2016 (7) TMI 1647 - HC - Income Tax

Penalty u/s 271(1)(c) - AO passed assessment order under Section 143 (3) determining the total income after rejecting the books of accounts and estimating the profit @ 6% and making addition under Section 40(a)(i) of the Act - Tribunal cancelling the penalty - HELD THAT - This Court is of the opinion that the Tribunal in its order has held that the substantial additions on merits have been deleted in this order while considering the cross appeals on merits and therefore nothing survives in favour of the revenue for levy of the penalty. AO could have initiated the fresh penalty proceedings after receipt of the order of the Tribunal but Assessing Officer did not do so. No review of the order is permitted under the I.T. Act by the Assessing Officer. The additions now made by the Assessing Officer in the order dated 6.01.2006 are not part of the show cause notice and no fresh notice is issued for initiating the penalty proceedings against the assessee. The result would be that the Assessing Officer dropped the proceedings for penalty on 30.03.2005 and thereafter did not initiate the penalty proceedings. Commissioner of Income Tax (Appeals) was justified in deciding the issue in favour of the assessee and against the revenue department. We may also note that substantial additions on merits have been deleted in this order while considering the cross appeals on merits. Therefore nothing survives in favour of the revenue for levy of the penalty. Considering the facts and circumstances in the light of the findings of the Commissioner of Income Tax (Appeals) we are of the view Learned Commissioner of Income Tax (Appeals) was justified in canceling the penalty under section 271(1)(c) - Decided in favour of assessee.

Summary

Issues involved:
1. Challenge to the ITAT order by the department regarding penalty cancellation.
2. Disallowance and additions made by the AO under Section 143(3) of the IT Act.
3. Reduction of total receipts rate by CIT (A) and deletion of addition under Section 40(a)(i).
4. Tribunal's directions on rejection of books of account and profit rate application.
5. AO's order disallowing expenses and subsequent appeal by the assessee.
6. Penalty levied under Section 271(1)(c) by the AO and its cancellation by CIT (A).
7. Tribunal's confirmation of CIT (A) order on penalty cancellation.

Analysis:
1. The appellant, the department, challenged the ITAT order that dismissed their appeal against the penalty cancellation. The AO had made disallowances and additions under Section 143(3) of the IT Act, resulting in a total income determination. The CIT (A) reduced the total receipts rate and deleted an addition under Section 40(a)(i), leading to appeals by both the department and the assessee before the Tribunal.

2. The Tribunal directed the AO to re-examine the rejection of books of account and profit rate application. The AO then disallowed certain expenses not allowable under the law, leading to an appeal by the assessee before the CIT (A), which partially allowed the appeal. Subsequently, the AO levied a penalty under Section 271(1)(c), which was cancelled by the CIT (A) and confirmed by the Tribunal.

3. The main contention by the appellant was that the penalty cancellation was unjustified as the penalty proceedings were initiated separately from the assessment proceedings. However, the Senior Counsel argued that since the substantial issues were decided in favor of the assessee, the penalty appeal should not stand.

4. The Tribunal concluded that since the substantial additions on merits were deleted, there was no basis for levying the penalty. The Tribunal highlighted that the penalty proceedings should have been initiated during the proceedings under the Act, which was not the case here. Therefore, the appeal on penalty levying was dismissed in favor of the assessee.

5. In light of the Tribunal's findings and the conclusion that the main appeal was resolved in favor of the assessee, the appeal regarding the penalty imposition did not stand and was dismissed. The Tribunal's detailed analysis and interpretation of the relevant provisions led to the cancellation of the penalty levied by the AO.