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TMI Blog2024 (5) TMI 1107X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer sought to impose penalty. Thus, significant features of the case in hand are that penalty proceedings were initiated during the assessment proceedings. The Assessing Officer had although issued a notice without a tick mark, it appears that both the limbs under section 271(1)(c) namely concealment of particulars of income and furnishing inaccurate particulars of such income were attracted in the facts of the case. Further At no point of time, the assessee had a grievance in regard to the section 271(1) (c) notice being in any manner vague, ambiguous and not being understood by the assessee in regard to the limbs under section 271(1)(c) being attracted. Assessee had wholeheartedly participated at the hearing before the Assessing Officer and The notice was in fact, responded by the assessee on both the counts as falling under section 271(1)(c) of the IT Act. As per binding decision of Veena Textiles [ 2024 (1) TMI 701 - BOMBAY HIGH COURT] we hold that non striking of any limb in notice u/s 274 rws 271 (1) (c) of the Act does not come to rescue of the assessee where the assessee never having raised any objection from very inception on account of defect in notice, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber, 2011, at total income of ₹625,180/-. Subsequently, based on the information received from the Director General of Income Tax, Investigation, Mumbai assessee was found to have obtained accommodation entries of bogus purchase bills amounting to ₹92,47,095/-. On hearing, reassessment order under Section 143(3) read with section 147 of the Act was passed on 19th march, 2015, determining the total income of the assessee at ₹17,81,070/- by making addition of 12.5% of alleged bogus purchases. Reassessment order was challenged before the learned CIT (A) unsuccessfully and consequently, before the ITAT. As per the order of the ITAT dated 25th October, 2021, in ITA No.2947/Mum/2019, the profit was estimated at 5%. 04. Meanwhile as along with the reassessment order penalty proceedings was initiated and at the time of passing of penalty order the order of the learned CIT (A) confirming the addition at the rate of 12.5% of the bogus purchases was available. Penalty order under Section 271 of the Act was passed by Income Tax Officer, Ward 19(1)(4), Bombay on 29th March, 2019, levying penalty of ₹357,170/- for furnishing of inaccurate particulars of income. 05. This p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act for A.Y. 2010-11 issued on 31st December, 2015, placed at page no.11 of the Paper Book does not strike off any one of the twin charges against the assessee and therefore, such penalty notices are bad in law and therefore, the penalty orders passed by the lower authorities are not sustainable. She relied upon the full Bench decision of the Hon'ble Bombay High Court in case of Mohamad Farah Mohd. Farhan A. Shaikh v. ACIT (2021) 434 ITR 1 (FB) (Bom) (HC). She referred to question no.1 at page no.56 and submitted that the issue is decided in favour of the assessee. 09. She also submitted that when the addition was made on the basis of the estimation of income, the penalty cannot be levied under Section 271(1)(c) of the Act. She also referred to the decisions of the co-ordinate Benches in this case such as m/s ETCO profiles pvt. Ltd. Versus assistant commissioner of income tax cc-35, Mumbai I.T.A. No. 5351/Mum/2012 and MUM gems V ACIT ITA No 1063 /Mum/2023. 010. The learned Departmental Representative referred to the decision of the Hon'ble Bombay High Court in case of Veena Estate Pvt. Ltd. and submitted that the defect in the notice cannot prejudice the assessee. 011. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on one or the other, or both grounds mentioned in Section 271(1)(c), does a mere defect in the notice not striking off the irrelevant matter vitiate the penalty proceedings? 181. It does. The primary burden lies on the Revenue. In the assessment proceedings, it forms an opinion, prima facie or otherwise, to launch penalty proceedings against the assessee. But that translates into action only through the statutory notice under section 271(1)(c), read with section 274 of IT Act. True, the assessment proceedings form the basis for the penalty proceedings, but they are not composite proceedings to draw strength from each other. Nor can each cure the other's defect. A penalty proceeding is a corollary; nevertheless, it must stand on its own. These proceedings culminate under a different statutory scheme that remains distinct from the assessment proceedings. Therefore, the assessee must be informed of the grounds of the penalty proceedings only through statutory notice. An omnibus notice suffers from the vice of vagueness. 