Calcutta High Court
Principal Commissioner Of Income ... vs M/S. Industrial Safety Products ... on 3 July, 2023
ITAT NO. 88 OF 2022 AND OCOT NO. 7 OF 2022
REPORTABLE
IN THE HIGH COURT OF JUDICATURE AT CALCUTTA
SPECIAL JURISDICTION (INCOME TAX)
ORIGINAL SIDE
RESERVED ON: 14.06.2023
DELIVERED ON: 03.07.2023
CORAM:
THE HON'BLE MR. CHIEF JUSTICE T.S. SIVAGNANAM
AND
THE HON'BLE MR. JUSTICE HIRANMAY BHATTACHARYYA
ITAT/88/2022
(IA NO: GA/2/2022)
WITH
OCOT NO. 7 OF 2022
PRINCIPAL COMMISSIONER OF INCOME TAX, CENTRAL-2. KOLKATA
VERSUS
M/S. INDUSTRIAL SAFETY PRODUCTS PRIVATE LIMITED
Appearance:-
Mr. Smarajit Roy Chowdhury, Adv.
Mr. Soumen Bhattacharya, Adv.
.....For the Appellant/Respondent.
Mr. Ranjeet Kumar Muraka, Sr. Adv.
Mr. Vivek Muraka, Adv.
Mr. Dibanath Dey, Adv.
.....For the Respondent/Cross Objector.
Page 1 of 10
ITAT NO. 88 OF 2022 AND OCOT NO. 7 OF 2022
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JUDGMENT
(Judgment of the Court was delivered by T.S.SIVAGNANAM, CJ.)
1. The appeal in ITAT No. 88 of 2022 has been filed by the revenue under
Section 260A of Income Tax Act, 1961 (the Act) challenging the order dated
31st October, 2019 passed by the Income Tax Appellate Tribunal, B Bench,
Kolkata (Tribunal) in ITA No.2128/Kol/2017 for the Assessment Year 2015-
16. The revenue has raised the following substantial questions of law for
consideration:
(i) Whether the on the facts and circumstances of the case,
the Learned Income Tax Appellate Tribunal has erred to
hold that undisclosed income under the disclosure petition
made during search and seizure proceedings as taken to
books subsequently does not attract penalty in terms of
Section 271AAB of the Income Tax Act, 1961.
(ii) Whether on the facts and circumstances of the case the
Learned Income Tax Appellate Tribunal has erred in
confirming the decision of Learned Commissioner of
Income Tax (Appeal) which was decided in favour of the
assessee, without examining the entire facts of the case.
2. OCOT No. 7 of 2022 is a cross-objection filed by the assessee
questioning the very same order passed by the Tribunal in so far as that
portion of the order where the Tribunal did not adjudicate the correctness of
the penalty notice dated 31st March, 2016 issued under Section 271/ 274 of
the Act.
3. We have heard Mr. Samarjit Roy Chowdhury, learned Standing
Counsel assisted by Mr. Soumen Bhattacharyya, learned Senior Counsel
appearing for the appellant revenue and Mr. Ranjeet Kumar Muraka,
learned Senior Advocate assisted by Mr. Vivek Muraka and Mr. Dibanath
Dey, learned Advocates for the respondent cross-objector.
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4. The revenue had filed the appeal before the Tribunal questioning the
correctness of the order passed by the Commission of Income Tax (Appeals),
21 Kolkata (CIT(A)) dated 04.07.2017 deleting the penalty levied on the
assessee under Section 271 AAB of the Act. The Assessing Officer while
completing the assessment for the Assessment Year under consideration, AY
2015-16 had issued a show-cause notice to the assessee calling upon them
to explain as to why the under-valuation of physical stock of Rs. 10.75 crore
deducted during the course of search in respect of such main companies in
the group namely New Horizon Limited and Industrial Safety Products
Private Limited should not be treated as suppression of profit made by the
assessee during the year under consideration and added back to the total
income of the assessee. The assessee stated that the excess stock found on
the physical verification is related to the company amounting to Rs.
6,04,95,912/- and have been properly accounted for in the books for
Financial Year 2014-15 and the same has also been disclosed in the
disclosure petition dated 06.05.2015, the excess stock found during the
course of physical verification has been duly accounted and hence, there is
no question of suppression of profit made by the company and the profit
reflected in statement of profit and loss includes the same. In this regard,
the assessee referred Note number 37 of the financial statement where the
auditor had certified that the surplus stock of leather found during the
course of physical verification of inventory during the month of January-
February, was subsequently disclosed in the statement recorded in course of
proceedings under Section 132 of the Act and has been duly accounted for
in the books of accounts. The Assessing Officer rejected the explanation
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offered by the assessee and held that the value of stock difference clearly
represents undisclosed income coming under the purview of Explanation (c)
of Section 271 AAB of the Act as it was not recorded in the books of
accounts or before the date of search and accordingly, thought fit to impose
penalty under Section 271 AAB. Challenging the said order, the assessee
preferred an appeal to the CIT(A). the first ground of challenge before the
Appellate Authority was that the order of penalty is ab initio void since the
conditions precedent for valid invocation of penalty proceedings were not
fulfilled. Further, it was contended that no satisfaction has been recorded in
the assessment order or in the show-cause notice that the assessee had any
undisclosed income and initiation of penalty proceedings in a mechanical
manner without application of mind was unjustified. Apart from the said
contention, other contentions on the merits of the matter were also raised.
