2025 (5) TMI 1390 - AT - Income Tax

Penalty levied u/s 271(1)(c) - addition of interest income reflected in Foreign Bank Account and interest income in respect of interest income from Standard Chartered Bank Mumbai - On the basis of information received by the Revenue about the existence of the Foreign Account reassessment proceedings were initiated in the case of JSY BSY and Assessee for the relevant assessment years - HELD THAT - There cannot be protective initiation/levy of penalty in case where addition is made on protective basis. It has been observed that the charge of concealment or furnishing inaccurate particulars of income can be made against a person in whose hands income taxed on substantive basis. We further note that in the present case the Revenue has not disputed the position that the income was taxed in the hands of the father of the Assessee (JSY) and that penalty u/s 271(1)(c) has also been levied in respect of the same. Therefore in the facts and circumstances of the present case penalty levied u/s 271(1)(c) of the Act in respect of interest income pertaining to the Foreign Bank Account added in hands of the Assessee on a protective basis could not have been sustained and was therefore rightly deleted by the CIT(A). Interest income from Standard Chartered Bank Fort Mumbai - We find that no finding has been returned by the CIT(A). However we have already noted that the Revenue has disputed that the above interest income has been brought to tax in the hands of the father of the Assessee. In case the same is excluded the interest income would fall below that taxable limit leading to no adverse tax impact. Therefore the question of levy of penalty under Section 271(1)(c) of the Act would not arise. Decided in favour of assessee.

The core legal questions considered in this batch of appeals and cross-objections pertain to the validity of penalty levied under Section 271(1)(c) of the Income Tax Act, 1961, in respect of income added on a protective basis in the hands of the Assessee for multiple assessment years. Specifically, the issues include:

1. Whether penalty under Section 271(1)(c) can be levied when the income addition is made on a protective basis and the same income has already been assessed in the hands of another person (the Assessee's father).

2. Whether the CIT(A) erred in deleting the penalty without requiring corroborative evidence from the Assessee regarding the nature of deposits in the Foreign Bank Account.

3. Whether the CIT(A) was correct in treating the assessment as protective, and whether penalty proceedings can be initiated on such protective assessments.

4. Whether reliance on judicial precedents, including the Supreme Court judgment in Lalji Haridas and High Court decisions, was appropriate in the facts of the case.

5. Whether the Revenue was entitled to proceed with penalty without providing an opportunity to the Assessing Director (AD) to call for remand reports or additional evidence.

6. Whether the penalty levied was valid in light of the monetary threshold specified in CBDT Circular No.09/2024.

Issue-wise Detailed Analysis:

1. Validity of Penalty on Protective Assessment:

Legal Framework and Precedents: Section 271(1)(c) of the Income Tax Act empowers the tax authorities to levy penalty for concealment of income or furnishing inaccurate particulars of income. However, the levy of penalty presupposes that the income has been conclusively assessed in the hands of the Assessee. Protective assessments are made to safeguard the Revenue's interest when there is a dispute as to the rightful owner of income. The principle that penalty cannot be levied on protective assessments has been upheld in several judicial pronouncements.

The CIT(A) relied on the Gujarat High Court decision in Bhailal Manilal Patel v. Commissioner of Income Tax, which held that initiation of penalty proceedings on protective assessments is impermissible. The Court observed that satisfaction required under Section 271(1)(c) cannot be reached when the Income Tax Officer himself believes the income does not belong to the person on whom penalty is sought to be levied but is added only as a protective measure.

Similarly, the Calcutta High Court in Commissioner of Income Tax v. Super Steel (Sales) Co. held that protective assessments cannot form the basis for penalty since the charge of concealment must be linked to substantive assessment of income in the hands of the person concerned.

Coordinate Bench decisions of the Tribunal in Abhay Kumar v. Assistant Commissioner of Income Tax and Gregory & Nicholas v. Assistant Commissioner of Income Tax also support this principle.

Court's Interpretation and Reasoning: The Tribunal noted that the Assessing Officer himself recorded that the interest income of GBP 5234.47 (equivalent to INR 3,54,910) from the Foreign Bank Account was offered and assessed in the hands of the Assessee's father (JSY). The addition of the same income in the hands of the Assessee was made purely on a protective basis to safeguard Revenue's interest pending final determination. Since the income was substantively assessed in the father's hands, the penalty levied on the Assessee for the same income could not be sustained.

The Tribunal concurred with the CIT(A) that penalty proceedings cannot be initiated or sustained on protective assessments. It emphasized that the basis for penalty is the requisite satisfaction that concealment or furnishing of inaccurate particulars has occurred, which cannot arise when the income is not conclusively attributed to the Assessee.

Application of Law to Facts: The penalty was levied @ 300% of tax sought to be evaded on interest income from the Foreign Bank Account and interest from Standard Chartered Bank. Since the income from the Foreign Bank Account was assessed in the father's hands and added protectively in the Assessee's hands, the penalty was rightly deleted. Regarding the smaller interest income from Standard Chartered Bank, the Tribunal found no adverse tax impact as it fell below taxable limits, negating the basis for penalty.

