2016 (12) TMI 1238 - AT - Income Tax

Levy of penalty u/s 271(1)(c) - additional income on account of on-money on sale of plots - Held that - The assessee had offered additional income on account of on-money on sale of plots. The Assessing Officer had accepted the same and had initiated penalty proceedings under section 271(1)(c) of the Act. The CIT(A) during the course of appellate proceedings relating to section 271(1)(c) of the Act issued enhancement notice to the assessee. Thereafter, he had gone through the seized documents and elaborately referred to them and even reproduced the scanned copies of such documents and comes to conclusion that loans were received from Ratanlal Bafna, but still upholds the penalty levied under section 271(1)(c) of the Act. Once the finding of CIT(A) is that these are loans received from Bafna and are not on-money received on sale of plots, then in cases where penalty proceedings have been initiated on a different footing and the CIT(A) reverses the same and holds the same to be loans received by the assessee, there is change in opinion and basis for levy of penalty for concealment varies. In such circumstances, there is no merit in levy of penalty under section 271(1)(c) of the Act and there is no merit at all in levying the penalty @ 150%. Accordingly, we allow the claim of assessee even on merits.

Issues Involved:
1. Levy of penalty under section 271(1)(c) of the Income Tax Act, 1961.
2. Jurisdictional issue regarding the validity of the notice issued by the Assessing Officer for levying penalty.
3. Enhancement of penalty by the CIT(A) from 100% to 150%.
4. Determination of whether the additional income declared by the assessee was on account of on-money on sale of plots or unaccounted loans.
5. Whether the entire additional income should be subject to penalty or only a reasonable net profit percentage.

Detailed Analysis:

1. Levy of Penalty under Section 271(1)(c):
The primary issue was whether the penalty under section 271(1)(c) of the Income Tax Act, 1961, was justified. The assessee had declared additional income following a search and seizure operation, which revealed undisclosed on-money on the sale of plots. The Assessing Officer concluded that the additional income would have remained concealed if not for the search, thus justifying the penalty for concealment of income and furnishing inaccurate particulars.

2. Jurisdictional Issue Regarding Validity of Notice:
The assessee challenged the validity of the penalty notice, arguing that it did not specify the exact charge—whether for concealment of income or furnishing inaccurate particulars. The Tribunal emphasized that the notice must clearly indicate the specific charge to ensure the assessee's right to a fair hearing. The Tribunal relied on the Karnataka High Court's decision in CIT & Anr. Vs. Manjunatha Cotton and Ginning Factory, which mandates that the notice should not be vague and must specify the exact charge. The Tribunal found that the notice issued in this case was ambiguous and thus invalid, leading to the quashing of the penalty proceedings.

3. Enhancement of Penalty by CIT(A):
The CIT(A) had enhanced the penalty from 100% to 150%. The Tribunal noted that the CIT(A) had based this enhancement on the belief that the transactions recorded in the seized documents were money lending transactions rather than on-money from the sale of plots. The Tribunal found that this change in the basis of the penalty was not justified, especially when the initial penalty proceedings were based on the concealment of income from on-money transactions.

4. Determination of Additional Income:
The CIT(A) had concluded that the seized documents indicated unaccounted loans rather than on-money from the sale of plots. The Tribunal noted that if the CIT(A) treated these amounts as loans, then they should not be considered as income, and consequently, no penalty for concealment should be levied. This change in the nature of the transactions further invalidated the basis for the penalty.

5. Scope of Penalty on Additional Income:
The assessee argued that if any penalty were to be levied, it should only be on the net profit element of the additional income, not the entire amount. However, the Tribunal did not address this issue in detail, as it had already decided the jurisdictional issue in favor of the assessee, quashing the penalty proceedings.

Conclusion:
The Tribunal allowed the appeals of the assessee, quashing the penalty proceedings on the grounds of invalid notice and improper basis for the penalty. The Tribunal emphasized the need for clear and specific charges in the penalty notice to ensure the assessee's right to a fair hearing. The enhancement of the penalty by the CIT(A) was also found to be unjustified.

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