Challenge order u/s 271(1)(c) on validity of ao

Tax queries 661 views 11 replies

Guest

From the year calendar 2004 onwards I have been living in Gurgaon, Haryana. Consequently, I have been filing my tax returns with a Gurgaon address since AY 2005-06. I filed a return for AY 2007-08 in July 2007 with a Gurgaon address, ITO, Gurgaon as the jurisdictional AO and showing only salary income. The return was picked up for scrutiny by ITO, New Delhi in June 2009. The following events then occurred.

ITO, New Delhi issued a show-cause notice u/s 148 in June 2009.
ITO, New Delhi issued a notice u/s 143(2) initiating assessment proceedings against me in August 2009.
I met ITO, New Delhi in August who told me that I had not paid taxes for three inward transactions into my savings bank account (let us assume amounts of 10,000, 20,000 and 30,000 respectively) that amounted to short-term capital gains. I informed the ITO that one of the transactions (30,000) resulted in short-term capital loss and accepted that the other two (10,000 and 20,000) resulted in short-term capital gains. However, I asked the ITO how he could initiate assessment proceedings against me given that he was not my jurisdictional AO. He did not provide any reply to my question. I received no further notices from the said ITO.
In August 2009 I paid tax plus interest on the two transactions (10,000 and 20,000) that resulted in short-term capital gains for me.
ITO, Gurgaon issued a notice u/s 142(1) in November 2009.
I met the ITO, Gurgaon and submitted all documents, including challans for the tax deposited in August 2009.
ITO, Gurgaon issued an order u/s 143(3) in December 2009, adding all three transactions (10,000, 20,000 and 30,000) as short-term capital gains.
ITO, Gurgaon issued an order u/s 156 in December 2009 demanding additional tax arising out of the third transaction (30,000) classified as short-term capital gain.
ITO, Gurgaon also recommended imposition of penalty u/s 271(1)(c) or furnishing inaccurate
ACIT, Gurgaon issued an order u/s 271(1)(c) imposing penalty amounting to 100% of the tax calculated on all the three transactions classified as short-term capital gains by the AO.
I appealed to CIT(A) who has accepted my submissions and agreed to delete the transaction that resulted in short-term capital loss (30,000), thereby setting aside the demand for additional tax u/s 156.
CIT(A) has asked me to submit a separate submission to explain why penalty should not be imposed for the taxes and interest that were paid (in August 2009) after the notice u/s 148 was issued.

I would like to submit to CIT(A) that no penalty should be imposed on me because I had already paid all the taxes and interest due before the jurisdictional AO raised his first notice in November 2009. I had already objected to the ITO, New Delhi issuing notices u/s 148 and 143(2) against me as he had no jurisdiction for raising those notices for the given assessment year. As far as I am concerned, the first legal notice was issued against me u/s 142(1) in November 2009 and I had already paid all taxes due by then.

I would like to know whether I can mention in my submission that the notices u/s 148 and 143(2) were legally invalid. If yes, references to past cases supporting this would be useful. Appreciate guidance in this regard.

It must be noted that I have never filed taxes in Delhi and the ITO, New Delhi has never had jurisdiction over my returns. I am also unaware if ITO, New Delhi transferred the assessment legally to ITO, Gurgaon u/s 127.

Replies (11)

CA Raj Doshi

Practising CA

8944 Points Joined December 2013

The Supreme Court in the case of Dilip N Shroff
held that the AO, while issuing a notice for initiating
a penalty proceeding under Section 271(1)(c) of the
Act should apply his mind and make it clear as to
whether he had proceeded on the basis that the
taxpayer had concealed his income or he had
furnished inaccurate particulars of income.
The Hyderabad Tribunal in the instant case relying
on the decision of the Supreme Court in the case of
SSA’s Emerald Meadows held that since the AO
has not specifically mentioned under which limb of
the Section 271(1)(c) of the Act the notice for
initiating penalty proceedings has been issued, the
said notice and entire penalty proceedings are not
valid.

In your case, I find your case to be concealment of income ( as you have not furnished details of stcg. ). So order imposing penalty can be quashed assuming the order passed us 271 (1)(c) is for furnishing inaccurate particulars of income.

CA Raj Doshi

Practising CA

8944 Points Joined December 2013

The decision of the Apex Court in MAK Data P. Ltd., v/s. Commissioner of Income Tax 358 ITR 593, that voluntary disclosure itself does not release the assessee from penal consequences.

