Bombay High Court considered penalty notice valid even if applicable limb of charge of penalty is not strike-off
Executive Summary
- In the recent ruling, Hon’ble Bombay High Court (HC) in case of Ventura Textiles Ltd. vs. Commissioner of Income Tax – Mumbai City – 11 (Bombay High Court) upheld the validity of the penalty notice, even though non-striking-off of inapplicable portion in the notice was considered as non-application of mind. However, the penalty was deleted on the merits of the case concluding that the present case was not of furnishing inaccurate particulars of income.
- HC also held that Assessing Officer (AO) must indicate in the penalty notice for which of the two limbs he proposes to impose the penalty and for this, the notice has to be appropriately marked. However, in the present case, if the assessment order and show cause notice are read in conjunction, a view can reasonably be taken that Ventura Textiles Ltd. (Taxpayer) was fully aware of the reason as to why the AO sought to impose the penalty. Hence, it would be too technical and pedantic to consider the penalty notice as invalid.
- HC placed reliance on the Hon’ble Supreme Court (SC) decision in Reliance Petroproducts Pvt. Ltd. and held that it is quite evident that the Taxpayer had declared the full facts in the present case. Accordingly, it is not the case of furnishing inaccurate particulars of income as contemplated under section 271(1)(c) of the Income Tax Act, 1961 (ITA).
- The taxpayer claimed the compensation for the supply of inferior quality of goods as bad debts under section 36(1)(vii) of the ITA.
- AO held that bad debts claimed were not actually debt and therefore it was not allowable as a deduction under section 36(1)(vii) of the ITA. AO further held that such claim was also not admissible even under section 37(1) of the ITA, with the observation that it was not wholly and exclusively for business purposes but for extraneous considerations.
- AO added back to the total income such amount stating that the Taxpayer had furnished inaccurate particulars of income and ordered the initiation of penalty proceedings under section 271(1)(c) of the ITA.
- AO issued a notice under section 274 read with section 271 of the ITA to the Taxpayer to show cause as to why an order imposing penalty should not be made under section 271 of the ITA (without striking-off the inapplicable portion of the charge or penalty).
- AO imposed the penalty at the rate of 100% of the tax, invoking section 271(1)(c) of the ITA.
- Aggrieved by the penalty order, the Taxpayer preferred an appeal before the Commissioner of Income Tax (Appeals) – 18, Mumbai (CIT-A).
- The CIT-A held that the Taxpayer had made a wrong claim by submitting inaccurate particulars of income by claiming bad debt which was not actually debt and also not an expenditure allowable under section 37(1) of the ITA. Given the same, CIT-A upheld such penalty imposed by AO.
- The taxpayer filed an appeal with the Income Tax Appellate Tribunal (ITAT) on the given issue.
- The ITAT upheld the order of the CIT-A and rejected the appeal of the Taxpayer.
- The taxpayer challenged the order of the ITAT before the HC.
- The taxpayer contended that the inapplicable portion of the printed penalty notice was not struck-off which is a fundamental error and goes to the root of the matter and has vitiated the impugned order of penalty.
- Taxpayer also contended that as this issue is a pure question of law touching upon the jurisdiction, it can be raised even for the first time in the High Court.
- Taxpayer placed reliance on (i) CIT vs. Jhabua Power Limited, (2003) 37 Taxmann.com 162 (SC), and (ii) Ashish Estates & Properties (P) Ltd. vs. CIT, (2018) 96 Taxmann.com 305 (Bombay).
- In the show-cause notice under section 274 read with section 271(1)(c) of the ITA, it must be specifically indicated on what ground penalty is sought to be imposed, whether for (i) concealment or (ii) furnishing inaccurate particulars. Such a notice being in printed format, the inapplicable portion or limb of section 271(1)(c) of the ITA has to be struck-off. Failure to do so would reflect non-application of mind, thus vitiating the penalty proceedings and the consequential order of penalty. Taxpayer placed reliance on various judgments in support of its contention.
- The taxpayer also contended that mere disallowance of a claim made bonafide would not amount to concealment of particulars of income or furnishing inaccurate particulars of such income to warrant the imposition of penalty under section 271(1)(c) of the ITA. To support such a contention, Taxpayer majorly placed reliance on CIT vs. Reliance Petroproducts Pvt. Ltd., 322 ITR 158 (SC).
- Revenue contended that had the case not been selected for scrutiny, such inadmissible claim would have escaped assessment. The taxpayer had wilfully submitted inaccurate particulars of income which had resulted in concealment.
- Revenue also placed reliance on the order passed by the CIT-A and ITAT.
- Whether the question of law can be raised for the first time before HC though not raised before the lower authorities?
- Whether non-striking off of inapplicable portion in the notice leads to inference as to non-application of mind by the Tax Authorities and accordingly impugned notice was invalid?
- Whether inaccurate particulars of income were furnished by the Taxpayer and therefore liable for the penalty?
- HC held that if an issue is not urged before the ITAT, the same cannot be raised before the High court. However, in Jhabua Power Limited (supra), the matter was remanded back to the ITAT for deciding the questions in accordance with the law. Again, in Ashish Estates & Properties (P) Ltd. (supra), the court was of the view that an appeal can be entertained by the High Court on the issue of jurisdiction even if the same was not raised before the ITAT.
- HC also held that AO must indicate in the penalty notice for which of the two limbs he proposes to impose the penalty and for this, the notice has to be appropriately marked. Non-striking-off of inapplicable portion in the notice lead to an inference as to non-application of mind, thus vitiating imposition of penalty. However, in the present case, if the assessment order and show cause notice are read in conjunction, a view can be reasonably be taken that the Taxpayer was fully aware of the reason as to why the AO sought to impose the penalty. 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 under section 271(1)(c) of the ITA had been initiated separately for furnishing inaccurate particulars of income. Therefore, on this point, HC was not inclined to interfere with the imposition of the penalty.
- HC placed reliance on the SC decision in Reliance Petroproducts Pvt. Ltd., where the apex court examined the meaning of the words “particulars” and “inaccurate”. SC held that if such stand of the revenue was accepted in case of every return where the claim made is not accepted by the AO for any reason, the Taxpayer will invite penalty under section 271(1)(c) of the ITA which is clearly not the intendment of the legislature. It is quite evident that the Taxpayer had declared the full facts and full factual matrix were before the AO while passing the assessment order. It is another matter that the claim based on the facts was found to be inadmissible. This is not the same thing as furnishing inaccurate particulars of income as contemplated under section 271(1)(c) of the ITA.
Tag: Bombay High Court Verdict