2012 (10) TMI 719 - AT - Income Tax

Penalty u/s 271 (1) (c) - claiming non compete fee as a capital receipt - CIT(A) deleted the levy - Held that - It is very much clear from the perusal of the provisions laid down u/s 271 (1) (C) that for seeking exemption from penal action regarding an income not declared in the return income the assessee is required not only to establish that all the facts relating to the same and material to the computation of his total income have been disclosed by him but he has to establish also that the explanation for not showing this income in his return of income was bona fide. As in the present case keeping in mind that the provisions laid down u/s 17 (3) (1) were clear to bring the receipt as taxable and there was no scope of debate regarding its taxability the bona fide of the explanation of the assessee that he was under a belief that the amount received is a capital receipt not chargeable to tax is not acceptable - thus while not declaring the capital receipt in question as his income in his return of income filed by the assessee the assessee in the present case had furnished inaccurate particulars of income attracting the penal action provided u/s 271 (1) (C) - against assessee.

Issues Involved:
1. Deletion of penalty imposed under section 271(1)(c) of the Income Tax Act.
2. Taxability of non-compete fee received by the assessee.
3. Bona fide belief and disclosure of income by the assessee.
4. Applicability of Explanation 1 to section 271(1)(c) regarding concealment of income.

Issue-wise Detailed Analysis:

1. Deletion of Penalty Imposed under Section 271(1)(c) of the Income Tax Act:
The revenue challenged the first appellate order where the CIT (A) deleted the penalty imposed under section 271(1)(c) by the AO. The CIT (A) had deleted the penalty on the grounds that there was no concealment of particulars of income or furnishing of inaccurate particulars by the assessee. The assessee had disclosed all necessary and material facts regarding the receipt of USD 10 lacs and the explanation offered was neither found false nor unsubstantiated. The revenue argued that the amount received was clearly taxable as it was received out of a contract for employment, and thus, it was a clear case of concealment of particulars of income.

2. Taxability of Non-compete Fee Received by the Assessee:
The assessee received USD 10 lacs from Deluxe Corporation as part of a severance package and claimed it as a capital receipt not chargeable to tax. The AO taxed the amount as income, and the Tribunal upheld this view, stating that the amount was received in connection with the termination of employment and thus was taxable under section 17(3)(i) of the Act as "profits in lieu of salary." The Tribunal distinguished this case from others where non-compete fees were considered non-taxable, emphasizing that the payment was made due to termination of services.

3. Bona Fide Belief and Disclosure of Income by the Assessee:
The assessee argued that he had a bona fide belief that the amount received was a capital receipt and not taxable. He had disclosed all facts regarding the receipt and had initially calculated and paid tax on the amount before claiming a refund. The Tribunal, however, found that the provisions under section 17(3) were clear and left no room for debate on the taxability of the amount. The Tribunal concluded that the assessee's belief was not bona fide as the law clearly categorized such receipts as taxable income.

4. Applicability of Explanation 1 to Section 271(1)(c) Regarding Concealment of Income:
The Tribunal referred to Explanation 1 to section 271(1)(c), which states that if an explanation offered by the assessee is not substantiated or found to be false, and the assessee fails to prove it as bona fide, the amount will be deemed to represent income for which particulars have been concealed. The Tribunal concluded that the assessee failed to prove the bona fide nature of his explanation, as the provisions of section 17(3) clearly indicated the taxability of the receipt. The Tribunal cited the decision in CIT Vs. Zoom Communication (P) Ltd., emphasizing that making untenable claims without a bona fide basis could lead to penal action under section 271(1)(c).

Conclusion:
The Tribunal concluded that the assessee had furnished inaccurate particulars of income by not declaring the receipt as income in his return, thereby attracting penal action under section 271(1)(c). The first appellate order was set aside, and the penalty of Rs. 1,43,33,963/- was restored. The appeal by the revenue was allowed, and the order was pronounced in the open court on 15/10/2012.

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