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2011 (8) TMI 1341 - AT - Income TaxPenalty u/s 271(1)(c) - Excess stock of gold ornaments and silver ornaments was found in business premises of Assessee - AO imposed penalty u/s 271(1)(c) on the amount comprising disallowance of remuneration to partners on account of treatment of the amount disclosed on account of excess stock u/s 69B of the Act and the amount added u/s 68. HELD THAT - In the assessee's own case, CHOKSHI HIRALAL MAGANLAL VERSUS DY. CIT 2011 (1) TMI 125 - ITAT, AHMEDABAD , tribunal have accepted the claim of the assessee that excess stock has to be treated as business income, entitled to deduction of a higher amount of remuneration to partners in terms of provisions of section 40(b) of the Act. As regards the amount added u/s 68, the matter has been restored to the file of the AO for fresh decision in accordance with law. Hon'ble Supreme Court in the case of, KC BUILDERS AND ANOTHER VERSUS ASSISTANT COMMISSIONER OF INCOME-TAX 2004 (1) TMI 7 - SUPREME COURT , held that ordinarily, penalty cannot stand if the assessment itself is set aside. Where an order of assessment or reassessment on the basis of which penalty has been levied on the assessee, has itself been finally set aside or cancelled by the Tribunal or otherwise, the penalty cannot stand by itself and the same is liable to be cancelled. Hon'ble Delhi HC, in the case of R DALMIA AND OTHERS (A. OP) VERSUS COMMISSIONER OF INCOME-TAX 1991 (10) TMI 35 - DELHI HIGH COURT , held that no penalty survives after deletion of additions, forming the basis for the levy of penalty. Since the very basis upon which the penalty has been imposed on the amount relating to excess stock added u/s 69B and consequently, denial of deduction on account of remuneration to partners in terms of provisions of section 40(b) of the Act, does not exist in view of the aforesaid order, we are of the opinion that penalty levied in relation to the said amount has to be cancelled. As regards penalty levied in relation to amount added u/s 68, since matter is restored to the file of the AO, penalty does not survive at this stage. However, the AO is free to initiate the penalty proceedings in accordance with law while completing the assessment in pursuance to the aforesaid directions of the ITAT in quantum appeal - Matter restored back.
Issues Involved:
1. Legality and justification of penalty levied under section 271(1)(c) of the Income-tax Act, 1961. 2. Alleged concealment of income by not showing the value of excess stock. 3. Applicability of the decision of Fakir Mohd. Haji Hasan. 4. Dispute over the assessability of income disclosed during the survey. 5. Addition of Rs. 1,05,000 under section 68 of the Act. Detailed Analysis: 1. Legality and Justification of Penalty under Section 271(1)(c): The assessee contested the penalty of Rs. 5,75,000 levied by the DCIT under section 271(1)(c) for the Assessment Year 2004-05. The CIT(A) upheld the penalty, which the assessee claimed was "wholly illegal, unlawful and against the principles of natural justice." The assessee argued that the CIT(A) did not fully consider the submissions and evidence, including audited annual accounts and tax audit reports. 2. Alleged Concealment of Income: The CIT(A) upheld the AO's finding that the assessee concealed income by not showing the value of excess stock, which was specifically credited in the Profit and Loss Account. The excess stock of gold and silver ornaments, worth Rs. 35,70,518, was found during a survey under section 133A. The working partner agreed to surrender the excess stock and pay the tax. The AO brought this amount to tax as deemed income under section 69B and denied the deduction of higher remuneration to partners under section 40(b). 3. Applicability of Fakir Mohd. Haji Hasan Decision: The CIT(A) relied on the decision of Fakir Mohd. Haji Hasan, which the assessee argued was distinguishable on facts and in law. The Tribunal noted that the CIT(A) found the appellant had "knowingly filed inaccurate particulars in the return of income," and thus the penalty was justified. 4. Dispute Over Assessability of Income: The assessee contended that there was a dispute over whether the income disclosed during the survey was assessable under any specific head of income or was a "headless income." The Tribunal, referencing their order in the quantum appeal, concluded that the excess stock should be treated as business income, thus entitling the assessee to a higher deduction for partner remuneration under section 40(b). 5. Addition Under Section 68: The AO added Rs. 1,05,000 under section 68, which was upheld by the CIT(A). However, the Tribunal restored the matter to the AO for fresh decision in accordance with the law. The Tribunal noted that the AO did not specifically initiate penalty proceedings under section 271(1)(c) for the amount added under section 68. Conclusion: The Tribunal concluded that the penalty on the excess stock could not stand as the stock was to be treated as business income, which allowed for higher partner remuneration. Consequently, the penalty related to the excess stock was canceled. Regarding the addition under section 68, since the matter was restored to the AO for fresh adjudication, the penalty did not survive at this stage. The AO was permitted to initiate penalty proceedings afresh based on the outcome of the reassessment. The appeal was allowed, and the penalty of Rs. 5,75,000 was canceled. Order Pronouncement: The order was pronounced in the court on 5-08-2011.
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