2011 (7) TMI 522 - HC - Income Tax

Penalty u/s 271(1)(c) - AO taxed the royalty income - CIT(Appeals) deleted the penalty on the ground that the assessment has been made on the basis of the facts disclosed by the assessee - Revenue informs the Court that the Revenue has filed an appeal against the decision of the Tribunal deleting the quantum addition in the present case and the same is pending - Held that - The fact that the appeal against the deletion of the quantum addition is pending before this Court, cannot be a ground to sustain the penalty imposed under Section 271(1)(c) because the quantum addition itself was made on the basis of the return filed by the assessee which is found to be correct. Merely because the assessee s contention that the royalty income is exempt was not acceptable to the AO cannot be a ground to impose penalty under Section 271(1)(c) - in favour of assessee.

Summary

Issues:
1. Justification of deleting penalty under Section 271(1)(c) of the Income Tax Act, 1961 by the Income Tax Appellate Tribunal.

Analysis:
Issue 1: The primary question in this appeal was whether the Income Tax Appellate Tribunal was correct in deleting the penalty levied under Section 271(1)(c) of the Income Tax Act, 1961. The case pertained to the assessment year 2004-05, where the assessee filed a return of income claiming a refund of tax, arguing that the royalty income received was covered under Article 7 of the Double Taxation Avoidance Agreement between India and Ireland. However, the Assessing Officer disagreed, taxed the royalty income, and imposed a penalty under Section 271(1)(c).

Issue 2: The Commissioner of Income Tax (Appeals) later deleted the penalty, emphasizing that the assessment was based on the facts disclosed by the assessee. The Tribunal upheld this decision, noting that the quantum addition made by the Assessing Officer had been deleted. The Revenue had filed an appeal against the Tribunal's decision on the quantum addition, which was pending. However, the Court held that the pendency of the appeal did not justify sustaining the penalty under Section 271(1)(c) as the quantum addition was based on the correct return filed by the assessee, even though the Assessing Officer did not accept the exemption claim for royalty income.

Conclusion: The High Court, comprising J.P. Devadhar and A.A. Sayed, JJ., found no merit in the appeal and dismissed it without costs. The judgment emphasized that the penalty under Section 271(1)(c) should not be imposed merely because the Assessing Officer did not accept the assessee's contention regarding royalty income exemption, especially when the quantum addition was based on the correct return filed by the assessee.