2023 (4) TMI 98 - AT - Income Tax

Penalty u/s 271(1)(c) - satisfaction of the AO before initiating penalty proceddings - Defective notice u/s 274 - HELD THAT - Both pre and post insertion of S. 271(1B), the position of law emerges is that for initiation of penalty proceedings, the assessment order must categorically record the specific charge or default alleged. Failing to do so or where the allegation of default committed is vague or non specific, the so called deemed satisfaction contemplated u/s 271(1B) can not be validated in law. The formation of satisfaction is not a mere formality or an empty ritual. In the present case, the so called satisfaction of the AO in the assessment proceedings has not been tied up with any positive finding towards the exact nature of default and hence, the so called satisfaction is mechanical illusory and thus cannot be countenanced in law. This apart, the notice issued to the Assessee under s. 274 r.w.s. 271(1)(c) also does not strike off the inappropriate part and a vague notice showing tentative nature of default in the form of either/or has been issued to the Assessee. The penalty proceedings sans strike off in the penalty notice and also in the assessment order thus is wholly unsustainable in law. We thus find apparent merit in the plea of the assessee - in the absence of satisfaction qua the nature of default committed, the initiation of penalty proceedings itself is a complete non-starter and consequent imposition of penalty is clearly vitiated in law. The imposition of penalty in question is thus liable to be quashed and set aside on this ground alone. Non fulfillment of prerequisites before invoking Explanation-5A to Section 271(1)(c) of the Act - In the present case, the penalty flows from a mere disclosure in the course of statement recorded under Section 132(4) of the Act at the time of search operation. No averments are found in the assessment order or in the penalty order to the effect that any asset as specified in Explanation 5A(i) has been found or income is based on entry in any books of account or other documents or transaction referred under clause (ii) to Explanation 5A which can be said to correspond with such declaration. On appraisal, we find force in the plea of the assessee for non applicability of Explanation-5A in the peculiar facts of the case. It is trite that the Explanation 5A being penal in nature requires strict construction. The prerequisites towards applicability of Explanation-5A has not been demonstrated by the Revenue either in the penalty order or the first appellate order thereon. Thus, the imposition of penalty under the shelter of Explanation 5A is clearly without sanction of law. We find merit in the plea of the assessee on both counts. Consequently, the order of the CIT(A) is set aside and the penalty order seeking to impose penalty in question stands quashed. Penalty u/s 271(1)(c) - assessee offered a disclosure toward undisclosed income in the statement recorded u/s 132(4) Assessment framed u/s 153A - Assessment Year 2009-10 - HELD THAT - The nature of default being absent in the course of assessment proceedings, the initiation of penalty proceedings is bad in law. The penalty order passed by the Assessing Officer is liable to be cancelled on this score alone. On merits, it is yet again seen that the sole reason for imposition of penalty is that the disclosure would not have come in the absence of search proceedings. We are unable to find any substance in the approach adopted by the AO. The imposition of penalty under Section 271(1)(c) r.w. Explanation 5A thereon is dependent upon the conditions enjoined in Explanation-5A therein. The addition and consequent penalty appears to be on the basis of surrender made alone. It is true that Explanation-5A provides an exception and departure to the general rule that a concealment is committed vis- -vis the return filed and the Explanation 5A can be invoked towards undisclosed income found in the course of search despite its subsequent inclusion in ROI subject however to the fulfillment of specific conditions. The conditions provided in Explanation-5A are not shown to have been satisfied in any manner - The first appellate order is set aside and the Assessing Officer is directed to delete the penalty in question. Disallowance of deduction claimed u/s 35D and additions towards disallowance of speculative business loss claimed by the assessee - HELD THAT - As apparent from the directions of the Assessing Officer towards deemed satisfaction of default against the assessee is totally vague and unintelligible qua the nature of default and thus totally unsustainable in law. To reiterate, it is not known whether the satisfaction is qua concealment of particulars or towards furnishing inaccurate particulars of income . While drawing the satisfaction, the charge against the assessee is not known. Coupled with this, similar to other appeals supra, the notice issued under Section 274 r.w. Section 271(1B) is vague and non-descript and does not meet the requirement of law. Addition towards wrong claim of speculative loss as business loss - HELD THAT - AO has changed the character of the loss from business loss to speculative loss both of which are assessable under the same head of income, i.e., income from business / profession notwithstanding restrictive rules applicable for set off of speculative losses. While it is the case of the assessee that the loss has arisen from the activity of hedging and thus do not fall within the sweep of deeming fiction of S. 43(5) - AO disputed the claim of the Assessee on the ground that assessee is only a broker and does not require any hedging. On this point of difference, the loss has been reclassified from business to speculative loss. Thus, the loss arising on transaction of trading has not been disputed per se but the character of loss is subject matter of dispute. On such backdrop, the CIT(A) has applied the principles culled out from judicial pronouncements at the first appellate stage and found that the assessee is not exigible for penalty. We observe, that the judgment rendered in the case of CIT Vs. Auric Investment Securities Ltd 2007 (7) TMI 276 - DELHI HIGH COURT is directly on the issue AND in CIT vs. Bhartesh Jain 2010 (4) TMI 142 - DELHI HIGH COURT as held that penalty levied on account of additions made due to change of treatment of business loss as claimed by the assessee to speculative loss as determined by the Assessing Officer would not justify imposition of penalty under Section 271(1)(c) of the Act. Hence, in the light of judgment rendered in these cases, the penalty is not justified even on merits. The penalty action of AO is unsustainable in law on both counts, i.e., lack of satisfaction at the time of initiation of penalty proceedings as well as absence of any concealment on merits. Additions on account of disallowance of deduction u/s 35D - addition towards rent of guest hou se - HELD THAT - Imposition of penalty on account of mere disallowance of expense is prima facie unjustified. Noticeably, in case B.B. Singhal 2011 (1) TMI 868 - PUNJAB AND HARYANA HIGH COURT has held that bona fide mistakes could not be subject to penalty. In the instant case, it is undisputed fact that the assessee has disclosed all material facts and was under bona fide belief that it is entitled to deduction of share issue expenses under the provisions of Section 35D of the Act. The disallowance is only on the ground that the claim allegedly does not pass the test of S. 35D. In such circumstances, we see substantial merit on facts in the plea of the assessee towards inapplicability of Section 271(1)(c) of the Act on a highly debatable issue. Penalty has also been imposed towards rent expenses of guest houses on the ground that two houses are locked at the time of post search inquiry and have not been used as guest house - assessee submitted that the guest house has been actually found to be taken on rent by the AO and claim of the expenses is not dependent on actual usage of the guest house. The guest house is used occasionally as per need based requirements. All the relevant facts were placed on record in this regard. Thus, the penalty cannot be visited on the bona fide claim of the assessee. The disallowance in the assessment proceedings, we find merit in the plea. The penalty has been levied on the ground of disallowance of rent expenses due to non usage of such guest house. In the light of the decision rendered in Reliance Petro Products 2010 (3) TMI 80 - SUPREME COURT penalty under Section 271(1)(c) on such alleged wrong claim is totally unjustified. The penalty is thus reversed and cancelled on merits. The exercise of power for initiating penalty under Section 271(1)(c) is dependent upon a categorical satisfaction of the AO in the course of the assessment proceedings towards the nature of alleged default which is clearly absent in the present case and consequently the penalty proceedings initiated without requisite satisfaction is a nullity. The consequent penalty order thus requires to be quashed at the threshold. 49. The action of the CIT(A) thus requires to be reversed and the penalty imposed in question is required to be quashed both on merits as well as on the legal ground.

