2008 (3) TMI 506 - AT - Income Tax

Summary

The core legal questions considered by the Tribunal in this appeal are:

(i) Whether the disallowance of loss of Rs. 51,61,875 on sale of units of UTI, held to be a speculative loss by the Tribunal, attracts penalty under section 271(1)(c) of the Income-tax Act, 1961;

(ii) Whether the Explanation 6 to section 271(1)(c), which bars penalty where adjustments are made under section 143(1)(a) with additional tax charged, is applicable in the present case;

(iii) Whether the assessee concealed particulars of income or furnished inaccurate particulars of income so as to justify levy of penalty under section 271(1)(c); and

(iv) The legal effect of the genuineness of the transaction, delivery of units, and the nature of the transaction as a "dividend stripping transaction" on the question of penalty.

Issue-wise Detailed Analysis:

1. Applicability of Penalty under Section 271(1)(c) for Disallowance of Speculative Loss

The legal framework involves section 271(1)(c) which empowers levy of penalty for concealment or furnishing inaccurate particulars of income. The Assessing Officer disallowed the loss on the ground that the transaction was speculative and not bona fide, relying on the Supreme Court decision in McDowell & Co. Ltd. which condemns tax avoidance devices. The CIT(A) and the Tribunal upheld the disallowance treating the loss as speculative.

The Tribunal found the transaction genuine but speculative, noting contradictory positions regarding interest on loan and timing of resolutions and entries, suggesting a pre-planned transaction to reduce tax liability. The Tribunal emphasized the knowledge of the assessee about dividend declarations and price movements, concluding the transaction was a device to claim loss while also claiming dividend benefits.

However, the assessee contended that the units were registered in its name, dividend was received and offered for tax, and the transaction was a recognized "dividend stripping transaction" which had been judicially upheld prior to amendments in section 94(7) effective from assessment year 2002-03. The Special Bench of the Tribunal in Wallfort Shares & Stock Brokers Ltd. and the Delhi High Court in Vikram Aditya & Associates recognized such transactions as genuine and losses allowable.

The Court noted that the physical delivery and registration of units in the assessee's name was established, which under section 43(5) excludes the transaction from being speculative (which requires settlement otherwise than by actual delivery). The Tribunal's finding of speculative nature was based on possession of units by ANZ Bank as security, but the assessee's status as registered holder and receipt of dividend supported bona fide transaction.

The Court held that a difference in opinion on the allowability of loss does not amount to concealment or furnishing inaccurate particulars. The assessee had disclosed all relevant facts and substantiated its claim with documentary evidence, thus no mens rea or guilty mind was established.

2. Applicability of Explanation 6 to Section 271(1)(c)

Explanation 6 to section 271(1)(c) exempts penalty where adjustments are made under section 143(1)(a) with additional tax charged. The CIT(A) relied on this to delete penalty, noting the original disallowance was by way of prima facie adjustment under section 143(1)(a).

The revenue challenged this, arguing the disallowance was ultimately confirmed under regular assessment proceedings under section 143(3), and penalty was levied based on that order, not the prima facie adjustment. The Tribunal agreed the CIT(A) erred in applying Explanation 6 since the prima facie adjustment was deleted by the Tribunal and the loss disallowance was confirmed in regular assessment.

However, the Tribunal found that even ignoring Explanation 6, penalty was not leviable as the assessee did not conceal particulars or furnish inaccurate particulars, and the explanation was substantiated.

3. Concealment of Particulars or Furnishing Inaccurate Particulars of Income

Explanation 1 to section 271(1)(c) defines circumstances where penalty can be levied, including failure to offer explanation, offering false explanation, or inability to substantiate explanation and failure to prove bona fide disclosure of material facts.

The Court analyzed whether Explanation 1 applied. It found the assessee had offered explanation supported by documentary evidence including letters from ANZ Bank, UTI certificates showing registration of units, board resolutions, and proof of dividend income offered to tax. The explanation was not found false by the Assessing Officer or appellate authorities, only not accepted as correct.

Judicial precedents were relied upon, including decisions holding that mere failure to convince the revenue of the correctness of claim does not amount to concealment or furnishing inaccurate particulars. The Gujarat High Court in National Textiles clarified that penalty requires conscious concealment or furnishing inaccurate particulars, not mere failure to prove explanation.

The Court distinguished between a false explanation and one that is not accepted but not disproved. The assessee's bona fide belief and full disclosure negated the presence of mens rea. The Tribunal's finding of speculative nature was a difference in opinion, not a finding of concealment or falsehood.

4. Treatment of Dividend Stripping Transactions and Judicial Precedents

The assessee's contention that the transaction was a dividend stripping transaction was supported by judicial authorities including the Delhi High Court and Special Bench of the Tribunal, which held that losses from such transactions prior to amendment of section 94(7) are allowable and do not constitute tax avoidance schemes.

The Supreme Court's decision in Azadi Bachao Andolan was cited to emphasize that transactions valid in law cannot be invalidated solely on the basis of motive or economic detriment. The Court reiterated that penalty cannot be imposed merely because the revenue's view differs from that of the assessee on the allowability of loss.

Conclusions:

The Tribunal concluded that the penalty under section 271(1)(c) was not leviable because:

- The assessee had disclosed all material facts and furnished accurate particulars of income;

- The explanation offered was substantiated and bona fide;

- The difference in opinion on the speculative nature of the transaction and allowability of loss does not amount to concealment or furnishing inaccurate particulars;

- Explanation 6 to section 271(1)(c) was not applicable as the final disallowance was under section 143(3), but even without that, penalty was not justified;

- The transaction was genuine with actual delivery and registration of units, and dividend income was declared and taxed;

- Judicial precedents support the allowability of such losses and the non-automatic imposition of penalty on disputed additions.

Significant Holdings:

"If after disclosing all the materials and after substantiating the claim based on such material merely because the view of the Assessing Officer or appellate authority is different than that of the assessee, it cannot be said that the assessee has concealed the particulars of income or has furnished inaccurate particulars of income for the purpose of levy of penalty under section 271(1)(c) of the Act."

"The phrase 'concealed the particulars of his income' or 'furnished inaccurate particulars of income' are not defined in the Act. Explanation 1 envisage a situation whereby the amount added or disallowed in computing the total income of any person as a result thereof shall be deemed to represent the income in respect of which particulars have been concealed only if the explanation is false or not substantiated and bona fide disclosure is not made."

"A difference in perception of viewing a transaction but cannot be branded as 'furnished inaccurate particulars of income' for the purpose of section 271(1)(c) of the Act."

"Where the assessee has made a claim after giving full particulars and the basis of its claim, the fact that such claim was found to be erroneous could not by itself be treated as justification for penalty."

"The transaction was genuine as ANZ Bank confirmed having sold the units to the assessee and bought the same from the assessee. The units were transferred in the name of the assessee and dividend was received and offered for taxation."

"The loss claimed on sale of units of UTI was disallowed as speculative loss, but penalty under section 271(1)(c) is not attracted where the assessee has disclosed all facts and bona fide claimed loss."

Final determination: The penalty under section 271(1)(c) imposed on the assessee for disallowance of loss on sale of units treated as speculative loss is not sustainable and is accordingly dismissed.