Satisfaction of authority initiating penalty has to be prima facie and this satisfaction is not required to be reflected for each item of income or disallowance.

This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-5, Ludhiana ('CIT(A)', for short) dated 15.09.2016, partly allowing the assessee’s appeal contesting the levy of penalty u/s. 271(1)(c) (of Income Tax Act, 1961) ('the Act' hereinafter) by the Assessing Officer (AO) vide order dated 25.06.2012 for assessment year (AY) 2009-10.

2. The appeal raises the issue of sustainability of the impugned order to the extent it confirms the levy of penalty u/s. 271(1)(c) (of Income Tax Act, 1961), which stands assailed on the following grounds:

‘1. That the order under appeal is against law and facts of the case. 2. That on the facts and circumstances of the case the Ld. CIT (A) has not been justified in law in not accepting the contention of the appellant that the penalty order is not sustainable as there is neither proper satisfaction for initiation of penalty proceedings nor a valid notice for imposition of penalty has been issued.

3. That the Ld. CIT (A) has also erred both in law and facts in confirming the imposition of penalty regarding addition made by the Ld. A.O. on account of accrued bank interest of Rs.2,41,415/- and regarding disallowance of expenses of Charity and donations of Rs. 1,55,100/-.

4. That the Ld. CIT(A) has also erred in confirming the imposition of penalty regarding addition of Rs.5, 519/- on account of disallowance of depreciation on scooter.

5. Any other ground which may be urged and allowed at the time of hearing.’ 3. The issue, thus, is the validity of the impugned levy in law in the facts and circumstances of the case. We shall, before proceeding to discuss the case on merits, consider the assessee’s legal objections raised per Ground 2; Gd. 1 being general in nature, warranting no adjudication. Taking us through the assessment order dated 29.12.2011, passed u/s. 143(3) (of Income Tax Act, 1961), it was submitted by the ld.

Authorized Representative (AR), the assessee’s counsel, that no satisfaction stands recorded by the Assessing Officer (AO) on each of the three sums, being income, expenditure and allowance, qua which penalty stands initiated. All that he has written in the name of such satisfaction is at the end of the said order (para 9) which reads as under:

‘The interest u/s and notice u/s. 271(1)(c) (of Income Tax Act, 1961) for penalty proceedings.’ A direction to issue notice can by no means be considered as a positive satisfaction as contemplated by law, and which forms the basis for the initiation of the penalty proceedings, even as clarified by the Apex Court in CIT v. Atul Mohan Bindal [2009] 317 ITR 1 (SC). The ld. Departmental Representative (DR) would, on the other hand, take us through section 271(1B) (of Income Tax Act, 1961), inserted on the statute book by Finance Act, 2008 with retrospective effect from (w.r.e.f) 01.04.1989, which reads as under:

‘Failure to furnish returns, comply with notices, concealment of income, etc.

271. (1).

(1B) Where any amount is added or disallowed in computing the total income or loss of an assessee in any order of assessment or reassessment and the said order contains a direction for initiation of penalty proceedings under clause (c) of sub-section (1), such an order of assessment or reassessment shall be deemed to constitute satisfaction of the Assessing Officer for initiation of the penalty proceedings under the said clause (c).’ Further, the constitutionality of the said provision, it was argued, is not under challenge. No plea as to non-recording of satisfaction, for which no manner stands prescribed by law, can therefore be entertained.

4. We have heard the parties, and perused the material on record.

4.1 That it is the satisfaction of the authority, being the assessing or the first appellate authority, arrived at in any proceedings under the Act, i.e., as to the concealment of, are furnishing inaccurate, particulars of income by the assessee (per its return of income), that forms the basis or the fulcrum on which penalty u/s.

271(1)(c)) could be initiated, is, apart from being apparent from a bare reading of the provision, reading as under, well settled (refer: D.M. Manasvi v. CIT [1972] 86 ITR 557 (SC); CIT v. S.V. Angidi Chettiar [1962] 44 ITR 739 (SC)):

‘Failure to furnish returns, comply with notices, concealment of income, etc.

271. (1) If the Assessing Officer or the Commissioner (Appeals) or the Principal Commissioner or Commissioner in the course of any proceedings under this Act, is satisfied that any person —

(c) has concealed the particulars of his income or furnished inaccurate particulars of such income, or . he may direct that such person shall pay by way of penalty,— (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 be 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.’ (emphasis, ours).

In D.M. Manasvi (supra), it was explained by the Apex Court that what is contemplated under s. 271(1) is that the authority initiating penalty proceedings is to be satisfied in the course of proceedings under the Act regarding matters mentioned in the clauses of that sub-section. Further, that the notice initiating penalty proceeding is in consequence to such satisfaction, i.e., precedes it. It was therefore not correct to equate the said satisfaction with the actual issue of notice.

