2017 (8) TMI 1564 - AT - Income Tax

Penalty u/s 271(1)(c) - deemed dividend u/s 2(22) (e) - bonafide belief - treating the advances received by the assessee from the company in which the assessee has substantial interest as deemed dividend - HELD THAT - Advance was refunded by the assessee also during the impugned year. Also all facts material to the said transaction were truly and fully disclosed by the assessee during the quantum proceedings and no incorrect particular or detail was furnished by the assessee. In such circumstances where the true nature of the amount received is not income but is treated to be so only on account of the deeming provisions of section 2(22)(e) of the Act coupled with the explanation of the assessee that the sum was advanced for business purpose which explanation has not been found to be false and also the fact that the said amount was refunded during the year the assessee s belief that it was not in the nature of income appears to be bonafide. The Hon ble Gujarat High court in the case of Sarabhai Chemicals Pvt. Ltd. vs CIT 2002 (2) TMI 44 - GUJARAT HIGH COURT has held that where the assessee is under a bonafide belief that no income has actually accrued no penalty is leviable. Assessee should not be visited with the rigors of penalty u/s 271(1)(c) of the Act as the assessee s contention that no material was suppressed and therefore there was no malafide intention on the part of the assessee to evade the tax has sufficient cogency. Accordingly we direct that the order of the Ld.CIT(Appeals) be set aside and penalty imposed be deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Levy of penalty under section 271(1)(c) of the Income Tax Act, 1961.
2. Treatment of advances received as deemed dividend under section 2(22)(e) of the Income Tax Act, 1961.
3. Bona fide belief and explanation of the assessee regarding the nature of the advance.

Issue-wise Detailed Analysis:

1. Levy of Penalty under Section 271(1)(c) of the Income Tax Act, 1961:

The appeals were filed by the assessee against the orders of the CIT(Appeals) confirming the levy of penalty under section 271(1)(c) for the assessment years 2009-10 and 2010-11. The penalty was levied on account of the addition made of deemed dividend as per section 2(22)(e). The CIT(A) upheld the penalty, stating that the treatment of the advances as deemed dividend was unambiguous and not debatable. The CIT(A) noted that the assessee did not disclose the advance in his return and only during detailed scrutiny was the issue highlighted and added to the income. The CIT(A) referred to the Supreme Court judgment in the case of Reliance Petro Products and other relevant judgments, concluding that the penalty was rightly levied as the assessee furnished inaccurate particulars of income.

2. Treatment of Advances Received as Deemed Dividend under Section 2(22)(e) of the Income Tax Act, 1961:

The assessee received advances amounting to Rs. 12,87,115 from a company in which he held a substantial shareholding. The Assessing Officer treated the advance as deemed dividend under section 2(22)(e) and added it to the assessee's income. The CIT(A) restricted the addition to the peak of the advance given, which was Rs. 10,99,518, and the ITAT upheld this addition. The explanation provided by the assessee was that the advance was for purchasing land on behalf of the company, but this was not substantiated. The ITAT noted that the provisions of section 2(22)(e) were clear and unambiguous, and the assessee's explanation did not hold.

3. Bona Fide Belief and Explanation of the Assessee Regarding the Nature of the Advance:

The assessee contended that he harbored a bona fide belief that the advance was not income since it was for acquiring land for the company and was refunded during the year. The ITAT found merit in this contention, noting that the explanation was not accepted because it remained unsubstantiated, not because it was false. The ITAT cited the Gujarat High Court's decision in Sarabhai Chemicals Pvt. Ltd. vs CIT, which held that no penalty is leviable if the assessee is under a bona fide belief that no income has accrued. The ITAT also referred to the Supreme Court's decision in Hindustan Steels Ltd. vs. State of Orissa, which emphasized that penalty should not be imposed if there is a bona fide belief and no malafide intention to evade tax.

Conclusion:

The ITAT concluded that the assessee should not be penalized under section 271(1)(c) as the explanation provided was bona fide and all material facts were disclosed. The penalty of Rs. 10,99,518 was deleted, and the appeals for both assessment years were allowed. The ITAT emphasized that the assessee's belief was bona fide, and there was no malafide intention to evade tax, thus setting aside the CIT(A)'s order and deleting the penalty.