Ita/75/2020 Of The Principal Commissioner Of Income Tax v. Ambady Krishna Menon

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE DR. JUSTICE A.K.JAYASANKARAN NAMBIAR & THE HONOURABLE MR. JUSTICE SYAM KUMAR V.M. MONDAY, THE 20 DAY OF MAY 2024/ 30TH VAISAKHA, 1946 I.T.A.NO.75 OF 2020 AGAINST THE ORDER DATED 26-08-2019 IN I.T.A.NO.4 OF 2017 OFI.T.A.TRIBUNAL, COCHIN BENCH APPELLANT/RESPONDENT: THE PRINCIPAL COMMISSIONER OF INCOME TAX KOCHI-1, KOCHI, INCOME TAX OFFICE, CENTRAL REVENUE BUILDING, I.S. PRESS ROAD, KOCHI- 682 018. BY JOSE JOSEPH, SC, FOR INCOME TAX BY ADV.SRI.P.K.RAVINDRANATHA MENON (SR.) RESPONDENT/RESPONDENT: SHRI. AMBADY KRISHNA MENON AMBADY PANTHIYIL TOWERS, WARRIAM ROAD, KOCHI-682 016. BY ADV.SRI.P.SATHISAN THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARDON 20.05.2024, THE COURT ON THE SAME DAY DELIVERED THEFOLLOWING: I.T.A.No.75/2020 :: 2 :: J U D G M E N T Dr. A.K. Jayasankaran Nambiar, J. The Revenue is in appeal before us in this case impugningthe order dated 26.08.2019 of the Income Tax Appellate Tribunal,Cochin Bench that cancelled the penalty imposed on therespondent/assessee by the Assessing Authority under Section271(1)(c) of the Income Tax Act [hereinafter referred to as the “I.T.Act”], by raising the following questions of law: 1. Whether on the facts and in the circumstances of the case, the Tribunalwas right to hold that 'the penalty proceedings initiated by the AssessingOfficer is void abinitio' and is not such a decision perverse? And should notthe Tribunal have considered the case on merits? 2. (a) Whether on the facts and in the absence of any prejudice and violation of natural justice being alleged or caused, the Tribunal is right in law in declaring the penalty order?violation of natural justice being alleged or caused, the Tribunal is right in law in declaring the penalty order? (b) Whether the Tribunal is justified in entertaining the belated Ground raised for the first time? raised for the first time? 3. Whether the assessee having well understood the purport and import ofthe notice and having acted upon the same, is justified in challenging thesame for the reason alleged? 4. Are not the 271(1)(c) penalty proceedings and penalty order legal andwith jurisdiction and should not the Tribunal have upheld the same? 5. Whether, on the facts and in the circumstances of the case should not theTribunal have held that the appellant had concealed long term capital gainon transfer of equity shares by furnishing inaccurate and false particularsand therefore liable to penalty under Section 271(1)(c) of the Act? 2. The brief facts necessary for disposal of this appeal are asfollows: The respondent/assessee had filed a return dated 30.07.2011for the assessment year 2011-12 declaring a total income ofRs.70,74,466/-. In the said return, he had also computed a capitalgain of Rs.37,66,168/-. The said return was processed underSection 143(1) of the I.T. Act on 28.12.2012. Subsequently, it cameto the notice of the Revenue that there might have been asuppression of the capital gain declared by the assessee in thereturn that was filed on 30.07.2011. A summons was thereforeissued under Section 131 of the I.T. Act to the respondent/assesseeon 19.05.2014 calling for certain details with a view to ascertainingwhether there was any suppression of income. While therespondent/assessee sought some time for furnishing the detailsand the Department granted the assessee the said time by issuing afresh summons dated 05.06.2014 for furnishing the details, thedetails were eventually furnished by the assessee on 13.06.2014. I.T.A.No.75/2020 :: 4 :: I.T.A.No.75/2020 :: 4 :: Thereafter through another summons dated 18.06.2014, theRevenue called for further details and those details were alsofurnished by the assessee on 19.06.2014 itself. Thereafter, byAnnexure 'C' letter dated 23.06.2014, the respondent/assesseeinformed the Commissioner of Income Tax as also his AssessingAuthority that on a review of the return that was originally filed byhim, he came to understand that he had inadvertently taken intoaccount the cost of bonus shares under capital gains on sale ofequity shares of a company in which he was a share holder, andthat the mistake occurred while working the capital gain tax basedon the indexed value of equity shares. In the letter, he clearlyindicated that he was convinced that the mistake in computation ofcapital gain had been occassioned at his instance, and therefore hewas ready to pay differential tax on the differential amount ofRs.15,82,63,937/- that was computed under the head of capitalgain. 