THE COMMISSIONER OF INCOME TAX V. M/S H.E.DISTILLERY PVT LTD

ITA/350/2009

AI Insights

The case revolves around the imposition of a penalty under Section 158-BFA(2) of the Income Tax Act, 1961, following a block assessment of undisclosed income by M/s.H.E.Distillery Private Limited for the period from April 1, 1990, to January 18, 2001. Initially, the assessee declared an undisclosed income of Rs.73,80,526, which was later assessed by the Assessing Officer at Rs.2,42,47,658. After various appeals, the undisclosed income was recalibrated to Rs.1,20,61,900, and tax was paid accordingly. However, the penalty was contested due to the absence of a proper notice, which is a prerequisite for imposing such a penalty under the law. The Tribunal and the High Court both found that the absence of a formal notice rendered the penalty proceedings invalid.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 745719 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 01-08-2014
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: A SHANKAR; M LAVA
• Assessee Lawyers: JEEVAN NEERALGI
• Keywords: Block assessment; Penalty; Reasonable opportunity of being heard; Undisclosed income
• Section: 158BC; 260-A; 158 BFA(2); 158-BFA(3)

Judgement Text

" ITA 350/2009 1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 01ST DAY OF AUGUST, 2014 PRESENT: THE HON'BLE Mr.JUSTICE N.KUMAR AND THE HON'BLE Mr.JUSTICE B.MANOHAR Income-Tax Appeal No : 350 of 2009 BETWEEN: 1. THE COMMISSIONER OF INCOME-TAX, 284/1, PARK VIEW BUILDING, 4TH MAIN, P.J.EXTENSION, DAVANGERE – 577 002. 2. THE ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE – 2(2), BANGALORE. ...Appellant (By Sri.JEEVAN.J.NEERALGI, Adv.) AND: M/s.H.E.DISTILLERY PRIVATE LIMITED, B.H.ROAD, OPP.MEENAKSHI BHAVAN, SHIMOGA. ...Respondent (By Sri.A.SHANKAR & Sri.M.LAVA, Advs.) ITA 350/2009 2 This Appeal is filed under Section 260-A of I.T. Act, 1961 arising out of order dated 30.01.2009 passed in IT (SS) A.No.28/Bang/2008, for the Block Assessment Period 01.04.1990 to 18.01.2001, praying to formulate the substantial question of law stated therein and allow the appeal and set aside the order passed by the ITAT Bangalore in IT (SS) A.No.28/Bang/2008 dated 30.01.2009 and confirm the order passed by the Assessing Officer. This Appeal coming on for Hearing, this day, N.KUMAR, J., delivered the following: J U D G M E N T The Revenue has preferred this appeal against the order passed by the Tribunal upholding the order passed by the First Appellate Authority setting aside the imposition of penalty under Section 158-BFA(2) of the Income Tax Act, 1961. 2. The assessee filed returns in response to a notice under Section 158BC of the Income Tax Act, 1961 (for short, hereinafter referred to as the ‘Act’) for the block period on 13.08.2001 admitting undisclosed ITA 350/2009 3 income of Rs.73,80,526/-. However, the Assessing officer assessed the undisclosed income at Rs.2,42,47,658/-. The assessee’s appeal against the said order came to be rejected, which order has been affirmed by the Tribunal. The High Court subsequently modified the said order. 3. The undisclosed income was reduced to 1,20,61,900/- and tax on the said income has been paid. After the order of the Tribunal, penalty proceedings were initiated. By sending a letter dated 15.12.2005, penalty of Rs.1,18,40,726/- was imposed by the Assessing Officer. The said imposition was challenged before the Commissioner of Income Tax (Appeals). The said Commissioner cancelled the said penalty proceedings on the ground as Section 158- BFA(3) mandates that no order imposing a penalty under sub-section (2) shall be made usnless the assessee has been given a reasonable opportunity of being heard. ITA 350/2009 4 4. In the instant case, merely issuing a letter and no reasons being recorded for the non-appearance of the assessee before the Assessing Authority cannot be considered as a reasonable opportunity of being heard and therefore, the order imposing penalty was cancelled. Aggrieved by the said order, the Revenue preferred an appeal to the Tribunal. The Tribunal was of the view that issuance of notice is a pre-requisite for assuming jurisdiction for levying penalty under Section 158-BFA(2) of the Act. Issuance of notice is mandatory. In the absence of issuance of pre-requisite notice, the entire penalty proceedings are illegal and without jurisdiction. Therefore, it was held that the order passed by the Appellate Authority is justified and accordingly, dismissed the appeal. Aggrieved by the said order, the Revenue is in appeal. 