1986 (10) TMI 48 - AT - Income Tax

Summary

Issues Involved:
1. Confirmation of the levy of penalty under section 271(1)(c) of the Income Tax Act.
2. Determination of whether the interest income accrued and was concealed.
3. Evaluation of the bona fide nature of the assessee's explanation for non-disclosure of interest income.
4. Consideration of the legal principles regarding the accrual of income under the mercantile system of accounting.

Issue-Wise Detailed Analysis:

1. Confirmation of the Levy of Penalty under Section 271(1)(c) of the Income Tax Act:
The primary issue in these appeals was the confirmation of the levy of penalty under section 271(1)(c) of the Act. The assessee, a registered partnership firm engaged in the business of Real Estates, was penalized for allegedly concealing income by not accounting for accrued interest of Rs. 97,139 in its books for the assessment year 1977-78. The penalty was initially levied by the ITO and confirmed by the CIT(A), who reduced the amount of concealed income to Rs. 60,850.

2. Determination of Whether the Interest Income Accrued and Was Concealed:
The contention revolved around whether the interest income from a sale deed with Baroda Municipal Corporation (BMC) had accrued and whether its non-disclosure amounted to concealment. The assessee had sold land to BMC under an agreement that stipulated interest on delayed payments. BMC defaulted on payments, and the assessee filed a civil suit to recover the unpaid instalments and interest. The CIT(A) reduced the interest income to be added to Rs. 60,850, considering the dispute and the fact that BMC was not prepared to pay the stipulated interest rate.

3. Evaluation of the Bona Fide Nature of the Assessee's Explanation for Non-Disclosure of Interest Income:
The assessee argued that the interest provision was not made in the final accounts because the suit for recovery was filed after the accounts were finalized. The explanation was that the interest became relevant only after the legal course was pursued. The CIT(A) rejected this explanation, stating that the financial condition of BMC did not justify the non-disclosure of accrued interest. The assessee's representative highlighted that the revised return was filed to claim a legitimate liability and that the non-provision of interest was a bona fide act, not an intentional concealment.

4. Consideration of the Legal Principles Regarding the Accrual of Income Under the Mercantile System of Accounting:
The Tribunal referred to the Supreme Court judgment in the case of State Bank of Travancore v. CIT, which discussed the concept of real income and its relevance to the accrual of income under the mercantile system. The Tribunal noted that while the revenue's stand on the accrual of interest was upheld, the issue at hand was the levy of penalty. The Tribunal emphasized that the penalty for concealment requires clear evidence of conscious concealment, which was not established in this case. The Tribunal concluded that the assessee's belief in non-accrual was bona fide and that the revised return was filed for legitimate reasons.

Conclusion:
The Tribunal held that there was no conscious concealment of income by the assessee and that the explanation provided was bona fide. The penalties levied for both assessment years were deleted, and the orders passed by the CIT(A) were set aside. The appeals were allowed in favor of the assessee.