2012 (12) TMI 203 - AT - Income Tax

Penalty under section 271(1)(c) Held that - Department had not discharged its burden of proving concealment and had simply rested its conclusion on the act of voluntary surrender done by the assessee in good faith, and that penalty could not be levied - penalty proceedings and assessment proceedings both are separate proceeding and the explanation given during penalty proceedings is required to be considered by the assessing authority which in the present case has not been done - assessee s funds are mixed funds i.e. the own fund and interest bearing funds - AO has not specifically pointed out during the assessment proceedings or in the penalty proceedings that the funds which are interest bearing and having used for non-business purposes i.e. the AO has not brought on record the diversion of funds. Therefore on surmises and conjectures, the AO cannot levy the penalty u/s. 271(1)(c) of the Act In favor of assessee

Summary

Issues Involved:
1. Penalty under Section 271(1)(c) for unaccounted sales.
2. Penalty for interest-free loans/advances to group concerns.

Issue-wise Detailed Analysis:

1. Penalty under Section 271(1)(c) for Unaccounted Sales:

The assessee's appeal arises from the order of the Commissioner of Income-tax (Appeals)-II, Baroda, which upheld a penalty of Rs. 12,15,000 under Section 271(1)(c) of the Income-tax Act, 1961. The penalty was based on unaccounted sales of Rs. 25 lakh discovered during a survey operation. The partner of the assessee firm admitted that these sales were not recorded and were used for personal expenses. The Assessing Officer (AO) argued that the unaccounted income would not have been disclosed without the survey and thus, the revised return filed by the assessee could not be treated as a return under Section 139(5) of the Act. The AO relied on several case laws to justify the penalty.

The assessee contended that the revised return was filed voluntarily and without any material evidence of concealment. The explanation provided was that the loose papers found during the survey were related to commission on sales payable to staff and were mistakenly torn. The assessee claimed that the declaration was made to buy peace of mind and avoid litigation. The AO did not bring any evidence to prove that the assessee had concealed income or furnished inaccurate particulars. The Tribunal noted that the AO failed to discharge the burden of proving concealment and relied solely on the voluntary surrender by the assessee. The Tribunal referred to the Supreme Court's decision in CIT v. Suresh Chandra Mittal, which held that penalty could not be levied when the Department had not proved concealment and the assessee had voluntarily surrendered income to avoid litigation. Consequently, the Tribunal directed the AO to cancel the penalty.

2. Penalty for Interest-Free Loans/Advances to Group Concerns:

The AO also levied a penalty on the grounds that the assessee had given interest-free loans to various group concerns, which were routed through the cash credit account, indicating that interest-bearing funds were diverted. The AO calculated the disallowance of interest at Rs. 7,34,699, which was later restricted to Rs. 5,98,644 by the CIT(A). The assessee argued that these transactions were business transactions and that funds were borrowed and advanced based on business needs and availability of surplus funds.

The Tribunal observed that the AO and CIT(A) did not consider the explanation provided by the assessee during penalty proceedings. It emphasized that penalty proceedings are separate from assessment proceedings, and the explanation given during penalty proceedings must be considered. The AO did not specifically point out any diversion of interest-bearing funds for non-business purposes. The Tribunal concluded that the AO could not levy the penalty based on conjectures and surmises without concrete evidence. Therefore, the Tribunal reversed the order of the CIT(A) and directed the AO to cancel the penalty.

Conclusion:

In summary, the Tribunal allowed the assessee's appeal, directing the cancellation of the penalties levied under Section 271(1)(c) for both unaccounted sales and interest-free loans/advances to group concerns. The Tribunal emphasized the importance of concrete evidence and the need for the AO to discharge the burden of proving concealment or furnishing of inaccurate particulars before levying penalties.