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AMICUS AI
Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • Mr. D. Anand, Adv. ;
  • Mr. A.V.R. Sreenivasan, JCIT
Judges
  • George Mathan, J.M.
  • A. Mohan Alankamony, A.M.
Acts
  • Section 274 read with Section 271(1)(c) of the Income Tax Act, 1961 (for short the Act)
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • Mr. D. Anand, Adv. ;
  • Mr. A.V.R. Sreenivasan, JCIT
Judges
  • George Mathan, J.M.
  • A. Mohan Alankamony, A.M.
Acts
  • Section 274 read with Section 271(1)(c) of the Income Tax Act, 1961 (for short the Act)
See more information ...
Smart Summary

Structured Summary of Tribunal Opinion (ITA Nos.819 & 820/Mds/2016)

Factual and Procedural Background

These are appeals filed by the assessee against orders of the Commissioner of Income Tax (Appeals)-8, Chennai: ITA No.819/Mds/2016 relates to assessment year (AY) 2001-02 and ITA No.820/Mds/2016 relates to AY 2002-03. Both appeals are by the same assessee and were disposed of by a common order.

The factual matrix, as set out in the opinion, includes the following features:

  • The assessee is a company engaged in construction business which purchased 5,000 solar lanterns and leased them to several persons.
  • The assessee claimed depreciation on the purchased solar lanterns and also received lease rentals which were disclosed in accounts (for one year indicated as Rs.57,534 and for another year lease rentals of Rs.30.60 lakhs).
  • The Assessing Officer (AO) held that the purchase and lease transactions were sham transactions and disallowed depreciation; that finding was upheld by a Co-ordinate Bench of the Tribunal and by the Hon'ble Jurisdictional High Court of Madras.
  • The AO also disallowed amounts shown as advances from M/s. DAS Largerway Windfarm (or Windturbines) Limited, treating those amounts as not recoverable; the assessee later offered income relating to that matter in AY 2006-07.
  • The AO initiated penalty proceedings under section 271(1)(c) by issuing a notice under section 271 read with section 274; the show cause notice did not specify which limb of section 271(1)(c) (concealment of particulars of income or furnishing inaccurate particulars of income) the penalty related to.
  • The assessee challenged the additions and the penalty before the Tribunal; Revenue was represented by JCIT and the assessee by counsel.

Legal Issues Presented

  1. Whether penalty under section 271(1)(c) of the Income Tax Act can be levied where the show cause notice under section 274 read with section 271(1)(c) does not specify which limb of section 271(1)(c) (i.e., concealment of particulars of income or furnishing inaccurate particulars of income) is invoked.
  2. Whether the transaction of purchase and lease of solar lanterns (claimed for depreciation by the assessee) is a sham transaction and, if so, what is the effect on depreciation claimed and lease rentals offered or taxed.
  3. Whether amounts shown as advances/credits standing in the name of M/s. DAS Largerway Windfarm (Windturbines) Limited were appropriately assessed in the impugned assessment year, given that the assessee later offered income from that transaction in AY 2006-07.
  4. Whether, in light of the above, the AO's additions resulted in double taxation of the same income.

Arguments of the Parties

Appellant's (Assessee's) Arguments

  • The assessee conducted a legitimate purchase-and-lease business for solar lanterns, financed by IREDA (a Government of India enterprise), and claimed depreciation on those assets and received lease rentals which were disclosed in its accounts.
  • The lease rentals had been offered to tax by the assessee (figures in accounts and returns were produced) and therefore the transaction should not be characterized as concealment of income or furnishing inaccurate particulars merely because the assessee could not conclusively prove the transaction to the AO's satisfaction.
  • The transaction financing by IREDA indicates the genuineness of the commercial transaction and IREDA would not be party to a sham transaction.
  • The AO's assessment (including additions) was based on statements recorded from the seller, and those statements were not placed before the assessee for cross-examination.
  • Amounts shown as advances from M/s. DAS Largerway were disputed during litigation and, after settlement, the assessee offered the income for AY 2006-07; therefore, there was no concealment or furnishing of inaccurate particulars in the earlier years.
  • Penalty under section 271(1)(c) is not leviable because the show cause notice failed to specify whether it proceeded for concealment or for furnishing inaccurate particulars; reliance was placed on a Karnataka High Court decision (M/s.SSAS Emerald Meadows) and dismissal of SLP by the Supreme Court.
  • For the second appeal, the assessee offered to have issues restored to the AO for re-examination and had no objection to restoration for verification.

