1999 (4) TMI 128 - AT - Income Tax

Summary

Issues Involved:
1. Legality of Penalty under Section 271(1)(c) of the Income Tax Act.
2. Validity of Explanation 1 to Section 271(1)(c) in the context of penalty proceedings.
3. Applicability of judicial precedents regarding penalty proceedings.

Detailed Analysis:

1. Legality of Penalty under Section 271(1)(c) of the Income Tax Act:
The assessee filed a return of income admitting Rs. 1,26,135, but the Assessing Officer (AO) assessed the total income as Rs. 5,32,480. The AO imposed a penalty of Rs. 1,00,000 under Section 271(1)(c) for concealment of income, which was later reduced to Rs. 33,000 by the AO. The CIT(A) confirmed the penalty regarding the unexplained cash of Rs. 50,000 but deleted the penalty concerning the jewellery. The Tribunal, in its order dated 18-1-90, sustained the addition of Rs. 50,000 towards unaccounted cash but deleted the addition for jewellery worth Rs. 67,326.

2. Validity of Explanation 1 to Section 271(1)(c) in the Context of Penalty Proceedings:
The assessee argued that the AO erred in law by levying a penalty under Section 271(1)(c) as there was no intentional concealment of income. The assessee contended that the penalty proceedings were invalid as the Explanation to Section 271(1)(c) was not invoked in the penalty order or the notice under Section 274. The CIT(A) referenced the Explanation, but it was not mentioned in the AO's penalty order or notice. The Tribunal noted that judicial precedents require the Explanation to be put before the assessee at the earliest stage during assessment proceedings for the penalty to be valid.

3. Applicability of Judicial Precedents Regarding Penalty Proceedings:
The Tribunal considered various judicial precedents, including:
- P.M. Shah [1993] 203 ITR 792 (Bom.): Held that the assessee must be informed if the Explanation to Section 271(1)(c) is sought to be applied.
- Dharamchand L. Shah [1993] 204 ITR 462 (Bom.): Stated that additions made in assessment do not automatically justify penalty imposition.
- Prabhat Oil Traders v. ITO [133 CTR (Ahd.) 195]: Emphasized the necessity of mentioning the Explanation in penalty orders.

The Tribunal observed that the AO did not mention the Explanation in the penalty order or notice, and the CIT(A)'s reference to the Explanation was unwarranted. The Tribunal concluded that the penalty could not be sustained under the main provision of Section 271(1)(c) without evidence of concealment, and the benefit of doubt should be given to the assessee.

Separate Judgments Delivered:
Judgment by N.D. Raghavan, JM:
The learned Judicial Member allowed the appeal, stating that the penalty proceedings were invalid as the Explanation to Section 271(1)(c) was not invoked in the penalty order or notice. The Tribunal quashed the order impugned and deleted the penalty.

Judgment by P.S. Kalsian, AM:
The learned Accountant Member dissented, arguing that the CIT(A) was justified in directing the AO to recalculate the penalty. He emphasized that the assessee's explanation regarding the unexplained cash was not bona fide, and the penalty under Section 271(1)(c) was applicable.

Third Member Order by T.V. Rajagopala Rao, President:
The Third Member agreed with the Judicial Member, holding that the penalty could not be sustained as the Explanation to Section 271(1)(c) was not invoked in the penalty order or notice. The Third Member emphasized that the CIT(A) erred in invoking the Explanation for sustaining the penalty. Consequently, the penalty was cancelled, and the appeal of the assessee was allowed.

Conclusion:
The Tribunal, by majority view, allowed the appeal of the assessee, quashing the penalty imposed under Section 271(1)(c) of the Income Tax Act. The decision emphasized the necessity of invoking the Explanation to Section 271(1)(c) at the earliest stage and ensuring that penalty proceedings are conducted in strict compliance with legal provisions and judicial precedents.