2003 (11) TMI 288 - AT - Income Tax

Summary

Issues Involved:
1. Cancellation of penalty under Section 271(1)(c) of the IT Act, 1961.
2. Validity of the penalty proceedings initiated by the Assessing Officer (AO).
3. Applicability of Explanation 5 to Section 271(1)(c) for immunity from penalty.
4. Consideration of procedural fairness and natural justice in penalty proceedings.
5. Impact of the timing of return filing and payment of taxes on penalty imposition.

Detailed Analysis:

1. Cancellation of penalty under Section 271(1)(c) of the IT Act, 1961:
The Revenue appealed against the CIT(A)'s order canceling the penalty of Rs. 23,92,872 levied by the AO under Section 271(1)(c) for the assessment year 1995-96. The penalty was based on the alleged concealment of income and furnishing of inaccurate particulars by the assessee.

2. Validity of the penalty proceedings initiated by the Assessing Officer (AO):
The AO observed that during a search under Section 132, incriminating evidence indicated unaccounted income and expenses by the assessee. The assessee had disclosed Rs. 40,00,000 under Section 132(4) during the search but filed the return late. The AO held that the conditions for immunity under Explanation 5 to Section 271(1)(c) were not met, as the assessee did not specify the manner of earning the income and failed to pay taxes on time. Consequently, the AO levied a penalty of Rs. 23,92,872.

3. Applicability of Explanation 5 to Section 271(1)(c) for immunity from penalty:
The CIT(A) found that the AO did not provide sufficient reasoning to treat the additional income beyond Rs. 40,00,000 as concealed. The CIT(A) noted that the AO mechanically included Rs. 40,24,225 without proper justification. The CIT(A) emphasized that the penalty should be considered only in the context of Explanation 5, as the assessee had declared the income under Section 132(4) and included it in the return. The CIT(A) concluded that the assessee met the conditions for immunity under Explanation 5, except for the late filing of the return, which was due to the murder of the family head.

4. Consideration of procedural fairness and natural justice in penalty proceedings:
The CIT(A) highlighted that the penalty proceedings lacked procedural fairness, as the show-cause notice did not indicate the invocation of Explanation 5. The CIT(A) referred to the Tribunal's decision in Asstt. CIT vs. Dr. T.N. Venkataraman, which held that the AO must inform the assessee about the applicability of Explanation 5. The CIT(A) ruled that the lack of proper opportunity to the assessee to contest the penalty under Explanation 5 was a violation of natural justice, rendering the penalty order invalid.

5. Impact of the timing of return filing and payment of taxes on penalty imposition:
The CIT(A) observed that the assessee had paid almost the entire advance tax by March 1995 and requested the adjustment of seized cash against the remaining tax liability. The CIT(A) noted that there was no loss to the Revenue due to the late filing of the return, given the circumstances of the family head's murder. The CIT(A) held that the assessee's actions were bona fide and fulfilled the conditions for immunity from penalty under Explanation 5, except for the late filing of the return.

Conclusion:
The CIT(A) canceled the penalty, citing procedural lapses, lack of proper opportunity for the assessee to contest the penalty under Explanation 5, and the bona fide nature of the assessee's disclosure and tax payments. The Tribunal upheld the CIT(A)'s order, dismissing the Revenue's appeal and confirming the cancellation of the penalty.