Respondent's (Revenue's) Arguments

  • The AO's finding that the purchase and lease transactions were sham transactions has been upheld by the Hon'ble Jurisdictional High Court of Madras and by the Co-ordinate Bench of the Tribunal; therefore the disallowance of depreciation should stand.
  • With respect to advances shown from M/s. DAS Largerway, the letter of DAS Largerway indicated that the contract was complete and that no amount was due to the assessee; therefore the AO's disallowance/addition in the impugned year is correct.
  • The assessee was characterized as a shell company by the Revenue, and penalty was thus liable to be confirmed.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
M/s. SSAS Emerald Meadows (Hon'ble Karnataka High Court) — ITA No.380/2015, Order dated 23.11.2015 The Tribunal held that a notice issued under Section 274 read with Section 271(1)(c) is bad in law if it does not specify which limb of Section 271(1)(c) (concealment of particulars of income or furnishing inaccurate particulars of income) is being invoked. The Tribunal in the present matter followed the principles in this decision to conclude that the show cause notice failed to specify the limb of section 271(1)(c) and therefore penalty under section 271(1)(c) could not be levied; penalty was deleted.
COMMISSIONER OF INCOME TAX vs MANJUNATHA COTTON AND GINNING FACTORY (2013) 359 ITR 565 (Division Bench) Authority relied upon by the Tribunal in the SSAS Emerald Meadows decision (as recorded in the opinion) supporting the principle that the notice must specify the limb of section 271(1)(c). Referenced in the opinion as a supporting authority relied upon by the Karnataka High Court/Tribunal reasoning which the present Tribunal adopted in deciding that the show cause notice was defective for not specifying the specific limb under section 271(1)(c).
Supreme Court — SLP in CC No.11485/2016 (dismissed), Order dated 05.08.2016 The dismissal of the Special Leave Petition acted as approval (by non-interference) of the Karnataka High Court's reasoning in the SSAS Emerald Meadows case regarding the defective notice under section 274 read with section 271(1)(c). The Tribunal relied on the dismissal of the SLP to reinforce its view that, following the authoritative chain, penalty under section 271(1)(c) could not be levied where the show cause notice failed to specify the limb; this supported deletion of the penalty in the present case.
Co-ordinate Bench of the Tribunal (prior order) and Hon'ble Jurisdictional High Court of Madras (unnamed order) Both had previously upheld the AO's finding that the purchase-and-lease transactions of solar lanterns were sham transactions. The present Tribunal acknowledged these prior findings and, while noting them, elected not to re-adjudicate the merits of the sham-transaction issue (in some respects) because the issue had already been decided by a Co-ordinate Bench and upheld by the Madras High Court. However, for certain factual aspects (lease rentals offered and advances), the Tribunal required verification by the AO and restored issues for re-adjudication in one of the appeals.

Court's Reasoning and Analysis

The Tribunal's analysis proceeded in two main strands: (A) consideration of penalty proceedings under section 271(1)(c), and (B) adjudication of assessment issues relating to depreciation on leased solar lanterns and advances from M/s. DAS Largerway.

A. Penalty under section 271(1)(c)

  • The Tribunal examined the show cause notice issued under section 271 read with section 274 and found that the AO did not specify which limb of section 271(1)(c) was being invoked — whether for concealment of particulars of income or for furnishing inaccurate particulars of income.
  • The Tribunal applied the legal principle established by the Karnataka High Court in M/s. SSAS Emerald Meadows (which relied upon the Division Bench decision in Commissioner of Income Tax vs Manjunatha Cotton) and noted that the Supreme Court had dismissed an SLP against the Karnataka High Court order, thereby reinforcing that principle.
  • On that basis, the Tribunal concluded that the penalty under section 271(1)(c) could not be sustained because of the defect in the show cause notice and therefore deleted the penalty as levied by the AO and confirmed by the CIT(A).

