2005 (1) TMI 323 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of penalty under Section 271(1)(c) of the Income Tax Act, 1961.
2. Invocation of Explanation 1 to Section 271(1)(c).
3. Recording of satisfaction by the Assessing Officer (AO) during assessment proceedings.
4. Bona fide belief of the assessee regarding the system of accounting.

Detailed Analysis:

1. Deletion of Penalty under Section 271(1)(c) of the IT Act, 1961:

The primary issue in this case is whether the CIT(A) was correct in deleting the penalty of Rs. 76,60,927 imposed under Section 271(1)(c) for alleged concealment of income. The AO had added back amounts related to export incentives, interest on exports, and interest receivable from IDBI to the taxable income of the assessee, as these were declared on a receipt basis despite the assessee switching to a mercantile system of accounting.

2. Invocation of Explanation 1 to Section 271(1)(c):

The CIT(A) argued that the AO had not invoked Explanation 1 to Section 271(1)(c) during the assessment proceedings and thus could not apply it while levying the penalty. However, the Tribunal referenced the Supreme Court's rulings in *K.P. Madhusudhanan vs. CIT* and *Addl. CIT vs. Jeevan Lal Sah*, which clarified that Explanation 1 is a part of Section 271(1)(c) and can be invoked at any time. The Tribunal concluded that the CIT(A)'s observation lacked merit and rejected it.

3. Recording of Satisfaction by the AO During Assessment Proceedings:

The CIT(A) also held that the penalty was invalid because the AO had not recorded satisfaction regarding the concealment of income during the assessment proceedings. The Tribunal referred to the Supreme Court's decision in *D.M. Manasvi vs. CIT*, which stated that the AO's satisfaction regarding concealment must precede the issuance of a penalty notice. The Tribunal found that the AO had indeed recorded his satisfaction by issuing a penalty notice for furnishing inaccurate particulars of income, thus fulfilling the requirement under Section 271(1)(c).

4. Bona Fide Belief of the Assessee Regarding the System of Accounting:

The CIT(A) accepted the assessee's claim that the deduction was made in bona fide belief based on the previously accepted mixed method of accounting. However, the Tribunal noted that once the assessee switched to a mercantile system, all income, including export incentives and interest, should have been declared on an accrual basis. The Tribunal cited the Supreme Court's observations in *State Bank of Travancore vs. CIT*, which emphasized that a mercantile system requires accounting on an accrual basis. The Tribunal concluded that the assessee's explanation was not bona fide and that the AO correctly invoked Explanation 1 to Section 271(1)(c).

Conclusion:

The Tribunal reversed the CIT(A)'s order and upheld the AO's imposition of the penalty. The Tribunal found that the AO had correctly invoked Explanation 1 to Section 271(1)(c), had recorded the necessary satisfaction during the assessment proceedings, and that the assessee's explanation was not bona fide. Consequently, the appeal filed by the Revenue was allowed.