Rakesh Jain vs ACIT

Kuldip Singh, J

Appellant, Shri Rakesh Jain (hereinafter referred to as the 'assessee') by filing the present appeal sought to set aside the impugned order dated 06.03.2018 passed by the Commissioner of Income-tax (Appeals)-11, New Delhi qua the assessment year 2014-15 on the grounds inter alia that :-

"1. That on the facts and circumstances of the case, the learned CIT(A) erred in sustaining penalty u/s 271(1)(c) of the Act amounting to Rs. 20,30,403/- imposed by the Assessing Officer on allegedly claiming wrong exemption of Rs 67,68,010/-u/s 54F of the Act on construction of first floor of property at Sainik Farms. That the learned CIT (A) passed the Appellate Order ex-party.

That on the facts & circumstances of the case and as per law, the Orders passed by The Assessing Officer & CIT(A) are liable to be quashed as the penalty u/s 271(1)(c) of the Act was not specific in the Assessment Order as to which limb of the provisions of the section, the same has been initiated.

That the Order passed u/s 271(1)(c} of the Act is illegal, arbitrary being passed in utter violation of natural justice as the appellant was not given show cause notice u/s 274 of the Act specifying the exact charge I limb under which the AO has initiated the Penalty.

That on the facts & circumstances of the case, the penalty us 271(1)(c) of the Act is not leviable as the appellant neither concealed any income nor furnished any inaccurate particular of income. The exemption u/s 54F of the Act, on the facts was claimed by the appellant on construction of first floor of his house at Sainik Farm, on the advice of his Chartered Accountant.

Without prejudice to the above, otherwise also penalty levied u/s 271(1)(c) of the Act is excessive as the amount of tax levied on addition of long term Capital gain at 20% of Rs.67,68,010/- and the ACIT levied penalty @ 30% of Rs 67,68,010/-."

Briefly stated the facts necessary for adjudication of the controversy at hand are : On the basis of completed assessment under section 143 (3) of the Income-tax Act, 1961 (for short 'the Act') assessing the total income at Rs.1,60,72,970/- by making addition of Rs.67,68,010/- on account of disallowance of claim made under section 54 of the Act, penalty proceedings by way of issuance of notice u/s 274 read with section 271(1)(c) of the Act were initiated. Declining the contentions raised by the assessee that it was not a case of concealment of particulars of income or furnishing of inaccurate particulars of income attracting penalty u/s 271(1)(c) of the Act, AO reached the conclusion that the assessee has willfully furnished inaccurate particulars of income to the extent of Rs.67,68,010/- and thereby imposed the penalty of Rs.20,30,403/- @ 100% of the tax sought to be evaded u/s 271(1)(c) of the Act.

Assessee carried the matter by way of an appeal before the ld. CIT (A) who has confirmed the penalty by dismissing the appeal. Feeling aggrieved, the assessee has come up before the Tribunal by way of filing the present appeal.

We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.

Undisputedly, assessee has claimed deduction u/s 54 of the Act qua sale of two properties. It is also not in dispute that exemption qua one property has been allowed and exemption qua another property is disallowed by disputing the claim of the assessee that he has constructed the house so as to avail the deduction u/s 54 of the Act as AO reached the conclusion that the assessee has just renovated the house. It is also not in dispute that assessee has given all the details qua sale of the property and construction of the residential property at Khirki Extension. It is also not in dispute that the assessee has accepted the quantum, paid the tax along with interest.

In the backdrop of the aforesaid undisputed facts & circumstances of the case, order passed by the lower revenue authorities and arguments addressed by the Ld. Authorized Representatives of the parties to the appeal, the sole question arises for determination in this case is:-

"As to whether the assessee has concealed particulars of income or has furnished inaccurate particulars of such income during assessment proceedings?"