B. Assessment issues — depreciation on leased solar lanterns and advances from DAS Largerway

  • The Tribunal acknowledged prior findings by a Co-ordinate Bench of the Tribunal and by the Hon'ble Jurisdictional High Court of Madras that the purchase-and-lease transactions in relation to the solar lanterns were sham transactions; the Tribunal observed it would not re-open the merits of that issue because those earlier decisions had found the transactions to be sham.
  • Notwithstanding the above, the Tribunal analyzed specific factual consequences: the assessee had offered lease rentals in its return and the ledger/accounts showed receipt of lease rentals; the purchase-and-lease transactions were financed by IREDA (a Government enterprise), which, the Tribunal noted, would not ordinarily be party to a sham transaction.
  • The Tribunal focused on the practical effect: if a transaction is disbelieved as a sham, the income offered by the assessee in respect of that transaction cannot validly be treated as its income without further verification. The AO, according to the Tribunal, had not verified whether lease rentals received by the assessee had already been offered and taxed in other years.
  • Regarding the amounts shown as advances from M/s. DAS Largerway, the Tribunal observed that the assessee had offered the relevant income in AY 2006-07 and that the return for AY 2006-07 had been accepted by the Revenue under section 143(1). The time limit for re-opening that assessment had expired; therefore, the returned income for AY 2006-07 should be treated as final. If the same income was taxed in the impugned year as an addition, that would amount to double taxation.
  • Given deficiencies in the AO's inquiry (failure to verify whether lease rentals were already offered and whether the DAS Largerway income had been offered in AY 2006-07), the Tribunal directed that the assessment issues be restored to the file of the AO for re-adjudication after granting the assessee adequate opportunity to substantiate its case. The AO was to verify whether the lease rentals and the DAS Largerway receipts had already been offered in returns of other years and proceed accordingly.

Holding and Implications

Holding:

  • Penalty deleted: The penalty under section 271(1)(c) as levied by the AO and confirmed by the CIT(A) stands deleted because the show cause notice under section 274 read with section 271(1)(c) did not specify which limb of section 271(1)(c) was being invoked.
  • First appeal (ITA No.819/Mds/2016 for AY 2001-02): The appeal of the assessee was allowed (the opinion states the appeal "is stands allowed" in respect of this matter following deletion of penalty and related reasoning).
  • Second appeal (ITA No.820/Mds/2016 for AY 2002-03): The appeal was partly allowed for statistical purposes and the issues (disallowance of depreciation on leased solar lanterns and disallowance of amounts shown as advances from M/s. DAS Largerway) were restored to the file of the AO for re-adjudication with directions to verify whether the lease rentals and the DAS Largerway amounts had already been offered in the assessee's returns (notably AY 2006-07) and to give the assessee adequate opportunity to substantiate its case.

Implications:

  • Direct effect on the parties: the assessee successfully obtained deletion of the penalty under section 271(1)(c) because of a procedural defect in the show cause notice; one appeal was allowed and the other was remanded to the AO for factual verification and re-adjudication.
  • On the merits of the sham-transaction finding, the Tribunal acknowledged prior adverse findings by a Co-ordinate Bench and by the Madras High Court but declined to rehear those merits where they had already been adjudicated; nevertheless, the Tribunal required the AO to verify specific factual aspects (whether income had been offered in other years) before sustaining additions to avoid double taxation.
  • The opinion relies on existing authorities (Karnataka High Court decision in SSAS Emerald Meadows and supporting Division Bench authority, and the dismissal of SLP by the Supreme Court) for the proposition that a defective show cause notice under section 274/271(1)(c) precludes levy of penalty; the Tribunal's order deletes the penalty on that basis. The Tribunal did not purport to lay down new law beyond applying those precedents.

Order pronounced in the Open Court on August 14, 2017, at Chennai. Members signing: A. Mohan Alankamony (Accountant Member) and George Mathan (Judicial Member).

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    Marg Limited v. Deputy Commissioner Of Income Tax Company Range Iv (1), Chennai .

