By Ajay R. Singh
Advocate
7. Ventura Textiles Ltd. vs. CIT –
Mumbai-11 [ITA No. 958 of 2017 Date
of order: 12th June, 2020 (Bombay
High Court)
[Appellate
Tribunal in I.T.A. No. 5535/Mum/2014; Date of order: 11th January,
2017; A.Y.: 2003-04; Bench ‘F’ Mum.]
Appeal u/s 260A – Penalty u/s 271(1)(c) – The question relating to
non-striking off of the inapplicable portion in the section 271(1)(c) show
cause notice goes to the root of the lis and is a jurisdictional issue –
Issue can be raised first time before High Court – Penalty cannot be imposed
for alleged breach of one limb of section 271(1)(c) of the Act while
proceedings are initiated for breach of the other limb of section 271(1)(c) –
Penalty deleted
The issue involved in the
above appeal related to the imposition of penalty of Rs. 22,08,860 u/s
271(1)(c) of the Act by the A.O. on account of disallowance of Rs. 62,47,460
claimed as a deduction u/s 36(i)(vii) on account of bad debt and subsequently
claimed as a deduction u/s 37 as expenditure expended wholly and exclusively
for the purpose of business.
The assessee company filed
its ROI declaring total loss at Rs. 4,66,68,740 for A.Y. 2003-04. During the
assessment proceedings, it was found amongst other things that the assessee had
debited Rs. 62,47,460 under the head ‘selling and distribution expenses’ and
claimed it as bad debt in the books of accounts, thus claiming it as a
deduction u/s 36(1)(vii). Subsequently it was found that the aforesaid amount
was paid to M/s JCT Ltd. as compensation for the supply of inferior quality of
goods. Thus, the A.O. held that the amount of Rs. 62,47,460 claimed as bad debt
was not actually a debt and therefore it was not allowable as a deduction u/s 36(1)(vii).
The A.O. further held that the said claim was also not admissible even u/s
37(1), with the observation that payment made to M/s JCT Ltd. was not wholly
and exclusively for business purposes but for extraneous considerations. In
view thereof, the assessee’s claim was rejected. The A.O. initiated penalty
proceedings u/s 271(1)(c) of the Act for furnishing inaccurate particulars of
income.
The A.O. issued notice u/s
274 r/w/s 271 on the same day, i.e., on 28th February, 2006, to the
assessee to show cause as to why an order imposing penalty should not be made
u/s 271. It may, however, be mentioned that in the pertinent portion of the
notice the A.O. did not strike off the inapplicable portion.
The assessee had challenged
the disallowance of bad debt along with other disallowances in the assessment
order by filing an appeal before the CIT(A) who, by an order dated 14th
November, 2012, confirmed the disallowance of bad debt while deleting other
disallowances.
In the penalty proceedings,
the A.O. took the view that the assessee’s claim was not actually bad debt but
represented payment made to M/s JCT Ltd. which was also not incurred wholly and
exclusively for the purposes of business. Thus, by the order dated 14th
February, 2014, the A.O. held that by making an improper and unsubstantiated
claim of bad debt of Rs. 62,47,460, the assessee had wilfully reduced its
incidence of taxation, thereby concealing its income as well as furnishing
inaccurate particulars of income. Therefore, the A.O. imposed the minimum
penalty quantified at Rs. 24,99,200 which included penalty on another
disallowance.
The CIT(A) deleted the
penalty on the other disallowance. Regarding the penalty levied on Rs.
62,47,460 claimed as bad debt in the assessment proceedings, the CIT(A) held
that the assessee had made a wrong claim by submitting inaccurate particulars
of income by claiming bad debt which was not actually a debt and also not an
expenditure allowable u/s 37(1). Thus, it was held that the assessee had
wilfully submitted inaccurate particulars of income which had resulted in
concealment. Therefore, the penalty amount of Rs. 62,47,460 levied was upheld.