182. More particularly, a penal provision, even with civil consequences, must be construed strictly. And ambiguity, if any, must be resolved in the affected assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prejudice to the complainant; there is no such thing as a merely technical infringement of natural justice. The requirements of natural justice must depend on the circumstances of the case, the nature of the inquiry, the rules under which the tribunal is acting, the subject matter to be dealt with and so forth. Can the Courts supplement the statutory procedures with requirements over and above those specified? In order to ensure a fair hearing, Courts can insist and require additional steps as long a such steps would not frustrate the apparent purpose of the legislation. (emphasis supplied) 42. In the present case, applying such principles of natural justice, the assessee at no point of time, had discharged the basic burden of prejudice being caused to it. In State Bank of Patiala (supra), the Court observed that the respondent in such case, neither before the enquiry officer nor before the trial Court, or the appellate Court, had protested that he was denied of an adequate opportunity to cross-examine the witnesses effectively or to defend himself properly on account of non-supply of the statements of witnesses. In such circumstances, the Court observed that it was possible to say ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he test of prejudice, as it may be called - that any and every complaint of violation of the rule of audi alteram partem should be examined. Indeed, there may be situations where observance of the requirement of prior notice/no hearing may defeat the very proceeding - which may result in grave prejudice to public interest. It is for this reason that the rule of post-decisional hearing as a sufficient compliance with natural justice was evolved in some of the cases, e.g., Liberty Oil Mills v. Union of India (1984 (3) S.C.C. 465). There may also be cases where the public interest or the interests of the security of State or other similar considerations may make it inadvisable to observe the rule of audi alteram partem altogether [as in the case of situations contemplated by clauses (b) and (c) of the proviso to Article 311(2)] or to disclose the material on which a particular action is being taken. There may indeed be any number of varying situations which it is not possible for anyone to foresee. In our respectful opinion, the principles emerging from the decided cases can be stated in the following terms in relation to the disciplinary orders and enquiries: a distinction ought to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the commencement of the examination of the witnesses by the Inquiring Authority . Now take a case - not the one before us where the copies of statements are supplied only two days before the commencement of examination of witnesses instead of three days. The delinquent officer does not object; he does not say that two days are not sufficient for him to prepare himself for cross-examining the witnesesses. The eqnuiry is concluded and he is punished. Is the entire enquiry and the punishment awarded to be set aside on the only ground that instead of three days before, the statements were supplied only two days before the commencement of the examination of witnesses? It is suggested by the Appellate Court that sub-clause (iii) is mandatory since it uses the expression shall . Merely because, word shall is used, it is not possible to agree that it is mandatory. We shall, however, assume it to be so for the purpose of this discussion. But then even a mandatory requirement can be waived by the person concerned if such mandatory provision is his interest and not in public interest, . (Emphasis Supplied) 43. Alok Kumar (supra), the Court considered the doctrine of de facto prejudice an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be convenient at this point to deal with an argument that, even if as a general rule a watch committee must hear a constable in its own defence before dismissing him this case was so clear that nothing that the appellant could have said could have made any difference. It is at least very doubtful whether that could be accepted as an excuse. But, even if it could, the watch committee would, in my view, fail on the facts. It may well be that no reasonably body of men could have reinstated the appellant. But at between the other two courses open to the watch committee the case is not so clear. Certainly, on the facts, as we know them the watch committee could reasonably have decided to forfeit the appellant's pension rights, but I could not hold that they would have acted wrongly or wholly unreasonably if they have in the exercise of their discretion decided to take a more lenient course. 