Issue of notice ordered to be so in the assessment order, after the passing of the assessment order, was found as in accord with the law. The decision in S.V. Angidi Chettiar (supra) is to the same effect and purpose.

The matter in recent times has again been visited by the Apex Court, apart from witnessing an amendment by insertion of section 271(1B)(supra) (of Income Tax Act, 1961). In Atul Mohan Bindal (supra) the Hon’ble Apex Court held that this satisfaction is to be discernible from the assessment order and, therefore, where not so, the initiation was not proper. Impliedly, therefore, what is relevant is not so much the words in which the satisfaction by the AO in the assessment order is couched, if it is otherwise apparent or discernible from his order.

This position of law was again confirmed by the Apex Court in Mak Data Pvt. Ltd. v. CIT [2013] 358 ITR 593 (SC), affirming the decision by the Hon'ble Delhi High Court (reported at 352 ITR.

1). We reproduce a relevant part thereof as under: (pg. 599): ‘The Assessing Officer has to satisfy whether the penalty proceedings be initiated or not during the course of the assessment proceedings and the Assessing Officer is not required to record his satisfaction in a particular manner or reduce it into writing. The scope of section 271(1)(c) (of Income Tax Act, 1961) has also been elaborately discussed by this court in Union of India v. Dharmendra Textile Processors [2008] 13 SCC 369 [306 ITR 277] and CIT v. Atul Mohan Bindal [2009] 9 SCC 599 [317 ITR 1].’ (emphasis, ours) There was, therefore, no ambiguity in law for the Parliament to have stepped in by introducing section 271(1B) (of Income Tax Act, 1961), deeming a satisfaction where the order of assessment or reassessment contains a direction for initiation of penalty proceedings u/s. 271(1)(c) (of Income Tax Act, 1961). This is precisely what stands clarified by the Hon'ble Delhi High Court in Madhushree Gupta & Ors v. Union of India [2009] 317 ITR 107 (Del), a copious decision rendered under writ jurisdiction on a challenge to the vires of the provision (section 271(1B) (of Income Tax Act, 1961)). Upholding its’ constitutionality, it again emphasized on the primacy of the ‘satisfaction’, while clarifying that there is no particular manner in which the same is to be expressed, even as it must nevertheless be discernible from the order of the authority initiating penalty proceedings. As a corollary, therefore, stating of being satisfied – which is therefore unnecessary, which is otherwise not apparent or discernible from such order, would, despite section 271(1B) (of Income Tax Act, 1961), render the ‘satisfaction’ as not qualifying as so in the eyes of law.

Digressing here, and only for the sake of completeness of our order, the confusion had arisen, necessitating the need for insertion of a provision as to deemed satisfaction (section 271(1B) (of Income Tax Act, 1961)) w.r.e.f. 01.04.1989, on account of decisions, as in the case of CIT v. Ram Commercial Enterprises Ltd. [2000] 246 ITR 568 (Del) and Diwan Enterprises v. CIT [2000] 246 ITR 571 (Del.), which stood approved by the Apex Court in Dilip N. Shroff v. Joint CIT [2007] 291 ITR 519 (SC). The Apex Court in UOI v. Dharmendra Textile Processors [2008] 306 ITR 277 (SC), a decision by its larger bench, held its earlier decision in Dilip N. Shroff (supra) as not representing good law. This was again explained by the Hon'ble Apex Court in Atul Mohan Bindal (supra), toward which reference may be drawn to pgs. 10 to 13 of the Reports, extracting the relevant part as under: (at pg. 10)

‘12. In the case of Union of India v. Dharmendra Textile Processors [2008] 306 ITR 277 (SC), a three-judge Bench of this court held that Dilip N. Shroff did not lay down the correct law as the difference between section 271(1)(c) (of Income Tax Act, 1961) and section 276C (of Income Tax Act, 1961) was lost sight of. The court held that the Explanation appended to section 271(1)(c) (of Income Tax Act, 1961) indicates the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing the return. The court held thus (page 302):

“The Explanations appended to section 271(1)(c) (of Income Tax Act, 1961) entirely indicate the elements of strict liability on the assessee for concealment or for giving inaccurate particulars while filing the return. The judgment in Dilip N. Shroff’s case [2007] 291 ITR 519 (SC) has not considered the effect and relevance of section 276C (of Income Tax Act, 1961). The object behind the enactment of section 271(1)(c) (of Income Tax Act, 1961) read with Explanation indicates that the section has been enacted to provide for a remedy for loss of revenue. The penalty under that provision is a civil liability. Willful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution under section 276C (of Income Tax Act, 1961).”

