2017 (4) TMI 236 - AT - Income Tax

Penalty levied u/s 271(1)(c) - addition u/s 68 - cash credits found in the hands of the partnership firm in the name of partner and others - Held that - As noticed that the assessee s only source of income is rental income and there is no charge that the assessee has suppressed its rental income. Further the year under consideration, being the first year of operation, the assessee could not have generated income to the extent of cash credits/capital credits offered by it and introduced the same in that form. Hence, in the facts and circumstances of the case discussed above, the assessment of cash credits in the first year of operation was due to legal fiction created in sec. 68 of the Act. Hence acceptance of the said assessment, in our view, would not lead to a case of concealing particulars of income or furnishing of inaccurate particulars of income. The impugned addition has been made due to legal fiction prescribed u/s 68 of the Act and there is no scope that the assessee could have earned income to the extent assessed by the partnership firm. We have also noticed that the question of assessing such cash credits in the hands of partnership firm during the first year of operation has got divergent views. Hence the entire addition itself becomes debatable one. It is well settled proposition of law that the penalty u/s 271(1)(c) cannot be levied on debatable issues. - Decided in favour of assessee

Issues Involved:
1. Confirmation of penalty levied under Section 271(1)(c) of the Income Tax Act.
2. Validity of the penalty proceedings.
3. Applicability of legal fiction under Section 68 of the Income Tax Act.
4. Alleged concealment of income or furnishing of inaccurate particulars.
5. First year of operation and its implications on income generation.
6. Approval from Joint Commissioner for penalty proceedings.

Detailed Analysis:

1. Confirmation of Penalty Levied under Section 271(1)(c):
The assessee, a partnership firm formed on 10-04-2008, was in its first year of operation for the assessment year 2009-10. The AO noticed unsecured loans amounting to ?2,09,23,000/- from 23 parties, with confirmation letters from 20 parties. The AO initiated penalty proceedings under Section 271(1)(c) after the assessee's auditor offered the entire loan amount and additional capital as income during a survey operation. The AO levied a penalty of ?79.80 lakhs, which was confirmed by the CIT(A) based on the principle that voluntary surrender of income does not exonerate the assessee from penalty liability.

2. Validity of the Penalty Proceedings:
The assessee argued that the penalty notice did not specify the exact charge, i.e., whether it was for furnishing inaccurate particulars or concealing income, which are distinct under Section 271(1)(c). The AO's failure to strike off the inappropriate limb in the penalty notice and the absence of evidence of approval from the Joint Commissioner were cited as procedural lapses that could invalidate the penalty proceedings.

3. Applicability of Legal Fiction under Section 68:
The impugned addition was made under Section 68 due to the assessee's inability to produce loan creditors at the time of the survey. The legal fiction under Section 68 treats unexplained cash credits as income. However, the assessee furnished confirmation letters, financial statements, and returns of income from the creditors, which were not proven false. The Tribunal noted that the addition was due to the legal fiction and not because the assessee had actually earned the income equivalent to the cash credits.

4. Alleged Concealment of Income or Furnishing of Inaccurate Particulars:
The AO's penalty was based on the view that the assessee furnished inaccurate particulars and concealed income. However, the Tribunal observed that the addition under Section 68 was due to a legal fiction and not due to actual concealment or furnishing of inaccurate particulars. The Tribunal emphasized that the assessee's only source of income was rental, and there was no allegation of suppressed rental income.

5. First Year of Operation and Its Implications on Income Generation:
The Tribunal highlighted that the assessee was in its first year of operation, and it was improbable for the firm to have generated income equivalent to the cash credits. The assessment of cash credits in the first year of operation was seen as a result of the legal fiction under Section 68, making the addition itself debatable.

6. Approval from Joint Commissioner for Penalty Proceedings:
The assessee contended that the penalty order did not specify whether the AO obtained approval from the Joint Commissioner, a mandatory condition under the Act. However, the Tribunal did not find it necessary to address this issue, as it had already concluded that the penalty under Section 271(1)(c) was not leviable based on the facts and circumstances.

Conclusion:
The Tribunal set aside the order of the CIT(A) and directed the AO to delete the penalty, concluding that the addition under Section 68, due to legal fiction, did not warrant a penalty for concealment or furnishing inaccurate particulars. The appeal of the assessee was allowed.

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