2015 (9) TMI 436 - AT - Income Tax

Levy of penalty u/s.271(1)(c) - default u/s. 2(22)(e) - Held that - Ignorance of law is no excuse, even as clarified in CIT vs. Alkesh K. Patel 2010 (3) TMI 416 - BOMBAY HIGH COURT wherein the assessee-respondent pleaded similarly, admitting to a bona fide mistake in view of his being not aware of the relevant provision of law, being, in fact, the provision under reference, i.e., section 2(22)(e). The Hon ble Court discountenanced the plea of a bona fide mistake on account of being unaware of the provision of law, which would be by itself not sufficient. All the relevant facts and circumstances of the case could though be considered to arrive at a finding of fact with regard to a bona fide belief, and which had not been evaluated by the tribunal. The matter was accordingly restored back to it for the purpose, to do so upon considering all the material facts and circumstances. The matter of bona fide belief, or a mistake on its basis, would thus have to be examined on its merits. The assessee in the instant case himself admits to have realized his mistake, implying of his knowledge of having, perhaps inadvertently, violated the law in-asmuch as he could not, as a substantial shareholder, have, except by way of dividend, diverted the profits of a company in which public is not substantially interested, for his personal purposes. Precisely what we are saying, i.e., that the assessee having realized his mistake well in time, with the default u/s. 2(22)(e) the law on which is very clear, having been committed, he ought to have returned the said income in-asmuch as he has no reason for not so doing, preferring instead not to return his income in the admitted facts of the case, in accordance with law. He could have, at least, while not returning the same, narrated the sequence of events leading to the attraction of the provision of section 2(22)(e), besides the subsequent events, pleading to an indulgence in non-invoking section 2(22)(e). It is though doubtful if this would have served the purpose in-as-much as the assessee himself admits to have realized his mistake, i.e., having become aware of the position of law, and which gets established by his immediate returning the funds back to the company. The same, however, would have provided scope for consideration of the assessee s explanation, which we find as absent in the instant case. In short, the assessee has no explanation for his conduct in not returning the impugned income and, further, not declaring the material facts per the return of income. This, despite being aware of the provision being attracted. We have, rather, as afore-stated, observed a shift in the assessee s stand with time. No case for the non levy of penalty u/s.271(1)(c) in the facts and circumstances of the case is made out. In view of the foregoing, we confirm the levy of the penalty u/s.271(1)(c), which is at the minimum sum, i.e., in principle. We have already stated that the assessee having been allowed part relief by the tribunal, sustenance of penalty on the same is untenable, so that we direct its deletion to that extent. - Decided partly in favour of assessee.

Summary

Issues:
1. Confirmation of penalty u/s.271(1)(c) of the Income Tax Act, 1961.
2. Application of section 2(22)(e) regarding deemed dividend.
3. Bona fide mistake explanation by the assessee.
4. Consideration of remedial actions taken by the assessee.
5. Interpretation of relevant legal provisions and case laws.

Issue 1: Confirmation of Penalty u/s.271(1)(c):
The appeal concerns the confirmation of the penalty under section 271(1)(c) of the Income Tax Act, 1961. The tribunal observed that the penalty on the balance addition would not survive since the tribunal had restricted the addition. The penalty was levied and confirmed based on the decisions in the cases of Union of India v. Dharmendra Textile Processors and CIT vs. Nathulal Agarwala & Sons. The tribunal upheld the penalty, considering the explanations provided by the assessee and the legal provisions.

Issue 2: Application of Section 2(22)(e) - Deemed Dividend:
The case involved the application of section 2(22)(e) regarding deemed dividend. The tribunal found that the assessee failed to substantiate the claim that the investment was made on the company's behalf but ended up in the assessee's name due to technical reasons. The tribunal highlighted infirmities in the explanation provided by the assessee, including the absence of supporting board resolutions and proper accounting entries. The tribunal also emphasized the need for the assessee to include the deemed dividend as income in the return.

Issue 3: Bona Fide Mistake Explanation:
The assessee claimed a bona fide mistake in diverting company funds for personal investment, which was rectified promptly by returning the advance. However, the tribunal noted that ignorance of the law is not an excuse, citing case law. The assessee's awareness of the legal provision and subsequent actions were considered, leading to the conclusion that the penalty was justified.

Issue 4: Remedial Actions Taken by the Assessee:
The tribunal evaluated the remedial actions taken by the assessee, including returning the funds promptly upon realizing the mistake. While the prompt return indicated bona fides, the tribunal emphasized the importance of including the deemed dividend as income in the return, which the assessee failed to do despite being aware of the legal implications.

Issue 5: Interpretation of Legal Provisions and Case Laws:
The tribunal considered various legal provisions and case laws in arriving at its decision. The tribunal highlighted the importance of assessing the facts and circumstances of the case, applying relevant legal principles, and following binding decisions. The tribunal confirmed the levy of the penalty under section 271(1)(c) based on the established law and the specific details of the case.

In conclusion, the tribunal partly allowed the assessee's appeal, confirming the penalty under section 271(1)(c) while directing the deletion of the penalty on the amount where relief was granted. The decision was pronounced on August 5, 2015, following a comprehensive analysis of the issues raised in the appeal.