13. The decision of this court in Dharmendra Textile Processors [2008] 306 ITR 277 has been...

14. It goes without saying that for applicability of section 271(1)(c) (of Income Tax Act, 1961), the conditions stated therein must exist.

15. In so far as the present case is concerned, as noticed above, the High Court relied upon its earlier decision in Ram Commercial Enterprises Ltd. [2000] 246 ITR 568 (Delhi) which is said to have been approved by this court in Dilip N. Shroff [2007] 291 ITR 519. However, Dilip N. Shroff [2007] 291 ITR 519 has been held to be not laying down good law in Dharmendra Textile [2008] 306 ITR 277 (SC). Dharmendra Textile is explained by this court in Rajasthan Spinning and Weaving Mills [2009] 8 Scale 231. Having thoughtfully considered the matter, in our judgment, the matter needs to be reconsidered by the High Court in the light of the decisions of this court in Dharmendra Textile [2008] 306 ITR 277 (SC) and Rajasthan Spinning and Weaving Mills [2009] 8 Scale 231.’

The matter was also examined, arriving though at the same conclusion, by the Hon'ble High Court in CIT v. Rampur Engineering Co. Ltd. [2009] 309 ITR 143(Del)(FB), which decision stands also explained in Madhushree Gupta & Ors.

(supra) (refer paras 62 and 63 read with para 61, at pgs. 145-146 of the Reports), confirming the same to be in agreement with its understanding of the law as it stood prior to the introduction of section 271(1B) (of Income Tax Act, 1961), arrived at by it earlier at para 42 (pg. 134) of the judgment in the following words:

‘To summarize: the Supreme Court held that the “satisfaction” which the Assessing Officer was required to arrive at during the course of assessment proceedings for initiation of penalty proceedings was “prima-facie” in nature as against a “final conclusion”, that the assessee had committed an act of omission or commission which would bring him within the ambit of the provisions of clause (c) of sub-section (1) of section 271 (of Income Tax Act, 1961). The notice under section 274 (of Income Tax Act, 1961) was to follow. What was important was that “satisfaction” had to be arrived at during the course of assessment proceedings and not issuance of notice under section 274 (of Income Tax Act, 1961). (See D.

M. Manasvi [1972] 86 ITR 557 and S. V. Angidi Chettiar [1962] 44 ITR 739.’ Further, this understanding, it may be further noted, is and only understandably, without reference, to the subsequent decisions by the Apex Court in Mak Data Pvt.

Ltd. (supra) and Atul Mohan Bindal (supra). In fact, the said decisions by the Apex Court are themselves without reference to section 271(1B) (of Income Tax Act, 1961), and which would also explain the Hon'ble Courts’ finding in Madhushree & Ors. (supra) that section 271(1B) (of Income Tax Act, 1961), though constitutionally valid, has not materially impacted the existing law. If there was no ambiguity in law prior to section 271(1B) (of Income Tax Act, 1961), how, one may ask, could there be any thereafter, which thus can only be regarded as clarificatory of the position of law, also explaining the upholding of its retrospectivity w.e.f. 01.04.1989, from which date section 271(1) (of Income Tax Act, 1961) was substituted by Direct Tax Laws (Amendment) Act, 1987. We may add that the law in the matter, as delineated by the Hon'ble Apex Court, has always been clear and unambiguous, and our reference to the decisions by the Hon'ble High Courts is only to put the matter in perspective as well as to meet the Revenue’s case based of the language of section 271(1B) (of Income Tax Act, 1961). Further, it would also incidentally clarify that the satisfaction of the authority initiating penalty at the time of its initiation, arrived at during the course of any proceedings under the Act, is not to be confused with the conclusive satisfaction (finding), where so, to be arrived at after hearing the assessee in the matter, i.e., before the levy of penalty, and which is therefore to be duly recorded (in the order imposing penalty) in-as-much as the same appears to be the purpose for insertion of section 271(1B) (of Income Tax Act, 1961) on the statute, as explained in the Memorandum explaining the provisions of Finance Bill, 2008 and the Note to Clauses (clause 48) (refer [2008]) 298 ITR (St.) 67, 171, 216). It is again noteworthy that section 271(1B) (of Income Tax Act, 1961) stood inserted on the statute-book by Finance Act, 2008, i.e., prior to the afore-referred decisions by the Hon'ble High Court and the Hon'ble Apex Court. In other words, section 271(1B) (of Income Tax Act, 1961) - which relates only to penalty u/s. 271(1)(c) (of Income Tax Act, 1961), does not, as explained, operate to remove the need for the prima facie satisfaction on the part of the authority initiating the penalty proceedings.

