2025 (3) TMI 1005 - HC - Income Tax

Penalty under Section 271(1)(c) requires strict liability standard, not willful concealment for tax violations

Principal Commissioner Of Income Tax 5, Kolkata Versus Ram Awatar Dhoot

Calcutta HC held that ITAT's observation requiring stricter culpability standard for penalty under Section 271(1)(c) was legally unsustainable. The court ... Levy of penalty u/s 271 (1) (c) - addition of unexplained cash credit u/s. 68 on sale of shares of penny stock falsely claimed by the assessee as Long-Term Capital Gains exempt u/s 10(38) -Tribunal while granting relief to the assessee, made an observation that for levying penalty u/s 271 (1) (c), stricter yardstick of culpability is required to be established. HELD THAT:- This finding of ITAT, in our view, is not legally sustainable. We support our conclusion by placing reliance on the decision of Union of India & Ors. vs. Dharamendra Textile Processors & Others [2008 (9) TMI 52 - SUPREME COURT] held that the explanations appended to Section 271 (1) (c) of the Income Tax Act entirely indicates the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing return. It was further held that the judgment in Dilip N. Shroff [2007 (5) TMI 198 - SUPREME COURT] has not considered the effect and relevance of Section 276-C of the Income Tax. The object behind the enactment of Section 271 (1) (c) read with explanations indicates that the said Section has been enacted to provide for a remedy for loss of revenue. The penalty under the proceedings is a civil liability and willful concealment is not an essential ingredient for attracting civil liability as in the matter of prosecution under Section 276-C of the Income Tax Act. Accordingly, it was held that the decision in Dilip N. Shroff’s case was not correctly decided but SEBI’s case has analyzed the legal position in the correct perspective. In the light of the decision in Dharamendra Textile Processessors, the observations made by the learned Tribunal which appears to suggest that the culpability has to be established does not lay down the correct legal principle. Therefore, we are inclined to set aside that portion of the order passed by Tribunal while interpreting the provisions of section 271 (1) (c) of the Act as it is not in consonance with the decision of Dharamendra Textile Processors [supra] With regard to the penalty which has been imposed on the assessee, considering that the penalty is less than Rs. 5 lakhs and the assessee being an individual, we do not propose to interfere with the relief granted by the learned Tribunal to the assessee by deleting the penalty. Therefore, to that extent the order is affirmed. Decided in favour of revenue. 1. ISSUES PRESENTED and CONSIDEREDThe Court considered several core legal questions regarding the imposition of penalty under Section 271(1)(c) of the Income Tax Act, 1961:(i) Whether the ITAT was justified in deleting the penalty imposed for unexplained cash credit under Section 68, related to the sale of shares of a penny stock falsely claimed as Long-Term Capital Gains (LTCG) exempt under Section 10(38).(ii) Whether the ITAT was correct in holding that a stricter proof of culpability was missing, despite the Assessing Officer establishing that the assessee showed bogus LTCG with the objective of tax evasion.(iii) Whether the ITAT erred in allowing the assessee's appeal by deleting the penalty, even though the High Court upheld the quantum addition in favor of the Department in a related case.(iv) Whether the ITAT erred in law and on facts by deleting the penalty, given the jurisdictional High Court's decision in a lead case covering the issue of bogus LTCG from penny stocks and exceptions laid in a CBDT Circular.2. ISSUE-WISE DETAILED ANALYSISIssue (i) and (ii): Justification for Deleting Penalty and Proof of CulpabilityThe relevant legal framework involves Section 271(1)(c) of the Income Tax Act, which deals with penalties for concealment of income or furnishing inaccurate particulars. The Court examined whether the ITAT was justified in its decision to delete the penalty imposed by the Assessing Officer.The Court noted that the ITAT observed that penalty proceedings are distinct from assessment proceedings concerning quantum addition. The ITAT held that a stricter yardstick of culpability is required for imposing penalties, and the possibility of the assessee being a bona fide beneficiary of LTCG could not be ruled out, thus giving the benefit of doubt to the assessee.The Court disagreed with the ITAT's interpretation, citing the Supreme Court's decision in Union of India & Ors. vs. Dharamendra Textile Processors & Others, which clarified that Section 271(1)(c) indicates strict liability for concealment or inaccurate particulars, and willful concealment is not an essential ingredient for civil liability under this section.The Court concluded that the ITAT's finding on the requirement of culpability was not legally sustainable, as the penalty under Section 271(1)(c) is a civil liability, not requiring proof of mens rea.Issue (iii) and (iv): Consistency with Prior High Court Decisions and CBDT CircularThe Court considered whether the ITAT's decision was consistent with prior High Court rulings and relevant CBDT Circulars. The High Court had previously upheld the quantum addition in a related case, which the ITAT seemed to overlook in its decision to delete the penalty.The Court emphasized that the ITAT cannot act as an appellate body over the High Court's decision in penalty proceedings. The ITAT's observations suggesting a need for culpability were inconsistent with established legal principles and the Supreme Court's interpretation.The Court also noted that the penalty provisions under Chapter XXI of the Income Tax Act differ from the prosecution provisions under Chapter XXII, which require a mental state for offenses. This distinction further supports the imposition of penalties without requiring proof of willful concealment.Ultimately, the Court found that the ITAT erred in its interpretation and application of the law, but chose not to interfere with the relief granted to the assessee, considering the penalty amount and the individual's status.3. SIGNIFICANT HOLDINGSThe Court held that the ITAT's interpretation of Section 271(1)(c) requiring proof of culpability was incorrect. The Court reaffirmed the principle that penalties under this section are a civil liability, not requiring proof of willful concealment, as established in Dharamendra Textile Processors.Despite the legal errors identified, the Court affirmed the ITAT's decision to delete the penalty due to the small amount involved and the individual status of the assessee. The Court allowed the appeal in part, answering the substantial questions of law in favor of the revenue but maintaining the relief granted to the assessee.