2022 (12) TMI 173 - AT - Income Tax

ITAT Mumbai overturns penalty under IT Act, emphasizes reasonableness of assessee's explanations

The ITAT Mumbai allowed the appeal by the assessee, overturning the penalty imposed under section 271(1)(c) of the Income Tax Act for the assessment year ... Penalty u/s 271(1)(c) - addition u/s 36(1)(vii) on the basis that the conditions laid down in section 36(2) are not satisfied - HELD THAT:- We find that in respect of each party, to whom advances/payments were made, the assessee provided its explanation for non-realisation of the amount resulting in its decision of writing off the same during the year under consideration. We find that the AO did not agree with the aforesaid factual explanation and made the addition disallowing the claim under section 36(1)(vii) r/w section 36(2) vide its order passed under section 143(3) - neither the AO nor the learned CIT(A) in the penalty proceedings, found the assessee’s explanation to be incorrect or without any basis. Revenue also did not bring anything on record to controvert the aforesaid submission. There is no dispute on the fact that the assessee has not challenged the addition made vide the assessment order. At the same time, it is well established that quantum proceedings and penalty proceedings are separate in nature. Even if, for any reason, the assessee has not challenged the addition made in quantum proceedings, while deciding the issue of imposition of penalty regard must be had to the reasonable explanation furnished by the assessee. This is not a fit case for the levy of penalty under section 271(1)(c) - Decided in favour of assessee. Issues:Challenge to penalty under section 271(1)(c) of the Income Tax Act.Analysis:The appeal was filed by the assessee against the penalty imposed under section 271(1)(c) of the Income Tax Act for the assessment year 2014-15. The appellant did not appear during the hearing, leading to an ex-parte disposal of the appeal. The grounds raised by the assessee included challenges to the penalty, questioning the intentional wrong claims and the applicability of expenses under section 36(1)(vii) of the Act.The case involved the assessment of the appellant's income, where certain advances written off by the assessee were disallowed under section 36(1)(vii) of the Act. The penalty proceedings were initiated based on this disallowance. The Assessing Officer levied a penalty under section 271(1)(c) on the grounds of deliberate tax evasion by the assessee. The Commissioner of Income Tax (Appeals) upheld the penalty, leading to the current appeal before the ITAT Mumbai.During the assessment proceedings, it was found that the assessee had written off advances totaling Rs. 2,85,269, and the AO disallowed this amount under section 36(1)(vii) due to non-satisfaction of conditions under section 36(2). The appellant provided explanations for each written-off amount, citing reasons such as non-realizability and disputes. The AO and the CIT(A) did not find fault with the explanations provided by the assessee, and the Revenue did not present any evidence to refute these explanations.The ITAT Mumbai, after considering the factual explanations provided by the assessee, held that the penalty under section 271(1)(c) was not justified. The tribunal emphasized that even though the addition was not challenged in the quantum proceedings, the penalty should be decided based on the reasonableness of the assessee's explanation. Consequently, the ITAT directed the AO to delete the penalty, allowing the appeal by the assessee.In conclusion, the ITAT Mumbai allowed the appeal by the assessee, overturning the penalty imposed under section 271(1)(c) of the Income Tax Act for the assessment year 2014-15.