    PER GEORGE MATHAN, JUDICIAL MEMBER: ITA No.819/Mds/2016 is an appeal filed by the assessee against the Order of Commissioner of Income Tax (Appeals)-8, Chennai, in ITA No.107/2014-15 dated 31.12.2015 for the AY 2001-02. ITA No.820/Mds/2016 is an appeal filed by the assessee against the Order of ITA Nos.819 & 820/Mds/2016 :- 2 -: Commissioner of Income Tax (Appeals)-8, Chennai, in ITA No.01/2005-06 dated 31.12.2015 for the AY 2002-03.

    2. Mr.AV.R.Sreenivasan, JCIT represented on behalf of the Revenue and Mr.D.Anand, Adv. represented on behalf of the assessee.

    3. As both the appeals are related to the same assessee and being inter-connected, both the appeals are disposed of by this common order. ITA No.819/Mds/2016 for the AY 2001-02

    4. It was submitted by the Ld.AR that the assessee is a company, which was doing construction business. During the relevant AY, the assessee had purchased 5000 solar lanterns and had leased the same to five different persons. It was a submission that the assessee had claimed depreciation in respect of the said solar lanterns purchased by the assessee and given on lease. It was a submission that in the course of the assessment, the AO held that the purchase of solar lanterns by the assessee and the same being leased out was a sham transaction. It was a submission that the same had been upheld, on appeal by the ITAT and by the Honble Jurisdictional High Court of Madras. It was a submission that though the transaction has been treated as a sham transaction, the lease rentals received by the assessee has been taxed. The Ld.AR placed before us copy of the balance sheet and P&L account, wherein for the relevant ITA Nos.819 & 820/Mds/2016 :- 3 -: AY under the schedule-J, the lease rentals from the solar lanterns is shown at Rs.57,534/-. It was a submission that the transaction was not a sham transaction. It was a further submission that the whole assessment is based on a statement recorded from the seller whose statement not been put the assessee for cross-examination. It was a further submission that for the AY 2002-03, the assessee has shown lease rentals of Rs.30.60 lakhs. It was a submission that just because, the assessee was unable to prove the transaction, that would not make the transaction or the claim of the assessees depreciation, concealment of income or furnishing of inaccurate particulars of income. It was a further submission that the loan which had been given by IREDA for the purchase of the solar lanterns was also not considered by the AO. It was a submission that the IREDA was a Government of India Enterprise which provided loans only for procuring renewable energy equipment. It was a submission that the penalty u/s.271(1)(c) was not leviable on the said transaction. It was a further submission that in the course of the assessment, the AO had disallowed and advance shown under the name of M/s.DAS Largerway Windfarm Limited. It was a submission that the assessee had entered into contract with M/s.DAS Largerway Windturbines Limited and had shown amounts received from the said concerned as advances, as there was a litigation between the assessee and the said firm. It was a submission that after the litigation was settled, the assessee had offered the income for the AY 2006-07. It was a submission that the AO had obtained a letter from M/s.DAS Largerway Wind Windturbines Limited wherein the said ITA Nos.819 & 820/Mds/2016 :- 4 -: concerned had confirmed that there was no money or material due to the assessee. This was during the pendency of litigation. It was a submission that income having been offered during the assessment year 2006-07 and the amount received by the assessee having been shown as advance during the relevant AYs, there was no concealment of income or furnishing of inaccurate particulars. It was a submission that no penalty was leviable on this count. It was a further submission that in the course of the assessment proceedings in respect of both the additions, there is no satisfaction record as to whether the assessee has concealed his income or has furnished inaccurate particulars of his income. It was a submission that on the last page of the Assessment Order, it is mentioned that penalty has been initiated separately. The Ld.AR placed before us a copy of the notice u/s.271 r/w 274 dated 31.03.2004. It was a submission that even in the show cause notice, it has not been mentioned as to whether the penalty is being levied for concealment of particulars of income or for furnishing of inaccurate particulars of his income. The Ld.AR further drew our attention to the Penalty Order at Para No.6.5 to submit that in the said paragraph, the AO submits that the assessee has furnished inaccurate particulars of income and in Para No.7, the AO talks of concealment of income. The Ld.AR placed before us a copy of the decision of the Honble Karnataka High Court in the case of M/s.SSAs Emerald Meadows in ITA No.380/2015 wherein the Honble Karnataka High Court vide Order dated 23.11.2015, wherein Para No.3, the Honble High Court has held as follows: ITA Nos.819 & 820/Mds/2016 :- 5 -:

    3. The Tribunal has allowed the appeal filed by the assessee holding the notice issued by the Assessing Officer under Section 274 read with Section 271(1)(c) of the Income Tax Act, 1961 (for short the Act) to be bad in law as it did not specify which limb of Section 271(1)(c) of the Act, the penalty proceedings had been initiated i.e., whether for concealment of particulars of income or furnishing of inaccurate particulars of income. The Tribunal, while allowing the appeal of the assessee, has relied on the decision of the Division Bench of this Court rendered in the case of COMMISIONER OF INCOME TAX VS- MANJUNATHA COTTON AND GINNING FACTORY (2013) 359 ITR 565.

    5. The Ld.AR further placed before us a copy of the Order of the Honble Supreme Court in respect of SLP in CC No.11485/2016 dated 05.08.2016 wherein the SLP against the said order of the Honble High Court has also been dismissed. It was a submission that on merits and on technicality, no penalty was leviable with assessee u/s.271(1)(c).

    6. In reply, the Ld.DR submitted that in respect of the claim of the depreciation, the transaction was a sham transaction and the same has also been upheld by the Honble High Court. It was a further submission that in respect of the credit shown in the name of M/s.DAS Largerway Windfarm Limited, the letter of DAS Largerway itself shows that the contract was completed and no amount was due to the assessee or from the assessee. It was a further submission that the assessee was a shell company and the penalty was liable to be confirmed.

    7. We have considered the rival submissions. The fact that the lease rentals have been offered by the assessee in respect of the lease transaction of the assessee in respect of the solar lanterns is a fact in ITA Nos.819 & 820/Mds/2016 :- 6 -: support of the assessee. It is further noticed that in the transaction of the assessee, all the purchase and lease of the solar lanterns is financed by IREDA which is a Government of India Enterprise. IREDA, we are sure would not involved itself in such a sham transaction. Even assuming that the lease transaction was a paper transaction still the same would have to be considered as a financial transaction. However, we would not like to dwell on this merits of this issue in so far as the Co-ordinate Bench of this Tribunal has already upheld the transaction to be a sham one which has also found favour with the Honble Jurisdictional High Court. In respect of the issue of credit standing in the name of M/s.DAS Largerway Windfarm Limited, it is noticed that this is not a case of concealment of income in so far as the assessee has disclosed the transaction in its return and it is only the nature of the transaction which has been altered to treat the same as income. We must mention here that the income from the said transaction has been offered by the assessee in his return for the AY 2006-07. The return for the AY 2006-07 has been accepted by the Revenue, though admittedly, u/s.143(i). The time limit for re-opening of the said assessment is long over and consequently the returned income would be considered as final. Thus, by the said addition the Revenue has taxed the same income twice, one in the form of disallowance during the impugned AY and second time on account of the income being offered by the assessee for the AY 2006-07. Thus, it cannot be said that the assessee has concealed its particulars of his income or has furnished inaccurate particulars of its income. However, even on this issue we would not like ITA Nos.819 & 820/Mds/2016 :- 7 -: to go into on merits in so far as the Co-ordinate Bench of this Tribunal has upheld the addition and the said order has also been confirmed by the Honble Jurisdictional High Court of Madras.

    8. A perusal of the show cause notice u/s.271 r/w 274 clearly shows that the AO has not specified as to which limb of Sec.271(1)(c), the penalty proceedings has been initiated. This being so, in view of the principles laid down by the Honble Karnataka High Court in the case of M/s.SSAS Emerald Meadows referred to supra approved by the Honble Supreme Court by dismissal of the SLP referred to supra, we are of the view that the penalty u/s.271(1)(c) of the act cannot be levied in the case of the assessee. In these circumstances, the penalty as levied by the AO and confirmed by the Ld.CIT(A) stands deleted.

