The order of the Bench was delivered by
P. K. Bansal (Accountant Member)- These three appeals have been filed by three different assessees of the same group against the separate orders of the Commissioner of Income-tax (Appeals)-IV, Kanpur all dated May 31, 2016 relating to the assessment year 2014-15. In all these appeals the issue involved is common therefore, these appeals are being disposed of by this consolidated order for the sake of convenience. Both the parties agreed that the facts involved in all the appeals are similar therefore, all the appeals be decided on the basis of the facts involved in I. T. A. No. 416/Lucknow/2016 in the case of Shri Sandeep Chandak.
2. The common grounds taken in all the appeals are as under :
"1. That the learned Commissioner of Income-tax (Appeals)-4, Kanpur has erred in law and on the facts in wrongly confirming the penalty of Rs. 40,00,000 imposed under section 271AAB of the Income-tax Act, 1961, without considering and appreciating that the income was duly recorded in the diary and related to the assessment year 2014-15, hence no penalty was exigible under section 271AAB of the Income-tax Act, 1961.
2. That the learned Commissioner of Income-tax (Appeals)-4, Kanpur has failed to consider and appreciate that the income shown in the return of income or assessed under section 143(3) of the Income-tax Act, 1961 vide order dated March 31, 2015, did not fall under the definition of undisclosed income within the meaning of clause (c) of Explanation below sub-section (3) of section 271AAB, hence no penalty was exigible.
3. That the impugned penalty order is insupportable in law and on facts and is liable to be quashed being illegal and void ab initio.
4. That the learned Assessing Officer as well as the learned Commissioner of Income-tax (Appeals)-4, Kanpur, have grossly erred in not considering and appreciating that had the penalty been mandatory then why the same was not initiated at the time of assessment despite the fact that the assessment was completed under section 143(3) vide order dated March 31, 2016, with the prior approval of learned Additional Commissioner of Income-tax, Central Circle, Kanpur allegedly under section 153D of the Income-tax Act, 1961, therefore, the penalty imposed is not sustainable in law and on facts.
5. The learned Commissioner of Income-tax (Appeals)-IV, Kanpur has erred in law in holding that satisfaction is not required to be recorded by the Assessing Officer during the assessment proceeding or at the time of completion of the proceedings for initiation of penalty under section 271AAB.
6. The learned Commissioner of Income-tax (Appeals)-IV, Kanpur has erred in holding that principles of natural justice has not been violated by the Assessing Officer in not allowing proper opportunity of being heard before imposing the penalty and ignoring the specific requirement of law of providing 'reasonable opportunity of being heard'.
7. That without prejudice to the above grounds of appeal, the order under appeal is contrary to the principles of natural justice and equity and deserves to be annulled."
3. The only issue involved in all the grounds is sustenance of penalty of Rs. 40 lakhs levied under section 271AAB of the Income-tax Act.
4. The facts of the case, in brief, are that there has been a search and seizure operation carried out under section 132 of the Income-tax Act in Kamal Chandak Group of cases on October 24, 2013. During the course of searchvarious documents were found and seized. Shri Kamal Kishore Chandak surrendered undisclosed income of Rs. 12,00,00,000 on behalf of himself, his wife and his son at Rs. 4 crores in the hands of each of them. During the course of assessment proceedings, the assessee explained that the said undisclosed income was earned from trading of F&O and derivatives and was advanced for the purchase of land. The Assessing Officer completed the assessment at the returned income of Rs. 4,16,39,315 under section 143(3) of the Act. The assessment order was passed with the prior approval of Additional Commissioner of Income-tax, Central Range, Kanpur under section 153D of the Act vide order dated March 31, 2015. Subsequently, the Assessing Officer issued show-cause notice to the assessee under section 274 read with section 271(1)(c) of the Act dated September 23, 2015 and asked the assessee to appear before him at 10.30a.m. on September 28, 2015 and show cause why an order imposing a penalty on the assessee should not be made under section 271(1)(c) of the Act. The said notice was received by the assessee on September 24, 2015. September 26 and 27 were the public holidays being Saturday and Sunday. The assessee attended the office of the Income-tax Officer on September 28, 2015 and submitted that counsel of the assessee was out of station as his wife was undergoing chemotherapy etc. in MAX Hospital at Delhi and requested the Assessing Officer to give any date after October 8, 2015 but the Assessing Officer just levied the penalty on the assessee under section 271AAB of the Act vide order dated September 29, 2015 by holding as under :
"The claim of the assessee regarding surrender of undisclosed income is absolutely against the fact as narrated under paragraph 2 above and are available in the record. Further, so far as the direction for initiation of penalty on the face of the order dated March 31, 2015 is concerned, it is explicit that the penalty under section 271AAB of the Income-tax Act, should be imposed mandatorily as per the conditions mentioned in the section itself. Besides this section is not covered under section 273B also. Accordingly there is no need of direction by the Assessing Officer in the assessment order. In view of the above the contention of the assessee is not tenable.
