2017 (7) TMI 204 - HC - Income Tax

Penalty Proceedings under Section 271(1)(c) - Held that - Tribunal had accepted the case of the assessee that he has carried on the business of Draft Discounting and earns money thereby negating the Order of the Assessing Officer in the Assessment Proceedings. Further, no amount was added as income. On the contrary, the case of the assessee, which was negated by the assessing officer of carrying on the business of Draft Discounting, is accepted by the Tribunal. The Explanation (1) to Section 271(1)(c) of the Act, in the facts and circumstances of the present case, would not arise.- Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the Tribunal was right in holding that the Explanation to Section 271(1)(c) was correctly invoked by the CIT (A)?
2. Whether the basis for initiation of Penalty Proceedings was valid given the Tribunal's findings in the Quantum Appeal?
3. Whether the assessee's explanation regarding Draft Discounting business was substantiated and bona fide?
4. Applicability of Explanation 1 to Section 271(1)(c) of the Income Tax Act in this case.

Issue-wise Detailed Analysis:

1. Whether the Tribunal was right in holding that the Explanation to Section 271(1)(c) was correctly invoked by the CIT (A)?

The Tribunal initially upheld the penalty imposed by the Assessing Officer under Section 271(1)(c) on the grounds that the assessee failed to prove the Draft Discounting business and thus concealed income. However, this was challenged by the assessee, who argued that the Tribunal in the Quantum Appeal had accepted the existence of the Draft Discounting business, albeit with a higher commission rate of ?2 per thousand instead of ?1 per thousand. The Tribunal's acceptance of the business invalidated the basis for the penalty, making the invocation of Explanation 1 to Section 271(1)(c) incorrect.

2. Whether the basis for initiation of Penalty Proceedings was valid given the Tribunal's findings in the Quantum Appeal?

The Penalty Proceedings were initiated based on the Assessing Officer's finding that the assessee did not carry on the Draft Discounting business. However, the Tribunal in the Quantum Appeal later held that the assessee was indeed engaged in Draft Discounting and adjusted the commission rate. This decision effectively negated the original basis for the penalty. Since the Tribunal's findings in the Quantum Appeal contradicted the basis for the penalty, the initiation of Penalty Proceedings was deemed invalid.

3. Whether the assessee's explanation regarding Draft Discounting business was substantiated and bona fide?

The assessee consistently maintained that they conducted a Draft Discounting business, earning a commission of ?1 per thousand. Despite initial rejections by the Assessing Officer and the Commissioner (Appeals), the Tribunal in the Quantum Appeal accepted this claim, albeit adjusting the commission rate to ?2 per thousand. The Tribunal's acceptance of the business operations and the commission structure substantiated the assessee's explanation, proving it to be bona fide. Thus, the penalty for concealment of income was not justified.

4. Applicability of Explanation 1 to Section 271(1)(c) of the Income Tax Act in this case.

Explanation 1 to Section 271(1)(c) applies when an assessee fails to offer an explanation or provides a false or unsubstantiated explanation. In this case, the Tribunal accepted the assessee's explanation regarding the Draft Discounting business and its commission structure. Since no additional income was added or disallowed, and the Tribunal found the explanation to be bona fide, Explanation 1 to Section 271(1)(c) was not applicable. The penalty provisions under this section were thus not attracted.

Conclusion:

The High Court concluded that the Tribunal was not right in invoking Explanation 1 to Section 271(1)(c) of the Act since the very basis of the Penalty Proceedings was negated by the Tribunal in the Quantum Appeal. The assessee's explanation was substantiated and accepted, rendering the penalty proceedings invalid. The question referred was answered in favor of the assessee, and the reference was disposed of with no costs.