86. Expanding this principle further, this Court in the case of K.L. Tripathi v. State Bank of India [(1984) 1 SCC 43] held as under: . It is not possible to lay down rigid rules as to when the principles of natural justice are to apply, nor as to their scope and extent. There must also have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Singh AIR 2009 SC 195; P.D. Agrawal v. State Bank Of India AIR 2006 SC 2064; Haryana Financial Corporation v. Kailash Chandra Ahuja [2008] 9 SCC 33; Union of India v. Mustafa Najibai Trading Co. 1998 taxmann.com 667 (SC)/AIR 1998 SC 2526. Some of these decisions can be discussed. 45. In the above context the Supreme Court in Inderjit Singh (supra) observed thus:- 17. In Alighar Muslim University itself, the Court noticed the decision of the Court in S.L. Kapoor v. Jagmohan wherein it was held that non-compliance with the principles of natural justice by itself causes prejudice. No doubt, the development of law in the field would have also to be kept in mind. The said decision, however, was rendered in the facts of the said case as it was a case of overstay of leave by an employee. It was found that no prejudice had been caused to the petitioner therein. Mr. Patwalia places strong reliance upon para 21 of the said decision which reads as under: (Alighar Muslim University case, SCC p. 539, para 21) 21. As pointed recently in M. C. Mehta v. Union of India there can be certain situations in which an order passed in violation of natural justice need not be set aside under Article 226 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has suffered prejudice on account of the failure on the part of the officer passing the order for confiscation of goods. The owner of goods ordered to be confiscated cannot be said to have suffered any prejudice in a case where notice has been given to the person responsible for the alleged contravention on which the order for confiscation of goods is founded and who alone is in a position to offer an requirement regarding issuing of notice to the owner of the goods under section 124 cannot therefore, be construed as a mandatory requirement so as to have the effect of invalidating an order. An order of confiscation would not be rendered invalid if there is substantial compliance with the requirements of section 124 in the sense hat before passing an order of confiscation a notice has been given either to the owner of the goods or a person who is responsible for the contravention on which the order for confiscation of goods is founded and who alone is in a position to offer an explanation 39. Decision of this Court in S.L. Kapoor v. Jagmohan [(1980) 4 SCC 379] whereupon Mr Rao placed strong reliance to contend that non-observance of principle of natural justice itself causes prejud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... WLR 935 : (1963) 2 All ER 66 (HL)] it was contended that an opportunity of hearing to the delinquent would have served no purpose. Negativing the contention, however, Lord Reid stated: (All ER p. 73 F- G) It may be convenient at this point to deal with an argument that, even if as a general rule a watch committee must hear a constable in his own defence before dismissing him, this case was so clear that nothing that the appellant could have said could have made any difference. It is at least very doubtful whether that could be accepted as an excuse. (emphasis supplied) 33. Wade and Forsyth in their classic work, Administrative Law, (9th Edn.) pp. 506-09 also stated that if such argument is upheld, the Judges may be tempted to refuse relief on the ground that a fair hearing could have made no difference to the result. But in principle it is vital that the procedure and the merits should be kept strictly apart, since otherwise the merits may be prejudiced unfairly. (emphasis supplied) 34. This Court expressed the same opinion. In Board of High School Intermediate Education v. Chitra Srivastava [(1970) 1 SCC 121] , the Board cancelled the examination of the petitioner who had actuall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... caused to a person by the supposed denial to him of a particular right. (emphasis supplied) 39. In B. Karunakar [(1993) 4 SCC 727 : 1993 SCC (L S) 1184 : (1993) 25 ATC 704] this Court considered several cases and held that it was only if the court/tribunal finds that the furnishing of the report would have made a difference to the result in the case that it should set aside the order of punishment. The law laid down in B. Karunakar [(1993) 4 SCC 727 : 1993 SCC (L S) 1184 : (1993) 25 ATC 704] was reiterated and followed in subsequent cases also (vide State Bank of Patiala v. S.K. Sharma [(1996) 3 SCC 364 : 1996 SCC (L S) 717] , M.C. Mehta v. Union of India [(1999) 6 SCC 237] ). 40. In Aligarh Muslim University v. Mansoor Ali Khan [(2000) 7 SCC 529 : 2000 SCC (L S) 965] the relevant rule provided automatic termination of service of an employee on unauthorised absence for certain period. M remained absent for more than five years and, hence, the post was deemed to have been vacated by him. M challenged the order being violative of natural justice as no opportunity of hearing was afforded before taking the action. Though the Court held that the rules of natural justice were violated, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... change . If there is no prejudice to the employee, an action cannot be set aside merely on the ground that no hearing was afforded before taking a decision by the authority. .. .. 