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Dy Commissioner of Income Tax, Circle-31(1), Room No. 217, C.R.Building, New Delhi Vs. M/s. PCL Solvents, M-105, Cannaught Place, New Delhi
February, 02nd 2015
                       DELHI BENCH "F": NEW DELHI
                   SHRI A. T. VARKEY, JUDICIAL MEMBER

                               ITA No. 1393/Del/2010
                              Assessment Year 2006-07

                    Dy Commissioner of                M/s. PCL Solvents,
                    Income Tax, Circle-31(1),         M-105, Cannaught Place,
                    Room No. 217,               Vs.   New Delhi
                    C.R.Building, New Delhi           PAN:AAAFM9552A
                    (Appellant)                       (Respondent)

                         Appellant by       : Vikram Sahay, Sr. DR
                         Respondent by     : Sanjeev Jain, F.C.A.


     This is an appeal preferred by the department against the order of the

ld CIT(A)-XXVI, New Delhi for the Assessment Year 2006-07.

2.    The grounds of appeal are as follows:-

      "1.     The ld CIT(A) has erred in deleting the penalty of Rs.24,57,006/-
              imposed by the AO u/s 271 (1)(c) of the Income Tax Act, 1961.
      2.      The Ld. CIT(A) has erred in holding that the AO has no jurisdiction
              to impose penalty u/s 271(1)(c) read with section 274 of the Act,
              1961, without considering the fact that the assessment was
              completed by the Additional Commissioner of Income Tax and
              satisfaction for furnishing inaccurate particulars of income were
              also recorded by Additional Commissioner of Income Tax.
      3.      The Ld. CIT(A) has ignored the fact that during the course of
              Penalty Proceedings, assessee never challenged the jurisdiction
              of the AO imposing penalty under section 271(1)(c) read with
              section 274 of the Act.
      4.      The Ld. CIT(A) has erred in accepting the additional grounds
              raised by the assessee during the course of appellate
              proceedings with respect to challenging the jurisdiction of the
              AO imposing penalty, without giving an opportunity to the AO,
              before accepting such claim of the assessee."

3.    The brief facts of the case, as stated by the ld CIT(A) is are follows:-
                                                                        Page 2 of 9

      "The appellant in this case is a partnership firm which derives income
      from trading in chemicals. A return of income declaring net loss of
      Rs.98,79,504/- was furnished by the appellant on 31st October 2006. The
      assessment in the instant case was completed u/s 143(3) of the Act on
      11.12.08 by the Jt. Commissioner of Income Tax, Range-31, New Delhi
      determining the loss of the assessee at Rs.25,80,020/- by making
      disallowance out of bank interest and charges as also interest paid on
      unsecured loans by the assessee on the ground that the assessee had
      given interest free unsecured loans to various parties amounting to
      Rs.3,49,64,147/-, whereas it had borrowed funds on interest from hanks
      as well as from two other parties. The assessee had incurred a total
      expenditure of Rs.52,34,067/- on bank interest and charges and a
      further sum of Rs.20,52,817/- which was incurred on payment of interest
      on unsecured loans. The learned JCIT inferred that the interest bearing
      funds have been diverted to the sister concerns and family members
      and therefore made the above disallowance. The learned JCIT
      recorded her Satisfaction regarding the furnishing of inaccurate
      particulars of income to the above extent by the assessee and initiated
      penalty proceedings U/S 271 (1) (c) of the Act. A notice u/s 271(l)(c) of
      the Act was issued by her on 11.12.08 as against which the assessee
      furnished reply to the learned JCIT on 14th January 2009. Thereafter, a
      show cause notice u/s 271(1) (c) was issued by the Deputy
      Commissioner of Income Tax, Circle 31 (1), on 12.05.09, who ultimately
      passed the order u/s 271(1) (c) of the Act levying a penalty for
      concealment at Rs.24,57,006/-. Aggrieved by the above the appellant
      order, has filed this appeal before me."

4.    The Preliminary issue raised by the revenue as would be evident from

ground No. 2 to 4 is that the ld CIT(A) has erred in deleting the penalty of

Rs.24,57,006/- imposed by the AO u/s 271(1)(c) of the Income Tax Act, 1961.

