2016 (7) TMI 662 - AT - Income Tax

Penalty u/s 271(1)(c) - whether the assessee firm has discharged its onus by establishing the identity of the creditors who are the partners of the firm, creditworthiness of the creditors / partners and genuineness of the transactions? - Held that - Where there was no intention on the part of the assessee to conceal income and the assessee had agreed to offer sundry credits which were carried forward from the previous year as income as a measure of purchasing peace, imposition of penalty u/s 271(1)(c) of the Act was not justified. In the instant case also, the assessee had clearly disclosed the reasons on account of which, it agreed to treat the contribution made by the partners towards capital as its income. In our opinion, there was almost a measure to purchase peace. It is not a case where the assessee had furnished inaccurate particulars of its income. Viewed from any angle, in the facts and circumstances of the present case, no penalty u/s 271(1)(c) of the Act for furnishing inaccurate particulars of income can be validly levied in this case. In that view of the matter, impugned penalty cancelled. - Decided in favour of assessee.

Issues Involved:
1. Legitimacy of penalty imposed under Section 271(1)(c) of the Income Tax Act.
2. Explanation of sources for additions in the capital accounts of partners.
3. Assessment of the firm's income and the partners' contributions.
4. Validity of the surrender of income and its implications on penalty.
5. Differentiation between assessment and penalty proceedings.
6. Applicability of legal precedents in determining the penalty.

Issue-wise Detailed Analysis:

1. Legitimacy of Penalty Imposed under Section 271(1)(c):
The appeal challenges the penalty of Rs. 4,27,770/- imposed under Section 271(1)(c) of the Income Tax Act for the assessment year 2005-06. The main contention was whether the assessee firm deliberately furnished wrong particulars of income, thereby justifying the penalty.

2. Explanation of Sources for Additions in Capital Accounts:
The assessee firm explained the sources of additions in the partners' capital accounts. For Shri Sunil Choupal, the sources included withdrawals, sale of jewelry, cash gifts, and loans. The Assessing Officer accepted sources totaling Rs. 3,15,000/- but disputed Rs. 8,55,000/- attributed to cash gifts and loans. For Shri Sudhir Choupal, the explanation included sale of jewelry, current year income, and cash loans. The Assessing Officer accepted Rs. 2,51,000/- but disputed Rs. 3,14,000/-.

3. Assessment of Firm's Income and Partners' Contributions:
The Assessing Officer added Rs. 11,69,000/- (Rs. 8,55,000/- for Shri Sunil Choupal and Rs. 3,14,000/- for Shri Sudhir Choupal) as unexplained income under Section 68 of the Act. The assessee firm surrendered this amount subject to no penalty, which the Assessing Officer rejected, leading to the penalty imposition.

4. Validity of Surrender of Income and Implications on Penalty:
The surrender letter dated 18.12.2007 by one of the partners was central to the Revenue's case. The letter stated the surrender of Rs. 11,69,000/- as undisclosed income for peace of mind, subject to no penalty. The Tribunal noted that the surrender was made to avoid prolonged litigation and not due to concealment intentions.

5. Differentiation Between Assessment and Penalty Proceedings:
The Tribunal emphasized that penalty and quantum proceedings are independent. While findings in assessment proceedings are relevant, they do not automatically justify penalty imposition. The Tribunal cited CIT v. Ishtiaq Hussain, asserting that assessment findings alone cannot operate as res judicata in penalty proceedings.

6. Applicability of Legal Precedents:
The Tribunal referred to several legal precedents, including:
- CIT v. Ishtiaq Hussain: Assessment findings are relevant but not conclusive for penalty.
- India Rice Mills v. CIT: Unexplained deposits before business commencement should be added in partners' hands, not the firm's.
- Abhyudaya Pharmaceuticals v. CIT: Unexplained credits before business commencement cannot be firm's income.
- CIT v. Kewal Krishan & Partners: Capital contributions at business start are not firm's income.
- CIT v. Chennupati Tyre & Rubber Products: No penalty if surrender was to purchase peace and not due to concealment.

The Tribunal concluded that the firm started its business in January 2005, and the partners' capital contributions were before this period. Therefore, the unexplained deposits should be considered in the partners' hands, not the firm's. The penalty under Section 271(1)(c) was deemed unjustified, and the appeal was allowed, canceling the impugned penalty.

Conclusion:
The Tribunal allowed the appeal, canceling the penalty imposed under Section 271(1)(c) of the Income Tax Act, emphasizing that the penalty was not justified as the unexplained capital contributions were made before the firm commenced its business.

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