In fine, the law, per its clear language, as well as, as explained per a series of decisions by the Apex Court, settling the same, admits of no ambiguity. The satisfaction, which is to be prima facie, is the foundation, the basis for the initiation of penalty u/s. 271(1)(c) (of Income Tax Act, 1961), i.e., on which the jurisdiction to initiate it is assumed.

There is no manner contemplated by law for expressing the same; not even the requirement for recording the same, so that it may not even be reduced in writing.

Indeed, writing so, without being otherwise manifest or discernible, would be of little consequence in law. That, therefore, it must be discernible, is sine qua non, a jurisdictional fact, which is a finding of fact.

We are thus unable to accept the assessee’s contention that merely because the AO has not stated in the assessment order that he is satisfied as regards the applicability of section 271(1)(c) (of Income Tax Act, 1961) qua a particular addition made or disallowance effected in assessment, or has not recorded his satisfaction in explicit terms, would not by itself imply that he is not satisfied with regard to the same. Equally, a noting as to initiation of penalty proceedings in the assessment order would not by itself signify the AO’s such satisfaction, i.e., without anything more. This satisfaction, to be held prima facie, must be otherwise apparent or discernible from his order.

Further, such satisfaction need not be necessarily recorded, i.e., where so, separately for each item for which penalty is being initiated.

4.2 Given the legal position in the matter, we may now advert to the assessment order in-as-much as the penalty proceedings stand initiated during the course of the assessment proceedings. As the penalty survives on three items, we may consider the aspect of satisfaction, challenged by the assessee per its Ground 2, qua each of them, to examine if the assessment order reflects the same or could be gathered there-from:

a). The assessee’s balance-sheet revealed Fixed Deposit Receipts [FDRs] with J&K Bank Limited and Central Bank of India, at Rs.26,40,902 and Rs.3,76,782 respectively. Copies of account thereof, as appearing in the assessee’s books of account, revealed non-accounting of any interest in respect of these FDRs. The assessee did not furnish any explanation, nor produced the interest certificates from the banks in respect of these FDRs (para 2 to 2.2 of the assessment order). The AO, under the circumstances, made an addition for accrued interest, adopting a rate of 8% per annum for the purpose, i.e., at Rs.2,41,415, also initiating penalty proceedings. Without doubt, there is no question of interest on these bank FDRs having not accrued for the relevant year. The assessee’s method of accounting is admittedly mercantile. In fact, section 145 (of Income Tax Act, 1961), as substituted by Finance Act, 1995, w.e.f. 01.04.1997, proscribes following a mixed or hybrid system of accounting, so that the books of account have to be maintained following either mercantile or cash method, i.e., as regularly employed by the assessee in respect of ‘business income’ or ‘income from other sources’. There has clearly been an omission on the part of the assessee to account for and return the accrued interest on FDRs in terms of section 5 (of Income Tax Act, 1961) read with section 145 (of Income Tax Act, 1961). The assessee did not furnish any explanation during the assessment proceedings. Interest income was accordingly assessed, and penalty proceedings initiated. Under the circumstances, the AO’s satisfaction for the levy of penalty u/s. 271(1)(c) (of Income Tax Act, 1961) is plain and apparent.

(b) The second item is qua the disallowance in the sum of Rs.1,55,100, claimed as a ‘miscellaneous expense’ (claimed at a total of Rs.3.10 lacs), which was, on verification during the course of the assessment proceedings, explained and found to be ‘Charity and Donation’. The same being admittedly paid to certain trust/s or other institution/s as donation/s, how could the same be claimed as a business expense? The assessee did not furnish any explanation, much less justifiable, nor did it furnish any proof as to the same being eligible for deduction (from the gross total income u/s. 80G (of Income Tax Act, 1961) (Chapter VI-A of the Act / paras 6 to 6.2 of the assessment order). The same was accordingly disallowed, and penalty u/s. 271(1)(c) (of Income Tax Act, 1961) initiated.

The primary fact of the sum claimed as a business expense being in fact ‘Charity and Donation’ is not disputed; rather, admitted. The assessee offers no explanation, much less bona fide. It is, again, the absence of satisfaction, which is apparent, or the non initiation of the penalty that would rather startle us.

(c) The third sum represents the assessee’s claim for depreciation allowance (at Rs. 5,519) on a vehicle (scooter) purchased during the year. The same, however, on verification, was found to be in the name of one, Vijay Kumar.

The assessee not furnishing any explanation for the claim, with the ownership (of an asset) being a basic condition for the claim of depreciation thereon, the same was disallowed, and penalty proceedings initiated (refer para 5 of the assessment order). The primary facts, coupled with the clear position of law as well as the absence of any explanation by the assessee, is disconcerting enough, and there is no question or doubt about existence of the AO’s satisfaction as to the assessee furnishing inaccurate particulars of income.

