2006 (7) TMI 155 - HC - Income Tax

Penalty levied u/s 271(1)(c) - concealment of income and inaccurate particulars - disallowance of loss - falsely claimed deduction of capital loss in the profit and loss account and fraudulently suppressed its closing stock by claiming double deduction in the trading account - HELD THAT - We found substance in the other arguments of Mr. Patel on this issue. All the facts were disclosed before the authorities. Explanation was offered which has not found favour with the authorities. But simply on that ground penalty under section 271(1)(c) cannot be levied. The Income-tax Officer has rightly not invoked the provisions of Explanation 1 to section 271(1)(c). The burden was not therefore on the assessee to discharge. The decision of this court in Sarabhai Chemicals case 2002 (2) TMI 44 - GUJARAT HIGH COURT and Explanatory Note on Explanation 1 to section 271(1)(c) would certainly help the assessee s case inasmuch as the explanation offered by the assessee is bona fide and all the facts relating to the explanation of total income have been disclosed by the assessee. We are therefore of the view that there is no case of levy of penalty u/s 271(1)(c) of the Act in relation to the disallowance of loss claimed by the assessee and it is accordingly deleted. We are of the view that the Tribunal has rightly decided this issue. The Tribunal as a matter of fact found that the double claim for an amount of Rs. 1, 00, 112 was made due to some bona fide mistake on the part of the assessee. No sooner an entry was made in the trading account of this year it was to affect the opening stock in the next year and hence it could have been easily found out and would not have resulted in any advantage to the assessee. We therefore confirm the order of the Tribunal on this issue and hold that the penalty relatable to the disallowance of loss of Rs. 1, 00, 112 is rightly deleted by the Tribunal. In the result both the questions referred to us at the instance of the assessee as well as the Revenue are answered in favour of the assessee and against the Revenue.

Issues Involved:
1. Justification of penalty under section 271(1)(c) of the Income-tax Act, 1961, for the claim of Rs. 1,83,492/-.
2. Justification of penalty cancellation for the claim of Rs. 1,00,112/-.

Detailed Analysis:

Issue 1: Justification of Penalty for Rs. 1,83,492/-
Facts and Background:
The assessee, a private limited company, claimed a loss of Rs. 1,83,492/- due to fire damage to its plant and machinery. The insurance company paid Rs. 84,462/-, but the Income-tax Officer (ITO) noted the written down value was only Rs. 74,349/-, resulting in a profit under section 41(2) of Rs. 10,112/-. The ITO disallowed the loss claimed by the assessee, and the Commissioner of Income-tax (Appeals) upheld this disallowance, directing the ITO to consider the insurance amount in the succeeding year.

Tribunal's Findings:
The Tribunal confirmed the penalty for the claim of Rs. 1,83,492/-, stating that the assessee dishonestly claimed this as a trading loss in the profit and loss account. The Tribunal held that the burden of proof was on the Revenue to show the assessee's conduct was dishonest or contumacious.

Court's Analysis:
The court disagreed with the Tribunal's confirmation of the penalty. It referenced several legal precedents, including CIT v. Vania Silk Mills P. Ltd. and CIT v. Mrs. Grace Collis, to establish that the extinguishment of rights due to asset destruction does not constitute a transfer under section 45. The court found the assessee's belief that the loss was of a revenue nature, based on advice from its chartered accountant, to be bona fide. The court noted that all facts were disclosed, and the explanation, although not accepted, was bona fide. The ITO did not invoke Explanation 1 to section 271(1)(c), which would have shifted the burden of proof to the assessee.

Conclusion:
The court held that there was no case for the levy of penalty under section 271(1)(c) for the disallowance of Rs. 1,83,492/-. The penalty was accordingly deleted.

Issue 2: Justification of Penalty Cancellation for Rs. 1,00,112/-
Facts and Background:
The assessee claimed a loss of Rs. 1,00,112/- due to fire damage to its stock, which was doubly claimed in the accounts. The ITO added this amount back to the income, and the Commissioner of Income-tax (Appeals) confirmed the addition, noting the double claim.

Tribunal's Findings:
The Tribunal found the double claim to be a bona fide mistake and canceled the penalty. It noted that the mistake would affect the opening stock of the succeeding year and could have been easily detected, resulting in no advantage to the assessee.

Court's Analysis:
The court agreed with the Tribunal's finding that the double claim was a bona fide mistake. It referenced the decision in National Textiles v. CIT, emphasizing that penalty requires proof of conscious concealment or furnishing of inaccurate particulars. The court also cited Sarabhai Chemicals P. Ltd. v. CIT, stating that a bona fide explanation with full disclosure of facts negates the application of Explanation 1 to section 271(1)(c).

Conclusion:
The court confirmed the Tribunal's decision to cancel the penalty for the disallowance of Rs. 1,00,112/-, holding that the penalty was rightly deleted.

Final Judgment:
Both questions referred to the court were answered in favor of the assessee and against the Revenue. The penalties for both claims were not justified and were accordingly deleted. The reference was answered without any order as to costs.

← Previous Next →