45. In the instant case, no finding has been recorded by the High Court that prejudice had been caused to the delinquent employee, the writ petitioner. According to the High Court, such prejudice is writ large . In our view, the above observation and conclusion is not in consonance with the decisions referred to above, including a decision of the Constitution Bench in B. Karunakar [(1993) 4 SCC 727 : 1993 SCC (L S) 1184 : (1993) 25 ATC 704] . The view of the High Court, hence, cannot be upheld. The impugned order, therefore, deserves to be set aside and is accordingly set aside. 46. Since the High Court has not considered the second question, namely, whether failure to supply the report of the inquiry officer had or had not resulted in prejudice to the delinquent employee, ends of justice would be met with if we remit the matter to the High Court to decide the said question. (emphasis supplied) 49. In a recent decision of the Supreme Court in Madhyamam Broadcasting Limited v. Union of India 2023 (3) BCR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the notice in question was defective. This even assuming and as seen from the aforesaid decisions, that the law is well settled in a series of decisions, that even a mandatory provision can be waived. Thus, to accept such belated plea of a defective notice, would not be a permissible course of action for the Court, considering the well settled principles of law, as laid down by the Supreme Court as noted above. 52. We may also observe that arguments are advanced by both the sides on the view taken by the Full Bench of this Court in the case of Mohd. Farhan A. Shaik (supra). We discuss the judgment of the Full Bench. In such case, the Full Bench was considering a precedential cleavage in view of the two decisions of this Court namely in Smt. Kaushalya (supra) and in case of Goa Coastal Resorts and Recreation (P.) Ltd. (supra). The order passed by the Division Bench referring the issue to the Full Bench is required to be noted which reads thus:- Heard Mr. S. R. Rivankar, learned Senior Advocate with Mr. Rama Rivankar for the Appellant in both these Appeals and Ms. Amira Razaq, learned Standing Counsel for the Respondent-Income Tax Department in both these Appeals. 2. The issue in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Promotions (supra) and Kaushalya (supra). 6. Though the said decisions relied upon by Mr. Rivankar were rendered subsequent to the decision of the Division Bench in Kaushalya (supra), it appears that the decision in Kaushalya (supra) was not brought to the notice of the subsequent Division Benches. 7. Though attempts were made by the learned Counsel for the parties to distinguish the two sets of decisions based upon the fact situations in the present matters, the conflict, according to us, will still persist. Since such issues recur, we feel that these Appeals can be more advantageously heard by a Bench of more than two Judges, so that, this conflict between the two sets of decisions, is resolved by authoritative pronouncement of the Full Bench. 8. Besides, we find that in the first set of decisions, relied upon by Mr. Rivankar while the entire emphasis is upon the proper form of the notice and inference of non-application of mind and failure to observe natural justice, there is no discussion on the aspect of 'prejudice' which a party is expected to demonstrate in a case where the complaint is of 'inadequate notice', as opposed to a case of 'no notice'. 9. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that an appeal or matter can be more advantageously heard by a Bench of two or more Judges, he may report to that effect to the Chief Justice who shall make such order thereon as he shall think fit. 13. According to us, the following question can be more advantageously considered by a Bench of more than two Judges, taking into consideration the conflicting decisions as aforesaid, as well as absence of any discussion on the aspect of 'prejudice' in the set of decisions relied up by Mr. Rivonkar :- When in the assessment order or the order made under sections 143(3) and 153C of the IT Act, the Assessing Officer has clearly recorded satisfaction for imposition of penalty on one or the other, or both grounds mentioned in section 271(1)(c), whether a mere defect in the notice of not striking out the relevant words, would vitiate the penalty proceedings ? 