3. On receipt of the said letter, the Revenue then proceededto issue a notice under Section 148 of the I.T. Act for the purposesof re-assesssing the tax by including the escaped income. The saidnotice under Section 148 was issued to the respondent/assessee on03.07.2014. On receipt of the said notice, the assessee proceededto file a fresh return including the differential amount of capital I.T.A.No.75/2020 :: 5 :: gain computed by him and intimated by him to the Department inAnnexure 'C' letter dated 23.06.2014. The total tax liability ofRs.3,42,63,389/- together with the interest liability ofRs.1,39,81,676/- was thereafter paid by the assessee along with thereturn filed pursuant to the notice under Section 148 of the I.T. Act.In total, the respondent/assessee paid an amount ofRs.5,00,85,159/- towards tax and interest liability for theassessment year 2011-12. 4. The Revenue proceeded to complete the assessment forthe assessment year 2011-12 under Section 143(3) read withSection 147 of the I.T. Act by Annexure 'E' order dated 31.01.2015.It is significant to note that in the assessment order so passed,there was no addition to the income of the assessee save to theextent already admitted by him through Annexure 'C' letter dated23.06.2014. 5. The issue that arises for consideration in this appeal is notwith regard to the assessment completed against therespondent/assessee but with regard to the penalty that wasimposed on him under Section 271(1)(c) of the I.T. Act immediatelythereafter. It would appear that while by Annexure 'F' notice dated30.01.2015, the Revenue proposed the imposition of a penalty on I.T.A.No.75/2020 :: 6 :: the respondent/assessee on the ground that the “assessee hadconcealed particulars of his income or furnished inaccurateparticulars of such income”, the said notice did not clearly mentionwhich of the two grounds i.e., concealment of income or furnishinginaccurate particulars of income formed the basis on which thenotice for penalty had been issued. Notwithstanding the aforesaiddiscrepancy in the notice, the respondent/assessee preferred adetailed reply citing reasons as to why a penalty under Section271(1)(c) could not be imposed on him. The explanation of theassessee did not however find favour with the Assessing Authority,who, by Annexure 'G' order dated 20.07.2015 confirmed a penaltyequal to 100% of the tax allegedly sought to be evaded, namely,Rs.3,26,57,795/- on the respondent/assessee. 6. In the appeal preferred by the assessee before the FirstAppellate Authority, the Appellate Authority by Annexure 'H' orderfound that the requirement of “concealment of income”, which wasa pre-requisite for invoking the provisions of Section 271(1)(c) ofthe I.T. Act, was not established on the facts of the instant case andtherefore cancelled the penalty imposed on the assessee. TheRevenue therefore preferred an appeal before the AppellateTribunal against Annexure 'H' order of the First AppellateAuthority. The Appellate Tribunal dismissed the appeal preferred by the Revenue on technical ground and without going into themerits of the finding of the First Appellate Authority. The technicalissue on which the Appellate Tribunal decided against the Revenuewas that in Annexure 'I' notice that proposed the imposition ofpenalty on the respondent/assessee, the Revenue had not clearlyindicated the specific ground on which it was proceeding againstthe respondent/assessee for imposition of penalty. The Tribunal, inparticular, relied on various decisions of the High Courts and theSupreme Court to find that the Assessing Officer had not struck outthe irrelevant provision of the notice and had thereby not specifiedwhether he was levying penalty for concealment of particulars ofincome or furnishing of inaccurate particulars of income. Itaccordingly held that the notice issued by the Assessing Officer wasbad in law, and could not support the imposition of penalty underSection 271(1)(c) of the I.T. Act. 7. We have heard Sri.Jose Joseph, the learned StandingCounsel for the appellant as also Sri.P.Sathisan, the learned counselfor the respondent/assessee. 