Penalty under Section 271(1)(c) not justified when assessee voluntarily withdrew LTCG exemption claim on penny stocks

The ITAT Raipur held that penalty u/s 271(1)(c) was not justified where the assessee voluntarily withdrew its claim for LTCG exemption u/s 10(38) on penny stock transactions and offered the amount as income from other sources in response to notice u/s 148. The AO failed to establish concealment or furnishing of inaccurate particulars. The assessee's withdrawal of the exemption claim was done to avoid litigation, not to conceal income. Since penalty proceedings u/s 271(1)(c) are quasi-criminal in nature, conclusive proof of false claims is required. The appeal was decided in favor of the assessee.

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Issues Involved:
1. Imposition of penalty under Section 271(1)(c) of the Income-tax Act, 1961.
2. Legitimacy of the assessee's claim for exemption under Section 10(38) of the Income-tax Act, 1961.
3. Genuineness of the Long Term Capital Gain (LTCG) transactions on the sale of shares of "CCL International Ltd."
4. Whether the assessee's withdrawal of the exemption claim was voluntary and bona fide.
5. Evaluation of the documentary evidence provided by the assessee.
6. The role of the surrounding circumstances and modus operandi in determining the genuineness of the transactions.
7. The applicability of judicial precedents and the principles established therein.

Detailed Analysis:

1. Imposition of Penalty under Section 271(1)(c):
The Assessing Officer (A.O.) imposed a penalty of Rs. 93,88,640/- on the assessee for deliberate concealment of income under Section 271(1)(c) of the Income-tax Act, 1961. The penalty was based on the conclusion that the assessee had concealed particulars of income by claiming exemption of LTCG on the sale of shares of "CCL International Ltd." The Commissioner of Income-Tax (Appeals) [CIT(A)] upheld the penalty, stating that the assessee's claim was not bona fide and that the assessee had voluntarily offered the income only after being cornered by the Department.

2. Legitimacy of the Assessee's Claim for Exemption:
The assessee initially claimed exemption under Section 10(38) for LTCG of Rs. 2,78,42,063/- on the sale of shares of "CCL International Ltd." in its original return of income filed on 26.07.2014. The claim was later withdrawn by the assessee through a letter dated 23.03.2020, stating that the withdrawal was to avoid protracted litigation and to buy peace of mind after the exemption claim was rejected in the case of a co-parcener.

3. Genuineness of the LTCG Transactions:
The A.O. questioned the genuineness of the LTCG transactions, labeling "CCL International Ltd." as a penny stock and alleging that the assessee had laundered unaccounted money through bogus LTCG transactions. The A.O. observed that the shares were purchased through off-market transactions and later sold at significantly higher prices, which was against human probabilities. The CIT(A) supported this view, emphasizing that the assessee's transactions were part of a pre-arranged scheme to convert black money into white money.

4. Voluntariness and Bona Fides of Withdrawal:
The assessee argued that the withdrawal of the exemption claim was voluntary and bona fide, prompted by the desire to avoid litigation and based on the rejection of a similar claim in a related case. The assessee had paid the due taxes before filing the letter of withdrawal. The Tribunal found that the A.O. failed to dislodge the bona fides of the assessee's explanation and that the withdrawal was made in good faith.

5. Evaluation of Documentary Evidence:
The assessee provided extensive documentary evidence to substantiate the genuineness of the transactions, including purchase invoices, demat account statements, bank statements, and contract notes. The Tribunal observed that the A.O. did not disprove the authenticity of these documents and relied on general observations and modus operandi to draw adverse inferences.

6. Surrounding Circumstances and Modus Operandi:
The A.O. referred to the modus operandi adopted for laundering money through penny stocks, citing the bell-shaped trading pattern, the financials of "CCL International Ltd.," and the offline purchase of shares. However, the Tribunal noted that the A.O. failed to conclusively establish the involvement of the assessee or its broker in price rigging or any fraudulent activities.

7. Applicability of Judicial Precedents:
The Tribunal considered various judicial precedents, including the Supreme Court's rulings in cases such as CIT v. Suresh Chandra Mittal and MAK Data (P) Ltd. v. CIT. The Tribunal distinguished the facts of the present case from these precedents, emphasizing that the assessee had provided a bona fide explanation and that the A.O. had not discharged the burden of proving concealment.

Conclusion:
The Tribunal concluded that the penalty under Section 271(1)(c) was not justified as the A.O. failed to disprove the authenticity of the documentary evidence provided by the assessee and did not establish that the assessee's explanation was not bona fide. The Tribunal set aside the order of the CIT(A) and quashed the penalty of Rs. 93,88,640/-. The appeal of the assessee was allowed.

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