2010 (1) TMI 897 - AT - Income Tax

Penalty under section 271(1)(c) - addition has been made by the Assessing Officer only on the basis of the disclosure by the assessee. There is no other material or basis for the income declared by the assessee and it was an ad hoc declaration Held that - scheme of settlement provides a means by which an assessee can give all confidential information to the department and the department in turn promises immunity against penalty and prosecution. The Government in the process gets expeditious tax collection without having to go into complex investigation into the case. penalty imposed on the assessee cancelled, appeal of the assessee is allowed. Sudarshan Silk and Sarees (2008 - TMI - 3593 - Supreme Court)

Issues Involved:
1. Imposition of penalty under section 271(1)(c) of the Income-tax Act.
2. Use of confidential information disclosed in the Settlement Commission application by the Assessing Officer.
3. Validity of the assessment made based on the disclosure in the Settlement Commission application.
4. Applicability of the abatement provisions under section 245HA of the Income-tax Act.
5. Comparison with the Sudarshan Silk and Sarees case regarding penalty imposition.

Detailed Analysis:

1. Imposition of Penalty under Section 271(1)(c):
The primary issue revolves around the penalty imposed on the assessee under section 271(1)(c) of the Income-tax Act. The penalty was confirmed by the learned CIT(A) and was challenged by the assessee. The penalty was based on the addition of Rs. 2,27,273 to the assessee's income, which was disclosed during the Settlement Commission proceedings. The Tribunal held that the imposition of penalty was not justified as the disclosure was made on an ad hoc basis without any incriminating material found during the search. The Tribunal emphasized that the penalty imposition was invalid as the addition itself was not legally sustainable.

2. Use of Confidential Information Disclosed in the Settlement Commission Application:
The Tribunal examined whether the confidential information disclosed in the Settlement Commission application could be used by the Assessing Officer. It was noted that the Settlement Commission had excluded the assessment year 2005-06 from the settlement process because the disclosed income did not meet the criteria of minimum tax payable exceeding Rs. 1 lakh. Since the application for the assessment year 2005-06 was not admitted under section 245D(1), the confidential information disclosed could not be used by the Assessing Officer. Therefore, the addition based on such disclosure was deemed invalid.

3. Validity of the Assessment Made Based on the Disclosure in the Settlement Commission Application:
The Tribunal ruled that the assessment made by the Assessing Officer, which reduced the declared loss by Rs. 2,27,273 based on the disclosure in the Settlement Commission application, was not valid. Since the application for the assessment year 2005-06 was not admitted for settlement, the use of disclosed information was not permissible. Consequently, the addition to the income was invalid, and the penalty based on such addition could not be sustained.

4. Applicability of the Abatement Provisions under Section 245HA:
The Tribunal considered the alternative argument regarding the abatement of proceedings before the Settlement Commission as per section 245HA. It was noted that if the application was treated as admitted but no order was passed under section 245D(4) by 31-3-2008, the proceedings would abate. In such cases, the Assessing Officer could use the confidential information. However, since the Tribunal concluded that the application for the assessment year 2005-06 was not admitted, this argument was not further explored.

5. Comparison with the Sudarshan Silk and Sarees Case:
The assessee relied on the Supreme Court's decision in Sudarshan Silk and Sarees v. CIT, where it was held that penalty should not be imposed if the assessment was based on estimated income disclosed without incriminating material. The Tribunal found the assessee's case comparable, as the disclosure was made to avoid litigation and was not based on any incriminating material. The Tribunal concluded that the penalty imposition was not justified, aligning with the principles laid down in the Sudarshan Silk and Sarees case.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the penalty imposed under section 271(1)(c) was not sustainable. The assessment based on the disclosure in the Settlement Commission application was invalid as the application for the assessment year 2005-06 was not admitted. Consequently, the use of confidential information from the Settlement Commission application by the Assessing Officer was not permissible. The Tribunal also emphasized that the penalty imposition was not justified, drawing parallels with the Sudarshan Silk and Sarees case.

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