2016 (8) TMI 740 - HC - Income Tax

High Court rules penalties unjustified under Income Tax Act for years 1993-1996; emphasizes proof standard.

The High Court concluded that the penalties levied under Section 271(1)(c) of the Income Tax Act for the assessment years 1993-1994, 1994-1995, and ... Penalty levied on them under Section 271(1)(c)- Held that:- Assessing Officer has proceeded to levy the penalty on the basis that in the absence of an explanation submitted by the assessee he was satisfied that, these are cases fit for penalty under Section 271(1)(C). There is no finding that there are any concealment of any particulars of income or that the assessee has furnished inaccurate particulars of income to attract Section 271 (1)(c). That the assumption of the Assessing Officer is factually erroneous as is evident from the orders passed by the First Appellate Authority, which refers to the explanations submitted by the assessee and the contentions therein. Thus, there is absence of a finding rendered by the Assessing Officer, bringing the case within the scope of clause (B) of Explanation (1) to Section 271(1) (c). Secondly, the Assessing Officer has levied penalty ignoring the explanations submitted by the assessee. Consequently, as held by the Apex Court in Commissioner of Income Tax v Reliance Petro Products Pvt. Ltd. [2010 (3) TMI 80 - SUPREME COURT ] . We may here reiterate that merely because of the assessee has made certain claims, which were not accepted or was not acceptable to the Revenue, that itself would not attract the penalty under Section 271(1)(c). If that is the interpretation accepted that in every return where the claim made is not accepted for some reason, the assessee will be inviting penalty under Section 271(1)(c). - Decided in favour of assessee. Issues Involved:1. Validity of the penalty levied under Section 271(1)(c) of the Income Tax Act for the assessment years 1993-1994, 1994-1995, and 1995-1996.Detailed Analysis:Issue 1: Validity of Penalty Levied Under Section 271(1)(c)Facts and Proceedings:The Revenue appealed against the order of the Income Tax Appellate Tribunal (ITAT), which had allowed the respondent assessee’s appeals challenging the penalty levied under Section 271(1)(c) for the assessment years 1993-1994, 1994-1995, and 1995-1996. The penalties were based on discrepancies found during the scrutiny of the returns filed by the assessee for these years. For instance, the total income declared by the assessee for the year 1993-1994 was Rs. 16,060/-, but after scrutiny, it was increased to Rs. 23,93,510/-. Similar discrepancies and subsequent penalties were noted for the other years.First Appellate Authority’s Observations:The First Appellate Authority noted that the assessee had indeed responded to the penalty notices. Despite this, the primary authority confirmed the penalties.Tribunal’s Reasoning:The Tribunal observed that the additions were made based on details furnished by the assessee itself, and the deficiencies pointed out by the Assessing Officer (AO) were related to the lack of supporting evidence for certain expenditure claims. The Tribunal emphasized that such disallowances do not automatically lead to the conclusion that the assessee had concealed income or furnished inaccurate particulars. The Tribunal held that penalty proceedings are penal in nature and require a reasonable standard of proof of guilt.Legal Framework:Section 271(1)(c) and Explanation 1 were discussed. The section provides for penalty if there is concealment of income or furnishing of inaccurate particulars. Explanation 1 clarifies that if an explanation is offered and found to be false, or if it is not substantiated and not bona fide, the amount added or disallowed shall be deemed to represent concealed income.High Court’s Analysis:The High Court noted that there was no finding in the impugned orders that attracted clause (A) of Explanation 1. For clause (B), the Court identified three parts: the explanation must be offered and not substantiated, it must not be bona fide, and all material facts must not have been disclosed. The Court found that the AO had levied penalties without considering the explanations provided by the assessee, which was factually incorrect as the First Appellate Authority had noted the explanations.Precedents:The Court referred to the Supreme Court’s judgment in Commissioner of Income Tax v. Reliance Petroproducts Pvt. Ltd., which held that merely making an unsustainable claim does not amount to furnishing inaccurate particulars. The Court also cited the Gujarat High Court’s judgment in New Sorathia Engineering Co. v. Commissioner of Income Tax, which emphasized the need for a positive finding of concealment or furnishing of inaccurate particulars.Conclusion:The High Court concluded that the AO’s assumption was erroneous and there was no positive finding of concealment or furnishing of inaccurate particulars. The Tribunal was justified in setting aside the penalties. The Court confirmed the Tribunal’s orders and answered the question of law in favor of the assessee and against the Revenue. The penalties under Section 271(1)(c) were not justified merely because the claims made by the assessee were not accepted by the Revenue.