2006 (1) TMI 71 - HC - Income Tax

Penalty under section 271(1)(c) for cash credits quashed for failing to apply binding precedent and misreading law

The HC held that the Tribunal erred in upholding the penalty under section 271(1)(c) in respect of cash credits, because it failed to apply a binding ... Penalty under section 271(1)(c) - cash credits - concealment or furnishing inaccurate particulars of its income – Whether the Tribunal was right in upholding the penalty under section 271(1)(c) in respect of cash credit - held that:- It is an admitted position that the decision of this court in the case of CIT v. Manu Engineering Works [1978 (9) TMI 18 - GUJARAT HIGH COURT] had been pressed into service on behalf of the applicant-Revenue (assessee?) before the Tribunal. As can be seen from the impugned order of the Tribunal dated April 28, 1994, though the Tribunal had set out the citation in the list of authorities reproduced in paragraph No. 5 of its impugned order no finding as such is recorded on the said issue. In such circumstances, it could be stated that the Tribunal has not adjudicated upon the said contention, or it could be stated that once the contention was raised and recorded by the Tribunal it is deemed to have been rejected in the absence of any specific finding. In the facts of the present case the subtle difference between the two stages would not matter. It is nobody's case and it is not possible to contend, that the Tribunal was not bound by a decision of the jurisdictional High Court, especially when its attention was invited to the said decision. Therefore, whether the Tribunal has recorded any finding or not becomes immaterial. In the facts as are available on the record it is apparent that the ratio of a decision of this court in the case of CIT v. Manu Engineering Works applies on all fours. The penalty order and the order of the Commissioner (Appeals) show that no clear-cut finding has been reached. The Tribunal has failed to appreciate this legal issue. Applying the ratio to the facts of the case it is apparent that the order of penalty cannot be sustained and the Tribunal could not have sustained the same. The Tribunal having failed to take into consideration and deal with the decision of the jurisdictional High Court it would constitute an error in law which goes to the very basis of the controversy involved and hence, the impugned order of the Tribunal cannot be upheld. Tribunal was not right in upholding the penalty under section 271(1)(c) Issues Involved:1. Whether the Tribunal was right in upholding the penalty under section 271(1)(c) in respect of cash credits aggregating to Rs. 61,000.2. Whether the Tribunal erred in rejecting the contention that the penalty was bad in law due to lack of a clear finding on 'concealment or furnishing inaccurate particulars of income.'3. Whether Explanation 1 to section 271(1)(c) could be relied upon despite not being invoked in the notice.4. Whether the Tribunal was correct in applying Explanation 1 in the absence of confirmations when confirmations were allegedly present.5. Whether section 271(1)(c) applies to cash credits in light of the Gujarat High Court decision in CIT v. Vinaychand Harilal.Detailed Analysis:1. Tribunal's Decision on Penalty under Section 271(1)(c):The Tribunal upheld the penalty under section 271(1)(c) in respect of cash credits aggregating to Rs. 61,000. The assessment year in question was 1981-82, and the assessment was framed under section 144 of the Act. The assessee did not succeed in quantum proceedings, and the addition of Rs. 61,000 was confirmed by the Tribunal.2. Lack of Clear Finding on 'Concealment or Furnishing Inaccurate Particulars':The assessee contended that the penalty could not be sustained due to the absence of a clear-cut finding by the Assessing Officer. The Assessing Officer and the Commissioner (Appeals) had stated that the assessee was liable for either concealment or furnishing inaccurate particulars of income. The assessee relied on the decisions in CIT v. Manu Engineering Works [1980] 122 ITR 306 and A.M. Shah and Co. v. CIT [1999] 238 ITR 415. The court observed that the Tribunal failed to appreciate this legal issue, and the penalty order and the order of the Commissioner (Appeals) did not reach a clear-cut finding.3. Reliance on Explanation 1 to Section 271(1)(c):The Tribunal's decision to apply Explanation 1 to section 271(1)(c) was challenged on the grounds that it was not invoked in the notice. The court noted that the Tribunal did not record any finding on this issue, which could constitute an error apparent on the record.4. Application of Explanation 1 in Absence of Confirmations:The Tribunal upheld the penalty by applying Explanation 1, despite the assessee's contention that confirmations of the creditors were present. The court found that the Tribunal did not adjudicate upon this contention, and the absence of a specific finding implied rejection of the contention.5. Applicability of Section 271(1)(c) to Cash Credits:The assessee argued that section 271(1)(c) does not apply to cash credits based on the Gujarat High Court decision in CIT v. Vinaychand Harilal [1979] 120 ITR 752. The court did not find it necessary to reproduce and deal with this contention due to the conclusion reached on the other issues.Conclusion:The court concluded that the Tribunal was not right in upholding the penalty under section 271(1)(c) of the Act. The penalty order and the order of the Commissioner (Appeals) were found to be unsustainable due to the lack of a clear-cut finding on whether the penalty was for concealment of income or furnishing inaccurate particulars. The court applied the ratio of the decision in CIT v. Manu Engineering Works [1980] 122 ITR 306 and held that the impugned order of the Tribunal could not be upheld. The question was answered in the negative, in favor of the assessee and against the Revenue, and the reference was disposed of accordingly with no order as to costs.