Since the assessee had surrendered the income of Rs. 4,00,00,000 during the course of search, substantiated the manner in which the undisclosed income was derived and paid the tax due thereon before the specified date, the assessee is liable to pay penalty at the rate of ten per cent. of undisclosed income surrendered during search as per section 271AAB(a) of the Income-tax Act, 1961 which comes to Rs. 40,00,000. Accordingly, I, hereby, impose a penalty of Rs. 40,00,000. Issue notice of demand and challan."
5. When the matter went before the Commissioner of Income-tax (Appeals), the Commissioner of Income-tax (Appeals) dismissed the appeal of the assessee and confirmed the order of imposing the penalty on the assessee under section 271AAB of the Act.
6. Before us, the learned counsel for the assessee vehemently contended that no penalty notice has been issued by the Assessing Officer during the course of assessment. The penalty has not been initiated during the course of assessment and for this our attention was drawn to the assessment order. It was contended that the assessment was completed on March 31, 2015 but the penalty notice dated September 23, 2015 was issued. That notice was also issued under section 274 read with section 271(1)(c) of the Act. No show-cause notice was issued under section 271AAB of the Act. For this our attention was drawn to page 21 of the assessment order. The provisions of section 271AAB used the word "may" which means that the imposition of penalty under section 271AAB is not mandatory. The section empowers the Assessing Officer to exercise his discretion to impose the penalty or not to impose the penalty. For the interpretation of the word "may" the reliance was placed on the decision of the Hon’ble Supreme Court in the case of CIT v. Smt. P. K. Noorjahan [1999] 237 ITR 570 (SC). No initiation of penalty during the course of assessment itself proves that the Assessing Officer was of the view that no penalty has to be imposed under section 271AAB of the Act. There are two types of the penalty imposable under the Income-tax Act ; one which is linked with the income and the other which is not linked with the income of the assessee. So far the penalty imposable under section 271AAB is concerned, it is linked with the income of the assessee and has to be initiated during the assessment proceedings otherwise the levy of penalty will be void ab initio. It was also contended that the notice issued on September 23, 2015 and received by the assessee on September 24, 2015, nowhere states for which specific charge the penalty has to be imposed on the assessee. The reference has been given to the provisions of section 271(1)(c) of the Act. There is difference between the provisions of section 271(1)(c) of the Act and 6. section 271AAB of the Act. There were holidays on 26th and 27th of September being Saturday and Sunday. Thus, the assessee was given only three days to reply the notice as the Assessing Officer asked the assessee to appear before him at 10.30 a.m. on September 28, 2005. The penalty under section 271(1)(c) of the Act has to be initiated for failure to furnish the returns, comply with the notices, concealment of income etc. while the penalty imposable under section 271AAB relates to the undisclosed income in such case. Section 271AAB also consists of three types of penalties which are imposable at 10 per cent., 20 per cent. and 30 per cent. respectively. The notice does not specify for which specific charge the penalty has been imposed. Drawing our attention towards the sequence of events from the issuance of the notice till the date of order of levying the penalty, it was pointed out that the notice issued on September 23, 2015 was received by the assessee on September 24, 2015 and 26th and 27th were Saturday and Sunday and the assessee was asked to appear on September 28, 2015. The assessee on the date attended and also stated that no penalty has been initiated during the course of assessment. Further it was submitted that the counsel of the assessee was out of station as his wife was undergoing chemotherapy etc. in MAX Hospital at Delhi and therefore, the adjournment sought for 10 days i.e. the case be fixed on any date after October 8, 2015 but the Assessing Officer was in hurry to pass the penalty order which was passed by him on September 29, 2015 without giving opportunity to the assessee. No doubt the provision of section 271AAB nowhere requires for the issue of show-cause notice but the principles of natural justice is inbuilt and therefore, there is mandatory requirement of reasonable opportunity of being heard. The authority has to issue show-cause notice to the party/assessee to explain and produce evidence before any adverse inference may be drawn against him. Reliance was placed in this regard on the decision of the Hon’ble Supreme Court in the case of C. B. Gautam v. Union of India [1993] 199 ITR 530 (SC) ; [1993] 1 SCC 78 (SC). Our attention was also drawn to the provisions of section 275 of the Act and on the basis of that provisions it was stated that in case the notice issued on September 23, 2015 is valid, the Assessing Officer could have passed the order levying the penalty before March 31, 2016 as per the limitation provided under that provision. For the adequate and proper opportunity, reliance was placed on the following decisions as were placed before the Commissioner of Income-tax (Appeals) :
(i) Rameshwaram Paper Mills (P) Ltd. v. State of U. P. [2009] 11 VLJ 33 (All) ; and
(ii) Padam Traders v. State of U. P. [2009] 47 STJ 392 (All).