In sum, the facts qua each of the three sums are so striking, and the claim/s so discordant with the settled position of law, clearly indicating an act/s of omission or, as the case may be, commission in furnishing the return of income, that it is the non-satisfaction for the initiation of penalty u/s. 271(1)(c) (of Income Tax Act, 1961) that would on the contrary surprise us. It may also the relevant to add here, as explained by the Apex Court time and again, and for which reference may be made to its decisions afore-cited, that this satisfaction of the authority initiating penalty is to be prima facie. Further, this satisfaction may not be reflected for each item of income or disallowance (refer para 85 (pg. 156) of the decision in Madhushree Gupta & Ors.

(supra)), even as we have, as apparent, considered it separately for each of them. We, therefore, are of the clear view that the AO had a sufficient reason to be satisfied for initiating penalty proceedings u/s. 271(1)(c) (of Income Tax Act, 1961) qua each of the three items under reference, i.e., the same is discernible from the assessment order. The first limb of Ground 2, challenging the initiation of penalty for want of such satisfaction, is misplaced, nay, misconceived. The same is accordingly dismissed.

4.3 The second limb of Ground 2 assails the penalty proceedings for want of a valid notice u/s. 274 (of Income Tax Act, 1961). We observe no corresponding ground before the first appellate authority nor, consequently, any finding or adjudication by him in the matter. The question though, being legal, going to the root of the matter, could be validly taken before us for the first time where the facts are admitted or borne out by the record or otherwise not in dispute. The validity of the notice being under challenge, the least that the assessee ought to have done is to place a copy of the same on record, informing us as to why it considers the same, as claimed, not valid in law. Merely stating so in the grounds of appeal would be of little consequence.

This in fact was also put across to the ld. AR during hearing, who would submit that the same bears non-specification of the limb as to the concealment of particulars of income or furnishing inaccurate particulars of income. How, we wonder, could this be said without reference to the impugned notice, which is conspicuous by its absence. The burden of placing it on record is on the assessee, and not the Revenue, as the ld. AR would argue. In fact, we do not find any contention to this effect, raising a presumption, in the statement of facts before the ld. CIT(A) or in the lengthy grounds before him. Even the ground/s of appeal before us does not state so. Even no request for placing a copy of same on record was not made during hearing. In other words, the ground raised, together with the arguments advanced, is itself vague and not proper. The (second limb of the) assessee’s Ground 2 is therefore not maintainable.

Further, without prejudice to the above, the plea as to non-strike off of one of the two limbs on which a penalty u/s. 271(1)(c) (of Income Tax Act, 1961) becomes leviable, is even otherwise not maintainable in the facts of the case. This is, as apparent, and as also evident from the assessment and the penalty order, there is an omission, i.e., a concealment of particulars of income, in respect of non-returning of interest income, as well as a commission in filing its return, i.e., furnishing inaccurate particulars of income, when the assessee claims charity/donation as a business expense or claims depreciation on an asset not owned by it. As such, both the limbs of s. 271(1)(c) are applicable in the instant case and, accordingly, there is no question of strike off of one of them in the notice initiating penalty proceedings.

4.4 We, next, consider the assessee’s case on merits, i.e., separately for each levy (of penalty). The first is with respect to the non-returning of income by way of interest on bank FDRs. The assessee’s case in the penalty proceedings was that the same was due to non-receipt of TDS certificate/s from the bank. This is tantamount to putting the cart before the horse. Tax is deducted at source because interest (income) stands accrued, and not vice versa. Even if, therefore, hypothetically speaking, the bank has omitted to deduct tax at source - on which there is nothing on record to suggest so, it still would not by itself lead to the inference of interest having not accrued? Rather, it should have propelled the assessee to inquire about the non-deduction of tax at source, i.e., reason therefor, so that it may deposit the advance-tax on the entire income arising. We have already noted that there is nothing on record to exhibit, or even a claim to that effect, that tax had not been deducted at source by the bank. All that was required by the assessee was to make an enquiry with its’ bank/s qua tax deduction at source, and which it presumably failed to, given that there is no doubt about accrual of interest at the contracted rate/s. We say so as we cannot presume a perverse or inexplicable behavior on assessee’s part, i.e., of it being in the know of tax deduction at source on interest, and yet not booking and returning the same (interest). Further, before the ld. CIT(A), the assessee also contended that it has been following receipt method of accounting with regard to interest income on bank FDRs. Though not a valid argument for not returning interest income in-as-much as section 5 (of Income Tax Act, 1961) read with section 145 (of Income Tax Act, 1961) would require accounting for and returning such interest from year to year on accrued basis; it being trite law that income is to be brought to tax at the earlier of receipt or accrual and, further, that income is to be brought to tax for the right year, and it being taxed for another year is no ground for it being not tax for the right year (CIT v. British Paints India Ltd. [1991] 188 ITR 44 (SC)), it yet furnishes a valid ground for non-levy of penalty in-as-much as a plausible explanation saves penalty. There would be, in such as case, clearly, no evasion of tax, but only a deferment thereof on the basis of a consistent method adopted.