    9. In the result, the appeal filed by the assessee is stands allowed. ITA No.819/Mds/2016 for the AY 2001-02

    10. It was submitted by the Ld.AR that the issues in the assessment were in respect of the disallowance of the depreciation claimed in respect of the leased solar lanterns which had been disallowed by the AO for the AY 2001-02 holding the same to be a sham transaction and in respect of advance shown in the name of M/s.DAS Largerway Wind Windturbines Limited which had also been disallowed for the immediately preceding AY ITA Nos.819 & 820/Mds/2016 :- 8 -: 2001-02. It was submitted by the Ld.AR that during the relevant AY the assessee had offered an amount of Rs.30.60 lakhs as its lease rentals and the same has also been accepted by the AO. It was a submission that 50% depreciation in respect of the leased solar lanterns had been disallowed by the AO following the Assessment Order for the immediately preceding AY. It was a further submission that in respect of the receipts from M/s.DAS Largerway Windfarm Limited the income from the said transaction had been offered in the return for the AY 2006-07. It was a submission that the assessee had no objection, if the issues were restored to the file of the AO for re-examination.

    11. In reply, the Ld.DR submitted that in respect of the depreciation on the solar lanterns the Honble Jurisdictional High Court has already confirmed the stand of the AO that the transactions were sham transactions. It was a further submission that in respect of the advance shown from M/s.DAS Largerway Wind Windturbines Limited, it was a submission that the assessment for the immediately preceding year had also been confirmed by the Co-ordinate Bench of this Tribunal. It was a submission that the order of the Ld.CIT(A) was liable to be confirmed.

    12. We have considered the rival submissions. It is an admitted fact that the Honble Jurisdictional High Court has upheld the finding of the AO that the transaction of purchase and lease of the solar lanterns is a sham ITA Nos.819 & 820/Mds/2016 :- 9 -: transaction. However, a perusal of the Assessment Order shows that the AO has brought to tax, the lease rentals received by the assessee in respect of the business of purchase and lease of the solar lanterns. If the transaction itself is disbelieved and treated as a sham transaction admittedly the income offered by the assessee in respect of the said transaction cannot be treated as income of the assessee. This has not been considered or verified by the AO. In respect of the issue of advance received from M/s.DAS Largerway Wind Windturbines Limited, it is stated by the assessee that the income from the said transaction has been offered during the AY 2006-07. Further, the AO has brought to tax the amounts standing in the name of the said creditor in the AY 2001-02 holding that the transaction is complete. If this is so, then how was additional advance given during the impugned assessment year? This has also not been examined by the AO. In these circumstances, we are of the view that the issues must be restored to the file of the AO for re- adjudication and we do so. In respect of the transaction of the purchase and lease of the solar lanterns, the AO has to verify as to whether the assessee has offered the lease rentals in respect of the said solar lanterns and has to adjudicate on this issue after such verification. In respect of the issue of the advance shown from M/s.DAS Largerway Windfarm Limited, the AO is to examine as to whether the assessee has offered the income from the said transaction for the AY 2006-07. If the income has been offered during the AY 2006-07, then no addition is called for in the hands of the assessee in the impugned Assessment Order. With these ITA Nos.819 & 820/Mds/2016 :- 10 -: directions, the issues are restored to the file of the AO for re-adjudication after granting the assessee adequate opportunity to substantiate his case.

    13. In the result, the appeal filed by the assessee is partly allowed for statistical purposes. Order pronounced in the Open Court on August 14, 2017, at Chennai. Sd/- Sd/- (. ) (A. MOHAN ALANKAMONY) !/ACCOUNTANT MEMBER ( ) (GEORGE MATHAN)  !/JUDICIAL MEMBER /Chennai, 1/Dated: August 14, 2017. ) '23 43/Copy to:

    1. &/Appellant 4. 5/CIT

    2. '(&/Respondent 5. 3 '

    3. 5 ()/CIT(A) 6.  /GF

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    Marg Limited v. Deputy Commissioner Of Income Tax Company Range Iv (1), Chennai .
    (Aug 14, 2017)