The Tribunal upheld the order
of the CIT(A) and rejected the appeal of the assessee. According to the
Tribunal, it was rightly held by the CIT(A) that the assessee had made a wrong
claim by submitting inaccurate particulars of income by claiming a bad debt
which was not actually a debt and also not an expenditure allowable u/s 37(1).
Therefore, the finding recorded by the CIT(A) that the assessee had wilfully
submitted inaccurate particulars of income which had resulted in concealment
was affirmed.
Before the High Court the
first contention was raising a question of law for the first time before the
High Court though it had not been raised before the lower authorities; the
Court referred to a series of decisions, including of the Supreme Court in
Jhabua Power Limited (2013) 37 Taxmann.com 162 (SC) and of the Bombay
High Court in Ashish Estates & Properties (P) Ltd. (2018) 96
Taxmann.com 305 (Bom.) wherein it is observed that it would not
preclude the High Court from entertaining an appeal on an issue of jurisdiction
even if the same was not raised before the Tribunal.
The Court further noted and
analysed 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. The Court further
noted that the A.O. 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.
Therefore, the question
relating to non-striking off of the inapplicable portion in the show cause
notice which is in printed format, thereby not indicating therein as to under
which limb of section 271(1)(c) the penalty was proposed to be imposed, i.e.,
whether for concealing the particulars of income or for furnishing inaccurate
particulars of such income, would go to the root of the lis. Therefore,
it would be a jurisdictional issue. Being a jurisdictional issue, it can be
raised before the High Court for the first time and adjudicated upon even if it
was not raised before the Tribunal.
The Hon. Court relied on
decisions of SSA’s Emerald Meadows (2016) 73 Taxmann.com 241 (Karnataka);
Manjunath Cotton & Ginning Factory 359 ITR 565 (Kar.); and
Samson Pernchery (2017) 98 CCH 39 (Bom.) wherein the issue was
examined, i.e. the question as to justification of the Tribunal in deleting the
penalty levied u/s 271(1)(c). It was noted that the notice issued u/s 274 was
in a standard proforma without having struck off the irrelevant clauses
therein, leading to an inference as to non-application of mind.
A similar view had been taken
in Goa Coastal Resorts & Recreation Pvt. Ltd. (2019) 106 CCH 0183
(Bom.); New Era Sova Mine (2019) SCC OnLine Bom. 1032; as well as Shri
Hafeez S. Contractor (ITA Nos.796 and 872 of 2016 decided on 11th
December, 2018).
On the facts of the present
case, the Court noticed that the statutory show cause notice u/s 274 r/w/s 271
of the Act proposing to impose penalty was issued on the same day when the
assessment order was passed, i.e., on 28th February, 2006. The said
notice was in printed form. Though at the bottom of the notice it was mentioned
‘delete inappropriate words and paragraphs’, unfortunately, the A.O. omitted to
strike off the inapplicable portion in the notice. Such omission certainly
reflects a mechanical approach and non-application of mind on the part of the
A.O. However, the moot question is whether the assessee had notice as to why
penalty was sought to be imposed on it?
The Court observed that in
the present case, the assessment order and the show cause notice were both
issued on the same date, i.e., on 28th February, 2006, and if they
are read in conjunction, a view can reasonably be taken that notwithstanding
the defective notice, the assessee was fully aware of the reason as to why the
A.O. sought to impose penalty. It was quite clear that the penalty proceedings
were initiated for breach of the second limb of section 271(1)(c), i.e., for
furnishing inaccurate particulars of income. The purpose of a notice is to make
the noticee aware of the ground(s) of notice. In the present case, it would be
too technical and pedantic to take the view that because in the printed notice
the inapplicable portion was not struck off, the order of penalty should be set
aside even though in the assessment order it was clearly mentioned that penalty
proceedings u/s 271(1)(c) had been initiated separately for furnishing
inaccurate particulars of income. Therefore, this contention urged by the
appellant / assessee was rejected.
Having held so, the Court
went on to examine whether in the return of income the assessee had furnished
inaccurate particulars. As already discussed above, for the imposition of
penalty u/s 271(1)(c) either concealment of particulars of income or furnishing
inaccurate particulars of such income are the sine qua non. In the
instant case, the penalty proceedings u/s 271(1)(c) were initiated on the
ground that the assessee had furnished inaccurate particulars of income.