However, the assessee has not demonstrated the same in any manner, and at any stage, including before us. It was required to do so, so that the claimed method of accounting, stated as followed from a preceding year/s, i.e., when the FDRs were made, continues for the current and the subsequent year/s. i.e., of such method of accounting being consistently followed. In the result, the assessee’s plea, valid in principle, remains unsubstantiated, including before us. In other words, the same fails in the facts and circumstances of the case. The levy of penalty on the impugned interest, not challenged on quantum, i.e., in the penalty proceedings, in- as-much as the actual interest accrued may be higher, shall therefore obtain. The working of the penalty, which has been levied at 100% of the tax sought to be evaded, however, is to be at net of tax deductible at source on the impugned interest.

The reason is simple. The assessee, to be fair, has not claimed tax deducted at source on the interest credited by bank in its account/s. If, therefore, the tax deductible at source is (say) 10%, and the tax leviable on the impugned interest is 35% (say), the tax sought to be evaded under Explanation 4 to section 271(1)(c) (of Income Tax Act, 1961) would be at 25% of the impugned interest.

We decide accordingly, and the assessee gets part relief.

The second disallowance is in respect of ‘Charity and Donation’ (at Rs.1.55 lacs, claimed as miscellaneous expense, and discovered to be so during the course of verification proceedings under the Act). It is clearly a case of furnishing inaccurate particulars of income; the assessee’s explanation itself suggesting of it being an application of income for which deduction u/s. 80G (of Income Tax Act, 1961) - vehemently argued before us as well by the ld. counsel, Sh. Bansal, is applicable. No certificate/s u/s. 80G (of Income Tax Act, 1961), however, stands furnished either during the course of the assessment proceedings, resulting in the disallowance for the entire sum claimed, or in the penalty proceedings, i.e., on merits. The assessee has not improved its case in the penalty proceedings, or even before us. So, however, where and to the extent it leads evidence before the AO at the time of giving appeal effect to this order, that any part of the disallowance is eligible for deduction u/s. 80G (of Income Tax Act, 1961) - which the AO may verify for its authenticity, the AO shall compute the tax sought to be evaded under Explanation 4 to section 271(1)(c) (of Income Tax Act, 1961) by reckoning the tax rebate as applicable to a section 80G (of Income Tax Act, 1961) donation. We decide accordingly.

The third and final disallowance qua which the penalty stands levied is in respect of depreciation allowance claimed on a scooter. The assessee’s case that it is the beneficial owner thereof is wholly unsubstantiated. It is not even demonstrated that Vijay Kumar, the purchaser thereof, is its employee, as claimed before the ld. CIT(A) for the first time. Even so, he is still a third person as far as the assessee-firm is concerned. As regards the decisions, as argued before us by the ld. counsel, where the assets are held by a partner/s (in a partnership firm) or a director (in a company), the same are distinguishable. A partnership represents a contractual relationship between partners. A partner, a legal person, may hold the property of the firm in his name. The relation of a director of a closely held private company with it is also materially different. Such director/s, holding enormous powers of management, though a separate person, may at times, so as to avail tax benefit, hold a vehicle of such company in his name. Where so, he does so in a fiduciary capacity; the asset being even otherwise under his dominion and control (also refer section 187C of the erstwhile Companies Act, 1956). In the present case, it has not been exhibited that Shri Vijay Kumar is an employee, much less as to why should the assessee-firm purchase the asset in his name. As held by the Revenue, there is no corroborative evidence to hold that the assessee-firm is the beneficial owner of the said asset. The payment by the assessee would under the circumstances be construed as a capital advance to the said person. The levy of penalty, under the circumstances, requires no interference. We decide accordingly.

4.5 No other ground stands raised or otherwise argued before us. The assessee’s challenge to the penalty on legal and factual grounds fails, even as it secures part relief with regard to the computation of penalty.

5. In the result, the assessee’s appeal is partly allowed.

Sd/-

(Sanjay Arora)

Accountant Member

Date: 09.05.2018 6. I have gone through with the proposed order passed by Hon'ble A.M. . In my considered view, observations/analyzations made in paras at pages no 5 to 8 and 12 to 13, which are reproduced herein below, neither necessary nor mandatorily required for the just decision of the case, hence I do not endorse the same.