8. On a consideration of the facts and circumstances of thecase and the submissions made across the bar, we find that it is notin dispute that in the original return filed by the I.T.A.No.75/2020 :: 8 :: respondent/assessee, only a lesser figure was returned both inrespect of the total income as also capital gains earned by therespondent/assessee. It is also not in dispute that but for theinvestigation initiated by the Revenue, the differential income mighthave escaped assessment to tax. What is significant however isthat it was during the course of the investigation initiated by theRevenue, but well before any conclusion could be arrived at by theRevenue as regards suppression/concealment of income, that theassessee in the instant case came forward and admitted before theRevenue authorities that he was convinced of the mistakeoccassioned at the time of filing the original return, and that he wasready and willing to pay the differential amount of tax computed byhim based on a revised computation of the capital gains earned byhim. We further find from the records that the differential tax,together with interest thereon, was subsequently paid by therespondent/assessee when he was afforded an opportunity of doingso by filing the necessary returns pursuant to the notice issued tohim under Section 148 of the I.T. Act. In our view, on the peculiarfacts of this case, the notice issued under Section 148 of the I.T. Acthas to be seen as one that literally enabled the respondent/assesseeto pay the differential tax along with interest thereon by filing afresh return that was recognised under the I.T. Act. We have toremind ourselves that, but for the notice under Section 148 of the I.T.A.No.75/2020 :: 9 :: I.T.A.No.75/2020 :: 9 :: I.T. Act, the assesseee in the instant case could not have paid thedifferential tax that was admitted by him as payable, because thetime limit for filing returns in terms of Section 139 of the I.T. Acthad already expired. At any rate, the subsequent payment of tax,based on the disclosure that was made prior to the notice underSection 148 of the I.T. Act, led to the finalisation of the assessmentfor the assessment year concerned [2011-12], and in the finalisedassessment, there was no addition to the income of therespondent/assessee over and in addition to what was alreadydisclosed and admitted by him before the Revenue authorities. 9. As already noticed, in the instant appeal, we are notconcerned with the assessment that was completed on the assesseebut on the penalty that was imposed on him under Section 271(1)(c)of the I.T. Act. The relevant portion of Section 271(1)(c) of the I.T.Act reads as follows: “271.(1) If the Assessing Officer or the Joint Commissioner (Appeals)or the Commissioner (Appeals) or the Principal Commissioner orCommissioner in the course of any proceedings under this Act, is satisfiedthat any person- (a)xxxxxx xxxxxx (b)xxxxxx xxxxxx (c)has concealed the particulars of his income or furnished inaccurate particulars of such income, or he may direct that such person shall pay by way of penalty,- I.T.A.No.75/2020 :: 10 :: (i)xxxxxx xxxxxx (ii)xxxxxx xxxxxx (iii)in the cases referred to in clause (c) or clause (d), inaddition to tax, if any, payable by him, a sum which shallnot be less than, but which shall not exceed three times,the amount of tax sought to be evaded by reason of theconcealment of particulars of his income or fringe benefitsor the furnishing of inaccurate particulars of such incomeor fringe benefits.addition to tax, if any, payable by him, a sum which shallnot be less than, but which shall not exceed three times,the amount of tax sought to be evaded by reason of theconcealment of particulars of his income or fringe benefitsor the furnishing of inaccurate particulars of such incomeor fringe benefits. [Explanation 1. - Where in respect of any facts material to thecomputation of the total income of any person under this Act,- (A)such person fails to offer an explanation or offers anexplanation which is found by the Assessing Officer or theor the Joint Commissioner (Appeals) or the Commissioner(Appeals) or the Principal Commissioner or Commissionerto be false, or explanation which is found by the Assessing Officer or theor the Joint Commissioner (Appeals) or the Commissioner(Appeals) or the Principal Commissioner or Commissionerto be false, or (B)such person offers an explanation which he is not able tosubstantiate and fails to prove that such explanation isbona fide and that all the facts relating to the same andmaterial to the computation of his total income have beendisclosed by him, substantiate and fails to prove that such explanation isbona fide and that all the facts relating to the same andmaterial to the computation of his total income have beendisclosed by him, then, the amount added or disallowed in computing the total income ofsuch person as a result thereof shall, for the purposes of clause (c) of thissub-section, be deemed to represent the income in respect of whichparticulars have been concealed.” (B)such person offers an explanation which he is not able tosubstantiate and fails to prove that such explanation isbona fide and that