1991 (1) TMI 197 - AT - Income Tax

Summary

Issues Involved:
1. Validity of the penalty levied under Section 271(1)(c) of the Income-tax Act, 1961.
2. Applicability of Explanation 1 to Section 271(1)(c) to the facts of the case.

Detailed Analysis:

1. Validity of the Penalty Levied Under Section 271(1)(c):

The primary issue in this case is whether the penalty of Rs. 2,50,000 levied under Section 271(1)(c) of the Income-tax Act, 1961, is valid. The penalty was imposed on the grounds that the assessee firm had concealed income by claiming a deduction of Rs. 2,99,996 as export commission, which was disallowed by the Income-tax Officer (ITO) and confirmed by the CIT (Appeals) and the Tribunal.

The ITO's basis for the penalty was that the commission was not genuinely payable to Hotel Winrace Pvt. Ltd., Bangalore, but was a device to reduce the firm's real income. The CIT (Appeals) confirmed the penalty, stating that the commission was ultimately divided among the partners of the firm, making it disallowable under Section 40(b) of the Act.

The Judicial Member held that the penalty should be canceled since the addition was upheld on a different ground by the appellate authorities, and there was no concealment of income. The Accountant Member disagreed, stating that the penalty proceedings were validly initiated and the Explanation 1 to Section 271(1)(c) applied, deeming the income concealed.

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

Explanation 1 to Section 271(1)(c) provides that where an assessee offers an explanation which is found to be false or is unable to substantiate and fails to prove its bona fides, the amount added or disallowed shall be deemed to represent the concealed income.

The Judicial Member opined that the explanation offered by the assessee was bona fide and the penalty could not be imposed merely because the claim was disallowed under Section 40(b). The Accountant Member, however, held that the explanation was false and the penalty was justified under Explanation 1(A).

The Third Member concluded that the penalty could not be imposed under Section 271(1)(c) as the assessee's explanation was bona fide, and there was no finding that the company was sham or that the payment was not made. The issue was only whether the payment should be considered as an indirect payment to the partners, attracting disallowance under Section 40(b).

Conclusion:

The Third Member's decision was in favor of the assessee, concluding that the penalty imposed under Section 271(1)(c) should be canceled. The explanation offered by the assessee was bona fide, and there was no concealment of income. The penalty proceedings were validly initiated but did not warrant imposition on the merits of the case. The matter was referred back to the original Bench for passing an order according to the majority opinion.