5.    The admitted facts as emerging are that the assessee was assessed by

the JCIT, Range-31 ; and the JCIT had also issued the notice u/s 271(1)(c) of

the Act to the assessee and in response to which reply was also submitted to

her by the assessee. However the DCIT, Circle 31(1) passed the impugned

penalty order. It was therefore submitted before the CIT(A) that the

jurisdiction to levy penalty u/s 271(1)(c) of the Act was only with the Assessing

Officer of the assessee who has recorded satisfaction during the course of

the assessment proceedings that the assessee had concealed the particulars
                                                                        Page 3 of 9

of his income or furnished inaccurate particulars of such income and not with

any other officer. In view thereof, in the instant case, since the order of

penalty was passed instead by the DCIT, Circle 31(1), the assessee

contended before the CIT(A) that the said DCIT did not had any valid

jurisdiction to pass the impugned order in terms of the provisions of section

271(1)(c),and so it was submitted that the order passed u/s 271(1)(c) of the

Act is bad in law, so null & void. On the said contention the ld CIT(A) has held

as follows:-

      "5.     I have carefully considered the submission of the appellant. I find
      that the assessment order in the instant case was passed by the JCIT
      Range 31, New Delhi, who had initiated Penalty u/s 271(1) (c) in the
      order u/s 143(3). Notice u/s 274 was also issued by the JCIT
      simultaneously. However subsequently, the impugned order u/s 271 (1)
      (c) was passed by the DCIT Circle 31(1).
              In the instant case, I find that the Penalty u/s 271(1)(c) were
      initiated by the JCIT, hence leaving the penalty proceeding at half
      way and allowing the DCIT to pass the penalty order was not the in the
      manner in which concurrent jurisdiction is to be exercised as per law.
      The above referred ruling of the Delhi High Court in the case of
      Valvoline Commnins Limited (supra) goes even beyond this and holds
      that proceeding emanating from the order u/s 143(3) ought to have
      been completed by the AO himself. Moreover the provisions of Section
      271(1)(c) evidently require the satisfaction of the AO. On facts and also
      in view of the provisions of section 120(5), the JCIT Range 31 was the
      AO in the case and hence the penalty u/s 271(1)(c) ought to have
      been levied by the JCIT Range 31 only.
              In view of this, I hold that the penalty order passed u/s 271(1)(c)
      of the Act in the instant case suffers from inherent lack of jurisdiction
      and is therefore bad in law and null and void ab initio."

6.    Before us, the ld DR contended that the order made by DCIT imposing

the penalty is well within his jurisdiction. It was submitted that once the

assessee did not challenge the jurisdiction at the stage of imposition of the

penalty, the objection raised at the appellate stage was belated and

therefore not maintainable. In any case, the ld CIT(A) before allowing the
                                                                           Page 4 of 9

claim of the assessee ought to have granted opportunity to the AO. In reply

the ld AR stated that the ld CIT(A) had followed the mandate of the

jurisdictional High Court in the case of Valvoline Cummins Ltd. Vs. DCIT 307 ITR

103 (Del) and as such all the objections raised are not in accordance with


7.     We have considered the rival submission and perused the material on

record. Section 271(c) of the Act reads as under:-

       "271.(1) If the (Assessing) Officer or the (***) {Commissioner (Appeals)
       (or the Commissioner} in the course of any proceedings under this Act,
       is satisfied that any person
       (a) (* **)
       (h) Has failed to comply with a notice (under sub-section (2) of section
       115WD or under sub-section (2) of section 115WE or) under sub-section
       (1) of section 142 or sub-section, (2) of section 143 (or fails to comply
       with a direction issued under sub-section (2A) or section 142), or
       (c) Has concealed the particulars of his income or (***) furnished
       inaccurate particulars of (such income, or)
       (d) Has concealed the particulars of the fringe benefits or furnished
       inaccurate particulars of such fringe benefits.)
       He may direct that such person shall pay by way of penalty.-
       (0      (***)
       (ii)    in the cases referred to in clause (b), (in addition to tax, if any,
       payable) by him (a sum often thousand rupees) for each such failure,)
       (iii)   in the cases referred to in clause(c) {or clause (d)}, (in addition to
       tax, if any payable) by him, a sum which shall not be less than, but
       which shall not exceed (three times), the amount of tax sought to he
       evaded by reason of the concealment of particulars of his income (or
       fringe benefits) or the furnishing of inaccurate particulars of such
       income (or fringe benefits). "
               Thus, from the perusal of the above provisions, levy of penalty u/s
       271(1) (c) pre-requisites satisfaction of the A.O. that any person has
       concealed the particulars of his income or furnished inaccurate
       particulars of such income and in such circumstances the A.O. may
       direct that such person shall pay by way of penalty."

