PENALTY PROCEEDINGS ARE DISTINCT FROM THE ASSESSMENT PROCEEDINGS

[Mr. M. GOVINDARAJAN]

Case law referred:

Assistant Commissioner of Income Tax V. Varun Finstock Private Limited - (2010) 5 ITR (Trib) 271 (Ahmedabad)

In this case the assessee purchased 75800 shares of Shardul Securities Limited at the rate of Rs.22 per share for a total consideration of Rs.16,67,600. These shares were held as a closing stock as on March 31, 2001 when the market value fell to Rs. 4 per share. These shares were valued at Rs. 3,30,200 and were shown in the trading account as well as in the balance sheet at Rs. 3,03,200.

The assessee, thus, incurred a loss of Rs.13,64,4000. The Assessing Officer took the view that loss is a speculation loss in view of the provisions of the Explanation to Section 73 and allowed it to be carried forward for being set off against the speculation profit of the subsequent assessment years. On the basis of these facts the Assessing Officer initiated penalty proceeding under Sec. 271(1)(c) of the Income Tax Act, 1961. For this purpose he issued a show cause notice. The assessee submitted the written reply in which he explained that the assessee claimed the loss in the profit and loss account filed along with the return of income. In Schedule I to the profit and loss account, share trading has been shown where the details of purchase of above stock and the value of the same closing stock have been mentioned.   Therefore the assessee has disclosed all material facts required for computation of income. He further claimed that the above loss has not been claimed on the basis of any fact which is found to be false.  Neither the claim has been made by suppressing certain facts. The Assessing Officer did not accept the contention of the assessee and levied penalty of Rs. 5,39,620/- under Section 271(1)(c) of the Act.

The assessee filed appeal before the Commissioner of Income Tax (Appeals), the Commissioner of Income Tax (Appeals), considering the various case laws, set aside the penalty. The Tribunal considered the various decisions of the Courts on this issue relied on by the Commissioner of Income Tax (Appeals) and found that there are divergent opinions of court on the issue. Thus two opinions are possible in this issue. The disallowance is made purely on a question of law. In such a situation penalty under Section 271(1)(c) cannot be imposed. The Tribunal found that the appellant has claimed the loss in the profit and loss account filed along with the return of income. In Schedule I to the profit and loss account share trading has been shown where the details of purchase of the above stock and the value of closing stock has been mentioned. Therefore it can be said that the appellant had disclosed all the material facts required for computation of income. The above loss has not been claimed on the basis of any fact which is found to be false. Neither the claim has been made by suppression certain facts.

The Tribunal considered the decisions of the High Courts. In 'Commissioner of Income Tax V. Harshvardhan Chemicals and Mineral Limited' - [(2003) 259 ITR 212 = 2008 -TMI - 12163 - RAJASTHAN High Court] the High Court held that from the discussions it follows that such a deduction could be an arguable, controversial or a debatable question. In such a situation the claim could not be said to be false. If this were not so, it would become impossible for any assessee to raise any claims or claim any deductions which are debatable.  It is not certainly the intention of the Legislature to make punishable such claims or deductions under Section 271(1)(c), if they are not accepted.

In 'Commissioner of Income Tax V. S.P.K. Steels P. Ltd.,[(2004) 270 ITR 156 (MP) = 2008 -TMI - 10891 - MADHYA PRADESH High Court] the High Court held that the penalty is not leviable under Section 271(1)(c) in a case where loss is genuine but not allowed because of the deeming provisions of the Explanation to Sec. 73.

The Tribunal found that the appellant's case is squarely covered by the above said decisions of the High Courts. The Tribunal held that the penalty is not leviable in the case of the appellant where the claim of share trading loss has been disallowed. Accordingly the penalty levied by the Assessing Officer is cancelled.

The Tribunal analyzed the provisions of Sec. 271(1)(c). As per the provisions of Section 271(1)(c) the penalty under this section is leviable if the Assessing Officer is satisfied in the course of any proceedings under the Income Tax Act any person  has concealed the particulars of his income or furnished in accurate particulars of such income. The tribunal held that penalty proceedings and the assessment proceedings both are different.

There are two situations enshrined in Explanation 1 to Sec. 271(1)(c) as detailed below:

*  The first situation is where the assessee, in respect of any facts material to the computation of his total income, fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner to be false;

*  The second situation is where the assessee in respect of any facts material to the computation of his total income, offers an explanation which he is not able to substantiate and also fails to prove that such explanation was bona fide and that all the facts relating to the computation of total income have been disclosed by him.

The presumption available under Explanation 1 cannot be drawn unless in the case of the case of the assessee false under either of the two situations.

The tribunal further held that the presumption under Explanation 1 is rebuttable and not conclusive. The assessee can submit the explanation as the onus shifted on the assessee to prove that he has not concealed the particulars of the income. In this case the assessee has duly submitted the explanation. No cogent material or evidence was brought to which may prove that the Revenue has detected the concealment or the explanation submitted was a false one. There is no material to prove that the assessee was not able to substantiate its explanation. In this case the assessee has discharged his onus and has rebutted the presumptions available to the Revenue under Explanation 1 to Section 271(1)(c). No penalty under Section 271(1)(c) can be imposed on the assessee.   

The Department relied on the case 'Union of India V. Dharmendra Textile Processors' - [(2007) 295 ITR 244 (SC) = 2008 -TMI - 48039 - SUPREME COURT OF INDIA].  The Tribunal analyzed the said case law. In this case the Supreme Court has held that penalty under Section 271(1)(c) is a civil liability and that 'willful concealment' and 'mens rea' are not essential ingredients for attracting the civil liability as is the case in the matter of prosecution under Section 276 of the Act. The Tribunal observed that the Supreme Court nowhere held that if the addition is made, penalty is automatic. This judgment does not over rule the Explanations appended to section 271(1) (c). Thus the ratio laid down in this judgment was confined to treating the willful concealment as not essential for imposing penalty under section 271(1)(c) of the Act. Where an assessee genuinely makes a claim for a particular deduction by disclosing all the necessary facts relating to the same that cannot be regarded to be concealment even if the assessee's claim is rejected. This is settled law that penalty proceedings are distinct from the assessment proceedings and, therefore, if any addition is made, it does not mean that the penalty will automatically be levied. In the penalty proceedings the assessee is given an opportunity to explain his case if he successfully explains his position and is not trapped within the parameters of Section 271(1)(c) along with the Explanations deeming the concealment of income, penalty cannot be imposed. In this case the penalty has been imposed for concealment of income by the assessee by invoking the Explanation to Section 271(1)(c). Section 271(1)(c) deals with the two situations for imposing the penalty:

a)      Has concealed the particulars of his income; or

b)      Has furnished the inaccurate particulars of such income.

Explanation 1 is applicable only in case of first situation i.e., amount added or disallowed in computing the total income be deemed to represent the income in respect of which particulars have been concealed.

The Tribunal further analyzed the term 'inaccurate particulars'. 'Inaccurate particulars' means that the particulars have not been furnished in a correct/exact manner as is required to be furnished to determine the correct/exact manner as is required to be furnished to determine the correct income of the assessee chargeable to tax. At the time when the return was filed by the assessee, can the particulars submitted by him relating to the total income, be regarded to be incorrect. The claim made by theassessee is bona fide as there are two views possible on the applicability of Sec. 73 of the Act. Merely that the claim of the assessee was not accepted does not mean that the assessee be penalized.

The Tribunal confirmed the order of the Commissioner of Income Tax (Appeals) deleting the penalty imposed under Section 271(1)(c).