2015 (3) TMI 713 - HC - Income Tax

Penalty u/s 271(1)(c) - no explanation as to how the shares were purchased for over ₹ 23 lakhs in AY 2004-05 - ITAT deleted penalty levy based on reasoning that the AO did not make any effort to discharge the burden placed upon him to investigate and to bring on record some material to dispute the assessee s contentions with regard to the actual sale being at ₹ 6000/- - Held that - It is now well established that Section 271(1)(c) of the Act does not compel the Revenue to initiate proceedings imposing penalty in all cases where findings were adverse against the assessee at a given point of time, leading to addition of amounts or disallowance. Possibly, an explanation may have been required from assessee in the given facts of this case as to why it acquired the shares even when the company was facing winding up proceedings but the fact remains that the efforts to rehabilitate the company were undertaken. The lack of proper explanation undoubtedly might have justified the addition. The disallowance was ultimately directed and upheld by the ITAT, however, the reasoning of the ITAT in holding that the penalty proceedings required satisfaction of a higher threshold of proof, which confirmed the basis for it, ultimately cannot be faulted. - Decided against revenue.

Summary

Issues:
1. Penalty imposed under Section 271(1)(c) of the Income Tax Act, 1961 was cancelled by the ITAT.
2. Disallowance of claimed loss on the sale of shares of a company facing winding up proceedings.
3. Burden of proof on the Assessing Officer regarding the actual sale price of shares.
4. Interpretation of Section 271(1)(c) and the threshold of proof required for penalty imposition.

Analysis:

Issue 1: Penalty Imposed under Section 271(1)(c)
The Revenue challenged the ITAT's cancellation of the penalty imposed by the Assessing Officer for Assessment Year 2006-07 under Section 271(1)(c) of the Income Tax Act, 1961. The ITAT directed the deletion of the penalty amount, stating that the Assessing Officer failed to discharge the burden of proof to investigate and dispute the actual sale price of shares. The ITAT emphasized that the sale price declared by the assessee was not disproved by the AO, leading to the deletion of the penalty.

Issue 2: Disallowance of Claimed Loss on Sale of Shares
The transaction involved the sale of shares of a company undergoing winding up proceedings. The assessee had acquired shares over different years, with the last acquisition in AY 2004-05. The AO disallowed the claimed loss of Rs. 44,20,250, which was rejected in quantum proceedings. The ITAT observed that the AO did not make efforts to substantiate claims that the sale price was manipulated, leading to the deletion of the penalty.

Issue 3: Burden of Proof on the Assessing Officer
The ITAT highlighted that the burden to prove that apparent facts are not real lies with the party disputing them. In this case, the AO failed to provide substantial evidence to challenge the sale price declared by the assessee. The ITAT emphasized that if transactions were accepted in earlier assessments, they cannot be reviewed in subsequent years unless there is evidence of manipulation, which was lacking in this case.

Issue 4: Interpretation of Section 271(1)(c) and Threshold of Proof
The judgment clarified that Section 271(1)(c) does not mandate penalty imposition in all cases where findings are adverse against the assessee. The lack of a proper explanation for acquiring shares of a company facing winding up proceedings may justify additions or disallowances. The ITAT's requirement of a higher threshold of proof for penalty imposition was upheld, concluding that no legal question arose in the case, leading to the dismissal of the appeal.

In conclusion, the judgment focused on the Assessing Officer's failure to meet the burden of proof regarding the sale price of shares, the inability to review transactions accepted in earlier assessments, and the interpretation of Section 271(1)(c) in light of the threshold of proof required for penalty imposition.