2013 (4) TMI 212 - HC - Income Tax

Penalty u/s 271(1)(c) - Tribunal cancelled the penalty levy - addition of rental income - Held that - So far as rental income which was initially held to be sham and was added in the income of the respondent, is concerned, this question has already been decided in Commissioner of Income Tax Vs. Kohinoor Tobacco Products (P) Ltd (2005 (2) TMI 31 - MADHYA PRADESH HIGH COURT). The facts show that the addition of the rental income itself was set aside in the appeal by the Tribunal. When the addition was set aside, there was no question of imposition of penalty and the ITAT have rightly set aside the order, in which no error is found. Thus the Tribunal was justified in law in setting aside the penalty under Section 271(1)(c) - against the revenue.

Summary

Issues:
1. Interpretation of penalty under Section 271(1)(c) of the Income Tax Act, 1961.
2. Justification of penalty imposition based on addition made by the assessing officer.
3. Tribunal's authority to set aside penalty.

Analysis:
The case involved a reference under Section 256(1) of the Income Tax Act, 1961, with the main question being whether the Tribunal was justified in canceling a penalty under Section 271(1)(c) imposed by the assessing officer. The respondent's rental income was initially deemed sham by the assessing officer, leading to an addition in the income. However, the Tribunal later set aside this addition, prompting the assessing officer to impose a penalty of Rs.1,20,000 under Section 271(1)(c).

The petitioner argued that the penalty was justified, while the respondent supported the Tribunal's decision to set it aside. The assessing officer's penalty was based solely on the addition made, which was subsequently nullified by the Tribunal. The Tribunal's reasoning was that since the addition was set aside, there was no basis for imposing the penalty. The respondent's rental income issue had already been addressed in a previous case, but the current matter focused on the penalty imposition.

The High Court examined the facts and concluded that the Tribunal acted lawfully in setting aside the penalty. As the addition of rental income was revoked, there was no valid reason for the penalty under Section 271(1)(c) to stand. The Court referenced a previous judgment to support its decision. Ultimately, the Court ruled in favor of the respondent, agreeing with the Tribunal's decision to cancel the penalty.

In summary, the High Court upheld the Tribunal's authority to set aside the penalty imposed under Section 271(1)(c) due to the nullification of the addition in the respondent's income. The judgment clarified the legal position regarding penalty imposition in cases where the underlying addition is reversed, emphasizing the need for a valid basis for penalty enforcement.