Summary

Issues Involved:
1. Justification for imposition of penalty under Section 271(1)(c) of the Income Tax Act, 1961.
2. Validity of penalty proceedings based on vague satisfaction recorded in the assessment order and notice under Section 274 r.w. Section 271(1)(c).
3. Applicability of Explanation-5A to Section 271(1)(c) concerning the nature of disclosed income during search operations.
4. Treatment of speculative loss as business loss and its impact on penalty imposition.

Summary:

Issue 1: Justification for imposition of penalty under Section 271(1)(c)
The Tribunal examined whether the Assessing Officer (AO) was justified in imposing penalties for additional income disclosed during search operations and included in the return filed under Section 153A. The Tribunal found that the AO failed to specify the exact nature of the default (i.e., concealment of particulars of income or furnishing inaccurate particulars of income) in both the assessment order and the penalty notice. The lack of specific allegations rendered the penalty proceedings unsustainable in law.

Issue 2: Validity of penalty proceedings based on vague satisfaction
The Tribunal emphasized the necessity of the AO's satisfaction regarding the specific default committed by the assessee before initiating penalty proceedings. The AO's failure to clearly indicate the nature of the default in the assessment order and penalty notice, coupled with the issuance of vague notices, led to the conclusion that the penalty proceedings were invalid. This was supported by judicial precedents, including CIT v. Manjunatha Cotton and Ginning Factory and Madhushree Gupta v. UOI.

Issue 3: Applicability of Explanation-5A to Section 271(1)(c)
The Tribunal addressed the conditions under Explanation-5A to Section 271(1)(c), which apply to income disclosed during search operations. It was noted that for Explanation-5A to be invoked, the assessee must be found with certain assets or income deduced from entries in books of account. In the present cases, the penalty was based solely on disclosures made during search operations without any supporting evidence of assets or entries. Therefore, the imposition of penalties under Explanation-5A was deemed without legal sanction.

Issue 4: Treatment of speculative loss as business loss
The Tribunal considered cases where penalties were imposed due to the reclassification of business losses as speculative losses. It was determined that mere reclassification did not justify penalties under Section 271(1)(c). Judicial precedents, including CIT vs. Auric Investment & Securities Ltd. and CIT vs. Bhartesh Jain, supported the view that penalties were unwarranted when the dispute was over the nature of the loss rather than its existence. Consequently, penalties imposed on this basis were reversed.

Conclusion:
The Tribunal allowed all appeals of the assessee, quashing the penalties imposed under Section 271(1)(c) due to the absence of specific satisfaction regarding the nature of the default and the improper application of Explanation-5A. The appeals of the Revenue were dismissed. The order was pronounced in the open Court on 28/03/2023.