2013 (11) TMI 226 - AT - Income Tax

Penalty u/s 271(1)(c) - CIT upheld penalty - Held that - while imposing the penalty the AO is required to examine the aforesaid explanation of the assessee to ascertain whether it was totally a false or an untrue explanation as prescribed under Explanation-1(A) to section 271(1)(c). Even the ld.DR Mr.Singh has not ruled out the importance of the said Explanation, but he has argued that the AO is not required to prove the falsity of the explanation offered. In our humble understanding, this explanation prescribes that where in respect of any facts material if a person offers an explanation which is found by the AO to be false, then the amount so added results into a levy of penalty. Therefore, the AO is to find out the truthness of an explanation. Side by side, the statute has also added Explanation-1(B) to section 271(1)(c). This part of the Explanation prescribes that where in respect of any facts material a person offers an explanation which he is not able to substantiate or fails to prove that such explanation is bona fide, then the said failure results into levy of penalty. Meaning thereby an assessee has to prove to the satisfaction of the AO his bona fide. A situation where an assessee had offered an explanation duly substantiated by certain evidences to establish his bona fide. Therefore, in this manner, the onus, at first, has been discharged by the assessee as casted upon him by Explanation-1(B) of IT Act. The next step is that the AO has to investigate all those evidences and the onus thereafter shifts upon the AO to disprove the claim of bona fide of the assessee. The proceedings do not stop at that juncture. The AO is expected to communicate his reasoning for rejection of the said explanation of the assessee. Again if the assessee is not satisfied with the rejection of the AO, then the onus shifts upon the assessee to place on record substantial evidence in support of his truthness. Meaning thereby the onus of proving and disproving keeps on shifting as the proceedings are advanced. We are therefore, in this case, referring the issue of levy of penalty back to the stage of the AO to verify whether the assessee s explanation was altogether false being not substantiated by authentic evidences. The assessee is required to corroborate his explanation with the support of legitimate evidences - Question of levy of penalty restored back to the stage of the AO - Decided in favour of assessee.

Issues Involved:
1. Legitimacy of Penalty Imposed under Section 271(1)(c)
2. Timeliness of Penalty Proceedings
3. Justification of Quantum Addition
4. Evidentiary Value of Statements Recorded During Survey

Issue-wise Detailed Analysis:

1. Legitimacy of Penalty Imposed under Section 271(1)(c):
The primary issue contested was whether the Commissioner of Income-tax (Appeals)-IV, Baroda erred in not deleting the penalty of Rs. 4,29,260/- imposed by the Income-tax Officer under Section 271(1)(c). The penalty was based on the alleged concealment of income due to discrepancies in stock inventory discovered during a survey. The assessee argued that the penalty was unjustified as the discrepancies were due to unrecorded purchases and sales not known to the Accountant at the time of the survey. The Tribunal noted that the assessee had provided a reconciliation statement showing a difference of only 1629 Kgs. of "biddi-patti" and argued that the penalty should not be based solely on the Accountant's statement. The Tribunal emphasized that penalty proceedings are not automatic and that the AO must establish the taxpayer's wrongdoing through investigation. The Tribunal referred the issue back to the AO to verify the assessee's explanation and determine whether it was false or unsubstantiated, as per Explanation-1(A) and 1(B) of Section 271(1)(c).

2. Timeliness of Penalty Proceedings:
The assessee objected to the penalty proceedings on the grounds of being barred by limitation. The Tribunal's order was received by the Commissioner in August 2008, and the penalty order was passed on 23.02.2009, within the prescribed time limit. The Tribunal rejected the assessee's objection, confirming that the penalty proceedings were initiated within the statutory period.

3. Justification of Quantum Addition:
The quantum addition arose from a survey where excess stock of 29004 Kgs. of "biddi-patti" was detected. The assessee argued that the discrepancy was due to transactions with Majalees Bidi Factory and that the stock was accounted for through delivery memos rather than sales bills. The Tribunal upheld the quantum addition, stating that the assessee failed to produce transportation bills to authenticate the claim. The Tribunal also noted that the Accountant's and partner's statements during the survey were voluntary and not retracted, supporting the addition. However, during penalty proceedings, the Tribunal highlighted that the findings in assessment proceedings are not conclusive for penalty imposition and directed the AO to re-examine the assessee's explanation.

4. Evidentiary Value of Statements Recorded During Survey:
The assessee contended that the Accountant's statement recorded during the survey had no evidentiary value. The Tribunal rejected this argument, stating that the evidentiary value of the statement had already been considered during the quantum proceedings. The Tribunal emphasized that the argument was relevant at the time of deciding the quantum addition but not during penalty proceedings.

Conclusion:
The Tribunal restored the issue of penalty imposition back to the AO with directions to verify the assessee's explanation and provide a reasonable opportunity for hearing. The Tribunal instructed the assessee to appear before the AO with necessary details and evidences within 30 days to expedite the decision on the penalty. The appeal was treated as allowed for statistical purposes.

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