2003 (6) TMI 186 - AT - Income Tax

Tribunal cancels penalties for changing basis of levy, deeming assessee's explanations reasonable.

The Tribunal allowed the appeals, deleting penalties under Section 271(1)(c) for all three assessment years. The penalties were not justified as the basis ... Penalty - For concealment of income Issues Involved:1. Penalty under Section 271(1)(c) for filing inaccurate particulars of income.2. Allegation of concealing particulars of income.3. Validity of notice issued under Section 271 read with Section 274.4. Intentional misallocation of expenses to claim higher deduction under Section 80-I.5. Onus on the Revenue to prove concealment or filing of inaccurate particulars of income.6. Invocation of Explanation 1 to Section 271(1)(c).Detailed Analysis:1. Penalty under Section 271(1)(c) for filing inaccurate particulars of income:The CIT(A) confirmed the AO's action of levying penalty under Section 271(1)(c) for allegedly filing inaccurate particulars of income. The Tribunal noted that the assessee had drawn up two separate P&L accounts for the factory and the head office, with disproportionate allocation of expenses, leading to an artificially inflated factory profit and higher deduction under Section 80-I. However, the Tribunal observed that the CIT(A) and the Tribunal, in the quantum appeal, had not made any observations suggesting a deliberate attempt by the assessee to claim a higher deduction by adopting foul means. Hence, the penalty was not justified.2. Allegation of concealing particulars of income:The CIT(A) alleged that the appellant not only filed inaccurate particulars but also concealed particulars of income. The Tribunal found that the basis for initiation and levy of penalty had changed between the assessment stage and the CIT(A) stage. The AO's view was that the separate P&L accounts were an artificial device, whereas the CIT(A) found that two separate lines of business were carried out. This change in basis diluted the grounds for penalty.3. Validity of notice issued under Section 271 read with Section 274:The CIT(A) alleged that the notice issued by the AO required the appellant to show cause for penalty under both concealment of income and filing inaccurate particulars. The Tribunal did not find it necessary to address this issue separately, as the penalty was deleted on other grounds.4. Intentional misallocation of expenses to claim higher deduction under Section 80-I:The AO observed that the factory profits were artificially inflated by diverting expenses from the factory account to the head office account to claim a higher deduction under Section 80-I. The CIT(A) directed the apportionment of expenses on a reasonable basis, considering different methods for different expenses. The Tribunal found that the assessee's stand was reasonable and not far-fetched or absurd, and there was no calculated design to claim a higher deduction by adopting foul means.5. Onus on the Revenue to prove concealment or filing of inaccurate particulars of income:The CIT(A) invoked Explanation 1 to Section 271(1)(c), alleging that the appellant failed to prove that the explanation offered was bona fide. The Tribunal noted that the Revenue did not challenge the CIT(A)'s factual findings before the Tribunal, and the basis for penalty initiation was diluted due to the change in findings between the AO and CIT(A). The Tribunal concluded that the assessee's explanation was valid and plausible, and the penalty was not justified.6. Invocation of Explanation 1 to Section 271(1)(c):The CIT(A) invoked Explanation 1 to Section 271(1)(c) for the first time, alleging that the appellant failed to prove the bona fides of the explanation offered. The Tribunal found that the penalty could not be sustained as the basis for initiation and levy of penalty had changed, and the assessee's explanation was reasonable and plausible.Conclusion:The Tribunal allowed the appeals, deleting the penalties under Section 271(1)(c) for all three assessment years, as the basis for initiation and levy of penalty had changed, and the assessee's explanation was found to be reasonable and plausible. The Tribunal did not find it necessary to address other arguments, such as the recording of satisfaction in the assessment order, as the penalties were deleted on the grounds discussed.