2015 (4) TMI 1262 - AT - Income Tax

Levy of penalty u/s 271 (1)(c) - scope of deliberate default - cost of acquisition for the computation of long term capital gains - debatable issue - HELD THAT - Assessee during the course of the penalty proceedings for concealment to file documents as well as to give explanations which were not given in the assessment proceedings. Merely because an addition has not been contested, it cannot be presumed that the addition represents concealed income. It has been held by the Supreme Court in the case of Sir Shadilal Sugar & General Mills Ltd. 1987 (7) TMI 3 - SUPREME COURT that from the assessee agreeing to additions to his income, it does not follow that the amount agreed to be added was concealed income. There may be a hundred and one reasons for such admission. Hence in the present case, even though the Hon ble ITAT has confirmed the appeal on merits (though admitted by the Hon ble High Court) the penalty proceedings stand under a different footing and is not automatic. Penalty for concealment is not imposable where there are two views on the issue If the issue is a debatable one and two views are possible, penalty for concealment cannot be levied. It was held by the Rajasthan High Court in the case of CIT vs. Harshvardhan Chemicals & Minerals Ltd, reported 2002 (5) TMI 15 - RAJASTHAN HIGH COURT that where the wrong deduction has been claimed by the assessee but the issue is debatable, it could not be said that there was concealment of income. The claim of deduction made by the assessee can be described as inaccurate computation of income for which penalty for concealment cannot be levied. The above decisions are in line with that of the Supreme Court in the case of CIT vs. Reliance Petroproducts Ltd. 2010 (3) TMI 80 - SUPREME COURT where it was held that where the claim of deduction of interest was disallowed, it would be insufficient for levy of penalty for concealment as an incorrect claim does not amount to furnishing inaccurate particulars. Where a claim is made in the return of income it is up to the authorities to accept the claim when all particulars had been furnished. To conclude in the present case, the assessee has disclosed all the material facts before the AO and also the explanation offered by the assessee as to why FMV on the date of exercise was considered as cost of acquisition for the computation of long term capital gains in the return of income filed for the relevant A.Y.is bonafide. - Decided in favour of assessee.

Summary

Issues Involved:
1. Computation of capital gains on sale of shares acquired under Employee Stock Option Plan (ESOP).
2. Applicability of penalty under Section 271(1)(c) of the Income Tax Act for furnishing inaccurate particulars of income.

Detailed Analysis:

1. Computation of Capital Gains on Sale of Shares Acquired Under ESOP:

The assessee, an employee of Microsoft India (R&D) Pvt. Ltd., filed his return of income for A.Y. 2004-05 as a 'Resident and Ordinarily Resident'. He disclosed global income, including capital gains from the sale of Microsoft shares acquired through ESOP. The shares were acquired by exercising stock options in A.Y. 1997-98 and A.Y. 2000-01 when the assessee was a resident of the USA and paid taxes there on the difference between the fair market value (FMV) and the grant price as salary income.

For A.Y. 2004-05, the assessee considered FMV as the cost of acquisition for computing capital gains. However, the Assessing Officer (AO) recalculated the gains using the grant price as the cost, increasing the capital gains by Rs. 4,35,17,306. The ITAT upheld the AO's computation, stating that FMV cannot be considered as the cost of acquisition unless recognized under Section 17(2) of the Act, as per Section 49(2AA).

2. Applicability of Penalty Under Section 271(1)(c):

The AO levied a penalty of Rs. 95,73,807 under Section 271(1)(c) for allegedly furnishing inaccurate particulars of income. The assessee argued that all facts were disclosed, and the explanation was bonafide. The CIT(A) and ITAT upheld the AO's order on merits but noted that penalty proceedings are independent and must be reconsidered afresh.

The assessee contended that the issue was debatable, with two possible views on whether FMV or grant price should be the cost of acquisition. The assessee's explanation was based on a bonafide understanding of the law and the fact that federal taxes were paid in the USA on the difference between FMV and grant price.

The CIT(A) and ITAT emphasized that penalty for concealment is not automatic and requires a deliberate default. The assessee had disclosed all material facts, and the explanation offered was bonafide. Reliance was placed on judicial precedents, including the Supreme Court's decision in Reliance Petro Products (P) Ltd., which held that merely making an incorrect claim does not amount to furnishing inaccurate particulars.

The ITAT concluded that the assessee had disclosed all necessary facts and provided a bonafide explanation. As the issue was debatable and the explanation was not found to be false, the penalty under Section 271(1)(c) was not justified. The assessee's appeal was allowed, and the penalty was set aside.

Conclusion:

The ITAT held that the computation of capital gains should consider the grant price as the cost of acquisition. However, the penalty under Section 271(1)(c) was not applicable as the assessee had disclosed all material facts and provided a bonafide explanation. The appeal was allowed, and the penalty was set aside.