2024 (4) TMI 1027 - AT - Income Tax

Penalty under Section 271(1)(c) deleted after quantum additions removed in capital gains exemption case

Deputy Commissioner of Income Tax, Central Circle-1 (1), Ahmedabad Versus Sanjay Prataprai Mehta

ITAT Ahmedabad dismissed the department's appeal regarding penalty under Section 271(1)(c) for denial of capital gains exemption under Section 10(38) on ... Levy of penalty u/s 271(1)(c) - Denial of exemption of capital gains u/s 10(38) on account of sale of shares - company was not doing substantial business and not declaring dividend and accordingly disallowed the claim of exemption - penalty deleted by Ld. CIT(A) on the ground that since the issue in quantum proceedings has been decided in favour of the assessee by Hon’ble ITAT - HELD THAT:- It is a well settled law that once the additions made in quantum proceedings have been deleted, then there is no question of sustaining levy of penalty u/s 271(1)(c) of the Act. In the case of CIT v Shah Alloys [2012 (9) TMI 957 - GUJARAT HIGH COURT] the Gujarat High Court held that penalty need not be imposed when addition made, which was basis for penalty, was set aside. Also In the case of CIT v. Shishpal [2001 (9) TMI 41 - RAJASTHAN HIGH COURT] addition was made as unexplained investment under Section 69 and penalty was imposed under Section 271(1)(c).The aforesaid addition was deleted in quantum appeal. The High Court held that since the very foundation for imposition of penalty had become non-existent, penalty would not survive. Also in case of LRs Management. [2023 (5) TMI 351 - ITAT RAJKOT] it was held that Where quantum addition made by AO was deleted by Tribunal, there remained no basis for levy of penalty under Section 271(1)(c) of the Act. Thus once the quantum proceedings itself have been decided in favour of the assessee, there is no scope of levy of penalty under Section 271(1)(c) of the Act, we are here by dismissing the appeal filed by the Department. Issues Involved:1. Deletion of penalty u/s 271(1)(c) by Ld. CIT(A).2. Revenue's challenge against the deletion of penalty.Summary:1. Deletion of penalty u/s 271(1)(c) by Ld. CIT(A):The Revenue filed an appeal against the order of the Ld. CIT(A) for Assessment Year 2014-15, which deleted the penalty imposed u/s 271(1)(c) of the Income Tax Act. The brief facts reveal that the Assessing Officer (AO) disallowed the assessee's claim of exemption on capital gains amounting to Rs. 5,51,09,170/- u/s 10(38) on account of the sale of shares of M/s. Comfort Fincap Ltd., considering the company's business activities insubstantial. The Ld. CIT(A) initially sustained the AO's quantum additions, but the ITAT later deleted these additions, citing the lack of specific evidence proving the assessee's involvement in any collusion with entry operators or stockbrokers. The ITAT emphasized that 'income generated by the assessee cannot be held bogus only based on the modus operandi, generalisation, and preponderance of human probabilities.' The Tribunal referred to several judgments, including CIT vs. Sumitra Devi and Pr. CIT vs. Smt. Krishna Devi, to support its decision that mere suspicion or presumption without cogent material evidence cannot justify the addition.2. Revenue's challenge against the deletion of penalty:The AO levied a penalty u/s 271(1)(c) on the assessee, which was later deleted by the Ld. CIT(A) based on the ITAT's decision favoring the assessee in quantum proceedings. The Department appealed against this deletion, arguing that the ITAT's decision had been challenged before the Hon'ble Gujarat High Court. However, the Tribunal held that 'once the additions made in quantum proceedings have been deleted, then there is no question of sustaining levy of penalty under Section 271(1)(c) of the Act.' The Tribunal cited several judgments, including CIT v Shah Alloys, CIT v Atul Ltd., and CIT v Babul Harivadan Parikh, which consistently held that penalty cannot be imposed when the basis for such penalty (i.e., the addition) has been set aside. Consequently, the Tribunal dismissed the Department's appeal, affirming that 'there is no scope of levy of penalty under Section 271(1)(c) of the Act' once the quantum proceedings are decided in favor of the assessee.This Order pronounced in Open Court on 24/04/2024