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June 14, 2022

Penalty not sustainable under Section 271(1)(c) if specific charge is not specified

by CA Shivam Jaiswal in Income Tax

Penalty not sustainable under Section 271(1)(c) if specific charge is not specified

Facts and issues of the case

This appeal is filed by the assessee aggrieved from the order of the Commissioner of Income Tax (Appeal)- I, Raipur [ Here in after referred as Ld. CIT(A) ] for the assessment year 2010-11 dated 18.06.2018.
The hearing of the appeal was concluded through audio-visual medium on account of Government guidelines on account of prevalent situation of Covid-19 Pandemic, both the parties have placed their written as well as oral arguments during this online hearing process.
The fact as culled out from the records that the assessee has e- filed the Return of income on 31-08-2010 declaring total income of Rs. 12,85,579/ The assessee is doing business of MFG of HDP Pipes & Assembly of Sprinkler System. The scrutiny assessment completed u/s. 143(3) on 01-03-2013 determining total income of Rs. 67,14,940/-.

During the course of assessment proceedings it was noticed that the assessee has made payment of commission of Rs. 11,92,062/- on sales to 6 persons who all residing in Kolkata. The Assessing Officer [ here in after “ld AO or AO ] further observed that the commission agent travels from Kolkata to Raipur 830 kms. and from Raipur, he travels to Kanker, which is 130 km from Raipur and Raigarh which is 250 km from Raipur. They have not worked as commission agent for anyone else except the assessee during the year as evidenced from Income & Expenditure account and computation of income of the agent. The agents have offered entire commission income to tax and there is no expenditure incurred against it. All the agents have very low income and still lesser withdrawals to support their livelihood. All the agents have their bank account in the same branch in Kolkata. All these facts prove that this is a device to reduce the profits of the assessee and no such person has ever worked as a commission agent for the assessee. In such a circumstance it is beyond human probability to think that they would come to Chhattisgarh State to sell pipes. It is thus, clear that the assessee has shown the commission expenses to decrease the profit and has caused loss of the revenue. Hence the commission expenses of Rs. 11,92,062/- was disallowed and added back to the total income of the assessee and penalty proceedings u/s. 271(1)(C) was initiated for furnishing inaccurate particulars of income.

Observation by the court

 It was observed during the course of assessment proceedings that the assessee had incurred job work expenses at Rs. 36,95,000/-. Job work expenses were claimed to have paid to three persons. As per details submitted by the assessee, the address of the job work contractor is either same or close to that of the assessee. The job work payment was made at Rs. 10,45,000/-, 10,45,000/- & 16,00,000/- to the contractors who have offered a meagre profit i.e. below the taxability limit. On field enquiry it was noticed that no such job work is undertaken at the factory premises of the assessee or at the factory addresses of the parties to whom payments were made under this head. On  verification of books of accounts produced during the course of assessment proceedings, it was noted that there were no vouchers for the job work expenses. In response to show cause notice the assessee stated that the contract work was undertaken at the sites by the contractors. The site is various agricultural lands of the farmers and the nodal agency paying for such sale and installation is CG Rajya Beej Evam Krishi Vikas Nigam Ltd. The assessee could not produce any person, like the farmer or any authority from the agency or evidence in support of its claim. Summons u/s. 131 was issued to each recipient. When they attended it was noted that one of the person, Shri Navin Patel was the same person who had attended the hearings and produced books of the assessee as his accountant.

To give the picture in a nut shell, none of the parties have undertaken any job from other parties. They have submitted reply that is the same in all the three cases. They have no machinery or paraphernalia for the work, in their words, only tools and tackles are required. As for the labour payment, they had to state that the skilled labours are required for manufacturing of HDPE Pipes and whereas for assembly of Sprinkler Irrigation System unskilled Labours are required. They used to engage casual workers from time to time. They do not have permanent labours, therefore, it was not possible for them to produce the labour before the A.O. Thus, the persons had no proof of actually doing any work in the nature of job work. It is thus clear that the assessee has shown the job work expenses to decrease the and has caused loss of the revenue. Hence the job work expenses to profit s Job Work Expenses of Rs. 36,95,000/- was disallowed and added to the total income of the assessee and penalty proceedings u/s. 271(1)(C) was initiated for furnishing inaccurate particulars of income.

Against the order of the A.O. the assessee was in appeal before the Ld. CIT(A), who vide its order dated 31-08-2016, allowed relief at 30% and confirmed 70% of disallowances under both the above heads.So as to finalise the penalty proceedings initiated during the course of assessment proceedings, another opportunity was given to the assessee by issue a show cause notice dated 11-01-2017 fixing the case for 20-01-2017 as to why penalty u/s. 271(1)(C) should not be imposed. The notice was served on 12-01-2017. On the date of hearing none attended nor any written explanation or application has been filed by the assessee. Thus, it is clear that the assessee has nothing to say in the matter. In view of the above facts and circumstances of the case, the AO stated that I am satisfied that the assessee has furnished inaccurate particulars of not disclosing his true and correct income in the return of income and is liable for penalty u/s. 271(1) of the I.T. Act.

During the course of hearing, Ld. AR took us through the relevant facts of the case vis-à-vis paper book filed on record and in support of legal ground, it is submitted that, the initiation as well imposition of penalty suffers from voice of non-application of mind of the Ld. AO and therefore, penalty deserves to be deleted. In so far as the merits of the case concern, Ld. AR contended that, the ld. CIT(A) has already allowed part of the disallowance made which itself proves that the assessee neither provided inaccurate particulars nor concealed the particulars of income and it is the mere disallowance of claim made by the assessee and thus, the levy of penalty even on merits required to be deleted considering the various judicial decision on account of mere disallowance of claim no penalty is leviable.

During the course of hearing the ld. AR appearing on behalf of the assessee drawn our attention to show cause notice bearing dated 01.03.2013 and 11.01.2017 wherein there was complete absentia of clear findings so as to charge under which limb the assessee has to defend the penalty proceedings. Both the notices were issued mechanically without specifying the charge under which the default made by the assessee. In addition to the above oral arguments the ld. Per contra the Ld. DR supported the orders of the lower tax authority and the conviction of Ld. CIT(A) and also stated that it is mere technical error and the same may be seen accordingly and has heavily relied upon the findings of the lower authorities and requested to confirm the penalty levied.

Respectfully, following decision of the co-ordinate bench of this bench on the very legal issue that the assessing officer is under obligation to specify the appropriate limb of clause c of section 271(1)(c) of the Act at the time of initiation as well as at the time of levy of penalty notice. In this case it has been drawn our attention that while issuing the notice at two occasion ld. AO failed to specify the charge under which the assessee is liable for penalty and therefore, without going into the merits of the case, we set-a side the order of CIT(A) and direct the Assessing Officer to delete the levy of penalty imposed upon the assessee, relying on the various decision cited by the co-ordinate bench while the rendering the decision in the case of Shri Roopa Nankani. In the result the appeal of the assessee is allowed on legal issue.


The appeal of the assessee is allowed.


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