Treatment of Competing Arguments: The Revenue contended that the Assessee failed to submit corroborative evidence to establish the true nature of deposits and that the CIT(A) erred in relying on protective assessment principles and judicial precedents not applicable to the facts. The Tribunal rejected these contentions, noting that the Revenue did not dispute substantive assessment in the father's hands nor the penalty levied there. The Tribunal found no merit in the Revenue's argument that the CIT(A) should have called for remand reports or additional evidence before deleting penalty.

Conclusion: The penalty levied under Section 271(1)(c) on the Assessee for income added on a protective basis was unsustainable and rightly deleted by the CIT(A). The Tribunal confirmed this deletion for all assessment years on identical facts.

2. Requirement of Corroborative Evidence and Opportunity to Revenue:

Legal Framework and Precedents: The burden to prove concealment or furnishing inaccurate particulars lies on the Revenue. The initiation and sustenance of penalty require satisfaction based on evidence. The principles of natural justice require that the Revenue be given opportunity to examine additional evidence or call for remand reports if necessary.

Court's Interpretation and Reasoning: The Tribunal noted that the Revenue had sufficient material and did not dispute the substantive assessment in the father's hands. The CIT(A) and Tribunal found no justification for requiring further corroborative evidence from the Assessee or for remanding the matter. The protective nature of the assessment negated the basis for penalty, making further evidence unnecessary.

Application of Law to Facts: The Tribunal observed that the Revenue's failure to dispute substantive assessment or penalty levied in the father's case was determinative. The absence of additional evidence or remand was therefore not prejudicial to the Revenue's case.

Treatment of Competing Arguments: The Revenue's submission that the CIT(A) erred in not calling for remand or additional evidence was dismissed as the protective assessment nature precluded penalty in the Assessee's hands.

Conclusion: No error was found in the deletion of penalty without requiring corroborative evidence or remand.

3. Reliance on Judicial Precedents:

Legal Framework and Precedents: The CIT(A) and Tribunal relied on authoritative High Court and Supreme Court decisions to interpret the scope of penalty under Section 271(1)(c) in the context of protective assessments.

Court's Interpretation and Reasoning: The Tribunal found the reliance on the Gujarat and Calcutta High Court decisions appropriate and consistent with established legal principles. The Revenue's contention that the Supreme Court judgment in Lalji Haridas was distinguishable was noted, but the Tribunal found no merit in the Revenue's attempt to differentiate the facts.

Application of Law to Facts: The facts of the present case closely aligned with the principles laid down in the cited precedents regarding protective assessments and penalty.

Conclusion: The judicial precedents relied upon were correctly applied to the facts and supported deletion of penalty.

4. Applicability of Monetary Threshold for Filing Appeal:

Legal Framework: CBDT Circular No.09/2024 specifies monetary thresholds for filing appeals to the Tribunal to avoid frivolous litigation.

Court's Interpretation and Reasoning: The Assessee contended that the tax effect was below the threshold, rendering the Revenue's appeal bad in law. The Tribunal did not specifically elaborate on this point but dismissed the Revenue's appeals as devoid of merit.

Conclusion: The issue was raised but did not affect the Tribunal's ultimate dismissal of Revenue's appeals.

Significant Holdings:

"There cannot be any initiation of the penalty proceedings with respect to the protective assessment order. The aforesaid is supported by the decision of this Court in the case of Bankim J. Shah. In the said case also penalty was sought to be levied under Section 271(1) of the Act on the protective assessment and to that it is held that there cannot be any protective initiation of the penalty proceedings. It is further observed and held that in a given case a particular income belong to A or B and although the Income Tax Officer reaches to the conclusion that the said income belongs to one of them, he may make protective assessment on the other hearing regard to the fact that the matter was likely to be carried in appeal. It is observed that such a protective assessment may be permissible under the law but there cannot be protective initiation of the penalty proceedings."

"Before any penalty can be levied, the income has to be assessed as concealed income in the assessment of an assessee. Thereafter, in penalty proceedings, the competent authority has to probe into and decide whether there has been any concealment of income. But where there is a dispute as to whether such income allegedly concealed would be assessed in the hands of X or Y, unless the determination is made by the ITO, no charge of concealment can be made against the person in whose hands the income is added on protective basis."

Core principles established include that penalty under Section 271(1)(c) cannot be levied on income added protectively, and that substantive assessment in the hands of the person concerned is a prerequisite for penalty. The burden of proof lies on the Revenue to establish concealment or furnishing inaccurate particulars with requisite satisfaction. Protective assessments serve as a safeguard but do not create liability for penalty unless confirmed by substantive assessment.

Final determinations on each issue were that the penalty levied under Section 271(1)(c) on the Assessee for income added on a protective basis was unsustainable and rightly deleted. The appeals filed by the Revenue against the deletion of penalty were dismissed, and the cross-objections filed by the Assessee supporting the deletion were also dismissed as infructuous where applicable. This reasoning and conclusion were uniformly applied to all assessment years under consideration.

← Previous Next →