2017 (8) TMI 1127 - AT - Income Tax

Penalty u/s 271(1)(c) - deemed dividend addition u/s 2(22)(e) - debate-able issue - advance of loan to shareholders - Held that - the provisions envisaged by the legislature u/s 271(1)(c) of the Act has two limbs, both the limbs are independent to each other and any one of the ingredients may be the cause for imposition of the penalty u/s 271(1)(c) of the Act, in one limb, the concealment may exist whereas in another there may be furnishing of inaccurate particulars of income. The additions on the basis of which the penalty was levied by the AO u/s 271(1)(c) of the Act was deleted by the ld. CIT(A) and the ITAT upheld the order of the ld. CIT(A). Thereafter, the department preferred an appeal before the Hon ble Delhi High court wherein the appeal was admitted and a substantial question of law was framed which was decided against the assessee and in favour of the department. Against the said order of the Hon ble Jurisdictional High Court, the assessee filed SLP which was admitted by the Hon ble Supreme Court 2012 (2) TMI 619 - SUPREME COURT saying Pending appeal, there shall be stay as far as penalty or interest is concerned. In the present case, it is clear that the issue relating to the additions on the basis of which the impugned penalty was levied by the AO is highly debatable. In the present case also the issue relating to the additions on the basis of which the penalty u/s 271(1)(c) of the Act was levied by the Act was debatable. - Levy of penalty deleted - Decided in favour of assessee.

Issues Involved:
1. Deletion of penalty levied under Section 271(1)(c) of the Income Tax Act, 1961 for Assessment Years 2003-04, 2005-06, and 2006-07.
2. Interpretation and applicability of Section 2(22)(e) of the Income Tax Act regarding deemed dividend.
3. Whether the penalty proceedings initiated and concluded by the Assessing Officer (AO) were valid.
4. Whether the issue was debatable and if conflicting judicial opinions affect the imposition of penalty.

Issue-wise Detailed Analysis:

1. Deletion of Penalty Levied Under Section 271(1)(c):
The primary grievance of the department was the deletion of the penalty levied by the AO under Section 271(1)(c). The AO had initially framed the assessment and treated the loan taken by the assessee from its sister concern as deemed dividend under Section 2(22)(e) and added it to the assessee's income. The AO initiated penalty proceedings for furnishing inaccurate particulars of income but later levied the penalty for willful concealment of income. The CIT(A) deleted the penalty, stating that the issue involved was a matter of legal interpretation and that the assessee had not concealed any particulars of income nor furnished inaccurate particulars.

2. Interpretation and Applicability of Section 2(22)(e):
The AO invoked Section 2(22)(e) to treat the loan as deemed dividend, which was initially deleted by the CIT(A) and confirmed by the ITAT. However, the High Court reversed the ITAT's decision, holding that a partnership firm could be treated as a shareholder for the purposes of Section 2(22)(e). The High Court's decision was based on the interpretation that the beneficial owner of the shares, even if not a registered shareholder, could be subject to the deemed dividend provisions. The assessee argued that the interpretation of Section 2(22)(e) was debatable and involved substantial questions of law, which justified the non-imposition of penalty.

3. Validity of Penalty Proceedings:
The AO initiated penalty proceedings for furnishing inaccurate particulars of income but levied the penalty for willful concealment of income. The CIT(A) and the ITAT found this approach flawed, as the penalty proceedings were initiated on one ground and concluded on another. The Karnataka High Court in Manjunatha Cotton & Ginning Factory and the Gujarat High Court in Lakhdhir Lalji held that initiating penalty on one ground and concluding on another is bad in law. Therefore, the penalty order was deemed invalid.

4. Debatable Issue and Conflicting Judicial Opinions:
The CIT(A) and the ITAT noted that the issue of deemed dividend under Section 2(22)(e) was highly debatable, with conflicting judicial opinions. The Hon’ble Supreme Court admitted the assessee's appeal and granted a stay on the penalty and interest, indicating that the issue was arguable. The ITAT referenced several cases, including CIT vs Liquid Investment & Trading Co. and Nayan Builders & Developers Pvt. Ltd., where it was held that penalties should not be imposed in cases involving debatable issues or substantial questions of law. The ITAT concluded that the penalty under Section 271(1)(c) was not warranted in such circumstances.

Conclusion:
The ITAT upheld the CIT(A)'s decision to delete the penalty, emphasizing that the issue involved legal interpretation and was debatable. The AO's approach of initiating penalty on one ground and concluding on another was flawed, rendering the penalty order invalid. The appeals of the department were dismissed, affirming that no penalty under Section 271(1)(c) was exigible in this case.

← Previous Next →