Penalty under Section 271(1)(c) not sustainable when assessee provides bonafide explanation with documentary evidence for Section 54F deduction claim.

Dy. Commissioner of Income Tax Versus Sahil Vachani, Delhi

Dy. Commissioner of Income Tax Versus Sahil Vachani, Delhi - TMI The core legal issue considered in this appeal is whether the Commissioner of Income Tax (Appeals) was correct in deleting the penalty of Rs. 1,45,59,592/- levied under section 271(1)(c) of the Income Tax Act, 1961, on account of furnishing inaccurate particulars of income relating to the deduction claimed under section 54F of the Act for the Assessment Year 2016-17.

The principal legal questions examined include:

• Whether the claim of deduction under section 54F, which was subsequently disallowed due to non-compliance with statutory conditions, attracts penalty under section 271(1)(c) for furnishing inaccurate particulars of income.
• Whether the assessee concealed particulars of income or furnished inaccurate particulars within the meaning of section 271(1)(c) by claiming deduction without actual purchase or construction of a residential house within the prescribed time.
• Whether the explanation offered by the assessee regarding delay in construction attributable to the builder constitutes a bona fide explanation sufficient to negate penalty liability.
• Whether the Tribunal can rely on facts not recorded in the assessment or penalty orders or gathered from external/public domain sources without confronting the assessee.
• Whether the penalty can be sustained when the claim is merely rejected by the Assessing Officer on grounds of non-compliance with section 54F.
• Whether the limb of penalty can be changed from 'furnishing inaccurate particulars' to 'concealment of income' by the Tribunal when the Assessing Officer invoked only the former.

Issue-wise Detailed Analysis:

1. Applicability of Penalty under Section 271(1)(c) for Wrong Claim of Deduction under Section 54F

Legal Framework and Precedents: Section 271(1)(c) penalizes concealment of particulars of income or furnishing inaccurate particulars thereof. The Hon'ble Supreme Court in CIT vs. Reliance Petroproducts Pvt. Ltd. (322 ITR 158) clarified that mere disallowance of a claim or rejection of a deduction does not automatically attract penalty under section 271(1)(c) if the assessee has disclosed all relevant particulars and the claim was bona fide. The Court emphasized that if the details furnished in the return are not inaccurate or do not amount to concealment, penalty provisions should not be invoked merely because the claim was not accepted by the revenue.

Court's Reasoning and Application: The Judicial Member relied on this precedent and noted that the assessee had disclosed all relevant details, including the long-term capital gains and the agreements evidencing the intention to purchase and construct a residential house. The claim under section 54F was made in good faith based on the agreements and payments made. The subsequent rejection was due to non-completion of construction within the stipulated time, a statutory condition for the deduction.

The assessee surrendered the deduction during assessment and paid the due taxes with interest, indicating bona fide conduct. Hence, the penalty for furnishing inaccurate particulars was not attracted because there was no concealment or inaccurate particulars at the time of filing the return.

Competing Arguments and Findings: The Revenue contended that the assessee never owned up to the ineligibility at the time of filing the return and delayed disclosure until confronted, thus attracting penalty. The Accountant Member, dissenting, emphasized that the assessee was a director of the builder company, and the delay in construction was not beyond the assessee's control. He relied on public domain information to assert that the particular property was not constructed or sanctioned as claimed, indicating a bogus claim. The Accountant Member held that the assessee concealed particulars and furnished inaccurate particulars deliberately, thus penalty was justified.

Conclusion: The Judicial Member found the assessee's explanation and disclosure sufficient to negate penalty liability, applying the principle from Reliance Petroproducts. The Accountant Member found concealment and inaccurate particulars, relying on external facts and absence of corroborative evidence from the assessee, thus sustaining penalty.

2. Treatment of Explanation Regarding Delay in Construction

Legal Framework: Explanation 1 to section 271(1)(c) raises a rebuttable presumption of concealment or furnishing inaccurate particulars when there is difference between returned and assessed income. The onus lies on the assessee to prove bona fide explanation with corroborative evidence.

Court's Reasoning: The Judicial Member accepted the assessee's explanation that delay was due to the builder's default and that the assessee had made payments and agreements in good faith. The assessee's surrender of deduction and payment of taxes with interest further supported bona fide conduct.

Conversely, the Accountant Member found the explanation unsubstantiated, noting absence of approved construction plans or completion certificates for the specific property, and that the builder was controlled by the assessee. He concluded that the assessee knowingly made a bogus claim and failed to discharge the onus to rebut the presumption under Explanation 1.

