2005 (4) TMI 22 - HC - Income Tax

Penalty under section 271(1)(c) leviability - Where an order of assessment or reassessment on the basis of which penalty has been levied on the assessee has itself been finally set aside or cancelled by the Tribunal or otherwise, the penalty cannot stand by itself and the same is liable to be cancelled as in the instant case ordered by the Tribunal and later cancellation of penalty by the authorities - Tribunal was justified in holding that the penalty under section 271(1)(c) was not leviable

Issues Involved:
1. Legitimacy of penalty under section 271(1)(c) of the Income-tax Act, 1961.
2. Applicability of Explanation 5 to section 271(1)(c) regarding FDRs.
3. Assessment of FDRs as concealed income.
4. Tribunal's decision on quashing the penalty.

Issue-wise Detailed Analysis:

1. Legitimacy of penalty under section 271(1)(c) of the Income-tax Act, 1961:
The primary issue was whether the penalty under section 271(1)(c) was justifiable. The Tribunal concluded that the penalty was not leviable, as the FDRs found during the search were not considered "valuable articles or things" under Explanation 5 of section 271(1)(c). The Tribunal relied on precedents, including the Gujarat High Court's decision in Bhagwandas Narayan Das v. CIT, which held that documents like FDRs do not possess intrinsic market value and are not negotiable or transferable without the bank's concurrence.

2. Applicability of Explanation 5 to section 271(1)(c) regarding FDRs:
Explanation 5 to section 271(1)(c) applies to assets like money, bullion, jewellery, or other valuable articles or things. The Tribunal noted that FDRs do not fall under these categories. Citing the Madras High Court's decision in I. Devarajan v. Tamil Nadu Farmers Service Co-operative Federation, the Tribunal emphasized that FDRs are not negotiable instruments and lack intrinsic value, thus not attracting Explanation 5.

3. Assessment of FDRs as concealed income:
The Tribunal examined whether the FDRs, valued at Rs. 3.45 lakhs and found in the names of the assessee's minor children, constituted concealed income. The assessee had initially claimed that these FDRs were disclosed in the minors' income-tax/wealth-tax returns. The Tribunal found that the minors were assessed under the Amnesty Scheme, and the interest on these FDRs was assessed in their hands in subsequent years. The Tribunal concluded that the mere surrender of the FDRs' value in the revised return did not prove concealment of income, as the Department failed to establish that the explanation provided by the assessee was false.

4. Tribunal's decision on quashing the penalty:
The Tribunal quashed the penalty, stating that the Department did not provide sufficient evidence to prove that the FDRs were the concealed income of the assessee. The Tribunal emphasized that the surrender of the amount in the revised return could be for various reasons and did not necessarily indicate concealment. The Tribunal's decision was supported by the Supreme Court's rulings in Sir Shadilal Sugar and General Mills Ltd. v. CIT and K.C. Builders v. Asst. CIT, which highlighted that penalty for concealment requires evidence of intentional suppression of income.

Conclusion:
The High Court upheld the Tribunal's decision, agreeing that Explanation 5 to section 271(1)(c) did not apply to FDRs and that the Department failed to prove the FDRs as concealed income. The Court affirmed that the mere surrender of income in a revised return does not constitute concealment, and the Tribunal's findings were based on substantial evidence. The question referred to the Court was answered in favor of the assessee and against the Revenue.

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