(Kindly refer page 5 to 8 of the order passed by Hon'ble A.M.) There was, therefore, no ambiguity in law for the Parliament to have stepped in by introducing section 271(1B) (of Income Tax Act, 1961), deeming a satisfaction where the order of assessment or reassessment contains a direction for initiation of penalty proceedings u/s. 271(1)(c) (of Income Tax Act, 1961). This is precisely what stands clarified by the Hon'ble Delhi High Court in Madhushree Gupta & Ors v. Union of India [2009] 317 ITR 107 (Del), a copious decision rendered under writ jurisdiction on a challenge to the vires of the provision (section 271(1B) (of Income Tax Act, 1961)). Upholding its’ constitutionality, it again emphasized on the primacy of the ‘satisfaction’, while clarifying that there is no particular manner in which the same is to be expressed, even as it must nevertheless be discernible from the order of the authority initiating penalty proceedings. As a corollary, therefore, stating of being satisfied – which is therefore unnecessary, which is otherwise not apparent or discernible from such order, would, despite section 271(1B) (of Income Tax Act, 1961), render the ‘satisfaction’ as not qualifying as so in the eyes of law.

Digressing here, and only for the sake of completeness of our order, the confusion had arisen, necessitating the need for insertion of a provision as to deemed satisfaction (section 271(1B) (of Income Tax Act, 1961)) w.r.e.f. 01.04.1989, on account of decisions, as in the case of CIT v. Ram Commercial Enterprises Ltd. [2000] 246 ITR 568 (Del) and Diwan Enterprises v. CIT [2000] 246 ITR 571 (Del.), which stood approved by the Apex Court in Dilip N. Shroff v. Joint CIT [2007] 291 ITR 519 (SC). The Apex Court in UOI v. Dharmendra Textile Processors [2008] 306 ITR 277 (SC), a decision by its larger bench, held its earlier decision in Dilip N. Shroff (supra) as not representing good law. This was again explained by the Hon'ble Apex Court in Atul Mohan Bindal (supra), toward which reference may be drawn to pgs. 10 to 13 of the Reports, extracting the relevant part as under: (at pg. 10)

‘12. In the case of Union of India v. Dharmendra Textile Processors [2008] 306 ITR 277 (SC), a three-judge Bench of this court held that Dilip N. Shroff did not lay down the correct law as the difference between section 271(1)(c) (of Income Tax Act, 1961) and section 276C (of Income Tax Act, 1961) was lost sight of. The court held that the Explanation appended to section 271(1)(c) (of Income Tax Act, 1961) indicates the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing the return. The court held thus (page 302):

“The Explanations appended to section 271(1)(c) (of Income Tax Act, 1961) entirely indicate the elements of strict liability on the assessee for concealment or for giving inaccurate particulars while filing the return. The judgment in Dilip N. Shroff’s case [2007] 291 ITR 519 (SC) has not considered the effect and relevance of section 276C (of Income Tax Act, 1961). The object behind the enactment of section 271(1)(c) (of Income Tax Act, 1961) read with Explanation indicates that the section has been enacted to provide for a remedy for loss of revenue. The penalty under that provision is a civil liability. Willful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution under section 276C (of Income Tax Act, 1961).”

13. The decision of this court in Dharmendra Textile Processors [2008] 306 ITR 277 has been...

14. It goes without saying that for applicability of section 271(1)(c) (of Income Tax Act, 1961), the conditions stated therein must exist.

15. In so far as the present case is concerned, as noticed above, the High Court relied upon its earlier decision in Ram Commercial Enterprises Ltd. [2000] 246 ITR 568 (Delhi) which is said to have been approved by this court in Dilip N. Shroff [2007] 291 ITR 519. However, Dilip N. Shroff [2007] 291 ITR 519 has been held to be not laying down good law in Dharmendra Textile [2008] 306 ITR 277 (SC). Dharmendra Textile is explained by this court in Rajasthan Spinning and Weaving Mills [2009] 8 Scale 231. Having thoughtfully considered the matter, in our judgment, the matter needs to be reconsidered by the High Court in the light of the decisions of this court in Dharmendra Textile [2008] 306 ITR 277 (SC) and Rajasthan Spinning and Weaving Mills [2009] 8 Scale 231.’

