2015 (10) TMI 2050 - AT - Income Tax

Penalty under Section 271(1)(c) overturned for 2009-10 assessment year

Goldfilled Mercantile Company Versus DCIT Circle 12 (1), Mumbai

The Tribunal found that the penalty imposed on the assessee under section 271(1)(c) for the assessment year 2009-10 was unsustainable. The Tribunal ... Penalty u/s 271(1)(c) - transfer of title - diversion of income by overriding title - AO held that payment made to the legal heirs of the partner, Shri Pyarali Dholakia & Mrs. Pravin Dholakia cannot be allowed to be reduced from the gross consideration received, as the same belongs to the partnership and the entire amount should have been shown in the hands of the firm - whether the property belongs to the firm and the share of the legal heirs was paid to them under mutual agreement, however, tax on the amount paid to the legal heirs were erroneously deposited in the names of the heirs instead of the firm - Held that:- The main surviving partner, Mr. Mateen Dholakia (Son of late Mr. Pyarali & Mrs Pravin Dholakia), had tried to discharge his obligation as per the ‘Will’ of his parents and also by the family arrangement that out of the sale proceeds from the land originally belonging to his father, (later on converted into property of partnership firm) had to be given to his sisters. Instead of receiving the whole amount in the hands of the partnership firm and including it as its income and paying taxes thereon, and then paying to the legal heirs which would have been the correct manner, he chose to give the amount directly to the legal heirs after paying the taxes. Once assessee has complied with the terms of the Will and the family arrangement then, it cannot be held that at the time of filing of the return the assessee lacked genuine and bona fide belief or acted mala fidely to divert the income for evading the taxes. The concealment of income or furnishing of inaccurate particulars, as contemplated in clause (c) of section 271 has to be seen with reference to amount of tax sought to be evaded. Here, in case there is no tax which has been sought to be evaded, because as pointed out earlier, the assessee had paid more taxes as it has to pay taxes on the gross amount paid to the legal heirs. Thus, under the present facts and circumstances, we hold that penalty levied by the Assessing Officer and confirmed by CIT(A) is unsustainable. Issues Involved:1. Levy of penalty under section 271(1)(c) for the assessment year 2009-10.2. Deduction claim of Rs. 17,74,22,070/- by the assessee firm.3. Taxability of long-term capital gains in the hands of the assessee firm.4. Bona fide belief and intention of the assessee regarding the payment to legal heirs.5. Application of the doctrine of diversion by overriding title.Issue-wise Detailed Analysis:1. Levy of Penalty under Section 271(1)(c) for the Assessment Year 2009-10:The appeal was filed by the assessee against the order passed by CIT(A)-23, Mumbai, concerning the penalty proceedings under section 271(1)(c) for the assessment year 2009-10. The assessee was aggrieved by the levy of a penalty of Rs. 4,02,03,900/-. The Assessing Officer (AO) imposed the penalty on the grounds that the assessee claimed a deduction of Rs. 17,74,22,070/- which was not allowable, thereby furnishing inaccurate particulars of income.2. Deduction Claim of Rs. 17,74,22,070/- by the Assessee Firm:The assessee firm claimed a deduction of Rs. 17,74,22,070/- on the grounds that the payment to the legal heirs was due to the testament of the 'will' of the father and a family arrangement, which amounted to diversion by overriding title. The AO held that the payment made to the legal heirs of the partners could not be reduced from the gross consideration received, as the property and the resultant capital gains belonged to the partnership firm. The AO's detailed reasoning included that the legal heirs had no rights in the property or the joint venture and that the payment to them was merely an application of income.3. Taxability of Long-term Capital Gains in the Hands of the Assessee Firm:The AO concluded that the capital asset transferred was owned by the firm and not by the legal heirs of the partners. Therefore, the entire long-term capital gain arising from the transfer of such an asset was taxable in the hands of the assessee firm. The AO computed the long-term capital gain at Rs. 41,62,25,278/- after considering the gross sale consideration of Rs. 70 crores and reducing the amount already considered for taxation in the AY 2007-08.4. Bona Fide Belief and Intention of the Assessee Regarding the Payment to Legal Heirs:The assessee argued that the claim for deduction was based on a genuine and bona fide belief that the amount paid to the legal heirs was due to a diversion by overriding title as per the family arrangement and the 'will' of the father. The assessee contended that there was no mala fide intention to evade taxes, as evidenced by the payment of taxes on behalf of the legal heirs. The CIT(A) rejected this explanation, stating that the legal heirs had no right to the sale consideration and that the amount paid to them was not deductible under section 48.5. Application of the Doctrine of Diversion by Overriding Title:The assessee's explanation was that the payment to the legal heirs was a diversion by overriding title due to the family arrangement and the 'will' of the father. However, the AO and CIT(A) held that the legal heirs had no overriding title to the sale proceeds, and the payment to them was an application of income. The CIT(A) noted that the amount paid to the legal heirs was out of the amounts standing in the credit of the father and mother, which had no connection with the taxability of the sale of the assets.Conclusion:The Tribunal considered whether the assessee's explanation was bona fide and whether the penalty was justifiable. It was noted that the assessee acted in good faith, believing that the payment to the legal heirs was a diversion by overriding title. The Tribunal found that there was no intention to evade taxes, as the assessee had paid more taxes on behalf of the legal heirs. The Tribunal held that the penalty levied was unsustainable and allowed the appeal of the assessee, concluding that the explanation provided by the assessee was reasonable and bona fide. The order pronounced in the open court on 16th September 2015 allowed the appeal of the assessee.