Ld. AR for the assessee challenging the impugned order passed by the ld. CIT (A) contended inter alia that at the very outset, AO has failed to satisfy himself that as to whether the assessee has concealed the particulars of income or furnished inaccurate particulars of income in the assessment order as well as in the show-cause notice issued u/s 274/271(1)(c) of the Act so as to initiate the penalty proceedings; that at no point of time, assessee has filed inaccurate particulars of income or has concealed the particulars of income rather furnished all the details necessary for claiming deduction u/s 54 of the Act and relied upon the decision rendered by Hon'ble High Court of Madras in CIT vs. D. Harindran - (2018) 97 taxmann.com 297 (Madras), Hon'ble Apex Court in CIT vs. Reliance Petro Products Pvt. Ltd. 322 ITR 158 (S.C.), coordinate Bench of the Tribunal in D. Harindran vs. ITO ITA No.233/Mds/2016 order dated 23.09.2016, Hon'ble Karnataka High Court in case of CIT vs. Manjunatha Cotton and Ginning Factory-359ITR 565 and CIT vs. SSA's Emerala Meadows -73 taxmann.com 241 (kar.) (Revenue's SLP dismissed in 242 taxman 180).

However, on the other hand, ld. Senior DR in order to repel the arguments addressed by the ld. AR for the assessee contended inter alia that the assessee has claimed the deduction u/s 54 of the Act with malafide intention which amounts to concealment of particulars of income; that the assessee has never raised any question of invalid notice or satisfaction of the AO during the penalty proceedings nor before the ld. CIT (A) so no prejudice has been caused to the assessee as the assessee has understood the purport of the notice u/s 274 r/w section 271(1)(c) of the Act and relied upon the decision rendered by the Hon'ble Madras High Court in Sundaram Finance Ltd. vs. CIT (2018) 403 ITR 407 (Madras), in which SLP has also been dismissed by Hon'ble Supreme Court in the case cited as Sundaram Finance Ltd. vs. CIT (2018) 99 taxmann.com 152 (SC) and also relied upon the judgment of Hon'ble Delhi High Court in CIT vs. Zoom Communication (P.) Ltd. 327 ITR 510 (Delhi), CIT vs. Escorts Finance Ltd. 328 ITR 44 (Delhi) & Hon'ble Apex Court in UOI vs. Dharamendra Textile Processors 306 ITR 277 (SC).

In order to proceed further, we would like to peruse the notice issued by AO u/s 274 read with section 271(1)(c) of the Act to initiate the penalty proceedings which is extracted as under for ready perusal:-

"NOTICE UNDER SECTION 274 READ WITH SECTION 271 OF THE INCOME TAX ACT, 1961.

Income tax Office

New Delhi.

Dated: 27.12.2016

To,

Shri Rakesh Jain

172-B, Cariappa Marg Colony

Khirki Extn., M.B. Road, Sainik Farm, N.D.

Whereas in the course of proceedings before me for the assessment year 2014-15 it appears to me that you:-

• Have without reasonable cause failed to comply with a notice under section 142(1)/143(2) of the Income Tax Act, 1961 dated.........

• Have concealed the particulars of your income or furnished inaccurate particulars of such income in terms of explanation 1, 2,3,4 and 5.

You are hereby requested to appear before me at 11.00 AM/PM on 27.1.2017 and show cause why an order imposing a penalty on you should not be made under section 271 of the Income Tax Act, 1961. If you do not wish to avail yourself of this opportunity of being heard in person or through authorized representatives you may show cause in writing on or before the said date which will be considered before any such order is made under section 271(1)(c).

Sd/-

Assessing Officer

Delete inappropriate words and paragraphs."

Bare perusal of the assessment order particularly para 3.7 goes to prove that even at the time of assessment, AO was not sure enough if the assessee has concealed his income or has furnished inaccurate particulars of income and then issued the notice dated 27.12.2006 u/s 274/271(1)(c) of the Act, available at page 11 of the paper book, again with confused mind if he is going to charge the assessee for concealment of particulars of income or furnishing of inaccurate particulars of income

When initiation of penalty proceedings by the AO right from the stage of framing the assessment till serving of the notice u/s 271(1)(c) read with section 274 of the Act are vague and ambiguous and without application of mind rather initiated and completed the penalty proceedings in mechanical manner, we are of the considered view that the penalty proceedings are not sustainable.

