1994 (8) TMI 58 - AT - Income Tax

Summary

Issues Involved:
1. Legality of imposing penalty under section 271(1)(c) without prior notice.
2. Bona fide nature of the assessee's explanation and the adequacy of disclosed facts.
3. Justification of penalty related to disallowed expenses for theatre maintenance and vehicle maintenance.

Issue-wise Detailed Analysis:

1. Legality of Imposing Penalty Under Section 271(1)(c) Without Prior Notice:

The assessee contended that the imposition of penalty under section 271(1)(c) by resorting to the provisions of Explanation 1 without prior notice was illegal. The assessee relied on the decision of the Bombay High Court in CIT v. P.M. Shah, which held that in penalty proceedings, the provisions of the Statute must be strictly construed, and the levy of penalty under the Explanation was not sustainable without specific initiation of penalty proceedings under the Explanation.

However, the Departmental Representative argued that Explanation to section 271(1)(c) can be invoked at any stage without prior notice, citing decisions from various High Courts and the ITAT, Bangalore Bench. The Gujarat High Court in Drapco Electric Corpn. held that the Explanation enacts a mere rule of evidence and can be invoked by the authority imposing the penalty even if not mentioned in the show-cause notice.

The Tribunal concluded that Explanation 1 to section 271(1)(c) could be resorted to at any stage of the proceedings without specific mention in the show-cause notice. The Tribunal distinguished the present Explanation 1 from the earlier Explanation, noting that the current Explanation merely explains the offense of concealment without providing an independent basis for constituting such an offense.

2. Bona Fide Nature of the Assessee's Explanation and Adequacy of Disclosed Facts:

The assessee claimed that its explanation was bona fide and that all relevant facts were disclosed, attributing the inability to substantiate the explanation to the death of the senior partner. The assessee relied on the decisions in CIT v. Devi Dayal Aluminium Industries (P.) Ltd. and CIT v. Mediratta Engg. Corpn.

The Tribunal referred to its order in the quantum appeal, which found that the assessee had inflated expenses and failed to provide a satisfactory explanation for certain expenses. The Tribunal noted that the explanation offered by the assessee was not bona fide and that all material facts were not disclosed.

3. Justification of Penalty Related to Disallowed Expenses for Theatre Maintenance and Vehicle Maintenance:

The Tribunal observed that the final disallowance of Rs. 2,75,720 out of theatre maintenance expenses constituted concealment of income. The Tribunal found that the assessee had managed to procure bills from third parties to support its claim and failed to provide a satisfactory explanation for certain expenses.

Regarding vehicle maintenance expenses, the Tribunal noted that the explanation offered by the assessee had some basis, although not fully substantiated. The Tribunal concluded that the rejection of the explanation for vehicle maintenance expenses did not constitute grounds for penalty under section 271(1)(c).

Conclusion:

The Tribunal upheld the leviability of penalty under section 271(1)(c) on the amount of Rs. 2,75,720 related to theatre maintenance expenses, considering it to constitute concealment of income. However, the Tribunal did not consider the disallowance of vehicle maintenance expenses to constitute concealment of income. The penalty was ordered to be computed based on the amount of Rs. 2,75,720, treating the tax on this amount as the tax sought to be evaded, and the levy of penalty at the minimal level was upheld. The assessee's appeal was partially allowed to this extent.