2026 (2) TMI 350 - AT - Income Tax

Penalty for recharacterisation of share sale proceeds as income versus long term capital gain deleted where no concealment found

Recharacterisation of share sale proceeds was contested as income while the assessee treated the amount as long term capital gain in the return; absence ... Penalty u/s. 271(1)(c) - addition u/s. 68 being the profit from the sale of shares - Recharacterisation of income - assessee has claimed the same amount on sale of shares and profit thereof as long term capital gain HELD THAT:- The fact remains that the assessee has taken this income as long term capital gain exemption while filing the income tax return for assessment year 2011-12 and thus the element of concealment does not appear in the present matter. Thought the quantum is confirmed while for invoking section 271(1)(c) the element of filing inaccurate particulars of income and concealment of particulars of income, these two conditions either has to be followed and substantiated by the AO while imposing penalty. But in the present case, both the limbs/conditions for invoking provisions of section 271(1)(c) does not appear. Thus, the penalty itself is not justifiable and the same is deleted. Appeal of the assessee is allowed. Issues: Whether penalty under section 271(1)(c) of the Income-tax Act, 1961 is justified where the assessee had disclosed the income in the return as long term capital gains but the Assessing Officer recharacterised it as business income and imposed penalty for concealment of particulars of income.Analysis: The issue requires examination of whether the statutory conditions for levying penalty under section 271(1)(c) are satisfied. The statutory framework contemplates punishment where there is concealment of particulars of income or furnishing of inaccurate particulars of income. Both the fact of non-disclosure or concealment and the inaccuracy of particulars must be established by the assessing authority to invoke the provision. In the present matter, the income was declared in the return as long term capital gains; the assessment proceedings involved a recharacterisation of that income as business income under section 68, but there is no finding that the income was not disclosed or that particulars were furnished inaccurately at the time of filing. The recharacterisation in assessment does not, by itself, establish concealment or furnishing of inaccurate particulars unless the essential elements for penalty are separately proved.Conclusion: Penalty under section 271(1)(c) is not sustainable because the elements of concealment of particulars of income and furnishing of inaccurate particulars of income are not established; decision in favour of the assessee.