2010 (8) TMI 651 - AT - Income Tax

Penalty Exemption u/s 54 - It is fundamental that both the cases of concealment of income or furnishing of inaccurate particulars of income eventually lead to evasion of tax which is intended to be curbed by the penalty provision - It is noticed that both the assessees claimed exemption under section 54 on the ground that they had invested a sum of Rs. 2, 25, 00, 000 each with Sapphire for the purchase of flats for residential purposes Sapphire is is a closely held company fully controlled by the assessee and his family members - It is interesting to note that but for these two assessees no other party had booked the flat in such proposed building - The mala fide intention was existing ab initio for lodging a false claim of exemption towards purchase of flats which was in fact never intended - In the result both the appeals are allowed

Summary

Issues Involved:
1. Legitimacy of the exemption claim under section 54.
2. Imposition of penalty under section 271(1)(c) for concealment of income or furnishing inaccurate particulars.

Issue-wise Detailed Analysis:

1. Legitimacy of the Exemption Claim under Section 54:

Factual Matrix: The assessees, Umedraj K. Vardhan and Champalal K. Vardhan, claimed exemption under section 54 for long-term capital gains by investing in flats. The Assessing Officer (AO) found that the agreements for these flats were tentative, with no formal plan approved by the Bombay Municipal Corporation (BMC), and no commencement certificate issued. The AO noted that the flats were supposedly on different floors than those mentioned in the agreements, and no construction had commenced. Consequently, the AO deemed the transaction a sham and denied the exemption under section 54.

Tribunal's Decision on Exemption: Both assessees failed to secure exemption under section 54 at the Commissioner of Income-tax (Appeals) [CIT(A)] and Tribunal levels. The Tribunal upheld the AO's decision, noting that the transactions lacked genuineness and were intended to create a false ground for claiming exemption.

2. Imposition of Penalty under Section 271(1)(c):

Penalty Proceedings and Legal Principles: The AO imposed penalties under section 271(1)(c) for concealment of income, which were later deleted by the CIT(A). The Tribunal reviewed whether the assessees' claims were bona fide or mala fide. It emphasized that penalty and assessment proceedings are distinct, and mere disallowance of a claim does not automatically lead to penalty. The Tribunal referred to the Supreme Court's judgment in CIT v. Reliance Petroproducts (P.) Ltd., which stated that making an unsustainable claim does not amount to furnishing inaccurate particulars of income.

Explanation 1 to Section 271(1)(c): The Tribunal analyzed Explanation 1, which deems income to be concealed if the assessee fails to offer an explanation, offers a false explanation, or fails to substantiate a bona fide explanation. The Tribunal found that the assessees' claims were not bona fide, as the transactions with Sapphire Capital & Infin Pvt. Ltd. (Sapphire) were not genuine. The company was closely held by the assessees, and no other flats were booked by third parties. The construction never commenced, and no building plan was approved by the BMC.

Conclusion on Penalty: The Tribunal concluded that the assessees' intention was mala fide, aimed at falsely claiming exemption under section 54. The Tribunal overturned the CIT(A)'s decision to delete the penalties and restored the AO's orders, thereby imposing penalties for concealment of income.

Final Judgment: Both appeals by the Revenue were allowed, and the penalties under section 271(1)(c) were upheld due to the assessees' mala fide intentions and the sham nature of the transactions.