The CIT(A) by order dated 4th July, 2017 allowed the assessee's appeal and
deleted the penalty. Aggrieved by the same, the revenue had preferred
appeal before the Tribunal which has been dismissed by the impugned
order. The learned Tribunal first took up for consideration the correctness of
the order passed by the CIT(A) by deleting the penalty on the ground that
the income of Rs. 6,04,95,912/- with reference to which penalty was levied
did not construe "undisclosed income". After elaborately going through the
facts and also taking note of the decisions of the learned Tribunal in the
case of the assessee's group company, M/s. New Horizon Ltd. in ITA No.
2128/Kol/2017 dated 28.08.2019 rejected the contention raised by the
revenue and affirmed the order passed by the CIT(A). As pointed out earlier
before the CIT(A), the assessee had specifically raised the contention
ITAT NO. 88 OF 2022 AND OCOT NO. 7 OF 2022
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objection the validity of the initiation of the penalty proceedings by issuance
of notice under Section 274 read with Section 271 of the Act and the
Tribunal while considering the order passed by the CIT(A) did not examine
the validity of the initiation of the penalty proceedings on the ground that on
facts the Tribunal had confirmed the order passed by the CIT(A) and
therefore, considering the validity of the initiation of the penalty proceedings
is only an academic exercise and therefore, did not adjudicate the same
separately. The assessee has filed the cross-objection objecting to that
portion of the order by raising the following substantial questions of law:
A. For that the purported penalty proceedings under
Section 271, 271AAB and 274 of the Income Tax Act, 1961
for the Assessment Year 2015-16, by penalty notice dated
31st March 2016 under Section 271/274 of the said Act
were and are vague, unspecific and invalid as it did not
disclose any satisfaction of the Assessing Officer and any
of the relevant provision of the said Act.
B. For that the purported penalty notice was issued
without application of mind and mechanically and did not
fulfill and satisfy the condition precedent necessary to
confer jurisdiction to issue the same and the purported
penalty proceedings were not issued in accordance with
Law.
C. For that the purported show cause notice do not
disclosed and specify the charge against the respondent
(assessee) and on the contrary relies on different charges
and therefore is bad in law and without jurisdiction.
5. The question which came up for consideration before the Tribunal
was whether the income offered by the assessee in the return for the
Assessment Year 2015-16 being the value of closing stock of Rs.
6,04,95,912/- can be considered to be undisclosed income found in the
course of search so as to warrant levy of penalty under Section 271 AAB of
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the Act. The Tribunal took note of the statement recorded from the Director
before the Investigating Officer and all other documents forming part of the
assessment file and held that no material has been brought on record by the
Assessing Officer to show that the during the course of search the
authorized officer of the department had conducted physical inspection of
the stock because of which excess quantities of raw leather was deducted
and consequence to which additions were made towards undisclosed stock.
Further the Tribunal found that the Assessing Officer himself assessed the
said sum of Rs. 6,04,95,912/- on the ground of "under-valuation" of stock
and not as value of "undisclosed stock".
6. The tribunal on facts further found that well before the search on
20.03.2015, the assessee had internally conducted stock taking exercise
and deducted the discrepancy in stock and the same was reported to the
assessee's Managing Director on 18.03.2015 well before the commencement
of search on 20.03.2015. Further the tribunal found that prior to
commencement of search the Managing Director of the assessee had issued
instructions to the respective unit heads to reconcile the stocks and records
and incorporate difference in the Company's books for the financial year
ending on 31.03.2015. Thus, taking note of all these facts, the tribunal held
that the difference in stocks of Rs. 6,04,95,912/- had been identified by
internal team of the assessee itself much prior to the commencement of the
search.
7. Further the tribunal also noted the decision of its coordinate bench in
the assessee's group company M/s. New Horizon Private Limited wherein
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the facts were identical and the tribunal by order dated 28.08.2019 had
affirmed the order passed by the CIT(A) in the case of New Horizon Limited
which order had attained finality and held that no penalty could be levied
under Section 271 AAB of the Act.
