2008 (10) TMI 273 - AT - Income Tax

Summary

Issues Involved:
1. Legitimacy of penalty u/s 271(1)(c) for concealment of income.
2. Applicability of Explanation 5 to Section 271(1)(c).
3. Validity of assessment based on estimated income.

Summary:

1. Legitimacy of Penalty u/s 271(1)(c) for Concealment of Income:
The assessee, engaged in various businesses including Arrack, did not file a return for the assessment year 1986-87. The AO assessed the total income at Rs. 20,56,130 u/s 144 and levied a penalty of Rs. 10,06,590 u/s 271(1)(c) for concealment of income. The CIT(A) confirmed the penalty, stating that the assessee had concealed income and failed to cooperate with the Department.

2. Applicability of Explanation 5 to Section 271(1)(c):
The CIT(A) invoked Explanation 5 to Section 271(1)(c), arguing that the penalty was justified as the income came to light only due to search and seizure operations. However, the Tribunal noted that Explanation 5 applies to assets found during a search, not to estimated income. The Tribunal held that the CIT(A) erred in applying Explanation 5 to the additions made by the AO on account of estimated income from various sources.

3. Validity of Assessment Based on Estimated Income:
The AO's assessment included estimated income from Arrack shops and other businesses. The Tribunal emphasized that the main item of Rs. 15,15,284 was based on pure estimation. The Tribunal concluded that a legal fiction, such as Explanation 5, should not be extended beyond its intended purpose. Since the additions did not represent tangible assets found during the search, the penalty could not be sustained.

Conclusion:
The Tribunal cancelled the penalty, stating that the CIT(A)'s order could not be sustained. The appeal filed by the assessee was allowed.