2006 (1) TMI 66 - HC - Income Tax

Penalty under section 271(1)(c) - Income-tax Appellate Tribunal, after noticing the Ordinance issued by the Central Government, coupled with the fact of the Reserve Bank of India refusing to exchange the high denomination notes when they were tendered for exchange, has come to the conclusion, that on the day, when the assessee was found to be in possession of high denomination notes, they were only scraps of paper and they could not be used as circulating medium in general use as the representative value and, therefore, it could not be said that the assessee was in possession of unexplained money, appears to us the correct, proper and reasonable conclusion. Therefore, the high denomination notes which were in the possession of the assessee as on January 24, 1978, cannot be said as unexplained money , which the assessee had not disclosed in his return of income and, therefore, it would not warrant levy of penalty under section 271(1)(c) of the Act.

Summary

Issues:
1. Levy of penalty under section 271(1)(c) of the Income-tax Act, 1961 for unexplained money found in possession of the assessee.
2. Applicability of section 69A of the Act in determining ownership of valuable articles.
3. Interpretation of the term "money" in the context of income-tax provisions.

Issue 1: Levy of Penalty under Section 271(1)(c):
The Income-tax Officer levied a penalty of Rs. 95,000 on the assessee for not recording high denomination notes worth Rs. 1,35,000 in the books of account. The Commissioner of Income-tax (Appeals) upheld the penalty, but the Income-tax Appellate Tribunal set it aside. The Tribunal found that the high denomination notes were valueless as they were no longer legal tender when the assessee tried to encash them. The Tribunal concluded that the addition of Rs. 1,35,000 as unexplained money was unsupportable, and thus, the penalty for concealment could not be justified. The High Court agreed with the Tribunal's reasoning and canceled the penalty.

Issue 2: Applicability of Section 69A of the Act:
Section 69A of the Income-tax Act deals with unexplained money or valuable articles owned by the assessee. The Income-tax Officer alleged that the assessee owned Rs. 1,35,000 on a specific date and did not record it in the books of account. However, the Tribunal noted that for section 69A to apply, the assessee must be the owner of the money and offer no satisfactory explanation about its acquisition. Since the high denomination notes were valueless when found in possession of the assessee, the Tribunal held that section 69A did not apply, leading to the cancellation of the penalty under section 271(1)(c).

Issue 3: Interpretation of the Term "Money" in Income-tax Provisions:
The High Court interpreted the term "money" in the context of income-tax provisions. It noted that currency notes should have representative value to be considered as money. The Court agreed with the Tribunal's finding that the high denomination notes, being valueless and unable to be used as a circulating medium, did not constitute unexplained money. Therefore, the Court concluded that the assessee was not in possession of undisclosed income warranting a penalty under section 271(1)(c) of the Act.

In conclusion, the High Court upheld the Tribunal's decision, emphasizing that the high denomination notes found in possession of the assessee were valueless and did not constitute unexplained money. Therefore, the penalty under section 271(1)(c) of the Income-tax Act was canceled, ruling in favor of the assessee and against the Revenue.