2013 (12) TMI 895 - AT - Income Tax

Whether penalty u/s 271(1)(c) be levied on change of head of income - Rent received - Business income or income from house property - Held that - The assessability of an income under a particular head depends upon various facts and circumstances - There is very thin line demarcation on which it can be adjudged the nature of income and its classification - It has clearly not been brought on record by the A.O. that assessee s explanation is actually false on the basis of some evidence or material. The penalty u/s.271(1)(c) cannot be sustained in such a situation - Decided against Revenue.

Summary

Issues:
Challenge to deletion of penalty under section 271(1)(c) by the learned Commissioner (Appeals) - Whether rental income should be considered as business income or income from house property for taxation purposes - Justification for levying penalty by the Assessing Officer.

Analysis:
The appeal was filed by the Revenue against the impugned order deleting the penalty of Rs. 3,84,000 under section 271(1)(c) by the Assessing Officer. The Revenue contended that the learned Commissioner (Appeals) erred in law by deleting the penalty. The assessee, engaged in real estate business, received rental income of Rs. 18 lakhs during the year and claimed expenditure of Rs. 9,36,344, treating the rental income as business income. The Assessing Officer rejected the claim, assessing the income as income from house property. In the penalty proceedings, the assessee argued that the treatment of rental income as business income was based on a genuine belief and not a deliberate attempt to reduce taxable income.

During the penalty proceedings, the Assessing Officer rejected the assessee's explanation, stating that the nature and source of income were known to the assessee, and the claim of business income was made to avail certain expense benefits. The learned Commissioner (Appeals) accepted the assessee's explanation, noting that the taxability of rental income as business income or income from house property is a debatable issue. The Commissioner observed that there were conflicting decisions on this matter and the assessee's claim was based on a genuine belief, thus canceling the penalty.

In the ITAT Mumbai judgment, it was emphasized that the penalty under Section 271(1)(c) should be viewed separately from the assessment proceedings. The Tribunal noted that the treatment of income under a specific head depends on various factors and can be a debatable issue. The Tribunal upheld the Commissioner's decision to delete the penalty, stating that the assessee's explanation was based on a bonafide belief at the time of filing the return of income. The Tribunal ruled that the penalty cannot be sustained when the explanation provided is not proven to be false or non-bonafide, especially in a situation where the nature of income classification is debatable.

Ultimately, the Tribunal dismissed the Revenue's appeal, affirming the decision to delete the penalty imposed by the Assessing Officer. The judgment highlighted the importance of considering the bonafide belief of the assessee in taxability issues and the distinction between assessment and penalty proceedings in determining the applicability of Section 271(1)(c) penalties.