Commissioner of Income Tax vs Prabhu Dayal Lallu Ram

G.S. Singhvi J.

In this appeal filed u/s 260A of the Income Ttax Act, 1961 (hereinafter referred to as "the Act), the appellant has prayed for determination of the following question of law :

"Whether, on the facts and in the circumstances of the case, the Hon''ble Income Tax Appellate Tribunal was justified in law in deleting the penalty u/s 271(1)(c) amounting to Rs. 73,000 by holding that Explanation 1 to section 271(1)(c) has not been invoked by the assessing officer ignoring the fact that Explanation 1 to section 271(1)(c) is an integral part of section 271(1)(c) as held by the Punjab and Haryana High Court in the case of Capital Cinema Vs. Commissioner of Income Tax, ?"

The respondent, which is a registered firm and is engaged in the business of sale of agricultural commodities and commission agency, filed a return for the assessment year 1988-89 declaring an income of Rs. 86,040. The assessing officer completed the assessment at Rs. 2,40,770 by making additions on account of cash credits including interest thereon, disallowance of losses in gram and barley accounts, etc. He also initiated penalty proceedings u/s 271(1)(c) read with section 274 of the Act. After considering the reply of the respondent, the assessing officer, vide his order dated 29-5-1991, imposed penalty of Rs. 80,000. The appeal filed by the respondent was partly allowed by the CIT(A), Faridabad (hereinafter referred to as "the CIT(A)"), who reduced the total additions by Rs. 30,000 and directed the assessing officer to recompute the penalty.

Feeling dissatisfied with the appellate order, the respondent filed further appeal before the Income Tax Appellate Tribunal, Delhi Bench "SMC", New Delhi (hereinafter referred to as , "the Tribunal"), with the prayer that the penalty may be quashed in its entirety because the notice issued by the assessing officer did not contain any indication that he intended to take into consideration Explanation 1 appearing below section 271(1)(c) of the Act. The Tribunal upheld the contention of the respondent and quashed the penalty order.

We have heard Shri Rajesh Bindal, learned counsel for the appellant, and Shri Akshay Bhan, learned counsel for the respondent and perused the record. The question whether the penalty imposed u/s 271(1)(c) of the Act can be annulled on the ground that the notice issued by the competent authority did not contain specific reference to Explanation 1 appended to that section is no longer res integra. In M/s. K.P. Madhusudhanan Vs. Commissioner of Income Tax, Cochin, , a three-judge Bench of the Supreme Court overruled the judgments of the Bombay High Court in Commissioner of Income Tax Vs. P.M. Shah, and Commissioner of Income Tax Vs. Dharamchand L. Shah, approved the decision of the Kerala High Court in Commissioner of Income Tax Vs. K.P. Madhusudanan, and held (headnote) :

"The Explanation to section 271(1)(c) is a part of section 271. When the assessing officer or the Appellate Asstt. CIT issues a notice u/s 271, he makes the assessee aware that the provisions thereof are to be used against him. These provisions include the Explanation. By virtue of the notice u/s 271 the assessee is put to notice that, if he does not prove, in the circumstances stated in the Explanation, that his failure to return his correct income was not due to fraud or neglect, he shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars thereof, and, consequently, be liable to the penalty under the section. No express invocation of the Explanation to section 271 in the notice u/s 271 is necessary before the provisions of the Explanation are applied."

Earlier, a Division Bench of this court in Capital Cinema Vs. Commissioner of Income Tax, held that mere non-mentioning of Explanation 1 to section 271(1)(c) in the notice issued for imposition of penalty is not fatal to the order passed under that section. Therefore, the view expressed by this court will be deemed to have been approved by the Supreme Court.

Shri Akshay Bhan, learned counsel for the respondent fairly stated that in view of the law laid down by the Supreme Court, he cannot persuade the court to affirm the view taken by the Tribunal on the validity of the penalty notice issued by the assessing officer, but argued that the court may not set aside the impugned order because the Tribunal has given other reasons for not sustaining the penalty.

In the backdrop of the submission of learned counsel, we have carefully scrutinised the order of the Tribunal but have not felt persuaded to agree with him. In paragraph 5 of the impugned order, the learned judicial Member of the Tribunal did make a reference to some other factors which could justify the annulment of the penalty order, but he rested his conclusion mainly on the ground that the assessing officer could not have invoked Explanation 1 to section 271(1)(c) of the Act without giving an indication of the same in the notice issued to the respondent.

For the reasons mentioned above, the appeal is allowed. Order dated 21-6-1999, passed by the Tribunal is set aside and the case is remanded to it for fresh adjudication of the appeal filed by the respondent.

The parties are directed to appear before the Tribunal on 1-4-2005.