2015 (8) TMI 1090 - AT - Income Tax

Penalty under section 271(1)(c) - Held that - What is really required to be seen by the authorities below was there was an explanation offered by the assessee which could be acceptable to a fact finding body and whether such an explanation could be said to be a bonafide explanation. We find that the explanation of the assessee is supported by the decisions of the Tribunal in Thermoflic s case (1996 (9) TMI 182 - ITAT JABALPUR) and Moped and Machine s case (2005 (8) TMI 49 - MADHYA PRADESH High Court). The fact that the assessee did not pursue the matter against this quantum addition, on merits, cannot be put against the assessee in the penalty proceedings, but then that is precisely what the authorities below have ended up doing. Quite to the contrary, the fact that the assessee has not prolonged this issue reaching finality by not challenging, before the appellate forums, the additions made by the Assessing Officer. Such a conduct should not deincentivized. We disapprove this approach in the penalty proceedings. In any case, so far as the penalty proceedings are concerned, all that is to be seen is whether explanation of the assessee is a reasonable explanation or not. In our considered view, for the detailed reasons set out the explanation of the assessee so far as non taxability of capital gains, even if that be so, on dissolution of partnership firm was a reasonable explanation which ought to have been accepted. As regards the disallowance of vehicle repairs, miscellaneous, printing and stationery expenses.for want of complete supporting evidence, such a disallowance cannot be reason enough to impose concealment penalty under section 271(1)(c). Not only that the assessee has an explanation for this claim but the explanation has been substantially accepted inasmuch as the disallowance is only for a small portion of the expenses. In view of this fact, as also bearing in mind entirety of the case, it was not a fit case for imposition of penalty on this count either. Thus it is a fit case for deletion for the impugned penalty - Decided in favour of assessee.

Summary

Issues Involved:
1. Legality of penalty under section 271(1)(c) of the Income Tax Act, 1961.
2. Taxability of capital gains under section 45(4) on the dissolution of a partnership firm.
3. Disallowance of expenses for lack of supporting evidence.

Detailed Analysis:

1. Legality of Penalty under Section 271(1)(c):

The primary issue in this appeal is the correctness of the penalty imposed under section 271(1)(c) of the Income Tax Act, 1961. The Assessing Officer (AO) imposed a penalty of Rs. 6,99,890, alleging that the assessee furnished inaccurate particulars of income relating to long-term capital gains and disallowed expenses. The CIT(A) confirmed the penalty, concluding that the assessee attempted to evade tax on the distribution of land upon the firm's dissolution. The Tribunal, however, found that the explanation provided by the assessee was reasonable and supported by judicial precedents, thus deeming the penalty inappropriate. The Tribunal noted that the penalty under section 271(1)(c) can only be imposed if the assessee fails to provide a satisfactory explanation, which was not the case here.

2. Taxability of Capital Gains under Section 45(4):

The AO brought to tax capital gains of Rs. 31,01,639 under section 45(4), arguing that the firm's dissolution and subsequent transfer of assets to a partner constituted a taxable event. The assessee contended that the firm's business continued with the remaining partner, thus it was a change in the firm's constitution, not a dissolution. The CIT(A) upheld the AO's view, citing a Tribunal decision in Dhingra Cold Storage & Ice Factory Vs ITO, which supported the taxability of capital gains on the dissolution of a firm. However, the Tribunal found merit in the assessee's reliance on the Delhi High Court's decision in CIT Vs Moped & Machines, which held that no capital gains tax could be levied on the dissolution of a firm as the firm ceases to exist, and thus, there is no transfer of assets. The Tribunal concluded that the assessee's explanation was reasonable and supported by judicial precedents, making the imposition of penalty unwarranted.

3. Disallowance of Expenses for Lack of Supporting Evidence:

The AO disallowed Rs. 11,534 out of vehicle repairs, miscellaneous, printing, and stationery expenses due to a lack of full supporting evidence. The CIT(A) upheld this disallowance, and the AO imposed a penalty on this ground as well. The Tribunal, however, found that the disallowance of a small portion of expenses, for which the assessee had provided a substantial explanation, did not justify the imposition of a concealment penalty under section 271(1)(c). The Tribunal emphasized that the penalty should not be imposed merely because the assessee did not challenge the disallowance in further appeals, as this conduct should not be disincentivized.

Conclusion:

The Tribunal concluded that the penalty of Rs. 6,99,890 imposed under section 271(1)(c) was not justified. The assessee's explanation regarding the non-taxability of capital gains on the firm's dissolution was reasonable and supported by judicial precedents. Additionally, the disallowance of a minor portion of expenses did not warrant a penalty for furnishing inaccurate particulars of income. Therefore, the Tribunal ordered the deletion of the penalty, providing relief to the assessee. The appeal was dismissed, and the decision was pronounced in the open court on 2.6.2015.