2015 (12) TMI 960 - AT - Income Tax

Penalty levied u/s 271(1) (c) - cessation of liability u/s 41(1) in respect of two trade creditors and in respect of one trade debtor - Held that - It clearly emerges that the amounts in question were carried over trade credits from earlier year, corresponding purchases were included in trading a/c thus legally speaking if trade credits are added as cessation of liability, the relevant entries exist in books and if they are held as bogus then they belong to earlier years. Besides relevant information is furnished along with return of income. Though surrendered in assessment the assessee can take fresh pleas in the penalty proceedings which by settled law are distinct and separate. Assessee can make fresh submissions and lead fresh evidence. AO can take fresh investigations on the basis of new pleas and material. Thus when surrendered is technically rejected and assessee gives reasonable explanation, penalty can be imposed not on the sole basis of alleged refused surrender. AO has a duty to consider the material and submission of the assessee and decide whether income on the basis of these pleas was assessable in the year in question. AO has held that the surrender is not acceptable and chose to add it u/s 41(1) of the Act. Thus technically even the surrender is not accepted and unilateral cessation of liable is assumed ignoring the plea that in subsequent years trading liability amounts were paid. The details about trading liabilities and transactions were reflected in the accounting statements which were part of the return of income. Hon ble Supreme Court in Reliance Petro Products case (2010 (3) TMI 80 - SUPREME COURT ) has held that if the relevant information is filed with the return of income in that case any variation in the claims of the assesse will not entail penalty. This judgment also supports the case of the assesse, in view thereof also the penalty in this case can not be imposed by merely referring to the alleged surrender and without considering the explanation. Thus, in consideration of entirety of facts, circumstances and case laws as relied on by assesse, we delete the penalty. - Decided in favour of assessee.

Issues Involved:
1. Confirmation of penalty levied under Section 271(1)(c) of the Income Tax Act, 1961.
2. Voluntariness and validity of income surrender by the assessee.
3. Independent inquiry during penalty proceedings.
4. Justification for penalty imposition based on surrendered income.
5. Distinction between assessment and penalty proceedings.
6. Consideration of opening balances and their taxability in the relevant year.
7. Applicability of judicial precedents and case laws.

Detailed Analysis:

1. Confirmation of Penalty Levied Under Section 271(1)(c):
The primary issue revolves around whether the penalty of Rs. 14,42,682/- levied under Section 271(1)(c) was justified. The assessee argued that the penalty was confirmed without appreciating that the income was surrendered voluntarily to avoid prolonged litigation and was not indicative of concealment or furnishing inaccurate particulars.

2. Voluntariness and Validity of Income Surrender:
The assessee contended that the income was surrendered during the assessment proceedings to buy peace of mind and avoid litigation. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] did not accept this surrender as voluntary, leading to the imposition of penalty. The assessee argued that the surrender was made under misunderstanding and pressure, and thus, should not automatically lead to penalty imposition.

3. Independent Inquiry During Penalty Proceedings:
The assessee argued that no independent inquiry was made during the penalty proceedings. The AO relied solely on the assessment order's findings without conducting a separate investigation to substantiate the penalty. The assessee emphasized that assessment and penalty proceedings are distinct, and independent inquiries should have been made before confirming the penalty.

4. Justification for Penalty Imposition Based on Surrendered Income:
The assessee highlighted that the penalty was imposed without considering that most of the amounts were opening balances from previous years, which were not taxable in the current year. The AO's rejection of the surrender as involuntary was not followed by a proper examination of whether the income was genuinely concealed or inaccurately reported.

5. Distinction Between Assessment and Penalty Proceedings:
The assessee argued that findings in assessment proceedings, while relevant, should not be the sole basis for penalty imposition. Penalty proceedings require a separate and distinct examination of facts and circumstances. The assessee cited several judicial precedents, including the Supreme Court's ruling in Reliance Petro Products, to support this argument.

6. Consideration of Opening Balances and Their Taxability:
The assessee contended that the amounts in question were carried over as trade credits from earlier years and were included in the trading account. Therefore, they should not be considered as income for the current year. The AO's addition of these amounts under Section 41(1) was challenged as incorrect, given that the liabilities were genuine and related to previous years.

7. Applicability of Judicial Precedents and Case Laws:
The assessee relied on various judicial pronouncements to argue against the penalty. Key cases cited include:
- CIT v. Sureshchandra Mittal (251 ITR 9 SC)
- Gebilal Kanhaiyalal (HUF) v. ACIT (270 ITR 523 Raj)
- CIT v. Badrilal Chaturbhuj (265 ITR 329 Raj)
- Reliance Petro Products (322 ITR 158 SC)
These cases emphasize that penalty under Section 271(1)(c) is not automatic and must be based on a thorough examination of facts and circumstances.

Conclusion:
The Tribunal concluded that the penalty under Section 271(1)(c) was not justified. The key reasons included:
- The amounts in question were opening balances from previous years, not taxable in the current year.
- The surrender of income was not voluntary, and the AO did not conduct an independent inquiry during penalty proceedings.
- Assessment and penalty proceedings are distinct, and the penalty cannot be imposed solely based on the assessment order's findings.
- Judicial precedents support the assessee's argument that penalty should not be imposed without a proper examination of facts and circumstances.

Final Order:
The appeal of the assessee was allowed, and the penalty of Rs. 14,42,682/- imposed under Section 271(1)(c) was directed to be deleted. The order was pronounced in open court on 31-10-2014.

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