Reliance was also placed on the decision of the Hon’ble Supreme Court in the case of CIT v. Jai Laxmi Rice Mills [2015] 379 ITR 521 (SC) and that of the Hon’ble Delhi High Court in the case of CIT v. Rampur Engineering Co. Ltd. [2009] 309 ITR 143 (Delhi) [FB]. Attention was also drawn on the decision of the Hon’ble Delhi High Court in the case of CIT v. Harkaran Das Ved Pal [2011] 336 ITR 8 (Delhi) which relates to the levy of penalty under section 158BFA(2) of the Act. By drawing our attention towards the Explanation (c) which defines the undisclosed income, it was submitted that whatever income the assessee has returned and found during the course of search, was duly recorded in the diary regularly maintained by the assessee. Section uses the word along with the books of account or any document also therefore, is income cannot be regarded to be the undisclosed income. Our attention was drawn towards page 23 which is answer to the question No. 9 as well as submission before the Commissioner of Income-tax (Appeals).
7. The learned Departmental representative on the other hand relied on the orders of the authorities below and vehemently contended that section 271AAB nowhere requires that the Assessing Officer should record the satisfaction. Issuing the notice under section 271(1)(c) of the Act and ultimately levying the penalty under section 271AAB is merely a technical default. Levy of penalty under section 271AAB is mandatory and there is no provision under the Income-tax Act that the penalty under section 271AAB must be initiated during the course of assessment proceedings. No doubt, the Assessing Officer must give an opportunity to the assessee. It is a case where the Assessing Officer has duly issued the show-cause notice and given opportunity to the assessee. Thus, it was contended that the order of the Commissioner of Income-tax (Appeals) must be sustained.
8. I have heard the rival submissions, carefully considered the same along with the orders of the tax authorities below. We noted that this is a fact that in this case the notice has been issued under section 271(1)(c) of the Act and no show-cause notice has been issued under section 271AAB of the Act why a penalty under section 271AAB may not be imposed on the assessee. The provisions of section 271(1)(c) and the provisions of section271AAB are entirely different. In our view, issuing the notice under section 271(1)(c) of the Act will not automatically deem that the Assessing Officer has initiated the proceedings for imposition of penalty under section 271AAB and accordingly, given an opportunity to the assessee. There is no provision under section 271AAB that the penalty has to be initiated during the assessment proceedings but in our view, it is essential to initiate the penalty proceedings under section 271AAB. In this case when questioned to the learned Departmental representative, he was fair enough to concede that the penalty proceedings has not been initiated under section 271AAB. The penalty proceeding has been initiated by issuing a notice under section 274 read with section 271(1)(c) of the Act on September 23, 2015 asking the assessee to appear before the Assessing Officer at 10.30 a.m. on September 28, 2015. He was fair enough to concede that 26th and 27th were Saturday and Sunday and the assessee was given two working days to reply the notice. The notice since does not relate to the provision of section 271AAB therefore, we cannot agree with the learned Departmental representative that the notice issued under section 271(1)(c) of the Act was valid for initiation of proceedings under section 271AAB. Initiation of penalty proceedings, in our view, is the foundation for the validity of the imposition of penalty under section 271AAB. On this basis itself, the penalty can be cancelled. This is also fact on record that no penalty proceedings either under section 271(1)(c) of the Act or 271AAB has been initiated during the course of assessment proceedings. We have gone through the decision of the Hon’ble Supreme Court in the case of CIT v. Jai Laxmi Rice Mills [2015] 379 ITR 521 (SC). We noted that in that case the Hon’ble Supreme Court has categorically held that absence of recording of the satisfaction for the penalty to be imposed under section 271E makes the penalty under section 271E illegal. Section 271E nowhere requires any specific terms that there must be satisfaction recorded for initiating the penalty proceedings under that section. Similarly, we noted the provision of section 271AAB nowhere requires that the Assessing Officer should record the satisfaction before initiating the penalty proceedings. We noted that the headnote of that decision of the Hon’ble Supreme Court reads as under (headnote) :