8.     In the instant case, the satisfaction was recorded by the Joint

Commissioner of Income Tax, Range 31, New Delhi (herein after referred as

JCIT) in the order of assessment dated 11.12.2008 as under:-
                                                                      Page 5 of 9

      "Therefore, amounts debited to the profit and loss account under the
      head bank interest and charges' amounting to Rs.52,34,067/- and
      Rs.20,52,817/- under head `interest charges' are being disallowed and
      added back to the taxable income of the assessee firm being not
      expended wholly and exclusively for the purpose of business and
      further that assessee has failed to justify the reasonableness in respect
      of above payment made to related parties/ persons as per the
      provisions of section 40A(2)(b) of the IT Act, 1961. Penalty proceeding
      u/s 271(1)(c) have been initiated separately for furnishing inaccurate
      particulars of income to the above extent."

9.    Pursuant to the said satisfaction, the JCIT issued notice dated

11.12.2008 u/s 271(1)(c) of the Act, which was replied by the assessee on 14th

January 2009. However, thereafter another notice dated 12th May 2009 was

issued by Deputy Commissioner of Income Tax, Circle 31(1), New Delhi

(hereinafter referred as DCIT) which was replied by the assessee (page 56 of

PB), by referring to the earlier reply dated 14thJanuary2009. In this

background, the DCIT imposed the impugned penalty by an order dated 25th

January 2009, after obtaining prior approval of additional CIT dated 25th June

2009. The ld CIT(A) has held in the impugned order that the penalty order

passed by the DCIT is without jurisdiction. In arriving at the above conclusion

he has relied on the judgement of the jurisdictional High Court in the case of

Valvoline Cummins Ltd (supra) wherein the Hon'ble High Court has held as


      "29. It appears to us quite clearly there is a distinction between con-
      current exercise of power and joint exercise of power. When power has
      been conferred upon two authorities concurrently, either one of them
      can exercise that power and once a decision is taken to exercise the
      power by any one of those authorities, that exercise must be
      terminated by the other authority having concurrent jurisdiction can
      conclude the exercise of that power. This perhaps may be permissible
      in a situation where both the authorities jointly exercise power but it
      certainly is not permissible where both the authorities concurrently
      exercise power."
                                                                       Page 6 of 9

10.   From the aforesaid judgement, it is quite apparent that when one

authority has initiated exercising the process of power then, the said authority

must also necessarily conclude the said process. Meaning that it is not

permissible that one authority initiate the exercise of a power and another

authority having concurrent jurisdiction can conclude the exercise of that

power. In view of the above binding judicial precedent the order imposing

the penalty by DCIT has been correctly struck down by CIT(A). No contrary

judgement or material has been placed on record by the Revenue to rebut

the factual and legal conclusion arrived by the ld CIT(A) so as to make us

take a different view on the matter. The basic plea raised by the Revenue is

that the assessee had not raised this plea before the DCIT. We don't find any

merit in the said submission as in the case of Valvoline Cummins Ltd.(supra),

their lordship have held that it is well settled that mere acquiescence in the

exercise of power by a person who do not have jurisdiction to exercise that

power cannot work as an estoppels against him. In view of the above, the

said contention of revenue has not merit.

11.   Furthermore the plea of the assessee is a legal plea, which goes to the

root of the matter and therefore could have been raised at any stage and

has been rightly decided by the ld CIT(A) even without granting an

opportunity to the AO, as there is no dispute on the facts. Having regard to

the above we uphold the finding of the ld CIT(A) in this regard and dismiss the

objection raised by the revenue.

12.   On merits too we find that the ld CIT(A) has held as under:-
                                                                       Page 7 of 9

      "6.    Without prejudice to the above, it has been well-established that
      the assessment proceedings and the Penalty proceedings are two
      different proceedings and Penalty does not automatically emanate
      from the assessment order. I have carefully perused the facts of the
      case and examined the cash flow chart prepared by the appellant in
      respect of source or interest free loans advanced in the earlier years,
      which are the subject matter of dispute in the assessment order and
      find that the appellant Firm had significantly sufficient funds available
      from Interest free funds including capital from Partners on the days
      such loans were advanced. I find that the AO in the assessment order
      has summarily rejected the submissions of the appellant without
      bothering to 'examine the cash flow in various bank accounts out of
      which interest free loans were advanced. These details were submitted
      before the AO in the assessment proceedings and also before the DCIT
      in the Penalty proceedings however both the authorities did not get
      into the exact source of funds available for interest free loans and
      disposed off the matter by making general observations. The DCIT,
      while passing Penalty order has disposed off the submissions of the
      appellant by passing general remarks such as " The reply of the
      assessee is a bald statement and requires to be rejected' without
      having examined the source or loans on detailed examination of the
      information that was available with the appellant.