Hon'ble Apex Court in case of CIT vs. SSA's Emerala Meadows - (2016) 73 taxmann.com 248 (SC) while dismissing the SLP filed by the Revenue quashing the penalty by the Tribunal as well as Hon'ble High Court on ground of unspecified notice has held as under:-

"Section 274, read with section 271(1)(c), of the Income-tax Act, 1961 - Penalty - Procedure for imposition of (Conditions precedent) - Assessment year 2009-10 - Tribunal, relying on decision of Division Bench of Karnataka High Court rendered in case of CIT v. Manjunatha Cotton & Ginning Factory [2013] 359 1TR 565/218 Taxman 423/35 taxmann.com 250, allowed appeal of assessee holding that notice issued by Assessing Officer under section 274 read with section 271 (1 )(c) was bad in law, as it did not specify under which limb of section 271 (1 )(c) penalty proceedings had been initiated, i.e., whether for concealment of particulars of income or furnishing of inaccurate particulars of income - High Court held that matter was covered by aforesaid decision of Division Bench and, therefore, there was no substantial question of law arising for determination - Whether since there was no merit in SLP filed by revenue, same was liable to be dismissed - Held, yes [Para 2] [In favour of assessee]"

Hon'ble Madras High Court in Sundaram Finance Ltd. (supra) upheld the order passed by the Tribunal confirming the penalty levied on the basis of notice issued under section 274 read with section 271(1)(c) of the Act in which specific charge was not pointed out by returning the following findings :-

"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 the 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 of not being able to submit an effective reply, it would be a different matter. This was never the plea of the assessee either before the Assessing Officer or before the first Appellate Authority or before the Tribunal or before this Court when the Tax Case Appeals were filed and it was only after 10 years, when the appeals were listed for final hearing, this issue is sought to be raised. Thus on facts, we could safely 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 r/w.Section 271 of the Act. Therefore, principles of natural justice cannot be read in abstract and the assessee, being a limited company, having wide network in various financial services, should definitely be precluded from raising such a plea at this belated stage.

Thus, for the above reasons, Substantial Questions of law Nos.1 and 2 are answered against the assessee and in favour of the revenue. The additional substantial question of law, which was framed is rejected on the ground that on facts the said question does not arise for consideration as well as for the reasons set out by us in the preceding paragraphs."

However, we are of the considered view that in the instant case, not only the notice issued to the assessee under section 274 read with section 271(1)(c) is defective but AO has not even made himself satisfied at the time of making disallowance / addition in assessment order if the assessee has furnished inaccurate particulars of income or has concealed particulars of his income rather to be on the safer side he has invoked both the limbs of section 271(1)(c) of the Act.

So, we are of the considered view that this is not merely a case of serving a defective notice under section 274 read with section 271(1) on the assessee rather it is a case of non-application of mind on the part of the AO to make himself satisfied as to under which limb of section 271(1)(c) of the Act, he is going to initiate/levy the penalty on the assessee and as such, decision of Sundaram Finance Ltd. (supra) relied upon by the ld. DR for the Revenue is not applicable to the facts and circumstances of the case.

Secondly, when we examine the case of the assessee on merits, it is categoric plea of the assessee that at no point of time, he has concealed the particulars of income or have furnished inaccurate particulars of income because he has given the necessary details as to claiming deduction u/s 54 of the Act in the form of detail of cost of construction of property, which has not been found to be incorrect, rather AO taken the view that new house has not been constructed rather assessee has expended the amount for renovation/interior designing of the property and which cannot be termed as construction.

