2006 (10) TMI 68 - AT - Income Tax

Penalty - Alleged that(i) assessee concealed his income (ii) assessee had shown the closing stock in the trading account and balance sheet at different figures - Held (i) allegation not sustained (ii) allegation is correct and penalty sustained

Summary

Issues Involved:
1. Validity of penalty proceedings under section 271(1)(c) due to lack of satisfaction recorded by the Assessing Officer.
2. Merit of the penalty imposed for concealment of income regarding unexplained cash credits.
3. Merit of the penalty imposed for the discrepancy in closing stock figures.

Issue-wise Detailed Analysis:

1. Validity of Penalty Proceedings under Section 271(1)(c):
The assessee contended that the penalty proceedings under section 271(1)(c) were invalid as the Assessing Officer did not record satisfaction in the assessment order. The assessee relied on several judicial decisions, including CIT v. Ram Commercial Enterprises Ltd. [2000] 246 ITR 568 (Delhi), which stated that the satisfaction must be recorded during the assessment proceedings. Conversely, the Department argued that recording satisfaction is not mandatory and cited decisions like Shyam Biri Works P. Ltd. v. CIT [2003] 259 ITR 625 (All).

The Tribunal noted conflicting judgments from different High Courts. The Delhi High Court emphasized the necessity of recording satisfaction, while the Allahabad and Madras High Courts held that a simple notation indicating initiation of penalty proceedings suffices. The Tribunal referred to the Supreme Court decision in CIT v. S. V. Angidi Chettiar [1962] 44 ITR 739, which supported the view that an endorsement at the foot of the assessment order is adequate to indicate satisfaction.

In this case, the Assessing Officer mentioned in the assessment order that "penalty proceedings are initiated separately under section 271(1)(c)," which the Tribunal found sufficient to establish that the Assessing Officer was satisfied during the assessment proceedings. Hence, the Tribunal rejected the assessee's contention and upheld the validity of the penalty proceedings.

2. Merit of the Penalty Imposed for Unexplained Cash Credits:
The assessee had unsecured loans totaling Rs. 8,70,000 and provided loan confirmations to the Assessing Officer. However, the assessee could not produce the creditors and subsequently offered the amount as income. The Tribunal examined whether this constituted concealment of income under Explanation 1 to section 271(1)(c).

The Tribunal found that the assessee had offered an explanation and substantiated it with loan confirmations. Since the explanation was not found to be false and the assessee disclosed all relevant facts, the case did not fall under Part A or Part B of Explanation 1. The Tribunal held that merely accepting the credit as income due to the inability to produce creditors does not amount to concealment of income, especially when full details and confirmations were provided. Consequently, the penalty for the unexplained cash credit of Rs. 8,70,000 was not justified.

3. Merit of the Penalty Imposed for Discrepancy in Closing Stock Figures:
The Assessing Officer found a discrepancy in the closing stock figures recorded in the trading account and the balance-sheet, amounting to Rs. 87,500. The assessee admitted having no explanation for this discrepancy and offered the amount as income.

Given the lack of explanation, the Tribunal applied Part A of Explanation 1 to section 271(1)(c), which states that failure to offer an explanation deems the income to be concealed. Therefore, the Tribunal upheld the penalty for the discrepancy in closing stock figures and directed the Assessing Officer to recompute the penalty on the amount of Rs. 87,500.

Conclusion:
The Tribunal partly allowed the assessee's appeal. The penalty for unexplained cash credits was canceled, but the penalty for the discrepancy in closing stock figures was upheld.