      Furthermore, I do not find that the appellant had concealed income or
      furnished inaccurate particulars, as disallowance u/s 40 A(2) (b) was
      itself made without ascertaining the germane facts, i.e. the source of
      interest free loans. The appellant had disclosed all relevant particulars
      in the return of income. The same facts, i.e., the source of interest free
      advances were also declared in the earlier year's returns as well and
      were accepted by the department. However, in the current year, the
      AO did not accept the explanation of the appellant, which itself was
      debatable as the AO had to prove that each and every instance of
      interest free loans to specified persons had a direct nexus with interest
      borrowing funds, which was not done and the AO summarily rejected
      the explanation given by the Appellant.

            In view of the above, I hold that the Penalty u/s 271 (1) (c) levied
      by the DCIT Circle 31 (1) was unlawful in terms of the provisions of that
      section r.w.s.120(5) and the penalty order was passed in a mechanical
      manner without either establishing 'Concealment' or 'furnishing of
      inaccurate particulars' and was based on inaccurate and superficial
      appreciation of the germane facts."

13.   Having considered the rival submission we find that identical

disallowance had been made in the succeeding assessment year 2007-08,
                                                                        Page 8 of 9

following the disallowance made in the instant year. The said disallowance

was deleted by the ld CIT(A) by holding as under:-

      " I have considered the submissions of the Ld counsel and the remand
      report of the Ld Assessing Officer as well as other facts on record. In this
      case the first finding which needs to be recorded is that the payment
      of interest does not relate to any fresh loan taken during the year but
      relates to brought forward interest bearing loans of earlier years. The
      requirement of law as has been held by the various Courts is that the
      Assessing Officer is required to establish the nexus of interest bearing
      funds having been diverted as interest free loans for non business
      purposes. In this case this exercise has not been done by the Assessing
      Officer. The appellant's claim that interest bearing funds were utilized
      only for business and not for making the interest free advances or loans
      was not investigated by the Assessing Officer, either in the course of
      assessment proceedings or while submitting the remand report nor in
      earlier years u/s 143(3). It is seen that in the immediately preceding
      year i.e. assessment year 2006-07 a similar disallowance of interest had
      been made by the Assessing Officer. Apparently the disallowance of
      interest was accepted as no appeal was filed against the 143(3) order.
      However, appeal was filed against the order u/s 271(1)( c) imposing a
      penalty of Rs.2457006/- on the disallowance made.

             Even in this year though the disallowance has been repeated
      (made for the first time in assessment year 2006-07), the Assessing
      Officer has not carried out the exercise of establishing the nexus
      between borrowed interest bearing funds and interest free
      advance/loans given. The Courts have held that for making the
      disallowance of interest the nexus has to be established by the
      Assessing Officer. As the nexus has not been established to show that
      interest bearing funds in earlier years have been diverted as interest
      free loans and advances it is held that the disallowance of interest of
      Rs.19,00,505/- is not justified. It is accordingly deleted."

14.   Further appeal filed by the revenue against the above order of CIT(A)

was dismissed by the Tribunal in ITA No.1914/Del/2011 for Assessment Year


15.   It is thus vivid that on merits too the disallowance was held to be not

maintainable in the succeeding assessment year. Here too the ld CIT(A) has

held that the assessee firm had sufficient funds to advance loan and the AO

had made the disallowance without examining the cash flows and material
                                                                        Page 9 of 9

placed on record. In any case it is not a case where it has been shown to us

that the assessee had concealed any particulars of income in the return of

income as to fulfil the conditions prescribed in Section 271(1)(c) of the Act. In

fact a perusal of the order of the assessment shows that AO had the

disallowance only on the basis of disclosures made by the assessee in the

financial statement furnished with the return, which has not been found to be

false. Mere disallowance of a legal claim, found of acceptable in the

succeeding year does not warrant imposition of penalty u/s 271(1)(c) of the

Act. In view of the above the appeal filed by the department lacks merits

and so is dismissed.

16.      In the result the appeal is dismissed.

         Order pronounced in the open court on 30.01.2015.

                 Sd/-                                           Sd/-

             (G. D. AGARWAL)                              (A. T. VARKEY)
             VICE PRESIDENT                             JUDICIAL MEMBER

A K Keot

Copy forwarded to
      1. Applicant
      2. Respondent
      3. CIT
      4. CIT (A)
      5. DR:ITAT
                                                        ASSISTANT REGISTRAR
                                                            ITAT, New Delhi

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