2004 (4) TMI 281 - AT - Income Tax

Summary

Issues Involved:

1. Jurisdiction of the Assessing Officer under section 120 for levying penalty.
2. Applicability of Explanation-3 to section 271(1)(c) of the Income-tax Act.
3. Bona fide belief and intention behind non-filing of returns.
4. Distinction between deliberate concealment and bona fide mistakes.
5. Ignorance of law as a reasonable cause.

Issue-Wise Detailed Analysis:

1. Jurisdiction of the Assessing Officer under section 120 for levying penalty:

The assessees contended that the ITO who levied the penalty lacked jurisdiction under section 120 of the Act, as the jurisdiction to assess the directors was vested with the DCIT, 3(2), Aayakar Bhavan, Hyderabad. However, this objection was not raised at the time of assessment or during penalty proceedings. According to section 124(3) of the Act, the assessees lost their right to question the jurisdiction at this stage. The Tribunal held that the assessees had no right to raise the issue of jurisdiction before the Appellate Tribunal, and accordingly, the additional grounds were rejected.

2. Applicability of Explanation-3 to section 271(1)(c) of the Income-tax Act:

The Tribunal found merit in the assessees' contention that Explanation-3 to section 271(1)(c) of the Act, as it stood at the relevant point of time, applied only to those who had not been previously assessed to tax. Since the assessees were previously assessed to tax, the Assessing Officer wrongly invoked Explanation-3 to impose penalties. The amendment to Explanation-3 by the Finance Act, 2002, which extended the theory of 'deemed concealment' to those previously assessed, was prospective and not applicable to the assessment years in question.

3. Bona fide belief and intention behind non-filing of returns:

The Tribunal observed that the assessees had no intention to conceal their income but were under a bona fide impression that the firm's returns and tax payments would cover their liabilities. Some assessees had filed returns under the Voluntary Disclosure of Income Scheme, indicating that their income particulars were within the knowledge of the tax department. The Tribunal concluded that no prudent assessee would intentionally avoid filing returns to face the consequences of paying huge taxes and penalties, and thus, the assessees' explanation was bona fide.

4. Distinction between deliberate concealment and bona fide mistakes:

The Tribunal noted that the balance-sheet, Profit & Loss A/c, and Tax Audit reports of the firm contained details of the partners' income, which were already known to the department. Therefore, it was difficult to conceive that the assessees intentionally concealed income. In the case of lady partners, the property income was omitted by mistake but was corrected before any detection by the department. The Tribunal held that the assessees did not conceal income with any mala fide intention, and even in the case of Sri Narayana, the claim of depreciation on an imported car was due to wrong advice.

5. Ignorance of law as a reasonable cause:

The Tribunal referred to various judicial observations that ignorance of law does not excuse, but also noted that the tax laws are complex and often require specialized assistance. The Tribunal concluded that the assessees' actions were based on bona fide impressions and not deliberate concealment. The penalties levied by the Assessing Officer were canceled, and the appeals filed by the assessees were allowed.

Conclusion:

The Tribunal allowed the appeals, canceling the penalties levied by the Assessing Officer, based on the findings that the assessees' actions were bona fide and not intended to conceal income, and that the jurisdictional and statutory provisions were not appropriately invoked by the Assessing Officer.