2012 (7) TMI 768 - AT - Income Tax

Penalty u/s. 271(1)(c) of the Act - disallowance of adjustment/set off of short term capital loss incurred in sham transaction of purchase and sale of shares Held that - Addition made on account of transaction has been deleted - assessee had made claim of short term loss, and merely claim of the assessee has been rejected by the Assessing Officer would not be sufficient to levy of the penalty - penalty provisions u/s. 271(1)(c) of the Act can not be invoked solely on the ground that a claim made in terms of income is rejected by the AO - Assessment proceedings and penalty proceedings are distinct and independent - Revenue s appeal is dismissed

Summary

Issues:
Penalty under section 271(1)(c) for disallowance of short term capital loss in sham transaction of purchase and sale of shares.

Analysis:
1. The Assessing Officer (AO) noted that the assessee had incurred a heavy loss of Rs.58,29,228 in transactions of purchase and sale of shares, claiming set off against Long Term Capital Gains (LTCG). The AO found the Short Term Capital Gains (STCG) not genuine, disallowed it, and initiated penalty proceedings under section 271(1)(c) of the Income-tax Act, 1961.

2. The Commissioner of Income-tax (Appeals) confirmed the addition made by the AO and levied a penalty of Rs.21 lakh. The assessee appealed against this penalty order, arguing that penalty proceedings should be distinct from assessment proceedings, and penalty should not be imposed if all facts are disclosed.

3. The Appellate Tribunal observed that the penalty was levied based on the assumption that the transactions were sham, leading to continuous losses. However, the Tribunal found that the transactions were genuine, especially those conducted through a specific broker, as confirmed in a separate quantum appeal.

4. Referring to the judgment in the case of CIT v. Reliance Petroproduct Pvt. Ltd., the Tribunal held that the rejection of the assessee's claim by the AO was not sufficient to justify the penalty under section 271(1)(c). The Tribunal emphasized the distinction between assessment and penalty proceedings, upholding the deletion of the penalty by the Commissioner of Income-tax (Appeals).

5. Ultimately, the Tribunal dismissed the Revenue's appeal, citing the genuineness of the transactions conducted through a specific broker, the allowance of set off of short term loss in a separate quantum appeal, and the principles laid down in the Reliance Petroproduct case. The Tribunal found no infirmity in the Commissioner's decision to delete the penalty.

This detailed analysis of the judgment highlights the key arguments, legal principles, and findings that led to the dismissal of the Revenue's appeal against the deletion of the penalty under section 271(1)(c) for the disallowance of short term capital loss in a sham transaction of purchase and sale of shares.