14. The Full Bench, in the context of the aforesaid question can then, perhaps examine the conflict between the decisions in Goa Dourado Promotions (supra) and Kaushalya (supra). The Full Bench can as well consider the impact of non-discussion on the aspect of 'prejudice' in the decisions relied upon by Mr. Rivonkar, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of notice or its issuance in a particular form. Penalty proceedings are quasi-criminal in nature. Section 274 contains the principle of natural justice of the assessee being heard before levying penalty. Rules of natural justice cannot be imprisoned in any straight-jacket formula. For sustaining a complaint of failure of the principles of natural justice on the ground of absence of opportunity, it has to be established that prejudice is caused to the concerned person by the procedure followed. The issuance of 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 not be done. Mere mistake in the language used or mere non-striking of the inaccurate portion cannot by itself invalidate the notice. The entire factual background would fall for consideration in the matter and no one aspect would be decisive. In this context, useful reference may be made to the following observation in the case of CIT v. Mithila Motors (P.) Ltd. [1984] 149 ITR 751. 57. .. 58. No doubt, there an exist a case where vagueness and ambiguity in the notice can demonstrate non-application of mind by the authority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other hand, the decision rendered in Smt. Kaushalya (supra). The Full Bench framed two questions which inter alia are (i) If the assessment order clearly records satisfaction for imposing penalty on one or other, or both grounds mentioned in section 271(1)(c), will a mere defect in notice not striking off the irrelevant matter vitiated penalty proceedings; and (ii) Has Kaushalya failed to discuss the aspect of 'prejudice'? The Full Bench answered these questions inter alia observing that in so far as the view taken in Goa Coastal Resorts and Recreation (P.) Ltd. (supra) and other similar orders were concerned, the same is required to be considered to be more acceptable, as it is beneficial to the assessee. We may observe that per se the test of prejudice ought not to be applied in the manner as may be applicable in the facts of the present case, is not what has been disapproved by the Full Bench. The Full Bench cannot be read so as to construe that the test of prejudice in the given facts or a waiver as acquiescence would not be applicable, in considering any challenge to the orders imposing penalty. In other words, the Full Bench does not hold that the principles of law a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst him . For Kaushalya, the statutory notice suffered from neither non-application of mind nor any prejudice. According to it, the so called ambiguous wording in the notice [has not] impaired or prejudiced the right of the assessee to a reasonable opportunity of being heard . It went onto observe that for sustaining the plea of natural justice on the ground of absence of opportunity, it has to be established that prejudice is caused to the concerned person by the procedure followed . Smt. Kaushalya case (supra) closes the discussion by observing that the notice issuing 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 not be done . 185. No doubt, there can exist a case where vagueness and ambiguity in the notice can demonstrate non-application of mind by the authority and/or ultimate prejudice to the right of opportunity of hearing contemplated under section 274. So asserts Smt. Kaushalya case (supra). .. 189. In Sudhir Kumar Singh, the Supreme Court has encapsulated the principles of prejudice. One of the principles is that where procedural and/or substantive provisions of law embody th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nize the principles of law as laid down by the Supreme Court that in accepting any plea of breach of principles of natural justice, such plea would be required to be tested on the aspect of prejudice. The law as laid down by the Supreme Court is law of the land and it is binding on all Courts. In this view of the matter, it would be unfounded for the assessee in the facts of the present case to contend that the test of prejudice was not attracted. 63. Even to consider such a plea as raised by the assessee, as a plea of jurisdiction, an anomalous situation is created, in as much as the assessee in a quasi judicial adjudication without raising any grievance in regard to any defect in the notice acquiesced in the jurisdiction of the Assessing Officer in responding to the notice on on all his pleas, in regard to penalty proposed to be imposed on him under section 271 (1)(c) of the Income-tax Act. Once having accepted the notice and having participated in the proceedings thereby submitting to the jurisdiction of the Assessing Officer, considering the settled principles of law, the assessee cannot take a position that there is a jurisdictional defect in the Assessing Officer proceeding t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h of principles of natural justice cannot be taken, unless a case