challenged the validity of penalty proceedings, in light of non striking of irrelevant portion in the notice u/s 274, but, fact remains that the AO had issued further show-cause notice, dated 19/02/2016, for which the assessee neither filed any explanation nor justified its case in light of Explanation-1 to section 271(1)(c). AO has arrived at proper satisfaction, in respect of additions made towards interest income on fixed deposits at the time of assessment proceedings, where he had initiated penalty proceedings u/s 271(1)(c) for furnishing inaccurate particulars of income leading to concealment of income. We, further noted that the AO had levied penalty u/s 271(1)(c) for furnishing inaccurate particulars of income leading to concealment of income. Once a proper satisfaction has been arrived at before initiation of penalty proceedings or any time during proceedings, then subsequent issue of show-cause notice is a formality to communicate the assessee about initiation of penalty proceeding. In this case, AO had issued one more show-cause notice and also, called upon the assessee to explain why penalty proceedings shall not be initiated for furnishing inaccurate particulars of income, for which no compliance from the assessee. Therefore a proper satisfaction has been arrived at before initiation of penalty proceedings, and then a defect in notice including mere non-striking of irrelevant portion in the notice does not invalidate the penalty proceedings. Although, the assessee has cited certain judicial precedents, including the decision in the case of Mehrjee Cassinath Holdings Pvt.Ltd. vs ACIT 2017 (5) TMI 904 - ITAT MUMBAI we find that facts of the present case are entirely different from the case laws relied upon by the assessee and hence, are not considered as applicable to the case of the assessee. In the case of M/s. Earthmoving Equipment Services Corporation vs DCIT 2017 (5) TMI 474 - ITAT MUMBAI had considered an identical issue and held that when, proper satisfaction has been recorded in the assessment order, as well as in the penalty order then mere non striking of notice or vague notice does not invalidate penalty proceedings. Therefore, we are of the considered view that there is no merit in legal arguments taken by the assessee and hence, ground no. 1 and 2 are rejected. Penalty levied in respect of additions made towards interest income earned from fixed deposits - HELD THAT - The fact that a person/entity carried on business does not lead to inference that all the income received from such persons/entity is assessable under the head income from business. It is the manner in which income is derived is relevant to decide the head of income, but not merely the fact that persons/entity are engaged in the business. If you examine the case of the assessee, it is abundantly clear that the assessee has parked its surplus funds in the banks in form of fixed deposits and earned interest income. Although interest income from fixed deposits is assessable under the head income from other sources, the assessee has treated said interest income as capital receipts and set up against pre-operative expenses without offering interest income for tax. Therefore, we are of the considered view that the assessee has furnished inaccurate particulars of income, in respect of interest income earned from fixed deposits, which warrants levy of penalty u/s 271(1)(c) - assessee has also failed to offer any explanation in response to a show cause notice thereby committed default within the meaning of Explanation-1 to section 271(1)(C) of the I.T.Act, 1961. Therefore, we are of the considered view that there is no error in penalty levied u/s 271(1)(c) and accordingly, the CIT(A) was right in affirmed penalty levied by the Ld. AO. Hence, we are inclined to uphold the findings of the Ld.CIT(A) and reject ground taken by the assessee.

Issues Involved:
1. Compliance with provisions of Section 274(1) of the Income Tax Act, 1961.
2. Validity of penalty proceedings under Section 271(1)(c) of the Income Tax Act, 1961.
3. Classification of interest income from fixed deposits.
4. Furnishing inaccurate particulars of income and concealment of income.

Detailed Analysis:

1. Compliance with provisions of Section 274(1) of the Income Tax Act, 1961:
The assessee argued that the Assessing Officer (AO) did not comply with Section 274(1) by not granting a reasonable opportunity of being heard and not explicitly mentioning the reason for initiating penalty proceedings in the penalty notice. The Tribunal noted that although the assessee challenged the validity of penalty proceedings based on non-striking of irrelevant portions in the notice, the AO had issued a further show-cause notice, which the assessee did not respond to. The Tribunal concluded that once proper satisfaction is arrived at before initiating penalty proceedings, any defect in the notice, such as non-striking of irrelevant portions, does not invalidate the penalty proceedings.

2. Validity of penalty proceedings under Section 271(1)(c) of the Income Tax Act, 1961:
The assessee contended that the AO erred in levying penalty without explicitly mentioning the reasons for initiating penalty proceedings. The Tribunal found that the AO had issued a show-cause notice and the assessee did not provide any explanation. The Tribunal held that proper satisfaction had been recorded in the assessment order, and mere non-striking of the notice does not invalidate the penalty proceedings. The Tribunal referred to the ITAT Mumbai decision in the case of M/s. Earthmoving Equipment Services Corporation vs. DCIT, where it was held that when proper satisfaction is recorded, a vague notice does not invalidate penalty proceedings.

3. Classification of interest income from fixed deposits:
The assessee treated the interest earned from fixed deposits as a capital receipt and set it off against pre-operative expenses. The AO assessed the interest income under the head "income from other sources," stating there was no nexus between the interest earned and the business activity. The Tribunal upheld this classification, stating that the manner in which income is derived is relevant, and the interest income from fixed deposits should be assessed under "income from other sources."

4. Furnishing inaccurate particulars of income and concealment of income:
The AO initiated penalty proceedings under Section 271(1)(c) for furnishing inaccurate particulars of income. The Tribunal noted that the assessee had parked surplus funds in fixed deposits and earned interest income, which was not offered for tax. The Tribunal found that the assessee furnished inaccurate particulars of income by not offering the interest income for tax and failed to provide any explanation in response to the show-cause notice. The Tribunal concluded that the assessee committed a default within the meaning of Explanation-1 to Section 271(1)(c) and upheld the penalty levied by the AO and confirmed by the CIT(A).

Conclusion:
The Tribunal dismissed the appeal filed by the assessee, upholding the penalty levied under Section 271(1)(c) for furnishing inaccurate particulars of income and confirming the classification of interest income from fixed deposits as "income from other sources." The Tribunal emphasized that proper satisfaction had been recorded by the AO, and the procedural defects in the notice did not invalidate the penalty proceedings.

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