1976 (4) TMI 18 - HC - Income Tax

Summary

Issues:
Penalty cancellation under Explanation to section 271(1)(c) for assessment year 1968-69.

Analysis:
The case involved a penalty imposed on the assessee for the assessment year 1968-69 under the Explanation to section 271(1)(c) of the Income Tax Act. The penalty was based on the discrepancy between the returned income and the assessed income, with the returned income being less than 80% of the assessed income. The penalty was initially imposed by the Inspecting Assistant Commissioner but was later cancelled by the Tribunal on appeal. The Tribunal's decision was based on the finding that the Explanation to section 271(1)(c) was not applicable in this case. The Tribunal held that although certain expenses, such as salary payments disallowed to partners, were added to the assessed income, these expenses should be deducted if they were bona fide incurred for the purpose of earning income, even if disallowed by the Income-tax Officer.

In the present case, the Tribunal found that there was no evidence to suggest that the partners to whom the salary was paid were not working partners. Additionally, there was no evidence that the salary amount shown in the books was not actually paid. The Tribunal recognized that while the Act may disallow certain expenditures, the business necessities might require such payments to be made. Therefore, the mere disallowance of an expense under the Act does not preclude it from being considered when determining the applicability of the Explanation to section 271(1)(c). After deducting the salary amount from the assessed income, which was reduced on appeal, it was established that the returned income was not less than 80% of the assessed income as calculated for the Explanation's purpose. Consequently, the Explanation to section 271(1)(c) was deemed inapplicable, and the penalty imposed on the assessee was rightly cancelled.

In conclusion, the High Court answered the question referred in favor of the assessee, ruling against the department. The assessee was granted costs, assessed at Rs. 200, along with counsel's fee at the same figure.