2009 (4) TMI 499 - AT - Income Tax

Penalty under Section 271(1)(c) deleted as assessee neither concealed income nor furnished inaccurate particulars, relying on precedents

ITAT-PUNE AT held that penalty under s.271(1)(c) could not be sustained because AO failed to satisfy the foundational requirement that the assessee ... Scope of penalty provisions under s. 271(1)(c) - concealment of income or furnishing inaccurate particulars - Revised return - carry forward of unabsorbed depreciation and business losses - Deduction u/s 10A - profits and losses of different units - HELD THAT:- There was never a controversy about the necessary precondition for imposition of penalty by way of AO satisfying himself that there is concealment of income by the assessee, or that there is furnishing of inaccurate particulars of income by the assessee, or that the case of the assessee is covered by deeming fiction covered by one of the Explanations appended to s. 271 (1)(c). Unless the AO is satisfied that the case of the assessee falls in one of these categories, the very foundation for imposition of penalty does not exist. In Dilip N. Shroff's case [2007 (5) TMI 198 - SUPREME COURT], a Division Bench of the Hon'ble Supreme Court thought so. It was their esteemed view that the onus of proof is on the AO that there was an element of mens rea. Obviously, this was in addition to the satisfaction of conditions laid down in s. 271(1)(c) r/w Explanations thereto. In Dharamendra Textile Processor's case [2007 (7) TMI 307 - SUPREME COURT], a Larger Bench of the Hon'ble Supreme Court did not share this perception and was of the esteemed view this additional precondition for imposition of penalty under s. 271(1)(c), i.e. establishing existence of mens rea, was wrongly being read into the provisions of the Act. On account of penalty under s. 271(1)(c), only consequences in the civil law, i.e., payment of a specified amount as damages or as compensation, follow, but on account of penalty under s. 276C, consequences under criminal law, i.e. loss of individual liberty by jail sentence, follow. It is, however, incorrect to infer that just because a liability has been held to be 'civil liability' it cannot be penal in character. There is no contradiction in a liability being a civil liability and the same liability being penal liability as well, though a civil liability cannot certainly be criminal liability as well. It is thus clear that a mere contravention of statutory obligation is enough to trigger the penalty provision, but then there has to be a contravention of the statutory obligation first-wilful or not. In our considered view, unless that contravention of law takes place and unless the conditions for imposition of penalty under s. 271 (1)(c) are satisfied, even a civil liability cannot be invoked. The case of the assessee is not even hit by the mischief of any of the three eventualities envisaged by the deeming fiction under Expln. 1 to s. 271(1)(c). We have already held that, on the facts and in the circumstances of the case, the assessee could not be said to have concealed the particulars of income or furnished inaccurate particulars of income. Under the scheme of s. 271(1)(c), therefore, it was not a fit case for the imposition of penalty. We need not, therefore, address ourselves to other legal issues raised before us, and, for the short reasons set out above, hold that it was not a fit case for imposition of penalty under s. 271(1)(c) of the Act. The issue whether even in the absence of any mens rea, on the facts of this case, the assessee could have been imposed penalty under s. 271(1)(c) would have been relevant only if it was found to be a fit case for imposition of penalty under the scheme of s. 271(1)(c). Since we have come to the conclusion that under the scheme of s. 271(1)(c), it was not a fit case for imposition of penalty, and in view of our analysis of legal position set out earlier in this order, we hold that the facts and circumstances of the case did not warrant or justify any imposition of penalty. We, therefore, direct the AO to delete the impugned penalty of Rs. 2,00,00,000. The assessee gets the relief accordingly. Issues Involved:1. Imposition of penalty under Section 271(1)(c) of the Income Tax Act, 1961.2. Interpretation of Section 10A regarding deduction of profits and losses of different units.3. Application of Explanation 1 to Section 271(1)(c) concerning concealment of income and furnishing inaccurate particulars.4. Impact of the Supreme Court's judgment in the case of Union of India vs. Dharamendra Textile Processors on penalty provisions.Issue-wise Detailed Analysis:1. Imposition of Penalty under Section 271(1)(c):The core issue is whether the penalty of Rs. 2,00,00,000 under Section 271(1)(c) was justified. The assessee claimed a carry forward of loss of Rs. 5,36,27,048 in a revised return, which was rejected by the AO. The AO imposed the penalty for furnishing inaccurate particulars of income. The Tribunal analyzed whether the assessee's actions constituted concealment of income or furnishing inaccurate particulars.2. Interpretation of Section 10A:The Tribunal examined the assessee's claim that deduction under Section 10A should be computed unit-wise rather than aggregating profits and losses of all units. The AO and CIT(A) held that the deduction must be from the total income, considering profits and losses of all units. The Tribunal noted that the assessee's interpretation was based on a bona fide belief supported by a detailed note and Form 56F, and hence, the claim was not frivolous.3. Application of Explanation 1 to Section 271(1)(c):The Tribunal discussed the deeming fiction under Explanation 1 to Section 271(1)(c), which applies when an assessee fails to offer an explanation, provides a false explanation, or fails to substantiate an explanation and prove it was bona fide. The Tribunal found that the assessee provided a detailed explanation, which was not found false, and disclosed all material facts. Therefore, the conditions for invoking the deeming fiction were not satisfied.4. Impact of Dharamendra Textile Processors Judgment:The Tribunal analyzed the implications of the Supreme Court's judgment in Dharamendra Textile Processors, which held that penalty under Section 271(1)(c) is a civil liability and does not require proof of mens rea. The Tribunal clarified that while the judgment nullified the requirement of proving mens rea, it did not imply that penalty should be imposed automatically upon any addition to income. The Tribunal emphasized that penalty provisions under Section 271(1)(c) still require a finding of concealment or furnishing inaccurate particulars, or conditions under Explanation 1.Conclusion:The Tribunal concluded that the assessee's claim was made in a bona fide manner with full disclosure of facts and a reasonable explanation. The claim was based on a plausible interpretation of law, and there was no concealment of income or furnishing of inaccurate particulars. Therefore, the penalty under Section 271(1)(c) was not justified, and the appeal was allowed, directing the AO to delete the penalty.