2009 (4) TMI 937 - AT - Income Tax

Summary

Issues Involved:
1. Penalty u/s 271(1)(c) of the Income Tax Act, 1961.
2. Deemed Dividend u/s 2(22)(e) of the Income Tax Act, 1961.
3. Disallowance of Deduction u/s 80HHC of the Income Tax Act, 1961.

Summary:

1. Penalty u/s 271(1)(c) of the Income Tax Act, 1961:
The assessee challenged the penalty of Rs. 1,01,58,576/- levied u/s 271(1)(c) for alleged concealment of income. The AO had initiated penalty proceedings after disallowing the deduction u/s 80HHC and treating a credit balance from a sister concern as deemed dividend u/s 2(22)(e). The CIT(A) upheld the penalty related to the deemed dividend but noted that the Tribunal had set aside the disallowance of deduction u/s 80HHC for fresh adjudication.

2. Deemed Dividend u/s 2(22)(e) of the Income Tax Act, 1961:
The AO treated Rs. 59,25,916/- out of the total credit balance from M/s. Aagam Design Broderies Pvt. Ltd. as deemed dividend since the partners of the assessee firm had substantial interest in the said company. The Tribunal had earlier confirmed this addition based on the decision in Nikko Technologies (India) Pvt. Ltd. However, the Special Bench in ACIT vs. Bhaumic Colour Pvt. Ltd. later held that deemed dividend can only be assessed in the hands of a shareholder who is both the registered and beneficial shareholder. The assessee argued that it was under a bona fide belief that the amount was not taxable as deemed dividend since the shares were held by the partners and not the firm.

3. Disallowance of Deduction u/s 80HHC of the Income Tax Act, 1961:
The AO had disallowed the deduction u/s 80HHC due to negative income from export business after excluding export incentives. However, the CIT(A) noted that the Tribunal had set aside the disallowance for fresh adjudication in light of retrospective amendments to Section 80HHC by the Taxation Laws (Amendment) Act, 2005. The AO subsequently allowed the deduction u/s 80HHC, making the penalty on this ground unsustainable.

Conclusion:
The Tribunal found that the penalty related to the disallowance of deduction u/s 80HHC was not sustainable as the deduction was later allowed. Regarding the deemed dividend, the Tribunal noted that there was a reasonable justification for the assessee not showing it as deemed dividend in its return, given the subsequent clarification by the Special Bench. The Tribunal concluded that there was no concealment or furnishing of inaccurate particulars of income by the assessee. Therefore, the penalty levied was not justified, and the appeal of the assessee was allowed.

Order pronounced on 17.04.2009.