"For the assessment year 1992-93, the assessment order was passed on the assessee on February 26, 1996, ex parte. While framing the assessment, the Assessing Officer observed that the assessee had contravened the provisions of section 269SS of the Income-tax Act, 1961, and because of this the Assessing Officer was satisfied that penalty proceedings under section 271D of the Act were to be initiated. On appeal the Commissioner (Appeals) by order dated December 5, 1996, set aside the assessment order with a direction to frame the assessment de novo after affording adequate opportunity to the assessee. Meanwhile penalty under section 271D was levied by order dated September 23, 1996, i.e., before the appeal of the assessee against the original assessment order was heard and allowed thereby setting aside the assessment order itself. After remand, the Assessing Officer passed a fresh assessment order but in this assessment order, no satisfaction regarding initiation of penalty proceedings under section 271D of the Act was recorded. The Tribunal as well as the High Court held that the penalty order passed on the basis of the original assessment order could not still survive when that assessment order had been set aside because the satisfaction recorded therein for the purpose of initiation of the penalty proceedings would also not survive. On further appeals :
Held, dismissing the appeals, that in the fresh assessment order there was no satisfaction recorded regarding penalty proceedings under section 271D of the Act though in that order the Assessing Officer wanted penalty proceeding to be initiated under section 271(1)(c) of the Act. Thus, the penalty under section 271D was with out any satisfaction and, therefore, no such penalty could be levied."
8.1 In our view, the said decision is equally applicable to the case of the assessee and the Assessing Officer should record the satisfaction before initiating the proceedings under section 271AAB. The case of the assessee is more strong as in the case of the assessee even no penalty proceedings under section 271AAB has been initiated while in the case before the Hon’ble Supreme Court, the penalty proceedings were duly initiated by the Assessing Officer although no satisfaction has been recorded during the course of assessment proceedings. In view of the said decision of the Hon’ble Supreme Court, the penalty imposed under section 271AAB itself is invalid and on this basis itself, in our view, the order passed by the Assessing Officer levying the penalty under section 271AAB stands cancelled. Since both the parties have argued on the issue of natural justice, we are of the view that natural justice is a concept of common law and represents higher procedural principles developed by the courts, which every judicial, quasi-judicial and administrative agency must follow while taking any decision adversely affecting the rights of a private individual. In short, natural justice implies fairness, equity and equality. The concept of rule of law would lose its validity if the instrumentalities of the State are not charged with the duty of discharging these functions in a fair and just manner. The principles of natural justice are enshrined in articles 14 and 21 of the Constitution of India. With the introduction of concept of substantive and procedural due process in article 21, all that fairness which is included in the principles of natural justice can be read into article 21. The violation of principles of natural justice results in arbitrariness and therefore violation of natural justice is a violation of equality clause of article 14. The principles of natural justice encompasses the following two rules :
"1. Nemo judex in causa sua No one should be made a judge in his own cause or the rule against bias.
2. Audi alteram partem Hear the other party or the rule of fair hearing or the rule that no one should be condemned unheard. This principle is the basic concept of principle of natural justice. This expression implies that a person must be given opportunity to defend himself. This principle is sine qua non of every civilized society. This rule covers various stages through the administrative adjudication process starting from notice to the final determination of tax liability."