The Court observed that in
the assessment proceedings the explanation of the assessee was not accepted by
the A.O. by holding that the subsequent payment made to M/s JCT Ltd. would not
be covered by section 36(1)(vii) since the amount claimed as bad debt was
actually not a debt. Thereafter, the A.O. examined whether such payment would
be covered u/s 37(1) as per which an expenditure would be allowable as a
deduction if it pertains to that particular year and has been incurred wholly
and exclusively for the purpose of business. The A.O. held that the assessee’s
claim was not admissible even u/s 37(1) as the circumstances indicated that the
payments were not made wholly and exclusively for business purposes. While
disallowing the claim of the assessee, the A.O. took the view that since the
assessee had furnished inaccurate particulars of income, penalty proceedings
u/s 271(1)(c) were also initiated separately.
The Court noticed that in the
statutory show cause notice the A.O. did not indicate as to whether penalty was
sought to be imposed for concealment of income or for furnishing inaccurate
particulars of income, although in the assessment order it was mentioned that
penalty proceedings were initiated for furnishing inaccurate particulars of
income. In the order of penalty, the A.O. held that the assessee had concealed
its income as well as furnished inaccurate particulars of income.
But concealment of
particulars of income was not the charge against the appellant, the charge was
of furnishing inaccurate particulars of income. As discussed above, it is trite
that penalty cannot be imposed for alleged breach of one limb of section 271(1)(c)
while penalty proceedings are initiated for breach of the other limb of the
same section. This has certainly vitiated the order of penalty. In the appeal,
the CIT(A) took a curious view, that submission of inaccurate particulars of
income resulted in concealment, thus upholding the order of penalty. This
obfuscated view of the CIT(A) was affirmed by the Tribunal.
While the charge against the
assessee was of furnishing inaccurate particulars of income whereas the penalty
was imposed additionally for concealment of income, the order of penalty as
upheld by the lower appellate authorities could be justifiably interfered with,
yet the Court went on to examine whether there was furnishing of inaccurate
particulars of income by the assessee in the first place because that was the
core charge against the assessee.
The Court referred to the
decision of the Supreme Court in Reliance Petroproducts Pvt. Ltd. 322 ITR
158 (SC) wherein it was held that mere making of a claim which is not
sustainable in law by itself would not amount to furnishing inaccurate
particulars regarding the income of the assessee. Therefore, such claim made in
the return cannot amount to furnishing inaccurate particulars of income.
The Court noted that this
decision was followed by the Bombay High Court in CIT vs. M/s Mansukh
Dyeing & Printing Mills, Income Tax Appeal No. 1133 of 2008, decided on 24th
June, 2013. In CIT vs. DCM Ltd., 359 ITR 101, the Delhi
High Court applied the said decision of the Supreme Court and further observed
that law does not debar an assessee from making a claim which he believes is
plausible and when he knows that it is going to be examined by the A.O. In such
a case, a liberal view is required to be taken as necessarily the claim is
bound to be carefully scrutinised both on facts and in law. Threat of penalty
cannot become a gag and / or haunt an assessee for making a claim which may be
erroneous or wrong. Again, in CIT vs. Shahabad Co-operative Sugar Mills
Ltd., 322 ITR 73, the Punjab & Haryana High Court held that the
making of a wrong claim is not at par with concealment or giving of inaccurate
information which may call for levy of penalty u/s 271(1)(c) of the Act.
In view of the above, in the
present case it is quite evident that the assessee had declared the full facts;
the full factual matrix of facts was before the A.O. while passing the
assessment order. It is another matter that the claim based on such facts was
found to be inadmissible. This is not the same thing as furnishing inaccurate
particulars of income as contemplated u/s 271(1)(c).
Thus, on an overall
consideration, the appeal was allowed and the order of penalty as affirmed by
the appellate authorities was set aside.
