2001 (10) TMI 256 - AT - Income Tax

Summary

Issues Involved:
1. Cancellation of penalty imposed under section 271(1)(c) of the Income Tax Act.
2. Explanation and justification for the source of 2,100 shares.
3. Voluntary surrender of additional income by the assessee.
4. Imposition of penalty under section 271(1)(c) and the requirement of mens rea.
5. Quantum of penalty imposed.

Detailed Analysis:

1. Cancellation of Penalty Imposed under Section 271(1)(c):
The Revenue's primary contention was that the CIT(A) erred in canceling the penalty of Rs. 14,70,000 imposed under section 271(1)(c) for the assessment year 1992-93. The Assessing Officer (AO) discovered that the assessee, a share broker, had sold 30,000 shares of ITC Limited, but could not satisfactorily explain the source of 2,100 of those shares. The AO found the assessee's explanation about the source of these shares to be illogical and unbelievable, leading to an addition under section 69 of the Act. The penalty proceedings were initiated due to this discrepancy.

2. Explanation and Justification for the Source of 2,100 Shares:
The assessee claimed that the 2,100 shares were initially purchased on 18-6-1991 and sold on 30-7-1991, but later found their way back to the assessee through some broker/employee. The assessee admitted to not being able to identify the owner of these shares and voluntarily offered the value of these shares as additional income to avoid litigation. However, the AO rejected this explanation as unsubstantiated and proceeded with the addition.

3. Voluntary Surrender of Additional Income by the Assessee:
The assessee submitted a letter on 25-3-1995, voluntarily offering the value of the 2,100 shares as additional income to avoid litigation and requested leniency regarding penalty. The AO, however, was not convinced by this voluntary surrender, considering it a result of detection by the AO rather than a genuine act of good faith.

4. Imposition of Penalty under Section 271(1)(c) and the Requirement of Mens Rea:
During penalty proceedings, the assessee relied on judicial precedents to argue that penalty could not be imposed without proving mens rea. The CIT(A) agreed with the assessee, noting that no material evidence was brought to show that the surrendered amount was concealed income and that penalty based solely on the surrender was not justified. However, the Tribunal found that the explanation given by the assessee was not acceptable in light of human probabilities and was in the nature of a "fantastic or unacceptable explanation." The Tribunal referred to the Supreme Court's judgment in K.P. Madhusudanan's case, which clarified that proving mens rea was no longer necessary for imposing penalty under section 271(1)(c).

5. Quantum of Penalty Imposed:
The AO imposed a penalty at the rate of 200% of the tax sought to be avoided. The Tribunal found no specific reasons for this rate and considered the circumstances of the case, including the assessee's cooperation with the revenue authorities. The Tribunal directed the AO to reduce the penalty to 100% of the tax sought to be avoided, amounting to Rs. 7,35,000.

Conclusion:
The Tribunal upheld the imposition of penalty under section 271(1)(c) but reduced the quantum of the penalty to Rs. 7,35,000, considering the cooperation of the assessee and the circumstances of the case. The appeal was allowed in these terms.