all the facts relating to the same andmaterial to the computation of his total income have beendisclosed by him, substantiate and fails to prove that such explanation isbona fide and that all the facts relating to the same andmaterial to the computation of his total income have beendisclosed by him, then, the amount added or disallowed in computing the total income ofsuch person as a result thereof shall, for the purposes of clause (c) of thissub-section, be deemed to represent the income in respect of whichparticulars have been concealed.” It will be seen from a perusal of Section 271 of the I.T. Act that it isa specific provision providing for imposition of penalties, and is acomplete code in itself, regulating the procedure for the impositionof penalties prescribed. The proceedings are therefore to beconducted in accordance therewith, subject always to the rules ofnatural justice. The provisions for the assessment and levy of taxwill not apply as such for the imposition of penalty, and when thereis a specific provision, it is trite that it alone will govern theimposition of penalties. In terms of Section 271(1)(c) of the I.T. Act, the penal provision is attracted only when the conditions thereinare fulfilled namely, when there is a concealment of the particularsof an assessee's income or when the assessee has furnishedinaccurate particulars of such income. The crucial question thatarises for consideration before us is whether on the facts of theinstant case those pre-conditions existed for initiating proceedingsunder Section 271 of the I.T. Act. Further, the provisions of Section271(1) of the I.T. Act mandate that the existence of the conditionsprecedent for imposition of penalty under Section 271(1)(c) of theI.T. Act must have been noticed by the Assessing Authority in thecourse of some proceedings under the I.T. Act. In other words, thesatisfaction of the Assessing Authority with regard to the existenceof either of the conditions warranting the invocation of theprovisions of Section 271(1)(c) had to be in the course ofproceedings initiated by the Assessing Authority under the I.T. Act.In our view, the reference to proceedings under Section 271 of theI.T. Act, on the facts of the instant case, can only be a reference tothe proceedings initiated against the assessee in terms of Section148 of the I.T. Act. This is because the call for details andinformation under Section 131 of the I.T. Act cannot be seen asinitiation of any proceedings under the I.T. Act but is merely amanifestation of the exercise of a power similar to that conferred tocivil courts, by the Officers of the I.T. Department. If that be the case, then what we have to examine in the instant case is whetherat the time of issuance of notice under Section 148, the AssessingAuthority can say that he was satisfied that the assessee hadconcealed the particulars of his income or furnished inaccurateparticulars of such income. In our view, in the light of the disclosuremade by the assessee, of the income that he had omitted to includein his original return, well before the date on which the noticeunder Section 148 of the I.T. Act was issued to him by the AssessingAuthority, the Assessing Authority was effectively estopped fromcontending that he was satisfied at that point in time, of theassessee having concealed the particulars of his income orfurnished inaccurate particulars of such income. Section 271(1)(c)no doubt authorises the imposition of a penalty irrespective ofwhether the assessee had any mens rea to occasion the defaultspecified therein. The liability in that sense is a strict one as wasthe case under Section 11AC of the Central Excise Act, the scope ofwhich was considered by the Supreme Court in Union of India v.Dharmendra Textiles Processors – [(2008) 306 ITR 277]. It istherefore all the more necessary to strictly construe the provisionsof Section 271(1)(c) to ensure that only the clear and unambiguouscases of defaults specified therein would attract a penalty. On thefacts of this case, we fail to see how an assessee who disclosed hisliability to tax, well before the Assessing Authority himself could I.T.A.No.75/2020 :: 13 :: determine it, can be seen as having concealed or incorrectly statedthe facts leading to his liability. To invoke the penal provisions ofthe Act against an assessee in such a situation would throw to thewinds the elements of fairness in tax administration and discourageasssessees from disclosing defects in their tax returns before theirAssessing Authorities. This is more so when, as in the present case,the assessee had also paid the interest on the differential tax tocover the period of delay in payment thereof. The payment ofstatutory interest having compensated the exchequer adequately, tofurther penalise the assessee would tantamount to an act of overkilland would be antithetical to the rule of law. We are of the firm viewthat the honesty of an assessee cannot attract the penal provisionsunder the I.T. Act and that, in the instant case, the essentialpre-conditions for the invocation of the provisions of Section 271(1)(c) of the I.T. Act against the assessee were not established. 