2019 (5) TMI 421 - AT - Income Tax

Penalty u/s 271(1)(c) - addition u/s 41 on account of cessation of liability - bonafide explanation - assessee claimed that the said Alok Textile Traders stood merged with M/s Alok Textiles Limited and it was cited as one of the reasons by the assessee for not getting confirmation from the said party - HELD THAT - The assessee has offered an explanation which is a bonafide explanation as to existence of its liability to said concern as on 31.03.2009 which is also reflected to be payable in its books of accounts. The assessee did discharge its burden as is laid on it under penalty provisions as is contained in Section 271(1)(c). Now it is for the Revenue to rebut the same with cogent incriminating material that explanation offered by the assessee in penalty provisions are false. The Revenue did not bring any incriminating material to prove that the said liability ceased to exist and the assessee had obtained any benefit as is contemplated u/s 41(1) - AO did not made any enquiry with the aforesaid party as no notices u/s. 133(6) or summons u/s 131 were issued by the AO to Alok Textile Traders ( Now Alok Textiles Limited) to unravel truth. AO has not brought any cogent incriminating material to prove that the assessee has obtained any benefit as is contemplated u/s. 41(1). The assessee has rightly relied on the decision of ITAT, Mumbai benches in the case of Shiva Pigments Private Limited v. ITO 2012 (10) TMI 861 - ITAT MUMBAI - thus no penalty u/s 271(1)(c) is exigible on the assessee Income from sub-letting of the premises - income from house property or income from other sources - bonafide belief - dispute regarding taxability of head of income in respect of sub-letting is going on - HELD THAT - Obviously with a view to avoid litigation for the year under consideration, the assessee filed return of income on 26.09.2009 declaring rental income from sub-letting as income from house property despite the fact that the assessee being not owner of the said property. The explanation put forward by the assessee is bonafide which takes it out from the clutches of penalty provisions as are contained in Section 271(1)(c) and we hereby order deletion of the penalty levied by the AO u/s. 271(1)(c) of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of penalty proceedings initiated by the AO under Section 271(1)(c) of the Income-tax Act, 1961.
2. Legality of the penalty imposed for non-confirmation of a sundry creditor under Section 41(1) of the Act.
3. Legality of the penalty imposed for incorrect classification of rental income under the head "Income from House Property" instead of "Income from Other Sources."

Detailed Analysis:

1. Validity of Penalty Proceedings Initiated by the AO:
The assessee contended that the penalty proceedings initiated by the AO under Section 271(1)(c) were invalid due to an improper notice under Section 274, which did not specify whether the penalty was for concealment of income or furnishing inaccurate particulars. The tribunal noted that the penalty proceedings were initiated for furnishing inaccurate particulars of income, as mentioned in the assessment order dated 30.11.2011. The tribunal found that the assessee was duly confronted with the charge and participated in the penalty proceedings, thus dismissing the argument of invalid notice.

2. Penalty for Non-Confirmation of Sundry Creditor under Section 41(1):
The AO added ?2,31,775 to the assessee's income under Section 41(1) due to the inability to confirm the sundry creditor, M/s. Alok Textile Traders. The assessee explained that the creditor had merged with M/s. Alok Textiles Ltd., which was why the confirmation could not be obtained. The tribunal observed that the liability was acknowledged in the audited financial statements and was consistently claimed to be payable. The tribunal held that merely because the confirmation could not be filed, it does not prove the creditor is not genuine. The tribunal found that the assessee made complete disclosures and offered a bona fide explanation, and no incriminating material was brought by the Revenue to prove otherwise. Therefore, the tribunal ordered the deletion of the penalty on this ground.

3. Penalty for Incorrect Classification of Rental Income:
The AO reclassified the rental income of ?10,98,000 from "Income from House Property" to "Income from Other Sources" and denied the deduction under Section 24(1). The tribunal noted that in earlier years, the income was assessed under "Income from House Property," and the assessee had a bona fide belief in declaring it under the same head. The tribunal referred to its own decision in the assessee's case for AY 2003-04, where penalty was deleted for a similar change of head of income. The tribunal found that the assessee's explanation was bona fide and that the reassessment proceedings for earlier years were underway when the return for AY 2009-10 was filed. Thus, the tribunal ordered the deletion of the penalty on this ground as well.

Conclusion:
The tribunal concluded that on both counts—non-confirmation of sundry creditor and incorrect classification of rental income—penalty under Section 271(1)(c) was not exigible. The tribunal ordered the deletion of the penalty levied by the AO and confirmed by the CIT(A). The other grounds raised by the assessee were deemed academic and were not decided. The appeal of the assessee was allowed.