2012 (8) TMI 993 - AT - Income Tax

Penalty levied u/s. 271(1)(c) - omission or commission on part of the assessee-company - Held that - In the case under consideration, assessee-company was cheated by its employees and the AO has admitted the said fact by allowing defalcation in subsequent AY. In these peculiar circumstances, if the assessee could not support the claim made by it, during the assessment proceedings, it cannot be held that it had filed inaccurate particulars. Return of income, for the A.Y.under consideration had been filed before the fraud was be detected. So, if wrong claims were made by the assessee-company, on the basis of the material supplied by the employee-CA, penal provisions should not have been invoked. Lodging of a police complaint and subsequent arrest of the ex-employee of the company prove that assessee company had no role in filing inaccurate particulars rather it was a victim of a fraud. Penalties under the Act are imposed for some omissions and commissions. In our opinion, in the case under consideration it cannot held that there was any omission or commission on part of the assessee-company for which it should have been visited by penalty u/s. 271(1)(c) of the Act.

Summary

Issues:
1. Imposition of penalty under section 271(1)(c) of the Income Tax Act on sundry creditors, income stripping, non-genuine year-end provisions, and payment made to non-genuine parties.
2. Deletion of penalty by the First Appellate Authority (FAA) and challenge by the Assessing Officer (AO).
3. Consideration of fraud committed by employees leading to inaccuracies in the financial records.
4. Justification for not imposing penalty due to the circumstances of the fraud and the actions taken by the company.
5. Analysis of the legal infirmities in the FAA's decision and the final judgment by the Appellate Tribunal ITAT Mumbai.

Analysis:
1. The case involves the imposition of a penalty under section 271(1)(c) of the Income Tax Act on various grounds, including sundry creditors, income stripping, non-genuine year-end provisions, and payments to non-genuine parties. The AO imposed the penalty based on these additions/disallowances made during the assessment proceedings.
2. The FAA deleted the penalty after considering the submissions of the assessee and the assessment orders. The AO challenged this deletion specifically regarding four items, which led to the appeal before the ITAT Mumbai.
3. The company was a victim of a fraud committed by its employees, resulting in inaccuracies in the financial records. The fraud was detected in 2005, leading to a police complaint and subsequent actions by the company to rectify the situation.
4. The ITAT Mumbai held that due to the circumstances of the fraud and the actions taken by the company, it was not a fit case for imposing a penalty under section 271(1)(c). The company was deemed a victim of the fraud rather than a perpetrator, and penalties are typically imposed for omissions and commissions, which were not evident in this case.
5. The ITAT Mumbai upheld the FAA's decision to delete the penalty, citing the reliance on legal precedents and the unique circumstances of the case where the company was defrauded by its employees. The judgment dismissed the appeal filed by the AO, concluding that the penalty imposition was not justified given the situation. The order was pronounced on 10th August 2012 by the ITAT Mumbai.