2015 (3) TMI 978 - AT - Income Tax

Penalty under section 271(1)(c) - AO arrived at a conclusion that the actual profit of the assessee is worked at ₹ 4,21,71,890 instead of its group of companies and, accordingly, treated the difference of ₹ 1,64,98,954 (Rs. 42,12,71,890 - ₹ 2,56,72,936 (as admitted by the assessee in its return of income)) as inflated expenditure - Held that - The Assessing Officer, while framing the assessment order, as pointed out earlier, assumed wrongly that the rough working of the tax payable in respect of each group companies instead of group of companies which attributed the initiation of penalty proceedings and subsequent levy of penalty of ₹ 49.49 lakhs under section 271(1)(c) of the Act. Taking the facts and circumstances of the issue we are of the view that the Assessing Officer was not justified in levy of penalty of ₹ 49.49 lakhs under section 271(1)(c) of the Act based on the wrong assumption that the tax payable was in respect of the assessee alone. In substance, the penalty imposed under section 271(1)(c) of the Act is cancelled. - Decided in favour of assessee.

Issues Involved:
1. Under-declaration of profits by the assessee.
2. Inflation of expenditure by the assessee.
3. Imposition of penalty under section 271(1)(c) of the Income-tax Act.
4. Validity of the seized documents as evidence.
5. Satisfaction of the Assessing Officer for initiating penalty proceedings.
6. Justification for penalty imposition based on wrong assumptions.

Issue-wise Detailed Analysis:

1. Under-declaration of profits by the assessee:
The assessee, a partnership firm engaged in developing and building residential houses, filed a return of income admitting Rs. 2.65 crores for the assessment year 2005-06. A search operation under section 132 of the Act led to the discovery of documents indicating a profit of Rs. 4.21 crores, whereas the net profit shown in the return was Rs. 2.56 crores. This discrepancy led the Assessing Officer to conclude that the assessee had under-declared its profits.

2. Inflation of expenditure by the assessee:
The Assessing Officer observed that the difference of Rs. 1.64 crores (Rs. 4.21 crores - Rs. 2.56 crores) was due to inflated expenditure. Consequently, this amount was added to the income returned. The Tribunal upheld this addition in a previous order (I.T.A. No. 336/Bang/2009).

3. Imposition of penalty under section 271(1)(c) of the Income-tax Act:
Following the assessment, the Assessing Officer initiated penalty proceedings under section 271(1)(c) for furnishing inaccurate particulars and concealment of income. The penalty of Rs. 49,49,686 was imposed after considering the assessee's explanation. The Commissioner of Income-tax (Appeals) upheld this penalty, noting that the under-declaration of profits was brought to light by the seized documents during the search.

4. Validity of the seized documents as evidence:
The assessee argued that the addition of Rs. 1.64 crores was based solely on loose sheets found during the search, which were rough workings by a staff member and not conclusive proof of inflated expenditure. The assessee contended that these sheets did not bear its name and represented the total profits of the entire group, not just the assessee. The Departmental representative countered that the seized documents indicated systematic calculations related to the assessee's business.

5. Satisfaction of the Assessing Officer for initiating penalty proceedings:
The assessee argued that for invoking Explanation 1(B) to section 271(1)(c), three conditions must be satisfied: inability to substantiate the explanation, lack of bona fide explanation, and full disclosure of material facts. The assessee contended that the Assessing Officer did not provide a finding that all these conditions were met. The Departmental representative argued that the amended provisions of section 271(1B) deemed the assessment order's direction for penalty proceedings as sufficient satisfaction.

6. Justification for penalty imposition based on wrong assumptions:
The Tribunal found discrepancies between the original statement of a partner and what was recorded in the assessment order. The Assessing Officer wrongly assumed that the profit of Rs. 4.21 crores related to the assessee alone, leading to the erroneous conclusion of inflated expenditure. The Tribunal noted that the Assessing Officer was unsure whether the charge was for concealment of income or furnishing inaccurate particulars, as the notice under section 274 read with section 271 was not clear. Based on these findings, the Tribunal concluded that the penalty imposed under section 271(1)(c) was not justified and ordered its cancellation.

Conclusion:
The Tribunal allowed the assessee's appeal, canceling the penalty imposed under section 271(1)(c) of the Income-tax Act. The order was pronounced in the open court on February 28, 2014.

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