INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "F": NEW DELHI
BEFORE SHRI G. D. AGARWAL, HON'BLE VICE PRESIDENT
AND
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.
ORDER
PER A. T. VARKEY, JUDICIAL MEMBER
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
law.
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
under:-
"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
2007-08.
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
Dated:30/01/2015
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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