1984 (4) TMI 67 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Section 41(2) of the Income Tax Act.
2. Imposition of penalty under Section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Applicability of Section 41(2) of the Income Tax Act:
The primary issue concerns whether the provisions of Section 41(2) of the Income Tax Act, which deals with balancing charges, are applicable to the sale of a ship by the assessee.

- Assessment Year and Relevant Transactions: The assessment year in question is 1975-76. The assessee sold a ship for Rs. 70,000, which was initially acquired for Rs. 70,280. The assessee claimed a capital loss of Rs. 280 in its income statement.
- ITO's Draft Assessment: The Income Tax Officer (ITO) proposed treating Rs. 21,084 as profit under Section 41(2) due to depreciation previously allowed on the ship, reducing its Written Down Value (WDV) to Rs. 49,196. The ITO argued that the balancing profit should be taxed.
- Assessee's Objection: The assessee contended that Section 41(2) was not applicable, arguing that the written down value for ships should not be adjusted for depreciation.
- IAC's Direction: The Inspecting Assistant Commissioner (IAC) upheld the ITO's view, confirming that the balancing profit was correctly calculated.
- CIT(A) and Tribunal's Decision: Both the Commissioner of Income Tax (Appeals) [CIT(A)] and the Tribunal upheld the ITO's decision, emphasizing that the written down value should be calculated by deducting total depreciation from the actual cost, even for ships.

2. Imposition of Penalty under Section 271(1)(c) of the Income Tax Act:
The second issue revolves around whether the assessee's failure to include the balancing charge in its return of income justifies the imposition of a penalty under Section 271(1)(c).

- ITO's Penalty Order: The ITO imposed a penalty of Rs. 21,084, concluding that the assessee had no explanation for not showing the balancing charge in its return.
- Assessee's Appeal: The assessee argued before the CIT(A) that all necessary facts were disclosed and that there was a bona fide belief that Section 41(2) was not applicable to ships. The assessee relied on case law to support its position.
- CIT(A)'s Conclusion: The CIT(A) upheld the penalty, stating that the assessee had concealed income.
- Tribunal's Analysis: The Tribunal found that the assessee had disclosed all relevant facts and particulars in its return. The Tribunal noted that the assessee had consistently contested the applicability of Section 41(2) from the assessment stage to the Tribunal. The Tribunal concluded that the assessee's belief that no balancing charge would arise on the sale of the ship was bona fide and that the assessee had not concealed income or furnished inaccurate particulars.

Conclusion:
The Tribunal held that the assessee had neither concealed its income nor furnished inaccurate particulars. The penalty imposed under Section 271(1)(c) was cancelled. The appeal was allowed in favor of the assessee.