2015 (12) TMI 43 - AT - Income Tax

Penalty u/s.271(1)(C) - receipts on sale of paintings was not disclosed as “income” in the return of income filed - Held that:- In the penalty proceedings, the Assessee pointed out that the sale of paintings was not done by him as an adventure in the nature of trade. The paintings were kept for years over because of his aesthetic sense. It gave him tremendous pleasure and pride of profession. The paintings were therefore his “personal effects”. This aspect has not been disputed by the AO. In the statement recorded u/s.131 of the Act by the AO in the course of assessment proceedings, in answer to Question No.11 the assessee has stated that the paintings are made as per creation desire of the assessee. Therefore, it would be proper to accept the contention of the assessee that the paints were his “personal effects”.

The AO has not disputed the position that the source of funds for investment in units of mutual funds was the sale of paintings which were personal effects and therefore income from sale of paintings were capital receipts not chargeable to tax. Therefore, the plea of the assessee that the on the basis of professional advice, receipts from sale of paintings was treated as capital receipt not chargeable to tax, is found to be acceptable. Therefore the plea of the assessee that receipts from sale of paintings were not offered to tax on a bona fide belief is acceptable. Consequential imposition of penalty in so far as, it relates to the addition of ₹ 60,99,454/-, in our view is unsustainable, as there was neither concealment of particulars of income or furnishing of inaccurate particulars of income.

The show cause notice u/s. 274 of the Act is defective as it does not spell out the grounds on which the penalty is sought to be imposed. Following the decision of the Hon’ble Karnataka High Court in the case of CIT & Anr. v. Manjunatha Cotton and Ginning Factory [2013 (7) TMI 620 - KARNATAKA HIGH COURT ], we hold that the orders imposing penalty in all the assessment years have to be held as invalid and consequently penalty imposed is cancelled. - Decided in favour of assessee.