ITA sets aside penalties under section 271(1)(c) for 2009-10 and 2010-11, finding assessee's genuine belief.

The ITAT ruled in favor of the assessee, setting aside the penalty levied under section 271(1)(c) for the assessment years 2009-10 and 2010-11. The ITAT found the assessee's belief regarding the nature of the advance to be bona fide, leading to the deletion of the penalty of Rs. 10,99,518. The ITAT emphasized that the assessee disclosed all material facts, had a genuine belief, and lacked any intention to evade tax, thereby allowing the appeals for both assessment years.

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Issues Involved:
1. Levy of penalty under section 271(1)(c) of the Income Tax Act, 1961.
2. Treatment of advances received as deemed dividend under section 2(22)(e) of the Income Tax Act, 1961.
3. Bona fide belief and explanation of the assessee regarding the nature of the advance.

Issue-wise Detailed Analysis:

1. Levy of Penalty under Section 271(1)(c) of the Income Tax Act, 1961:

The appeals were filed by the assessee against the orders of the CIT(Appeals) confirming the levy of penalty under section 271(1)(c) for the assessment years 2009-10 and 2010-11. The penalty was levied on account of the addition made of deemed dividend as per section 2(22)(e). The CIT(A) upheld the penalty, stating that the treatment of the advances as deemed dividend was unambiguous and not debatable. The CIT(A) noted that the assessee did not disclose the advance in his return and only during detailed scrutiny was the issue highlighted and added to the income. The CIT(A) referred to the Supreme Court judgment in the case of Reliance Petro Products and other relevant judgments, concluding that the penalty was rightly levied as the assessee furnished inaccurate particulars of income.

2. Treatment of Advances Received as Deemed Dividend under Section 2(22)(e) of the Income Tax Act, 1961:

The assessee received advances amounting to Rs. 12,87,115 from a company in which he held a substantial shareholding. The Assessing Officer treated the advance as deemed dividend under section 2(22)(e) and added it to the assessee's income. The CIT(A) restricted the addition to the peak of the advance given, which was Rs. 10,99,518, and the ITAT upheld this addition. The explanation provided by the assessee was that the advance was for purchasing land on behalf of the company, but this was not substantiated. The ITAT noted that the provisions of section 2(22)(e) were clear and unambiguous, and the assessee's explanation did not hold.

3. Bona Fide Belief and Explanation of the Assessee Regarding the Nature of the Advance:

The assessee contended that he harbored a bona fide belief that the advance was not income since it was for acquiring land for the company and was refunded during the year. The ITAT found merit in this contention, noting that the explanation was not accepted because it remained unsubstantiated, not because it was false. The ITAT cited the Gujarat High Court's decision in Sarabhai Chemicals Pvt. Ltd. vs CIT, which held that no penalty is leviable if the assessee is under a bona fide belief that no income has accrued. The ITAT also referred to the Supreme Court's decision in Hindustan Steels Ltd. vs. State of Orissa, which emphasized that penalty should not be imposed if there is a bona fide belief and no malafide intention to evade tax.

Conclusion:

The ITAT concluded that the assessee should not be penalized under section 271(1)(c) as the explanation provided was bona fide and all material facts were disclosed. The penalty of Rs. 10,99,518 was deleted, and the appeals for both assessment years were allowed. The ITAT emphasized that the assessee's belief was bona fide, and there was no malafide intention to evade tax, thus setting aside the CIT(A)'s order and deleting the penalty.

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