2012 (8) TMI 360 - AT - Income Tax

Penalty u/s 271(1)(c) - assessment was reopened u/s 147 to bring to tax the distribution of capital asset by way of transfer u/s 45(4) r.w.s. 50 - Held that - On analyzing the facts of the case it appears that the partners of the assessee firm were of bona fide belief that withdrawing the asset from one of their partnership firm and inducting the same to another of their partnership firm, will not bring in any gain or loss affecting them. Further, the transaction had taken place by passing book entries and not by executing any conveyance deed or sale agreements. As decided in Btx Chemical P. Limited Versus Commissioner of Income-Tax 2006 (7) TMI 155 - GUJARAT HIGH COURT penalty u/s 271 (1) ( c ) cannot be levied for a mistake committed by the Chartered Accountant of the assessee - in this case as whole scheme of the transactions seems to be wrongly conceived by the Chartered Accountant of the assessee for which the assessee cannot be penalized though being innocent - though the additions are sustained in this case, levy of penalty u/s 271 (1) ( c ) is not warranted and farfetched - in favour of assessee.

Issues Involved:
1. Imposition of penalty under Section 271(1)(c) of the Income Tax Act.
2. Alleged concealment of income and furnishing of inaccurate particulars.
3. Interpretation and applicability of Section 45(4) read with Section 50 of the Income Tax Act.
4. Validity of valuation reports and their impact on capital gains computation.
5. Bona fide belief and debatable issues as a defense against penalty.

Detailed Analysis:

1. Imposition of Penalty under Section 271(1)(c) of the Income Tax Act:

The primary issue revolves around the penalty of Rs.1,12,89,700/- levied by the Assessing Officer (AO) under Section 271(1)(c) of the Income Tax Act. The penalty was imposed on the grounds of alleged concealment of income and furnishing inaccurate particulars by the assessee firm.

2. Alleged Concealment of Income and Furnishing of Inaccurate Particulars:

The AO noticed that the partners of the assessee firm withdrew the Ratnapur factory building at its Written Down Value (WDV) and introduced it into another firm, which was later converted into a private limited company. The building was revalued significantly higher, and depreciation was claimed on the revalued amount. The AO concluded that this revaluation and subsequent transactions were attempts to avoid tax liability, leading to the initiation of penalty proceedings.

3. Interpretation and Applicability of Section 45(4) read with Section 50 of the Income Tax Act:

The AO reopened the assessment to tax the distribution of capital assets under Section 45(4) read with Section 50 of the Act. The assessee contended that the factory building was transferred at face value and that the revaluation was done for availing bank credit facilities, not for tax evasion. The AO, however, determined Short Term Capital Gains (STCG) based on the revalued amount and initiated penalty proceedings.

4. Validity of Valuation Reports and Their Impact on Capital Gains Computation:

The assessee produced two valuation reports with significantly different values for the factory building. The AO dismissed the revised valuation report as an attempt to reduce tax liability. The CIT (A) upheld the AO's findings, stating that the revaluation and subsequent transactions were not bona fide and aimed at avoiding tax.

5. Bona Fide Belief and Debatable Issues as a Defense Against Penalty:

The assessee argued that the transactions were based on a bona fide belief and were debatable issues, thus not warranting penalty under Section 271(1)(c). The Tribunal considered the facts and circumstances, including the absence of a conveyance deed and the reliance on book entries. It concluded that the issue was debatable and the assessee acted on the advice of its Chartered Accountant, who might have misconceived the scheme of transactions.

Conclusion:

The Tribunal, after analyzing the case records and submissions, found that the penalty under Section 271(1)(c) was not warranted. It noted that the partners acted on a bona fide belief and the issue was debatable. The Tribunal deleted the penalty, emphasizing that the assessee should not be penalized for a mistake committed by its Chartered Accountant. The assessee's appeal was allowed, and the penalty levied by the AO, which was confirmed by the CIT (A), was deleted.

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