10. We might also in this connection notice Explanation 1 toSection 271 which clarifies that where in respect of any factsmaterial to the computation of the total income of any person underthe Act, such person fails to offer an explanation or offers anexplanation which is found by the Assessing Officer to be false, orsuch person offers an explanation which he is not able tosubstantiate and fails to prove that such explanation is bona fide I.T.A.No.75/2020 :: 14 :: 10. We might also in this connection notice Explanation 1 toSection 271 which clarifies that where in respect of any factsmaterial to the computation of the total income of any person underthe Act, such person fails to offer an explanation or offers anexplanation which is found by the Assessing Officer to be false, orsuch person offers an explanation which he is not able tosubstantiate and fails to prove that such explanation is bona fide I.T.A.No.75/2020 :: 14 :: and that all facts relating to the same and material to thecomputation of his total income have been disclosed by him, it isonly then that the amount added or disallowed in computing thetotal income of such person as a result thereof will be deemed torepresent the income in respect of which particulars have beenconcealed for the purposes of Section 271(1)(c) of the I.T. Act. Inour view, the Explanation clearly envisages that where as in theinstant case, a satisfactory explanation has been offered by theassessee, well before the issuance of a notice to him under Section148 of the I.T. Act and the admission of additional income made bythe assessee has been accepted by the Revenue which completedthe assessment under Section 143 read with Section 147 of the I.T.Act on that basis, the explanation offered by the assesee withregard to the differential income has to be been seen as acceptedby the Revenue for the purposes of the Explanation under Section271 of the I.T. Act. Axiomatically, therefore, the said additionalincome cannot be treated as concealed income for the purposes ofSection 271(1)(c) of the I.T. Act. 11. We also find merit in the finding of the AppellateTribunal in Annexure 'I' order that the notice proposing penalty,that was issued to the respondent/assessee, was inherentlydefective, in that, it had not specified the particular ground on which the Revenue was proceeding against the assessee for theimposition of the penalty. Thus, in any view of the matter, we findthat the imposition of penalty under Section 271(1)(c) of the I.T. Acton the respondent/assessee for the assessment year 2011-12 cannotbe legally sustained. 12. Resultantly, for the reasons stated by the First AppellateAuthority in Annexure 'H' order and the Appellate Tribunal inAnnexure 'I' order, as supplemented by the reasons given in thisjudgment, we dismiss the I.T. Appeal by answering the questions oflaw raised against the Revenue and in favour of therespondent/assessee. The I.T. Appeal is dismissed. Sd/-DR. A.K.JAYASANKARAN NAMBIAR JUDGE prp/21/5/24 Sd/- SYAM KUMAR V.M. JUDGE I.T.A.No.75/2020 :: 16 :: APPENDIX OF I.T.A.NO.75/2020 APPELLANT'S ANNEXURES: ANNEXURE-ACOPY OF THE ORIGINAL RETURN FILED BY THEASSESEE.ASSESEE.ANNEXURE-BCOPY OF THE AGREEMENT DATED 04/07/2009.ANNEXURE-CCOPY OF LETTER DATED 23/06/2014 FILED BYTHE ASSESSEE.ANNEXURE-CCOPY OF LETTER DATED 23/06/2014 FILED BYTHE ASSESSEE. ANNEXURE-DCOPY OF RETURN FILED IN PURSUANT TO NOTICEu/s 148.u/s 148.ANNEXURE-ECOPY OF ASSSESSMENT ORDER u/s 143(3)r.w.s.147 DATED 30/01/2015.r.w.s.147 DATED 30/01/2015.ANNEXURE-FCOPY OF THE SHOW CAUSE NOTICE u/s 274r.w.s. 271.r.w.s. 271.ANNEXURE-GCOPY OF THE ORDER u/s 271(1)(C) DATED20/07/2015.20/07/2015.ANNEXURE-HCOPY OF CIT(A) ORDER DATED 24.10.2016.ANNEXURE ICERTIFIEDCOPYOFITATORDERDT.26/08/2019.ANNEXURE ICERTIFIEDCOPYOFITATORDERDT.26/08/2019.ANNEXURE JCOPY OF THE MADRAS HIGH COURT ORDER IN THECASE OF M/S SUNDARAM FINANCE LTD.CASE OF M/S SUNDARAM FINANCE LTD.ANNEXURE KCOPY OF THE SUPREME COURT ORDER DISMISSINGTHE SLP FILED BY M/A. SUNDARAM FINANCELTD.THE SLP FILED BY M/A. SUNDARAM FINANCELTD. RESPONDENT'S ANNEXURES: NIL. //TRUE COPY// P.S. TO JUDGE