5. The substantial question of law that arise for our consideration in this appeal is: ITA 350/2009 5 “Whether issue of notice is mandatory for levy of penalty under Section 158-BFA(2) or the satisfaction of the Assessing Officer is sufficient to meet the said requirement?” 6. From the material on record, it is not possible to make out whether any letter dated 15.12.2005 was sent from the Department and it was served on the assessee. The assessee has denied such a notice and therefore the assessee was not present before the Assessing Authority. If we look into the scheme of the entire block assessment and in particular, Section 158-BFA, though the power is conferred on the Assessing Officer to impose by way of penalty, a sum which shall not be less than the amount of tax leviable but which shall not exceed three times the amount of tax so leviable in respect of the undisclosed income. The proviso to Section 158-BFA mandates that no order imposing penalty shall be made in respect of a person, if he satisfies the ITA 350/2009 6 condition mentioned in the said proviso. Therefore, imposition of penalty is not automatic. If the assessee files returns declaring the undisclosed income and pays tax thereon and if the Assessing Authority accepts the said undisclosed income, then the question of imposing any penalty would not arise. Imposition of penalty would arise only if the undisclosed income determined by the Assessing Authority is in excess of the amount of undisclosed income shown in the returns filed by the assessee. Even then, sub-section (3) mandates that no order imposing penalty under sub-section (2) shall be made unless an assessee has been given a reasonable opportunity of being heard and a period of limitation is prescribed for imposition of such penalty under the said sub-section. Therefore, if the Assessing Authority intends to impose penalty under sub-section (2), he has to hear the assessee, it necessarily follows that a notice demanding the penalty or a notice calling upon the assessee to show-cause ITA 350/2009 7 why penalty should not be imposed is to be issued. Then, sufficient opportunity should be given to the assessee to reply to such notice. It is only after hearing, the Assessing Authority can proceed to impose any penalty. Penalty proceedings are penal in nature and the said penalty being not automatic and the orders in such penalty proceedings is to be passed within the time stimulating in sub-section (3) of Section 158-BFA and in absence of any express provision stating that no such notice is not required, it necessarily follows that a notice to the assessee is a must before any penalty is imposed under sub-section (3). 7. Admittedly, in this case, no such notice is issued. What is issued, according to the Revenue is a letter for change in incumbent in office. In order to find out whether that letter satisfies requirements of a notice under law, we called upon the Revenue to make available that letter. It is submitted that the letter is ITA 350/2009 8 not available in their records. The said letter is said to have been issued on 15.12.2005, served on 15.12.2005 and for non-appearance of the respondent, the order was passed on 15.12.2005 itself. 8. The aforesaid facts speaks for itself and the said letter is not available on record. Therefore, in the facts of the case, the contention of the assessee that he has not been heard, no opportunity was provided to him and therefore, the mandatory requirements of sub-section (3) of Section 158-BFA are not complied with is fully justified. Both the Appellate Authorities were justified in setting aside the order of penalty. 9. Therefore, the substantial question of law is answered in favour of the assessee and against the Revenue. We do not see any merits in this appeal. Accordingly, the appeal is dismissed. Sd/- JUDGE Sd/- dh JUDGE "