2015 (4) TMI 50 - AT - Income Tax

Penalty under section 271(1)(c) - enhancement of income on the assets held to be taxed as capital gains - Held that - As per the assessment orders the incomes have been offered for taxation as agreed amount in so far as they have been rendered to tax as investments from tax paid incomes in the earlier years. It is nobody s case that the incomes which accrue or arise but remaining in the hands of the mutual funds or trust as investments whether could be computed on the basis of provisions of the Income-tax Act as earned for taxation or increase in capital. Unfortunately the assets that have been brought to tax as income in the hands of the assessee are increase in wealth were not to be disclosed in the form of financial assets in the balance-sheet. The computation was confronted to the assessee in so far as the holders of the funds on behalf of the assessee informed the assessee that the funds have accumulated to such an extent. It was therefore nobody s case that the assessee should have incorporated the enhancement of income on the assets held by it to be taxed as capital gains when no such decision could take place by the assessee. The crux of the issue therefore results in giving a finding that the amount was agreed upon by the assessee on the Assessing Officer giving a finding that the assessee s funds as held by the holders of the funds had informed the assessee that the funds have increased in value whether he agreed to encash the enhancement or not. The investment was noted by the AO in the assessment year 2005-06 and again after a gap of one year i.e. 2007-08 when the assessee cannot be said to be paying tax again on the so-called enhancement by the mutual fund company being the portfolio manager who keep changing the net asset value of the units in various other forms giving high or low rate of return. The assessee remained secured in so far as he had parted with the funds which funds belonged to him in the first place were reinvested in the hope that they will generate more income than the rate of interest available from a scheduled bank. Therefore it was a clear case of valuation of tax paid capital which the assessee had already paid tax on till such time when the enhancement was brought to the notice by the Assessing Officer on the basis of information made available to and by the assessee was readily agreed upon by the assessee to be taxed in the impugned assessment year. The short-term capital gains never accrued to the assessee and in fact is a loss in the capital was not considered in so far as the Assessing Officer had brought more income to tax quantum-wise in 2005-06 leading to duplication of income taxed in the assessment year 2007-08. It was enhancement in the capital which stood tax paid was therefore to be taxed at the time of receipt or transfer and not because the holder of the capital informs that the capital has increased. The crux therefore that the assessee agreed to the proposition that the holder of the asset is informing that his capital investment was worth more was accepted by the Assessing Officer as concealment in the hands of the assessee is not at all justified. The surrendered investment therefore cannot be considered for levy of penalty in so far as penalty should not be made if there is no conscious breach of law (Hindustan Steel Ltd. v. State of Orissa 1969 (8) TMI 31 - SUPREME Court . Thus penalty so levied under the provisions of section 271(1)(c) for the both assessment years under consideration is fit for cancellation - Decided in favour of assessee.

Issues Involved:
1. Levy of penalty under Section 271(1)(c) of the Income-tax Act, 1961 for the assessment years 2005-06 and 2007-08.
2. Voluntary disclosure of income and its impact on penalty proceedings.
3. The role of mens rea (intent) in the imposition of penalty.
4. The significance of judicial precedents and Central Board of Direct Taxes (CBDT) circulars in penalty proceedings.
5. Adequacy of opportunity provided to the assessee during penalty proceedings.

Issue-wise Detailed Analysis:

1. Levy of Penalty under Section 271(1)(c):
The appeals concern the imposition of penalty under Section 271(1)(c) for the assessment years 2005-06 and 2007-08. The assessee, a transport contractor, disclosed investments voluntarily during the assessment proceedings to avoid litigation. For 2005-06, the assessee's return showed an income of Rs. 2,91,560, but the assessment concluded with a total income of Rs. 91,90,967, including an addition of Rs. 88,00,123 as unexplained investment. For 2007-08, the penalty was imposed for concealment of income amounting to Rs. 72,33,660, despite the assessee's voluntary disclosure of these amounts during assessment.

2. Voluntary Disclosure of Income:
The assessee argued that the voluntary disclosure of investments was made in good faith to avoid unnecessary litigation and that the investments were accumulated over several years. The assessee cited several judicial precedents, including CIT v. S. I. Paripushpam and Dilip N. Shroff v. Joint CIT, to argue that voluntary disclosure and agreement to tax additions do not constitute concealment. The assessee also referenced a CBDT circular stating that no penalty should be imposed if the assessee voluntarily discloses income and cooperates with the assessment proceedings.

3. Role of Mens Rea in Penalty Imposition:
The judgment emphasized that both concealment of income and furnishing inaccurate particulars require a deliberate act on the part of the assessee. Mere omission or negligence does not constitute concealment. The assessee argued that there was no mens rea or fraudulent intent, as evidenced by the immediate payment of taxes on the disclosed amounts. The court noted that the burden of proof shifts to the assessee under the Explanation to Section 271(1)(c), but the penalty should not be automatic and must consider the assessee's intent.

4. Judicial Precedents and CBDT Circulars:
The assessee cited multiple judicial precedents, including CIT v. Beta Nepthol Ltd. and CIT v. Suresh Chandra Mittal, to support the argument that no penalty should be imposed when income is voluntarily disclosed to avoid litigation. The court also considered the CBDT circular, which supports the non-imposition of penalty in cases of voluntary and bona fide disclosure. The court acknowledged the principle that when there are conflicting judicial decisions, the one favorable to the assessee should be adopted.

5. Adequacy of Opportunity:
The assessee contended that adequate opportunity was not provided during the penalty proceedings, as the penalty was imposed hurriedly just before the limitation period expired. The court noted that the principle of natural justice requires adequate opportunity for the assessee to be heard. The court referenced the case of Berulal Tiwari v. CIT, emphasizing the need for adequate opportunity and disapproval of last-minute rush in assessment proceedings.

Conclusion:
The court concluded that the penalty under Section 271(1)(c) was not justified in both assessment years. The voluntary disclosure of income, lack of mens rea, and reliance on favorable judicial precedents and CBDT circulars supported the assessee's case. The penalty orders were quashed, and both appeals were allowed.

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