Application to Facts: The Judicial Member emphasized that penalty cannot be imposed merely because the claim was disallowed; the explanation and disclosure must be considered. The Accountant Member stressed that without documentary evidence, the explanation is fanciful and insufficient.

Conclusion: The Judicial Member held the explanation bona fide and penalty unwarranted. The Accountant Member found the explanation inadequate and upheld penalty.

3. Reliance on External/Public Domain Facts by the Tribunal

Legal Framework: It is settled law that the Tribunal cannot base its decision on facts not recorded in the assessment or penalty orders or not confronted to the assessee. The Supreme Court in Kishan Chand Chella Ram vs. CIT (125 ITR 713) held that cross-examination is necessary when relying on third-party statements not connected with the assessee.

Court's Reasoning: The Judicial Member held that the Accountant Member erred in relying on Google search and public domain information without confronting the assessee. Such reliance violates principles of natural justice and is impermissible.

Conclusion: The Tribunal cannot bring new facts on record gathered from external sources without confronting the assessee. The Judicial Member answered negatively to questions whether the Tribunal can travel beyond facts recorded or bring new external facts without confrontation.

4. Whether Penalty Can Be Sustained When Claim Is Merely Rejected on Non-Compliance of Section 54F

Legal Framework: Mere rejection of a claim for deduction on grounds of non-compliance with statutory conditions does not attract penalty under section 271(1)(c) if the claim was bona fide and all particulars were disclosed. This principle is reinforced by the Reliance Petroproducts judgment.

Court's Reasoning and Application: The Judicial Member held that since the assessee disclosed all relevant facts and the claim was made in good faith, the penalty cannot be sustained merely because the claim was rejected by the Assessing Officer.

Conclusion: The penalty is not sustainable on the basis of mere disallowance of deduction under section 54F.

5. Whether Tribunal Can Change the Limb of Penalty from Furnishing Inaccurate Particulars to Concealment of Income

Legal Framework: The penalty under section 271(1)(c) can be levied for either concealment of particulars of income or furnishing inaccurate particulars of income. However, the limb invoked by the Assessing Officer at the time of recording satisfaction is determinative. The Tribunal should not change the basis of penalty without jurisdiction or proper record.

Court's Reasoning: The Judicial Member held that since the Assessing Officer invoked penalty only for furnishing inaccurate particulars, the Tribunal cannot change the limb to concealment of income.

Conclusion: This question was answered in the negative and held not to arise in the facts of the case.

Significant Holdings and Core Principles:

'Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the revenue, that by itself would not, in our opinion, attract the penalty under section 271(1)(c). If we accept the contention of the revenue then in case of every return where the claim made is not accepted by Assessing Officer for any reason, the assessee will invite penalty under section 271(1)(c). That is clearly not the intendment of the Legislature.'

'The Tribunal cannot travel beyond the facts recorded in the orders of the authorities below or bring new facts on record gathered from external sources/public domain without confronting the same to the assessee.'

'Explanation 1 to section 271(1)(c) raises a rebuttable presumption of concealment or furnishing inaccurate particulars when there is difference between returned and assessed income. The onus lies on the assessee to prove bona fide explanation with corroborative evidence.'

'Penalty under section 271(1)(c) is a civil liability and willful concealment is not an essential ingredient. However, absence of plausible explanation or submission of false explanation attracts penalty.'

Final Determinations:

• The penalty levied under section 271(1)(c) for furnishing inaccurate particulars of income with respect to the deduction claimed under section 54F was rightly deleted by the Commissioner of Income Tax (Appeals) as the assessee had made a bona fide claim supported by agreements and payments, and had disclosed all relevant particulars in the return of income.
• The assessee's surrender of the deduction and payment of taxes with interest during assessment proceedings further negated the applicability of penalty.
• The Tribunal is not empowered to rely on facts outside the record of the assessment or penalty proceedings or external sources without confronting the assessee.
• The penalty cannot be sustained merely because the claim was disallowed for non-compliance with statutory conditions of section 54F.
• The limb of penalty invoked by the Assessing Officer cannot be altered by the Tribunal.
• However, on dissent, the Accountant Member held that the assessee had concealed particulars and furnished inaccurate particulars deliberately, relying on the control over the builder and absence of corroborative evidence, thus sustaining penalty.
• The Third Member concurred with the Judicial Member, thereby dismissing the Revenue's appeal and upholding deletion of penalty.