2007 (12) TMI 460 - AT - Income Tax

Tribunal allows appeal, deletes penalty on gifts under section 271(1)(c)

Deputy Commissioner of Income-tax, Central Cir. Versus S. Kumar

The Tribunal partially allowed the appeals by deleting the penalty under section 271(1)(c) on the gifts received by the assessee. The Tribunal found that ... - Issues Involved:1. Deletion of penalty levied under section 271(1)(c) of the Income-tax Act.2. Genuineness of gifts received by the assessee.3. Filing of revised returns and its implications on penalty.4. Application of Explanation 5 to section 271(1)(c) of the Income-tax Act.5. Arguments and evidence presented by both parties.Detailed Analysis:1. Deletion of Penalty Levied Under Section 271(1)(c) of the Income-tax Act:The revenue appealed against the deletion of the penalty levied under section 271(1)(c) by the CIT(A). The CIT(A) had deleted the penalty on the grounds that the gifts were disclosed in the returns filed before the date of the search, and the revised returns were filed to buy peace and avoid litigation. The CIT(A) relied on Supreme Court and MP High Court judgments, which held that penalty could not be levied if the revised returns were accepted and filed to purchase peace.2. Genuineness of Gifts Received by the Assessee:During the search, it was established that the gifts received by the assessee were not genuine. The assessee admitted that the gifts were arranged to convert unaccounted money into accounted income. The Assessing Officer (AO) concluded that the gifts were fictitious, as evidenced by the pattern of transactions, the involvement of intermediaries, and the lack of creditworthiness of the donors. The AO imposed a penalty under section 271(1)(c) for concealment of income.3. Filing of Revised Returns and Its Implications on Penalty:The assessee filed revised returns after the search, declaring additional income and paying taxes. The CIT(A) accepted the revised returns and deleted the penalty, arguing that the revised returns were filed to end the proceedings and avoid harassment. The CIT(A) held that the particulars were already available in the original returns, and the revised returns were filed to buy peace with the department, thus penalty should not be levied.4. Application of Explanation 5 to Section 271(1)(c) of the Income-tax Act:Explanation 5 to section 271(1)(c) provides immunity from penalty if the assessee, during the course of a search, admits to the undisclosed income, specifies the manner in which it was derived, and pays the tax along with interest. The Tribunal found that the assessee had complied with these conditions by admitting the non-genuine nature of the gifts, filing revised returns, and paying the taxes. Therefore, the Tribunal held that Explanation 5 was applicable, and the penalty on the gifts was deleted.However, the Tribunal noted that the commission paid for arranging the gifts was an outgoing expense and not represented by any assets or valuable articles. Therefore, Explanation 5 did not provide immunity for the commission paid, and the penalty on this amount was confirmed.5. Arguments and Evidence Presented by Both Parties:The revenue argued that the assessee had independent sources of income and that the gifts were arranged to evade taxes. They relied on the statements of the assessee and intermediaries, which confirmed the fictitious nature of the gifts. The revenue also cited various judgments to support their case for levying the penalty.The assessee argued that the gifts were genuine and that the revised returns were filed to buy peace. They cited Supreme Court and High Court judgments to argue that penalty should not be levied if the revised returns were accepted. The assessee also contended that the penalty proceedings should be based on the returns filed under section 153A and not the original returns.Conclusion:The Tribunal concluded that the penalty under section 271(1)(c) on the gifts was not justified as the assessee had complied with the conditions of Explanation 5 by admitting the non-genuine nature of the gifts, filing revised returns, and paying the taxes. However, the penalty on the commission paid for arranging the gifts was confirmed as Explanation 5 did not provide immunity for such expenses. The appeals were partly allowed, deleting the penalty on the gifts but confirming the penalty on the commission paid.