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Issues: Imposition of penalty under section 271(1)(c) of the Income-tax Act of 1961 - Sustainability of penalty in the case of alleged gifts made by partners to their wives and subsequent deduction of interest paid on loans.
Analysis: The High Court of Orissa addressed the issue of the sustainability of the penalty imposed under section 271(1)(c) of the Income-tax Act of 1961. The case involved a registered firm with five partners who made gifts to their wives in the form of book transfers during the assessment year 1969-70. The firm claimed a deduction of interest paid on these loans in the assessment year 1970-71. The Income Tax Officer (ITO) disallowed the claim, reopened the assessment for the previous year, and added the interest to the firm's income under section 40(b) of the Act. Subsequently, a penalty of Rs. 39,000 was levied under section 271(1)(c) by the Income-tax Appellate Tribunal (ITAT). The Tribunal upheld the penalty, emphasizing that the scheme adopted by the assessee was to reduce tax liability by showing gifts to the partners' wives. The Tribunal found that the revenue had established a case against the assessee for concealment of income or furnishing inaccurate particulars. However, the assessee contended that all primary facts were disclosed to the ITO, and the gifts were genuine to the best of their knowledge. The assessee argued that failure to establish the genuineness of the gifts did not amount to concealment or furnishing inaccurate particulars. The High Court noted that the firm, as an independent unit of assessment, could not exhibit contumacious conduct, which should be attributed to the partners. The Court disagreed with the Tribunal's reasoning and held that the imposition of penalty under section 271(1)(c) was not justified in this case. The Court emphasized that the partners, not the firm, were responsible for any contumacy, and the penalty should not have been levied. Therefore, the Court concluded that the imposition of the penalty was not sustainable in the given circumstances. In a concurring opinion, Justice Panda agreed with the judgment delivered by Justice Mishra, supporting the decision that the penalty under section 271(1)(c) was not sustainable in the case at hand. The Court made no order for costs in this matter.
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