The matter was also examined, arriving though at the same conclusion, by the Hon'ble High Court in CIT v. Rampur Engineering Co. Ltd. [2009] 309 ITR 143(Del)(FB), which decision stands also explained in Madhushree Gupta & Ors. (supra) (refer paras 62 and 63 read with para 61, at pgs. 145- 146 of the Reports), confirming the same to be in agreement with its understanding of the law as it stood prior to the introduction of section 271(1B) (of Income Tax Act, 1961), arrived at by it earlier at para 42 (pg. 134) of the judgment in the following words:

‘To summarize: the Supreme Court held that the “satisfaction” which the Assessing Officer was required to arrive at during the course of assessment proceedings for initiation of penalty proceedings was “prima-facie” in nature as against a “final conclusion”, that the assessee had committed an act of omission or commission which would bring him within the ambit of the provisions of clause (c) of sub-section (1) of section 271 (of Income Tax Act, 1961). The notice under section 274 (of Income Tax Act, 1961) was to follow. What was important was that “satisfaction” had to be arrived at during the course of assessment proceedings and not issuance of notice under section 274 (of Income Tax Act, 1961). (See D. M. Manasvi [1972] 86 ITR 557 and S. V. Angidi Chettiar [1962] 44 ITR 739.’ Further, this understanding, it may be further noted, is and only understandably without reference to the subsequent decisions by the Apex Court in Mak Data Pvt. Ltd. (supra) and Atul Mohan Bindal (supra). In fact, the said decisions by the Apex Court are themselves without reference to section 271(1B) (of Income Tax Act, 1961), and which would also explain the Hon'ble Courts’ finding in Madhushree & Ors. (supra) that section 271(1B) (of Income Tax Act, 1961), though constitutionally valid, has not materially impacted the existing law. If there was no ambiguity in law prior to section 271(1B) (of Income Tax Act, 1961), how, one may ask, could there be any thereafter, which thus can only be regarded as clarificatory of the position of law, also explaining the upholding of its retrospectivity w.e.f. 01.04.1989, from which date section 271(1) (of Income Tax Act, 1961) was substituted by Direct Tax Laws (Amendment) Act, 1987. We may add that the law in the matter, as delineated by the Hon'ble Apex Court, has always been clear and unambiguous, and our reference to the decisions by the Hon'ble High Courts is only to put the matter in perspective as well as to meet the Revenue’s case based of the language of section 271(1B) (of Income Tax Act, 1961). Further, it would also incidentally clarify that the satisfaction of the authority initiating penalty at the time of its initiation, arrived at during the course of any proceedings under the Act, is not to be confused with the conclusive satisfaction (finding), where so, to be arrived at after hearing the assessee in the matter, i.e., before the levy of penalty, and which is therefore to be duly recorded (in the order imposing penalty) in-as-much as the same appears to be the purpose for insertion of section 271(1B) (of Income Tax Act, 1961) on the statute, as explained in the Memorandum explaining the provisions of Finance Bill, 2008 and the Note to Clauses (clause 48) (refer [2008]) 298 ITR (St.) 67, 171, 216). It is again noteworthy that section 271(1B) (of Income Tax Act, 1961) stood inserted on the statute-book by Finance Act, 2008, i.e., prior to the afore-referred decisions by the Hon'ble High Court and the Hon'ble Apex Court. In other words, section 271(1B) (of Income Tax Act, 1961) - which relates only to penalty u/s. 271(1)(c) (of Income Tax Act, 1961), does not, as explained, operate to remove the need for the prima facie satisfaction on the part of the authority initiating the penalty proceedings.

In fine, the law, per its clear language, as well as, as explained per a series of decisions by the Apex Court, settling the same, admits of no ambiguity. The satisfaction, which is to be prima facie, is the foundation, the basis for the initiation of penalty u/s. 271(1)(c) (of Income Tax Act, 1961), i.e., on which the jurisdiction to initiate it is assumed. There is no manner contemplated by law for expressing the same; not even the requirement for recording the same, so that it may not even be reduced in writing.

Indeed, writing so, without being otherwise manifest or discernible, would be of little consequence in law. That, therefore, it must be discernible, is sine qua non, a jurisdictional fact, which is a finding of fact.

(Kindly refer page 12 and 13 of the order passed by Hon'ble A.M.) Further, without prejudice to the above, the plea as to non-strike off of one of the two limbs on which a penalty u/s. 271(1)(c) (of Income Tax Act, 1961) becomes leviable, is even otherwise not maintainable in the facts of the case. This is, as apparent, and as also evident from the assessment and the penalty order, there is an omission, i.e., a concealment of particulars of income, in respect of non-returning of interest income, as well as a commission in filing its return, i.e., furnishing inaccurate particulars of income, when the assessee claims charity/donation as a business expense or claims depreciation on an asset not owned by it. As such, both the limbs of s. 271(1)(c) are applicable in the instant case and, accordingly, there is no question of strike off of one of them in the notice initiating penalty proceedings.

However, in my view, observations/analyzations stated above does not impact the conclusion/result, because in principle, I am in agreement with the conclusion/result of the appeal.

8. In the result, the assessee’s appeal is partly allowed.

Order pronounced in the open court on May 09, 2018.

Sd/-

(N. K. Choudhry)

Judicial Member

Date: 09.05.2018