2010 (1) TMI 877 - AT - Income Tax

Penalty levied u/s 271(1)(c) - capital asset was converted into stock in trade - profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stockin- trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset - Held that - penalty is must only when there is some element of deliberate default and not a mere mistake, when the assessee has offered an explanation which was not found false and when the assessee s explanation was bonafide and when all the facts relating to the same have been disclosed, then no penalty u/s 271(1)(c) was called for, deletion of penalty levied u/s 271(1)(c) upheld, appeal of the Revenue is dismissed

Issues Involved:
1. Whether the penalty levied under Section 271(1)(c) of the Income Tax Act was justified.
2. Determination of the year in which capital gains from the conversion of a capital asset into stock-in-trade should be taxed.
3. Whether the assessee's belief regarding the timing of capital gains taxation was bona fide.

Detailed Analysis:

1. Justification of Penalty under Section 271(1)(c):
The Revenue appealed against the order of the CIT(Appeals)-XII, Mumbai, which deleted the penalty levied under Section 271(1)(c) of the Income Tax Act. The AO had levied the penalty on the grounds that the assessee deliberately concealed particulars of income by not declaring capital gains in the year when flats from the completed project were sold. The first appellate authority deleted the penalty, noting that the assessee had disclosed all particulars and was under a bona fide belief regarding the timing of capital gains taxation. The Tribunal upheld this view, stating that when two views are possible and there is a difference in opinion on the interpretation of a statute, no penalty can be levied.

2. Year of Taxation for Capital Gains:
The assessee converted a piece of land into stock-in-trade and entered into a joint venture agreement for construction projects. The AO computed capital gains on the proportionate land pertaining to the completed and sold building, Eternia B, and included it in the income for the year. The assessee contended that capital gains should be taxed only upon the completion of the entire project, which included three buildings. The Tribunal noted that there was a difference of opinion on whether the sale of stock-in-trade, which is not a capital asset, is governed by Section 2(47). The Tribunal acknowledged the Senior Advocate's opinion that capital gains arise only when a registered deed is executed, indicating a legitimate difference of opinion on the matter.

3. Bona Fide Belief:
The assessee argued that he was under a bona fide belief, based on a legal opinion, that capital gains were taxable only upon the completion of the entire project. The Tribunal found this belief to be genuine and supported by a written opinion from a Senior Advocate. The Tribunal emphasized that the AO had taxed the same capital gains in two different assessment years, leading to double taxation. The Tribunal concluded that the assessee's explanation was bona fide and not found false by the Revenue, thus no penalty under Section 271(1)(c) could be levied.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the deletion of the penalty levied under Section 271(1)(c). The Tribunal emphasized that when there is a legitimate difference of opinion on the interpretation of a statute and the assessee's explanation is bona fide, no penalty can be imposed. The judgment highlighted the importance of bona fide belief and the non-automatic nature of penalty imposition under the Income Tax Act.

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