2010 (7) TMI 150 - HC - Income Tax

Penalty u/s 271(1)(c) bonafide Investment loss - the sum of Rs. 40,00,000/- had given by the assessee to Shri Gautam Nemani, share broker, for purchase of shares in the month of July, 1997. - no shares were ever purchased out of the aforesaid amount the share broker also did to return the money - The AO in his assessment order has mentioned that on March 09, 2001, the Board of Directors of the Company had taken a resolution that in view of the very poor financial conditions of Mr. Gautam Nemani, the balance amount of Rs. 30,00,000/- due from him may be treated as bad debts and be written of in that year - Held that - if the assessee is able to bring his case within Explanation 1 to Section 271, then no penalty can be levied on him. - the explanation offered by the assessee is bona fide and the assessee s case would fall within the ambit of Explanation 1 to Section 271 of Act, 1961.

Summary

Issues:
Challenge to ITAT order deleting penalty under Section 271(1)(c) of the Income Tax Act, 1961 for assessment year 2001-2002.

Analysis:
1. The appeal was filed challenging the ITAT's order deleting the penalty under Section 271(1)(c) of the Income Tax Act, 1961. The counsel for Revenue argued that the ITAT erred in dismissing the appeal as the assessee's claim regarding bad debts related to shares was not bona fide. She relied on a judgment of the Supreme Court in Union of India Vs. Dharamendra Textiles Processors, (2008) 13, SCC 369.

2. The ITAT's order provided cogent reasons for not interfering with the Commissioner's order. The ITAT highlighted that the penalty under Section 271(1)(c) is a civil liability, and the burden lies on the assessee to establish the bona fide nature of their claim. In this case, the assessee had given a sum to a share broker for purchasing shares, but no shares were bought. The Board of Directors decided to treat the amount as bad debts due to the broker's poor financial condition. The ITAT accepted the assessee's contention based on a Board resolution from 1987, indicating the authority to invest in shares.

3. The judgment in Dharamendra Textile Processors clarified that the applicability of Section 271(1)(c) depends on the conditions stated in the section. If the assessee falls within Explanation 1 to Section 271, no penalty can be levied. In this case, the explanation offered by the assessee was deemed bona fide, aligning with Explanation 1 to Section 271 of the Act.

4. Considering the factual conclusions by the Commissioner and ITAT, the assessee's explanation was found to be genuine, and the case fell within the ambit of Explanation 1 to Section 271. Consequently, the assessee was not liable to pay the penalty under Section 271(1)(c) of the Income Tax Act, 1961. The appeal was dismissed as devoid of merits, with no costs imposed.

This detailed analysis of the judgment showcases the legal reasoning behind the decision to dismiss the appeal challenging the deletion of the penalty under Section 271(1)(c) of the Income Tax Act, 1961 for the assessment year 2001-2002.