2002 (11) TMI 42 - HC - Income Tax

Whether in the light of the Explanation 1 to section 271(1)(c) the Tribunal is right in law and fact in cancelling the penalty levied on the assessee? - The two appellate authorities without adverting to the provisions of clause (B) of Explanation 1 to section 271(1) had observed that the Assessing Officer has not established that the assessee had concealed the particulars of the income or had furnished inaccurate particulars of its income. This is wrong. The assessee has to substantiate the explanation offered and the Assessing Officer has to enter a finding. In these circumstances we are of the view that the Assessing Officer must be directed to consider the question of imposition of penalty afresh and in accordance with law

Summary

Issues Involved:
1. Legality of the penalty levied under section 271(1)(c) of the Income-tax Act, 1961.
2. Burden of proof regarding concealment of income under Explanation 1 to section 271(1)(c).
3. Procedural fairness in penalty proceedings.

Issue-Wise Detailed Analysis:

1. Legality of the Penalty Levied Under Section 271(1)(c):
The primary issue was whether the Tribunal was correct in canceling the penalty imposed on the assessee under section 271(1)(c) of the Income-tax Act, 1961. The assessee, a partnership firm engaged in abkari business, filed a return disclosing an income of Rs. 11,91,800 for the assessment year 1985-86. During the assessment, the Assessing Officer (AO) found unexplained cash credits and initiated penalty proceedings under section 271(1)(c). The AO imposed a penalty of Rs. 3,65,000, which was subsequently canceled by the Commissioner of Income-tax (Appeals) and affirmed by the Tribunal. The court noted that the AO did not provide the assessee with an adequate opportunity to substantiate the credits, leading to the assessee agreeing to an addition of Rs. 5,87,438 as peak credit.

2. Burden of Proof Regarding Concealment of Income Under Explanation 1 to Section 271(1)(c):
The Revenue argued that the burden of proof was on the assessee to establish that the income added was not unaccounted income, as per Explanation 1 to section 271(1)(c). The court referenced the Supreme Court's decisions in Addl. CIT v. Jeevan Lal Sah and K.P. Madhusudhanan v. CIT, which support the view that the burden is on the assessee to substantiate their explanation. The court highlighted that the AO must provide an opportunity for the assessee to substantiate their claims, which was not done in this case.

3. Procedural Fairness in Penalty Proceedings:
The court emphasized the need for procedural fairness in penalty proceedings. The AO failed to consider the assessee's explanations and did not provide an opportunity to rebut the assertions made by some creditors. The first appellate authority and the Tribunal found that the AO did not establish the charge of concealment adequately. The court noted that penalty proceedings are distinct from assessment proceedings and require a fresh consideration of all available material. The court cited CIT v. D.K.B. and Co., which underscores the necessity for the Department to examine the acceptability of the assessee's explanation and record a finding.

Conclusion:
The court concluded that the AO must reconsider the penalty proceedings, taking into account Explanation 1(B) to section 271(1)(c) and providing the assessee with a reasonable opportunity to substantiate their case. The orders of the AO and the appellate authorities were set aside, and the matter was remitted to the AO for fresh disposal in accordance with the law. The court declined to answer the question referred and disposed of the income-tax referred case accordingly.