Penalty for unsubstantiated explanations and clear notice defects: section 271(1)(c) sustained on cash deposits and capital gains

Penalty under section 271(1)(c) is sustained where the assessee's explanation for cash deposits is unsupported by evidence and remains unsubstantiated in assessment or penalty proceedings. The article also notes that a penalty notice under section 274 is not invalid merely because the inapplicable limb is not struck off, if the charge is otherwise clear from the assessment and penalty records and no prejudice is shown. On the capital gains issue, treating leasehold land as part of a depreciable block was held to be plainly incorrect, so the failure to offer long-term capital gain was not a bona fide or debatable claim.

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Issues: (i) Whether penalty under section 271(1)(c) of the Income-tax Act, 1961 was leviable in respect of cash deposit of Rs. 3,00,000 in the bank account. (ii) Whether penalty under section 271(1)(c) of the Income-tax Act, 1961 was leviable in respect of long-term capital gain of Rs. 40,79,195 on sale of the land component of the factory premises, and whether the notice issued under section 274 was invalid for non-striking off the inapplicable limb.

Issue (i): Whether penalty under section 271(1)(c) of the Income-tax Act, 1961 was leviable in respect of cash deposit of Rs. 3,00,000 in the bank account.

Analysis: The assessee offered only a bare assertion that the amount represented cash gifts received on the son's marriage, but no evidence or supporting particulars were produced. The explanation was not substantiated either in the assessment or penalty proceedings, and the Tribunal found no basis to accept it. The legal objection that the penalty notice did not strike off the inapplicable limb was also rejected because the assessment order and penalty proceedings disclosed invocation of both limbs, and no prejudice was shown.

Conclusion: Penalty under section 271(1)(c) was rightly sustained on the cash deposit of Rs. 3,00,000, and the assessee's challenge failed.

Issue (ii): Whether penalty under section 271(1)(c) of the Income-tax Act, 1961 was leviable in respect of long-term capital gain of Rs. 40,79,195 on sale of the land component of the factory premises, and whether the notice issued under section 274 was invalid for non-striking off the inapplicable limb.

Analysis: The assessee had erroneously merged leasehold land with the factory building and treated land as part of a depreciable block of asset, which the Tribunal held to be contrary to basic accounting and tax principles. The claim for non-offering of long-term capital gain was held to be ex facie incorrect rather than a debatable claim. The objection based on the penalty notice was again rejected for the same reasons recorded while dealing with the cash deposit issue, and any defect was treated as curable. The explanation was held to be not bona fide, attracting penalty.

Conclusion: Penalty under section 271(1)(c) was rightly sustained on the long-term capital gain issue, and the assessee's challenge failed.

Final Conclusion: The penalty order was sustained on the surviving issues, and the appeal was dismissed in full.

Ratio Decidendi: A penalty under section 271(1)(c) is sustainable where the assessee's explanation is unsubstantiated or ex facie incorrect, and a notice under section 274 is not invalid merely because both limbs are not separately struck off when the charge is otherwise clear and no prejudice is shown.

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