2014 (10) TMI 621 - HC - Income Tax

Levy of penalty u/s 271(1)(c) - Unexplained investment in promissory notes treated as income u/s 69 Whether the assessment order was protective assessment order or substantive assessment order - Held that - Assessee contended that the assessment order passed by the AO was a protective assessment order and the AO as such could not have passed an order to initiate the penalty proceedings u/s 271(1)(c) of the Act - while passing the order to initiate the penalty proceedings u/s 271(1)(c) of the Act the AO specifically observed that the penalty u/s 271(1)(c) of the Act be initiated in respect of income of ₹ 5 lakhs, which has been assessed as protective measure the protective assessment shall be treated as substantive assessment if and when income by way of unexplained investment in promissory note worth ₹ 37,65,000/- is finally excluded from the income of Shri Jitendra R., Patel and vice versa makes it very much clear that the assessment order passed by the AO was a protective assessment order and it cannot be termed and/or treated as substantive assessment order as observed by the tribunal thus, the tribunal has materially erred in treating the assessment order as substantive assessment order without properly appreciating the order passed by the AO and it is to be held that the assessment order as such was a protective assessment order. Where there is dispute as to whether income concealed would be assessed in the hands of the assessee, unless the determination is made by the AO, no charge of concealment can be made against the person in whose hands income is added on protective basis and the assessee is liable only if it is his income, which has been concealed - the only person upon whom the substantive assessment is made would be liable for penalty, provided the conditions precedent for the imposition of the penalty are satisfied. Unless and until the substantive assessment is made and final assessment order is passed in case of the assessee adding the income in the hands of the assessee, even the initiation of the penalty proceedings are not permissible - There cannot be any initiation of the penalty proceedings with respect to the protective assessment order relying upon Bankim J. Shah Versus Commissioner Of Income-Tax 1991 (7) TMI 59 - GUJARAT High Court - there cannot be any protective initiation of the penalty proceedings - as such the basis or foundation for initiation of the penalty proceedings is the requisite satisfaction as provided in Section 271(1) of the Act and as such satisfaction could not be reached when the Income Tax Officer himself believes that the income for which the assessee is charged for concealment or furnishing of inaccurate particulars does not belong to him and he is assessed only as a protective measure - the tribunal has materially erred in treating the order passed by the AO as substantive assessment order Decided in favour of assessee.

Issues Involved:
1. Whether the tribunal was right in law in holding that the penalty was rightly levied under Section 271(1)(c) of the Income Tax Act, 1961.
2. Whether the assessment order passed by the Assessing Officer was a protective assessment order or a substantive assessment order.

Detailed Analysis:

Issue 1: Legality of Penalty under Section 271(1)(c)
The core issue was whether the penalty levied under Section 271(1)(c) of the Income Tax Act, 1961, was justified. The assessee argued that the penalty proceedings were invalid as the assessment order was a protective assessment order. The tribunal, however, treated the assessment order as a substantive assessment order and upheld the penalty.

Issue 2: Nature of the Assessment Order
The determination of whether the assessment order was protective or substantive was crucial. The assessee contended that the assessment order was protective, citing the Assessing Officer's own statements in the order. The Assessing Officer had noted that the promissory notes worth Rs. 37,65,000 were found and seized from another individual's residence and that there was inconsistency and variation in the ownership claims. The officer concluded that the income from the unexplained investment in promissory notes was to be assessed in the hands of the assessee as a protective measure, with the condition that it would become substantive if excluded from the other individual's income.

The tribunal, however, interpreted the assessment order as substantive, noting that the assessee had admitted ownership of the promissory notes and had requested their inclusion in his income. The tribunal's stance was that the assessment was substantive due to the assessee's acceptance and subsequent tax payment.

Court's Findings:
The High Court examined the assessment order and found that the Assessing Officer had indeed treated the assessment as protective. The court emphasized that the officer had explicitly stated the assessment was protective and contingent upon the final exclusion of the promissory notes from the other individual's income. The court noted that the Assessing Officer had not accepted the assessee's statement in its entirety and had expressed uncertainty regarding the true ownership of the promissory notes.

The court further clarified that penalty proceedings under Section 271(1)(c) could not be initiated based on a protective assessment order. It held that penalty could only be levied on substantive assessments where the income was conclusively determined to belong to the assessee. The court cited precedents, including the Calcutta High Court's decision in Commissioner of Income Tax Vs. Super Steel (Sales) Co. and its own unreported decision in Commissioner of Income Tax Vs. Bankim J. Shah, which supported the view that protective assessments could not form the basis for penalty proceedings.

Conclusion:
The High Court concluded that the tribunal had erred in treating the assessment order as substantive. It held that the assessment order was indeed protective, and consequently, the initiation of penalty proceedings under Section 271(1)(c) was not permissible. The court rejected the revenue's alternative request to remand the matter for further factual determination and answered the question of law in favor of the assessee, setting aside the tribunal's order and quashing the penalty imposed.

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