8. The tribunal also examined the correctness of the submission of the
revenue that the excess stock found was undisclosed income of the assessee
on account of the admission made by the assessee's Director in a statement
under Section 132 (4) that it was not recorded in the books of accounts at
the time of search. The tribunal noted that the assessee is a body corporate
who is required to maintain and prepare its accounts in conformity with the
provisions of the Companies Act. The accounts are required to be audited
and the auditors of the Company is required to furnish his report in the
manner prescribed in Section 227 of the Companies Act, 1956 and the rules
made thereunder.
9. Referring to the auditor's report, the tribunal held that the auditor has
to certify as to whether the physical verification of the inventory conducted
by the Company at reasonable intervals and whether the procedures
followed are reasonable and adequate. The auditor is also required to report
whether any material discrepancies were noticed on physical verification
and whether they were properly dealt with in the books of accounts. After
taking note of the auditor's report as well as stock inspection report, the
tribunal found that such inspection report was prepared at the instance of
the management as a matter of internal control and the same was drawn up
much prior to the date of search. The tribunal placed reliance on the
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decision of the High Court of Karnataka in the case of Principal
Commissioner of Income Tax Versus Deccan Mining Syndicate Private
Limited 1 which decision was affirmed by the Hon'ble Supreme Court as a
Special Leave Petition filed by the revenue was dismissed on 15.04.2019.
Thus, we find that the tribunal has made elaborate examination of the
factual position and granted relief to the assessee and we find that there is
no substantial question of law as suggested by the revenue arising for a
decision in this case as both the CIT(A) as well as the tribunal has
proceeded on facts which appear to not in a dispute. Therefore, we find no
grounds to entertain the appeal filed by the revenue.
10. The assessee has filed the cross objection questioning the initiation
of penalty proceedings on the grounds of non-applications of minds and on
the ground of the notice being defective which goes to the root of the matter.
The notice issued under Section 274 read with Section 271 of the Act dated
31.03.2016 was placed before us. On a perusal of the notice, we find that
none of the particulars which are required to be mentioned in the notice
have been disclosed. In fact, the relevant columns have been left blank. The
question would be whether penalty proceedings could have been initiated
pursuant to such a notice and was the notice in accordance with law.
11. In Food Corporation of India Limited Versus State of Punjab
and Others 2, the Hon'ble Supreme Court while considering the validity of
the notice issued under the Punjab Municipal Act, 1911 pointed out that
notice to the affected person mandated in the section is not an empty
105 Taxmann.com 138 (SC)
AIR 2001 SC 250
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formality; it is meant for a purpose. A vague and unreasoned notice will not
provide reasonable opportunity to the noticee to file objection meeting the
reasons/grounds on which action is proposed. Since the notice did not state
the reasons of the grounds, the notice was held to be vague.
12. In Amrit Food Versus Commissioner of Central Excise, Uttar
Pradesh 3, it was held that the assessee should be put on notice as to the
exact nature of contravention for which the assessee was liable to be
proceeded against.
13. In Commissioner of Income-tax, Bangalore Versus SSA'S Emerald
Meadows 4, the High Court of Karnataka following the decision in
Commissioner of Income Tax Versus Manjunatha Cotton and Ginning
Factory 5 held that the imposition of penalty under Section 271(1)(c) of the
Act is bad in law and invalid for the reasons where the show cause notice
under Section 274 of Act did not specify the charge against the assessee as
to whether it is for concealment of particulars of income or furnishing of
inaccurate particulars of income. The said decision of the High Court of
Karnataka was affirmed by the Hon'ble Supreme Court in the decision
reported in (2016) 73 Taxmann.com 248 (SC). On the same lines it is the
decision of this court in Principal Commissioner of Income Tax Central -
2, Kolkata Versus Brijendra Kumar Poddar in ITAT No. 215 of 2018
dated 23.11.2021. As pointed out earlier, the show cause notice issued
under Section 274 read with Section 271 of the Act did not furnish any
2005 (190) ELT 433 (SC)
(2016) 73 Taxmann.com 241 (Kar)
35 Taxmann.com 250 (Kar)
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particulars and all the relevant columns have been left blank. Thus, by
applying the legal position in the aforementioned decision, this court has no
hesitation to hold that the show cause notice was bad in law consequently
the initiation of the penalty proceedings is vitiated.
14. For the above reason, the cross objection is allowed and the
substantial questions of law are answered in favor of the assessee.
15. In the result, the appeal filed by the revenue is dismissed as no
substantial question of law arises for consideration. The cross objection filed
by the assessee is allowed and substantial question of law are answered in
favour of the assessee and it is held that the penalty proceedings are bad in
law.
(T.S. SIVAGNANAM, CJ.)
I Agree
(HIRANMAY BHATTACHARYYA, J.)
(P.A - PRAMITA/SACHIN)