Right to fair hearing includes :
(i) Right to notice
8.2. This is the very edifice of the principles of natural justice. There is mandatory requirement of reasonable opportunity of being heard. This pre-requires issuance of a proper notice. The authority has to issue show cause to the party/assessee to explain and produce evidence before an adverse inference may be drawn against him. The notice should be specific and unambiguous so that proper compliance can be made by the assessee. Any order passed by the assessing authorities without giving notice is violative of the principles of natural justice.
8.3 The Hon’ble Supreme Court in C. B. Gautam v. Union of India [1993] 199 ITR 530 (SC) ; [1993] 1 SCC 78 invoked the same principle and held that even though it was not statutorily required, yet the authority was liable to give notice to the affected parties while purchasing their properties under section 269UD of the Income-tax Act, namely, the compulsory purchase of the property. It was observed that though the time frame within which an order for compulsory purchase has to be made is fairly tight one but urgency is not such that it would preclude a reasonable opportunity of being heard. A presumption of an attempt to evade tax may be raised in case of significant undervaluation of the property but it would be rebuttable presumption, which necessarily implies that a party must have an opportunity to show cause and rebut the presumption. In the impugned case the notice under section 274 read with section 271(1)(c) of the Act was issued on September 23, 2015 requiring the assessee to appear before the Assessing Officer at 10. 30 a.m. on September 28, 2015. The notice was received by the assessee on September 24, 2015. 26th and 27th were Saturday and Sunday. Thus, it is apparent that the assessee was given only two working days. Giving such a short period, in our opinion, cannot be regarded that the assessee has been given proper opportunity of being heard. This is a case which clearly shows undue haste on the part of the Assessing Officer. The penalty in this case is going to be barred by limitation on March 31, 2016. The learned Departmental representative was unable to explain as to what was the hurry with the Assessing Officer when the penalty proceedings was not going to be barred by limitation not to give the assessee adequate opportunity. We also noted that the assessee asked the Assessing Officer for adjournment after 18th October as the assessee's counsel was out of station because the wife of the counsel was undergoing chemotherapy etc. in MAX Hospital, Delhi. The Assessing Officer did not grant even any adjournment but levied the penalty on the assessee. We have gone through the decision of the Hon’ble jurisdictional High Court as relied on by the learned authorised representative of the assessee in the case of Rameshwaram Paper Mills (P) Ltd. v. State of U.P. [2009] 11 VLJ 33 (All) and that of Padam Traders v. State of U. P. [2009] 47 STJ 392 (All). In these decisions the Hon’ble Allahabad High Court has clearly laid down that adequate and proper opportunity of hearing should be provided to ensure fair hearing and fair deal to the assessee. In our view, an opportunity of being heard must be real, effective and not illusory. It appears that the notice in this case has been issued by the Assessing Officer just for the sake of providing the opportunity but this opportunity cannot be regarded to be a proper opportunity. We also noted that opportunity of being heard has been given to the assessee only in respect of the proceedings initiated under section 271(1)(c) of the Act. No opportunity has been given to the assessee in respect of the penalty to be levied under section 271AAB of the Act. On this basis also, the order passed by the Assessing Officer is against the principles of natural justice of providing the proper opportunity to the assessee and accordingly we quash the order of the Assessing Officer. We have also gone through the provisions of section271AAB and noted that this section specifies three different situations under which the penalty can be imposed on the assessee under different clauses (a), (b) and (c), the penalty has to be imposed on different rate. The Assessing Officer has not specified in the notice in respect of which clause the penalty is going to be levied on the assessee. On this basis also, in our opinion, the penalty cannot be sustained. We further noted that the provisions of section 271AAB are not mandatory which means that the penalty has to be levied in each and every case wherever the assessee has made default as stated under clauses (a), (b) and (c) of the Act. Sub-section (1) of section 271AAB uses the word "may" not "shall". "May" cannot be equated with "shall" especially in penalty proceedings. Using the word "may", in our opinion, gives a discretion to the Assessing Officer to levy the penalty or not to levy, even if the assessee has made the default under the said provision. In view of the aforesaid discussion, we set aside the order of the Commissioner of Income-tax (Appeals) and delete the penalty levied on the assessee.
9. In the result, all the appeals of the assessee are allowed.
The order pronounced in the open court on January 30, 2017.