2013 (12) TMI 773 - AT - Income Tax

Levy of penalty u/s 271(1)(c) - Income from property - Held that - Change of head or confirmation of an addition in quantum proceedings does not result in automatic levy of concealment of income. In the case before us, all the facts location of the properties, income received from the properties during the AY under consideration -were available on file - For levy of penalty u/s 271(1)(c) the two conditions must exist - In this case both the conditions were not fulfilled - Penalty u/s. 271(1)(c) was not leviable as it is a case of change of head of income only and assessee as well as AO were treating a particular head of income as correct head of income in earlier years - Decided in favour of assessee.

Issues:
1. Validity of the assessment order for penalty levy.
2. Classification of rental income under the head of 'Income from House Property' or 'Business Income.'
3. Allegations of lack of natural justice in penalty proceedings.
4. Consideration of appellant's reply in penalty assessment.
5. Disputable nature of the addition made for penalty levy.

Issue 1: Validity of the assessment order for penalty levy:
The appellant challenged the order of the Commissioner of Income Tax (Appeals) regarding the limitation of the assessment order under Section 143(3) for penalty imposition. The appellant argued that the assessment order was time-barred as per the proviso to Section 275(1)(a). The Tribunal analyzed the timeline of events, noting that the issue of the head of income under which rental income should be assessed was decided after the appellant filed the return of income. The Tribunal found that there was no concealment of income or filing of inaccurate particulars. As the issue of the head of income had not attained finality when the return was filed, the Tribunal ruled that the penalty under Section 271(1)(c) was not justified.

Issue 2: Classification of rental income:
The core dispute revolved around whether rental income should be classified as 'Income from House Property' or 'Business Income.' The Tribunal observed that until the assessment year 1998-99, the appellant had consistently shown rental income under the head of business income. The Tribunal highlighted that the appellant's stand was accepted by the department until a change in assessment occurred. The Tribunal emphasized that the change in the head of income did not automatically warrant a penalty under Section 271(1)(c). Considering the facts and circumstances, the Tribunal concluded that the penalty was not applicable as there was a justifiable basis for the appellant's classification of income.

Issue 3: Allegations of lack of natural justice in penalty proceedings:
The appellant contended that the penalty proceedings lacked natural justice as the specific grounds for initiation were not stated in the show-cause notice. The Tribunal acknowledged this argument and emphasized the importance of providing a proper opportunity for the appellant to rebut the allegations. The Tribunal found that the order levying the penalty was against the principles of natural justice due to the lack of clarity in the show-cause notice.

Issue 4: Consideration of appellant's reply in penalty assessment:
The appellant raised concerns regarding the assessing officer not considering the appellant's reply dated 25th June 2002 in the penalty assessment. The Tribunal noted this contention but primarily focused on the lack of justification for the penalty imposition based on the classification of rental income. The Tribunal's decision in favor of the appellant on the core issue rendered this specific concern largely moot.

Issue 5: Disputable nature of the addition for penalty levy:
The Tribunal addressed the disputable nature of the addition made for penalty levy, emphasizing that the question of whether the income should be taxed as 'business income' or 'income from house property' was a highly debatable legal issue. The Tribunal ruled that no penalty could be levied for additions made on disputable legal grounds, further supporting its decision in favor of the appellant.

In conclusion, the Tribunal allowed the appeal filed by the appellant, highlighting the lack of justification for the penalty imposition based on the classification of rental income and the absence of concealment or inaccurate particulars. The Tribunal's detailed analysis of each issue underscored the importance of considering the specific circumstances and legal principles in penalty assessments.

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