2012 (9) TMI 122 - AT - Income Tax

Penalty u/s 271(1)(c) - disentitled for deduction u/s 80HHC - Held that - AO initiated the penalty proceedings for furnishing of inaccurate particulars but finalized the penalty for concealment of income - Even though assessee has not contested the issue at the time of assessment, even after giving explanation that the amount was assortment charges/service charges, AO should have examined the nature of amount and should not have disallowed just because the amount was classified as export commission. Just because assessee has not contested the working made by AO it does not automatically lead to penalty under section 271(1)(c). Each and every addition made in the assessment cannot automatically lead to levy of penalty for concealment of income or furnishing inaccurate particulars of income - on the facts of the case there is no case for levy of penalty just because the claim was disallowed in the assessment and assessee has not contested - against assessee.

Issues Involved:
1. Imposition of penalty under section 271(1)(c) for the assessment years 2001-02 and 2002-03.
2. Whether the penalty proceedings were initiated on one ground and levied on another.
3. The correctness of the assessee's claim for deduction under section 80HHC.
4. Whether the penalty was justified given the nature of the income and the assessee's explanation.

Issue-wise Detailed Analysis:

1. Imposition of Penalty under Section 271(1)(c):
The assessee filed returns declaring nil income after claiming deductions under section 80HHC. The deductions claimed were Rs. 24,47,393/- for AY 2001-02 and Rs. 9,45,131/- for AY 2002-03, which included amounts earned under 'export commission.' The AO excluded 90% of these amounts under Explanation (baa) to section 80HHC(4C), resulting in a loss in the export activity and disallowing the deduction. Consequently, penalties of Rs. 9,67,944/- for AY 2001-02 and Rs. 3,37,412/- for AY 2002-03 were levied, which were confirmed by the CIT (A).

2. Initiation and Finalization of Penalty Proceedings:
The assessee contended that the penalty proceedings were initiated for "furnishing inaccurate particulars" but finalized for "concealment of income." The tribunal noted that the AO did initiate the penalty for furnishing inaccurate particulars but concluded on concealment of income, which was procedurally incorrect as per the precedent set by the Hon'ble Gujarat High Court in Lakhdhir Lalji (85 ITR 77).

3. Correctness of the Assessee's Claim for Deduction under Section 80HHC:
The assessee argued that the amounts termed as 'export commission' were actually re-assortment and service charges related to export activities and should be included in business profits for deduction under section 80HHC. The tribunal found that the assessee's claim was not malafide, supported by the jurisdictional High Court judgment in Bangalore Clothing Co. (260 ITR 371), which required the AO to ascertain the nature of income for deduction purposes. The AO had not examined the nature of the amounts but merely excluded them based on their nomenclature.

4. Justification of Penalty Given the Nature of Income and Explanation:
The tribunal observed that the penalty proceedings are distinct from assessment proceedings and require independent evaluation. The assessee had disclosed all particulars and supported the claim with tax audit reports. The tribunal noted that the AO did not make any inquiries into the nature of the income and that the assessee had provided prima facie evidence supporting the claim. The tribunal concluded that the assessee's claim was made on a bonafide belief and supported by documentation, thus the penalties were not justified.

Conclusion:
The tribunal held that the penalties levied under section 271(1)(c) were unsustainable as the assessee's claim for deduction under section 80HHC was made in good faith and supported by relevant documentation. The penalties were accordingly canceled, and the appeals filed by the assessee were allowed.

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