of prejudice has been made out, and if no case of prejudice is made out, certainly a plea of breach of principles of natural justice would be a hollow plea or a plea in futility. This for the reason, that a person complaining of breach of principles of natural justice needs to show that curing such breach, would culminate the proceedings with a different consequence favourable to the assessee. It is only after considering such pleas, it would be a fair decision, rendering justice to the complainant. In our opinion, this would be the logical conclusion of a plea on breach of principles of natural justice and the test of prejudice which is being sought to be applied in dealing with such complaints. The Full Bench does not lay down that the test of prejudice is not attracted when it comes to any complaint of breach of principles of natural justice on issues arising under section 271(1)(c) of the IT Act. The Full Bench also does not consider as to whether at such a belated stage as in the present case, that is after 23 years of after the Assessing Officer had decided the issue, a plea of defect in the notice can be permi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fely conclude that even assuming that there was defect in the notice, it had caused no prejudice to the assessee and the assessee clearly understood what was the purport and import of notice issued under section 274 read with section 271 of the Act. The principles of natural justice cannot be read in abstract. The relevant observations of the Court are required to be noted, which reads thus: 16. We have perused the notices and we find that the relevant columns have been marked, more particularly, when the case against the assessee is that they have concealed particulars of income and furnished inaccurate particulars of income. Therefore, the contention raised by the assessee is liable to be rejected on facts. That apart, this issue can never be a question of law in the assessee's case, as it is purely a question of fact. Apart from that, the assessee had at no earlier point of time raised a plea that on account of a defect in the notice, they were put to prejudice. All violations will not result in nullifying the orders passed by statutory authorities. If the case of the assessee is that they have been put to prejudice and principles of natural justice were violated on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... limb of section 271(1)(c) of the Act was attracted. At the time of hearing, learned counsel for the appellant had argued that in the show-cause notice the inapplicable portion was not struck off; thus it was not indicated in the notice whether the penalty was sought to be imposed for concealment of particulars of income or for furnishing inaccurate particulars of income, which has vitiated the impugned order of penalty. However, she fairly submits that this point was not urged before the lower authorities including the Tribunal. We have already noted and analyzed the two limbs of section 271(1)(c) of the Act and also the fact that the two limbs i.e. concealment of particulars of income and furnishing inaccurate particulars of income carry different connotations. We have also noticed that the Assessing Officer must indicate in the notice for which of the two limbs he proposes to impose the penalty and for this the notice has to be appropriately marked. If in the printed format of the notice the inapplicable portion is not struck off thus not indicating for which limb the penalty is proposed to be imposed, it would lead to an inference as to non-application of mind, thus vitiating i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 65,21,831/-. The AO levied penalty on the above said addition and the same was also confirmed by Ld CIT (A). Coordinate bench held that 4. Having heard rival submissions, we are of the view that there is merit in the contentions of the assessee. Admittedly, the AO has disallowed 20% of purchases only on presumptions without establishing fully that the assessee has made purchases from grey market. Even, if it is assumed for a moment that the assessee might have purchased goods from grey market, it was not established that the amount of purchases was less than that recorded in the books of account. Under these set of facts, it has to be held that the impugned addition has been made only on estimated basis that too on presumptions only. Hence, by following the decision rendered by the Tribunal in the assessee s sister concern s case (supra), we hold that the impugned penalty is liable to deleted. Accordingly, we set aside the order of Ld CIT(A) and direct the AO to delete the penalty of ₹ 7,30,464/- levied u/s 271(1)(c) of the Act. 019. In case of MUM Gems [Supra] also assessee was aggrieved by penalty of Rs. 5,68,596/- on account of addition made by applying GP rate of alleged ..... X X X X Extracts X X X X X X X X Extracts X X X X
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