1991 (1) TMI 196 - AT - Income Tax

Summary

Issues Involved:

1. Legitimacy of the penalty under section 271(1)(c) of the Income-tax Act, 1961.
2. Applicability of Explanation 1 to section 271(1)(c).

Issue-wise Detailed Analysis:

1. Legitimacy of the Penalty under Section 271(1)(c):

The primary issue revolves around the penalty of Rs. 2,50,000 levied by the Income-tax Officer (ITO) under section 271(1)(c) for the assessment year 1977-78. The assessee, a firm engaged in processing and exporting sea foods, had claimed a deduction of Rs. 2,99,996 as export commission, which was disallowed by the ITO. The ITO's finding was that the commission was not genuinely payable to Hotel Winrace Pvt. Ltd., Bangalore, and was instead a device to reduce the firm's income. This addition was confirmed by the CIT (Appeals) and the Tribunal, emphasizing that the commission was ultimately divided among the partners of the firm, thus falling under the mischief of section 40(b) of the Income-tax Act, 1961.

The ITO initiated penalty proceedings under section 271(1)(c) and concluded that there was a clear case of concealment of income, as the assessee failed to provide any evidence of services rendered by Hotel Winrace Pvt. Ltd. The CIT (Appeals) upheld the penalty, agreeing with the ITO's findings. However, the Tribunal had to decide whether there was concealment of income and whether the penalty was justified.

The Tribunal noted that the ITO's and the CIT (Appeals)'s findings were based on different grounds. The ITO's basis was the non-genuine nature of the commission, while the CIT (Appeals) disallowed the amount under section 40(b). The Tribunal referred to the decision in CIT v. Ananda Bazar Patrika (P.) Ltd., which held that penalty should emanate from the satisfaction of the ITO. Since the CIT (Appeals) and Tribunal's findings differed from the ITO's, the penalty was not justified. The Tribunal concluded that the penalty did not emanate from the ITO's satisfaction and thus was not exigible.

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

The applicability of Explanation 1 to section 271(1)(c) was another critical issue. The Explanation provides that if the assessee offers an explanation which is found to be false or fails to substantiate it, the amount added or disallowed shall be deemed to represent the concealed income. The ITO argued that the assessee's claim was false and thus attracted the Explanation. However, the Tribunal found that the explanation offered by the assessee was not proven to be false. The CIT (Appeals) had disallowed the commission under section 40(b), which was a different ground from the ITO's finding.

The Tribunal emphasized that the Explanation 1(A) would not apply as the assessee's explanation was not found to be false by the ITO or the appellate authorities. The Tribunal also noted that the explanation provided by the assessee was bona fide and the disallowance was merely a rejection of this bona fide explanation. Consequently, the Tribunal held that the Explanation 1(A) did not apply to the facts of this case, and the penalty was not warranted.

Separate Judgments by Judges:

The Judicial Member and the Accountant Member had differing views on the application of the penalty. The Judicial Member held that the penalty was not justified as it did not emanate from the ITO's satisfaction and the explanation provided by the assessee was bona fide. On the other hand, the Accountant Member believed that the penalty was justified under Explanation 1 to section 271(1)(c), as the assessee's claim was false and the penalty proceedings were validly initiated.

Third Member's Order:

The Third Member, considering the difference of opinion, concluded that the penalty under section 271(1)(c) was not justified. The Third Member agreed with the Judicial Member that the explanation offered by the assessee was bona fide and the disallowance under section 40(b) was a matter of legal contention rather than concealment of income. The Third Member also held that Explanation 1(A) did not apply as there was no finding that the assessee's explanation was false. Consequently, the penalty was cancelled.

Conclusion:

The Tribunal, by majority opinion, allowed the appeal filed by the assessee, cancelling the penalty levied by the Income-tax Officer. The Tribunal concluded that the penalty was not justified as it did not emanate from the satisfaction of the ITO and the explanation provided by the assessee was bona fide, thus not attracting the provisions of Explanation 1 to section 271(1)(c).