2019 (1) TMI 930 - AT - Income Tax

Levy of penalty u/s.271(1)(c) - addition on an estimated basis by rejecting the book results - Held that - As settled legal position on the issue of requirement of initiation of penalty as well as levy of penalty by the CIT(A) who makes the addition for the first time on new grounds, the penalty stands unsustainable on technical grounds. In any case, the addition of ₹ 5 lakhs constitutes adhoc addition based on the estimations. On this ground also, assessee gets relief. Penalty levied originally by the AO stands deleted as they no longer exists. See Arya Hybrids Seeds Ltd. Vs. DCIT 2017 (1) TMI 993 - ITAT PUNE . CIT(A) deleted the same. Further, the penalty levied on the addition of ₹ 5 lakhs sustained by the CIT(A), will be unsustainable in law as the relevant penalty proceedings should have been initiated by the CIT(A) only as the addition of ₹ 5 lakhs is his creation. Considering all we are of the considered opinion that the penalty levied by the AO is required to be quashed. We accordingly order the AO to delete the same. - Grounds raised by the assessee are allowed.

Summary

Issues Involved:
1. Levy of penalty under section 271(1)(c) for the addition of ?5,00,000 made by CIT(A) on an estimated basis.
2. Levy of penalty under section 271(1)(c) for the disallowance of interest under section 36(1)(iii) amounting to ?2,66,982.
3. Levy of penalty under section 271(1)(c) for the addition of ?75,000 under section 68 on account of unexplained loan from the brother of the assessee.

Detailed Analysis:

1. Levy of Penalty for Addition of ?5,00,000 on Estimated Basis:
The assessee contested the penalty levied under section 271(1)(c) for an addition of ?5,00,000 made by CIT(A) on an estimated basis. The assessee argued that since the addition was made on an estimated basis, there was no reason to levy a penalty. Additionally, the assessee contended that the penalty should have been initiated and levied by the CIT(A) as per the precedent set in the case of Manjunatha Cotton & Ginning Factory [359 ITR 565 (Kar.)]. The Tribunal agreed with the assessee, noting that penalty proceedings must be initiated and levied by the authority making the addition. Therefore, the penalty levied by the AO was unsustainable, and the addition being an estimation further invalidated the penalty.

2. Levy of Penalty for Disallowance of Interest under Section 36(1)(iii):
The assessee argued that the disallowance of ?2,66,982 under section 36(1)(iii) was incorrect as the interest was paid for a loan utilized for business purposes. The shed constructed using the loan was transferred to the assessee's brother due to unfavorable business prospects. The Tribunal found merit in the assessee's argument, referencing the Supreme Court's ruling in Reliance Petroproducts Pvt. Ltd. [322 ITR 158], which held that making an incorrect claim does not amount to furnishing inaccurate particulars. Additionally, the Tribunal noted that the relevant proviso to section 36(1)(iii) was not applicable for the assessment year in question. Consequently, the penalty for this disallowance was deemed unjustified.

3. Levy of Penalty for Addition under Section 68 for Unexplained Loan:
The assessee contested the penalty for an addition of ?75,000 under section 68, arguing that sufficient evidence, including the 7/12 extract of agricultural land, was provided to support the loan from his brother. The Tribunal accepted the assessee's evidence as plausible and reasonable, noting that agricultural produce is commonly sold in cash and the loan amount was relatively small. The Tribunal cited the case of National Textiles [249 ITR 125 (Guj)] to support its decision to delete the penalty.

Conclusion:
The Tribunal concluded that the penalties levied by the AO were unsustainable. The CIT(A) should have initiated and levied penalties for additions made by him. The penalties based on estimated additions and disallowances were not justified. Consequently, the Tribunal ordered the deletion of the penalties, allowing the appeal of the assessee.