2011 (1) TMI 1224 - AT - Income Tax

Capital gain or business income - Sale of shares - Held that - Assessing Officer gave a finding that the assessee was asked to submit proof of purchase and sale of shares, in response to which purchase note and sales note were filed. Thereafter, the assessee offered capital gains for taxation on August 29, 2008 by filing a letter to that effect - Thus, it transpires that the claim of the assessee has been rejected by treating the amount of Rs. 33,34,973 as income liable to be taxed under the head Capital gains and penalty proceedings have been initiated on this issue. According to our humble opinion, this amounts to recording a prima facie satisfaction that the assessee furnished inaccurate particulars of income - The assessee has furnished some explanation which is not found to be bona fide by us. The case of the Revenue also finds support from the decision in the case of Escorts Finance Ltd. In this case, the claim was made on the basis of the chartered accountant s certificate furnished in the prospectus. Yet, the court found that since the claim was prima facie inadmissible, the explanation of the assessee is not bona fide. In this case, the claim is not supported by any evidence. The explanation is also not based on any affidavit or declaration from the accountant - Following decision of Commissioner of Income-tax Versus ECS Ltd. 2010 (2) TMI 713 - Delhi High Court - Decided in favour of assessee.

Issues Involved:
1. Taxability of capital gains on the sale of shares.
2. Levy of penalty under section 271(1)(c) of the Income-tax Act for concealment or furnishing inaccurate particulars of income.
3. Voluntariness of the surrender of income for taxation.
4. Bona fide error and its implications on penalty proceedings.
5. Recording of satisfaction by the Assessing Officer for initiating penalty proceedings.

Detailed Analysis:

1. Taxability of Capital Gains on the Sale of Shares:
The primary issue revolves around the taxability of capital gains arising from the sale of 2,50,000 shares of Indocare Pharmaceuticals Ltd. The shares were purchased for Rs. 16,65,227 and sold for Rs. 50 lakhs. The assessee claimed the capital gains of Rs. 33,34,973 to be exempt under section 10(38) of the Income-tax Act, 1961. However, the shares were sold on a "spot basis" and not through a recognized stock exchange, and no securities transaction tax (STT) was paid. Consequently, the gains attracted a tax rate of 10% under the proviso to section 112 of the Act.

2. Levy of Penalty under Section 271(1)(c):
The Assessing Officer initiated penalty proceedings under section 271(1)(c) for concealment or furnishing inaccurate particulars of income. The penalty was levied on the grounds that the assessee failed to disclose the correct nature of the transaction and did not pay the required STT, thus making the claim under section 10(38) invalid. The penalty proceedings were completed, and a minimum penalty of Rs. 3,74,184 was imposed.

3. Voluntariness of the Surrender of Income:
The assessee argued that the mistake was realized and corrected voluntarily before the Department detected it. However, the Department contended that the surrender was not voluntary as it was made only after the Assessing Officer requested the purchase and sale bills. The Tribunal agreed with the Department, noting that the surrender was made on the third hearing and not immediately upon receipt of the questionnaire, thus it could not be considered voluntary.

4. Bona Fide Error and Its Implications:
The assessee claimed that the error was a bona fide mistake made by the accountant, who was unaware of the technical provisions of the law. The Commissioner of Income-tax (Appeals) accepted this explanation, noting that the accountant was common to all family members and the same mistake was made in all their cases. However, the Tribunal found this explanation unconvincing, as no affidavit or declaration from the accountant was provided to support the claim of bona fide error. The Tribunal referenced the Supreme Court's decision in Union of India v. Dharamendra Textile Processors, which held that penalty under section 271(1)(c) is a civil liability and does not require mens rea.

5. Recording of Satisfaction by the Assessing Officer:
The Tribunal examined whether the Assessing Officer recorded the necessary satisfaction for initiating penalty proceedings. The Tribunal cited the decision in Ms. Madhushree Gupta v. Union of India, which requires the Assessing Officer to arrive at a prima facie satisfaction that the assessee has concealed income or furnished inaccurate particulars. The Tribunal found that the Assessing Officer's assessment order did contain a prima facie satisfaction, as it clearly stated that penalty proceedings were initiated due to the incorrect claim of exemption under section 10(38).

Conclusion:
The Tribunal concluded that the assessee's claim of exemption under section 10(38) was not bona fide and was a result of furnishing inaccurate particulars of income. The surrender of income was not voluntary, and the explanation provided was not supported by any substantial evidence. Consequently, the Tribunal upheld the penalty levied under section 271(1)(c) and dismissed the cross-objections raised by the assessee. The order was made applicable to all related appeals and cross-objections, resulting in all appeals being allowed and all cross-objections being dismissed.

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