2016 (3) TMI 537 - AT - Income Tax

Penalty u/s 271(1)(c) - non communication of charge - Held that - On perusal of the said notice we have observed that the said notice did not contain any specific charge as to whether the penalty proceeding was initiated for concealment of particulars of income or for furnishing of such income and even in the body of the assessment order, what has been stated is, penalty proceedings u/s 271(1)(c) r.w. Explanation thereto are initiated separately . In these situation it is clear that by not specifying the specific charge in the show cause notice, the assessee has infact been denied is reasonable and sufficient opportunity of being heard as the assessee was not even knowing what was the fault for which it was to explain innocence. It is settled law that when a particular penal provision like clause-C of sub-section1 of section 271 of I.T. Act, 1961, deals with more than one situation for attracting penalty provisions, the AO is duty bound to communicate the charge Specifically so that assessee can explain his reasons and superior authority can test the application of mind. In this regard we found support from the judgment rendered by Hon ble Bombay High Court in case of CIT vs. Kaushalaya 1995 (1) TMI 25 - BOMBAY High Court . - Decided in favour of assessee Disallowance made consequent to change of heads of income - Held that - While passing of the penalty order there is no recording of the fact that the Explanation offered by assessee was found false and unless falsity of the Explanation is established, no penalty can be imposed. We are of the considered view that the penalty under the aforementioned grounds has been levied merely on the basis of additions by disallowing certain claim/expenses and there is no material or evidence has been brought on record to show constructive concealment on the part of assessee. We found our support from the decision rendered in the case of CIT vs. Reliance Petroproducts Ltd. 2010 (3) TMI 80 - SUPREME COURT wherein it has been categorically mentioned that in order to expose the assessee to the penalty, the case should be strictly covered by the provisions and the penalty provisions cannot be invoked in the routine manner. A mere making of a claim which is not sustainable in law by itself will not amount to furnish inaccurate particulars regarding the income of the assessee and as such claim made in the return cannot amount to the inaccurate particulars, therefore, considering the entire case as well as factual position, we allow the abovesaid grounds.- Decided in favour of assessee

Summary

Issues:
1. Confirmation of penalty order u/s 271(1)(c) of the Income-tax Act, 1961.
2. Classification of interest and rental income.
3. Claim of expenses under various heads.
4. Adequacy of explanation provided by the assessee.
5. Specific charges in the show cause notice.
6. Falsity of explanation for imposing penalty.

Confirmation of Penalty Order:
The appeal was filed against the penalty order passed by the Assessing Officer (AO) u/s 271(1)(c) of the Income-tax Act, 1961, which was confirmed by the CIT(A). The grounds of appeal challenged the legality and factual basis of the penalty. The appellant argued that the penalty was unwarranted as there was no finding of false explanation by the lower authorities. The Tribunal observed that the additions made by the AO and upheld by the CIT(A) were debatable issues, as evidenced by the admission of the appeal by the High Court on substantial questions of law. Citing a relevant judgment, the Tribunal held that the penalty could not be levied on debatable issues, leading to the allowance of the appeal and setting aside of the penalty.

Classification of Interest and Rental Income:
The AO classified interest and rental income as taxable under the head "income from other sources" instead of business income, a view upheld by the CIT(A). The appellant contended that the basis of assessment was altered for the year under consideration, making the penalty unwarranted. The appellant's explanation highlighted that the genuineness of the expenditure was not in question, and the change in income classification did not attract penal provisions. Citing legal precedent, the appellant argued that the claim was bona fide. The Tribunal considered these arguments and the pending appeal on substantial questions of law, leading to the conclusion that the penalty was not justified.

Claim of Expenses Under Various Heads:
The Revenue Authorities disallowed expenses claimed by the assessee under various heads not covered by the relevant provisions. The penalty proceedings were initiated under section 271(1)(c) of the Act. The appellant's explanation emphasized that the expenditure's genuineness was not doubted, and the disallowance was due to a change in the method of calculating total income. The Tribunal found that the penalty was imposed solely on the basis of disallowed expenses without evidence of constructive concealment, in line with a Supreme Court decision. Consequently, the Tribunal allowed the grounds related to the disallowed expenses.

Adequacy of Explanation Provided by the Assessee:
The appellant's explanation regarding the altered basis of assessment and the genuineness of the expenditure was deemed acceptable by the AO. However, the AO later found the explanation unacceptable and imposed the penalty. The Tribunal noted that there was no recording of the explanation being false in the penalty order. It emphasized that the penalty provisions cannot be invoked routinely and must strictly align with the legal requirements. Relying on legal precedent, the Tribunal concluded that the penalty was not justified, leading to the allowance of the appeal.

Specific Charges in the Show Cause Notice:
The Tribunal highlighted that the show cause notice did not specify the specific charges for initiating the penalty proceedings, denying the assessee a reasonable opportunity to defend against the alleged fault. Citing a Bombay High Court judgment, the Tribunal emphasized the importance of communicating specific charges to allow the assessee to explain and authorities to assess the application of the penalty provisions. Consequently, the Tribunal allowed the grounds related to the lack of specific charges in the notice.

Falsity of Explanation for Imposing Penalty:
The Tribunal reiterated the necessity of establishing the falsity of the explanation provided by the assessee to impose a penalty under section 271(1)(c) of the Act. It emphasized that penalties cannot be levied solely based on disallowed claims without evidence of deliberate concealment. Relying on legal principles, the Tribunal concluded that the penalty was not justified in the absence of proven falsity in the explanation. As a result, the penalty levied by the AO and upheld by the CIT(A) was set aside in favor of the assessee.

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