CA Raj Doshi

Practising CA

8944 Points Joined December 2013

CIT Vs Reliance petro products ( Supreme Court )

S. 271 (1) (c) penalty cannot be imposed even for making unsustainable claims

The assessee claimed deduction u/s 36 (1) (iii) for interest paid on loan taken for purchase of shares. The AO disallowed the interest u/s 14A and levied penalty u/s 271 (1) (c) on the ground that the claim was unsustainable. The penalty was deleted by the appellate authorities. On appeal by the department to the Supreme Court, HELD dismissing the appeal:

(i) S. 271 (1) (c) applies where the assessee “has concealed the particulars of his income or furnished inaccurate particulars of such income”. The present was not a case of concealment of the income. As regards the furnishing of inaccurate particulars, no information given in the Return was found to be incorrect or inaccurate. The words “inaccurate particulars” mean that the details supplied in the Return are not accurate, not exact or correct, not according to truth or erroneous. In the absence of a finding by the AO that any details supplied by the assessee in its Return were found to be incorrect or erroneous or false, there would be no question of inviting penalty u/s 271(1)(c).

(ii) The argument of the revenue that “submitting an incorrect claim for expenditure would amount to giving inaccurate particulars of such income” is not correct. By no stretch of imagination can the making of an incorrect claim in law tantamount to furnishing inaccurate particulars. A mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. If the contention of the Revenue is accepted then in case of every Return where the claim made is not accepted by the AO for any reason, the assessee will invite penalty u/s 271(1)(c). That is clearly not the intendment of the Legislature.

(iii) The law laid down in Dilip Shroff 291 ITR 519 (SC) as to the meanings of the words “conceal” and “inaccurate” continues to be good law because what was overruled in Dharmendra Textile Processors 306 ITR 277 (SC) was only that part in Dilip Shroff where it was held that mens rea was an essential requirement for penalty u/s 271 (1)(c).

CA Raj Doshi

Practising CA

8944 Points Joined December 2013

A good submission before the authorities around the above referred case laws in a more systematic and concluding way may work for you assuming that notice is invalid as AO has pointed furnishing inaccurate particulars of income as against concealment of income.

CA Raj Doshi

Practising CA

8944 Points Joined December 2013

Though notices u/s 143 (2) and 148 are legally invalid , there was no assessment order passed in this respect. Refer Mohd Rizwan vs Income tax officer ( Lucknow ITAT ). So mentioning invalidity of notices will be of no use.

Voluntary payment of taxes along with interest does not provide escape from penalty.

Studentsca

CA Practice

3577 Points Joined September 2012

Do you have any documentary evidence to prove that you raised an objection to the Notice issued US 148 at the time when you did??

Guest

My reading of the "MAK Data v/s CIT" case (and other similar cases) tells me that protection against imposition of penalty cannot be provided for "voluntary disclosure" or "offer to pay taxes due" "during the course of an assessment proceeding" . My contention is that I paid taxes in August 2009 when the assessment proceedings had not legally started (as far as I am concerned they started only in November 2009 when the jurisdictional AO issued a notice u/s 142(1)).

As to whether I have documentary evidence that I objected to the notices u/s 148 and 143(2) in writing, my reading of various cases says that I do not need to have any documentary evidence as the onus is on the department of check validity of law. Even my attending hearings and participating in assessment readings does not make illegal notices legal. I have relied on the following cases:

Mukesh Kumar v/s ITO (ITAT Delhi 2358/DEL/2012)
Hon’ble Apex Court in the cases of Y. NarayanaChetty Vs. ITO, 35 ITR 388, 392 (SC);
CIT Vs. Maharaja PratapsinghBahadur, 41 ITR 421 (SC); and
CIT Vs. Robert, 48 ITR 177 (SC).

In the case of Mukesh Kumar v/s ITO (ITAT Delhi) the Tribunal has also ruled that when assessment proceedings are taken over by the jurisdictional AO, a fresh notice u/s 148 should have been issued, which in my case didn't happen, although CIT(A) can contend that the AO did issue a notice u/s 142(1).

Studentsca

CA Practice

3577 Points Joined September 2012

Well it seems you have everything figured out. So what it is that bothering you??

Guest

Well, since I am neither a CA nor a lawyer I wanted confirmation that:

My interpretation of the various cases I have listed is correct so that I can use them in my submission at the next hearing (I guess that the comments received till now support my interpretation).
Are there any known (and recent) cases that contradict my interpretation and that CIT(A) could use to counter my submission? If there are, it will be good to know of them in advance before my next hearing which CIT(A) has said would be the final.

CA Raj Doshi

Practising CA

8944 Points Joined December 2013

Read Sec 292BB just for your knowledge.

I disagree that paying taxes and interest before a valid notice should save you from penalty.

Your case is covered us 271 (1)(c) where the focus is on Return of Income and NOT Payment of taxes.

Studentsca

CA Practice

3577 Points Joined September 2012

Well if you attend hearings in case of a notice issued and cooperate with the department it would be deemed that even a notice issued in an improper manner would be valid in the eyes of law. Raising an objection to such improper notice is necessary. Hence I have asked whether you have some evidence to prove that. As far as penalty us 271 is concerned it is show cause notice and penalty is to be levied or not is on the discretion of the officer. Your reply to the Notice would determine whether eventually penalty is levied or not.