2023 (9) TMI 1311 - AT - Income Tax

Penalty levied u/s 271(1)(c) - assessee returning a lower income/under reporting of income - whether Defective notice u/s 274 issued? - assessee income was in the absence of audit, liable to be assessed u/s. 44AD at 8% of the turnover, but Assessment was accordingly made, i.e., as against the returned income @ 5% - HELD THAT - The law, per Explanation 1 to s. 271(1)(c), shifts the onus on the assessee to satisfactorily explain his conduct in returning a lower income, as indeed his bona fides, failing which he is deemed to have concealed particulars of his income. The assessee failing to furnish any explanation, either before the authority levying penalty, before whom it is in law to be, or even the first appellate authority, as to why he did not, in the absence of audit of his accounts, return income, as statutorily mandated, at a net profit rate of 8 percent of the turnover, or, in the alternative, got them audited, returning income on the basis of the audited accounts, on which either side his case on facts would ordinarily lie, it is not open for him on facts, to contend that the notice did not specify the default , which essentially is the under-reporting of income w.r.t. to the amount that the law deems as his income in case of non-audit of books of account in a given set of facts. Audit of accounts, of which requirement the assessee is well aware, cannot be regarded as a mere formality, even as sought to be explained by the Hon ble jurisdictional High Court, as in Peroorkkada Service Cooperative Bank Ltd. 2020 (1) TMI 624 - KERALA HIGH COURT and in the context of s. 271B of the Act;the law thereby allowing due credence to the expert opinion of the Auditor, places reliance on the assessee s accounts. An assessee choosing not to get his accounts audited, cannot avoid the legal consequence/s thereof, and does so only at his own peril. Penalty u/s. 271(1)(c) is one such consequence, saved of course u/s. 273B on proving a reasonable cause, which is a reiteration of the principle that though a strict civil liability, penalty is yet not automatic and gets excluded where the assessee-defaulter was constrained to act in the manner he does, i.e., in the facts and circumstances of his case, the onus to prove which, raising the said plea, is though only on him. No such plea has been made in the instant case. Non-strike off of the appropriate limb of the notice u/s. 274 - Assessee s explanation in the given set of facts and circumstances could and, rather, ought to have, centred around the reason/s for the non-audit of his accounts for the relevant year which would have, where found reasonable, and despite the application of the statutorily presumed profit rate of 8% of the turnover in assessment, saved penalty. It may here also be relevant to state that the assessee s return was even not accompanied by a statement to the effect that income from his business was being disclosed at lower than the said rate, i.e., based on his unaudited accounts, also stating the reason/s for the same. To a unanimous and clear verdict that the said notice is an administrative device for informing the assessee about the proposal to levy penalty in order to enable him to explain as to why it should be not done. A mistake or a mere non-strike off of the inapplicable portion would not invalidate the notice. The entire factual background would fall for consideration in the matter and no one aspect would be decisive. These decisions, it would be seen, are consistent with the law as explained, inter alia, in Vankata Narayana Sons 1966 (10) TMI 50 - SUPREME COURT , T.A. Abdul Khader 2006 (10) TMI 78 - KERALA HIGH COURT , Maharaj Krishna 2000 (7) TMI 37 - DELHI HIGH COURT , and Hajarilal Kishorilal 1966 (9) TMI 5 - MADHYA PRADESH HIGH COURT all, save the first, being only in the context of a penalty notice, while that by the Apex Court was in respect of notice u/s. 148, a jurisdictional notice, while that u/s. 274 is admittedly not. And, further, validates the analysis carried out at para 4.1 of this order. In view of the fore-going, we find no merit in the assessee s case,

Summary

Issues Involved:
1. Validity of notice under Section 274 of the Income-tax Act, 1961.
2. Legitimacy of penalty under Section 271(1)(c) based on estimated income.

Summary:

Issue 1: Validity of notice under Section 274 of the Income-tax Act, 1961

The assessee contended that the notice under Section 274 was invalid as it did not strike out one of the two limbs of Section 271(1)(c)'either concealment of particulars of income or furnishing inaccurate particulars of income. The assessee relied on the case of *CIT v. Manjunatha Cotton & Ginning Factory* and subsequent judgments, including the Hon'ble Apex Court's dismissal of a special leave petition in *SSA's Emralds Meadows*.

The Tribunal found this argument flawed. It stated that the notice under Section 274 is not a jurisdictional notice but a device to extend an opportunity for hearing. The Tribunal observed that the assessee did not claim a lack of opportunity at any stage. The Tribunal further noted that the notice did specify the charge of furnishing inaccurate particulars of income, thus invalidating the assessee's reliance on *Manjunatha Cotton & Ginning Factory*. The Tribunal cited multiple precedents to support that a defect in the notice would not invalidate the proceedings but only make them irregular.

Issue 2: Legitimacy of penalty under Section 271(1)(c) based on estimated income

The assessee argued that no penalty could be levied where the income was assessed purely on the basis of an estimate. The assessee's net profit for the preceding two years was lower than the statutory rate of 8% under Section 44AD, which justified the lower reported income.

The Tribunal rejected this argument, stating that the law, per Explanation 1 to Section 271(1)(c), shifts the onus on the assessee to explain satisfactorily the conduct in returning a lower income. The assessee failed to furnish any explanation during the penalty or assessment proceedings. The Tribunal emphasized that the assessee, being aware of the audit requirements from previous years, could not claim ignorance. The Tribunal concluded that the penalty under Section 271(1)(c) was justified as the assessee did not provide a reasonable cause for the non-audit of accounts or the lower reported income.

Conclusion:

The Tribunal found no merit in the assessee's case on both issues. The appeal by the assessee was dismissed, and the penalty under Section 271(1)(c) was upheld. The order was pronounced on September 25, 2023, under Rule 34 of The Income Tax (Appellate Tribunal) Rules, 1963.