We are of the considered view that from the facts and circumstances of the case, assessment order and order passed by the ld. CIT (A), an iota of malafide on the part of the assessee in claiming deduction u/s 54 has not come on record and as such decision rendered by Hon'ble High Court in case of Zoom Communication (P.) Ltd. (supra) as relied upon by the ld. DR for the Revenue is not applicable. Rather the facts of this case is covered by Hon'ble Apex Court in case of CIT vs. Reliance Petro Products Pvt. Ltd. (supra) wherein it is held that merely making claim which is not sustainable in law by itself would not amount to furnishing of inaccurate particulars of income by returning following findings :-

"A glance at the provisions of section 271(l)(c) of the I.T. Act, 1961 suggests that in order to be covered by it, there has to be concealment of the particulars of the income of the assessee. Secondly, the assessee must have furnished inaccurate particulars of his income. The meaning of the word "particulars" used in section 271(l)(c) would embrace the detail of the claim made. Where no information given in the return is found to be incorrect or inaccurate, the assessee cannot be held guilty of furnishing inaccurate particulars. In order to expose the assessee to penalty, unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By no stretch of imagination can making an incorrect claim tantamount to furnishing inaccurate particulars. There can be no dispute that everything would depend upon the return filed by the assessee, because that is the only document where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. To attract penalty, the details supplied in the return must not be accurate, not exact or correct, not according to the truth or erroneous. Where there is no finding that any details supplied by the assessee in its return are found to be incorrect or erroneous or false there is no question of inviting the penalty under section 271(l)(c). A mere making of a claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such a claim made in the return cannot amount to furnishing inaccurate particulars."

Coordinate Bench of the Tribunal in case cited as Shri D. Harindran vs. ITO (supra) decided the identical issue in favour of the assessee in the light of the decision rendered by Hon'ble Apex Court in case of Rajasthan Spinning and Weaving Mills and decision rendered by Hon'ble Madras High Court in case of CIT vs. Gem Granites (2013) 86 CCH 160 by holding that even if it is considered that the claim made by the assessee u/s 54/54F is incorrect, it would not tantamount to furnishing of inaccurate particulars of income by returning following findings :-

"8. We have also carefully gone through the judgment of the Madras High Court in Gem Granites (supra). The Madras High Court after referring to the Apex Court judgment in Rajasthan Spinning and Weaving Mills found that the conditions stated in 271(1)(c) must exist for levying penalty.

In view of this judgment of the Apex Court and Madras High Court, even if it is considered that the claim made by the assessee under Section 54/54F is incorrect, it would not tantamount to furnishing of inaccurate particulars of income. Penalty can be levied only in respect of concealing the particulars of income or furnishing inaccurate particulars. Making a claim before the assessing officer under the statutory provisions cannot be considered by any stretch of imagination that the assessee has concealed any part of the income or furnished inaccurate particulars of income. This Tribunal is of the considered opinion that merely because claim made by the assessee under Section 54/54F was disallowed by the assessing officer in the assessment proceeding, that cannot be a reason to conclude that the assessee has furnished inaccurate particulars of his income or concealed any part of his income."

Even otherwise, perusal of the copy of ledger account of capital work-in-progress qua construction of residential property for claiming deduction u/s 54, available at pages 3 to 6 of the paper book, which has otherwise not been rejected by the AO, shows that the assessee has claimed deduction u/s 54 of the Act for raising construction of house bonafidely qua which the AO has taken different view that it does not amount to construction of house rather it is renovation/interior designing. In the face of the ledger account of capital work-in-progress assessee, when we examine the assessment order it is nowhere mentioned by the AO that at any point of time, he has visited the property in question or the property claimed to have been constructed by the assessee was not having sanctioned site plan. Rather AO proceeded to reject the claim of the assessee on the basis of imagination that the construction claimed by the assessee amounts to renovation/interior designing.

In view of what has been discussed above, we are of the considered view that case laws relied upon by the ld. DR are not applicable to the facts and circumstances of the case and as such, AO has miserably failed to prove that the assessee has willfully furnished inaccurate particulars of income so as to attract the provisions contained u/s 271(1)(c) of the Act, hence penalty levied by the AO and confirmed by the ld. CIT (A) is not sustainable in the eyes of law and ordered to be deleted. Consequently, the appeal filed by the assessee is allowed.

Order pronounced in open court on this 13th day of June, 2019.