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IN THE HIGH COURT OF JUDICATURE OF BOMBAY BENCH AT GOA
Dama Seshadri Naidu, Bharati Dangre, M.S. Jawalkar, JJ.
Mohd Farhan A Shaikh - Appellant
Versus
Deputy Commissioner Of Income Tax - Respondent
Tax Appeals No. 51 of 2012, 57 of 2012
Decided On : 11-03-2021
The Court held that a mere defect in the notice under Section 271(1)(c) of the Income Tax Act, 1961, such as not striking off irrelevant words, vitiates the penalty proceedings, as it violates the principles of natural justice and prejudices the assessee's right to a fair hearing.
Fact of the Case:
The assessee, a transporter, was subjected to search and seizure proceedings under section 132 of the Income Tax Act, 1961. The appellant was put on notice under section 153A/153C of the IT Act. The appellant filed a return of income in November 2008, declaring a total income of Rs.39,67,790. But because of the search and seizure proceedings against the company, the appellant was put on notice under section 153A/153C of the IT Act. Then, the appellant filed another return declaring the same taxable income as returned in his original return of income. Subsequently, "on advise by the AO the same was offered to tax by revising the return for AY 2006-07". On 22/12/2008, the AO passed an order under section 143, read with section 153C, of the IT Act. Aggrieved by the show-cause notice issued, the appellant contended that FY 2005-06 was the second year of his business. As he was inexperienced, he was unaware of the accounting and taxation formalities. Besides that, he has taken various other pleas. But, unimpressed by the reply, the AO imposed the penalty. On appeal, the Id. CIT(A) deleted the penalty. On further appeal, the Income Tax Appellate Tribunal has restored the AO's order of penalty.
Finding of the Court:
The Court held that the penalty proceedings are distinct from assessment proceedings; they are independent of each other. In penalty proceedings, the assessee may lead fresh evidence to prove that there was no concealment or that the particulars furnished were accurate and true. In this case, the notice issued to the assessee by the AO contained both the ingredients. And the notice, therefore, discloses non-application of mind. That is, the AO was not sure whether she had "proceeded on the basis that the assessee has either concealed its income or has furnished inaccurate details". According to the Court, the satisfaction regarding the grounds mentioned in section 271(1)(c) is essential for the Revenue to initiate the penalty proceedings. Second, the penalty proceedings must be confined only to those grounds specifically stated in the notice so that the assessee could meet those grounds. It is not open to the authority, to impose a penalty on the grounds other than what the assessee was called upon to meet.
Issues: 1. If the assessment order clearly records satisfaction for imposing penalty on one or the other, or both grounds mentioned in Section 271(l)(c), does a mere defect in the notice-not striking off the irrelevant matter-vitiate the penalty proceedings? 2. Has Kaushalya failed to discuss the aspect of 'prejudice'? 3. What is the effect of the Supreme Court's decision in Dilip N. Shroff on the issue of non-application of mind when the irrelevant portions of the printed notices are not struck off ?
Ratio Decidendi: The Court held that a mere defect in the notice under Section 271(1)(c) of the Income Tax Act, 1961, such as not striking off irrelevant words, vitiates the penalty proceedings, as it violates the principles of natural justice and prejudices the assessee's right to a fair hearing. The Court also held that the penalty proceedings are distinct from assessment proceedings; they are independent of each other. In penalty proceedings, the assessee may lead fresh evidence to prove that there was no concealment or that the particulars furnished were accurate and true.
Final Decision: The Court held that the penalty proceedings were vitiated due to the defect in the notice and set aside the penalty imposed on the assessee.
JUDGMENT
Dama Seshadri Naidu, J. - Introduction:
A learned Division Bench of this Court at Goa has faced a precedential cleavage on an issue. That issue is, does an income tax authority's "mere failure to tick mark the applicable grounds" in the notice issued under Section 271 of the Income Tax Act, 1961 ("IT Act") vitiate the entire penalty proceedings?
2. These decisions, according to the Division Bench, have answered that question in the affirmative-the failure vitiates the notice: (1) The Commissioner of Income-Tax-11 v. Shri Samson Perinchery, TXA No.1154/2014 & Ors. dtd. 05.01.2017; (2) The Principal Commissioner of Income-Tax (Central) Bengaluru v. Goa Coastal Resorts and Recreation Pvt. Ltd., TXA No.24/2019 dtd. 11.11.2019; (3) The Principal Commissioner of Income-Tax, Panaji v. New Era Sova Mind, TXA Nos.70/2019 & Ors. dtd. 18.06.2019 (TXA Nos.70/2019 & Ors, dated 18.6.2019); and (4) The Principal Commissioner of Income-Tax, Panaji v. Goa Dourado Promotions Pvt. Ltd., TXA No.18/2019 dtd. 26.11.2019.
3. On the other hand, an earlier decision by another co-equal bench, according to the referring Division Bench, has taken a contrary view: Commissioner of Income-Tax v. Smt. Kaushalya, 216 ITR 660 (Bombay).
4. In the end, the Division Bench has found a direct conflict between Goa Dourado Promotions and Kaushalya. So, through an order dated 28 February 2020, it has placed the matter before the Hon'ble the Chief Justice under Chapter 1, Rule 8 of the Bombay High Court Appellate Side Rules, 1960.
5. While placing the matter before the Hon'ble the Chief Justice for issue-resolution by a larger Bench, the learned Division Bench has framed this question for reference:
"[In] the assessment order or the order made under Sections 143(3) and 153C of the IT Act, [when] the Assessing Officer has clearly recorded satisfaction for the imposition of penalty on one or the other, or both grounds mentioned in Section 271(l)(c), [would] a mere defect in the notice of not striking out the relevant words [...] vitiate the penalty proceedings?
6. Besides, the Division Bench has also desired the larger Bench to consider two more aspects: (a) "the impact of non-discussion on the aspect of 'prejudice' in the [first set of decisions]"; (b) and "the effect of the decision of the Hon'ble Supreme Court in case of Dilip N. Shroff v. Joint Commissioner of Income-Tax, (2007) 291 ITR 519 (SC) on the issue of non-application of mind where the relevant portions of the printed notices are not struck off ".
7. This is how the Hon'ble the Chief Justice constituted this Full Bench for resolving the precedential tangle if any.
The Background:
8. Only to contextualise the issue, let us take the facts of one case under reference: Tax Appeal No.51 of 2012. In July 2006, there was search and seizure under section 132 of the IT Act in a company's premises at Belgaum and at Goa. The appellant was one of the main transporters of that company. So the appellant's case stood covered under section 153C of the IT Act. To be explicit, section 153C provides that where the search is conducted on a person and undisclosed assets/documents indicating undisclosed income are found as belonging to or pertains to "other person" other than "searched person", then in that case, proceedings under section 153C would be initiated against the "other person".
9. The appellant, on his part, initially filed a return of income in November 2008, declaring a total income of Rs.39,67,790. But because of the search and seizure proceedings against the company, the appellant was put on notice under section 153A/153C of the IT Act. Then, the appellant filed another return declaring the same taxable income as returned in his original return of income. This return was revised to include Rs.50,00,000/- on account of the declaration given during the search, which was earlier erroneously offered to tax for AY 2007-08. Subsequently, "on advise by the AO the same was offered to tax by revising the return for AY 2006
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