2019 (10) TMI 137 - AT - Income Tax

Levy of penalty u/s 271(1)(c) - addition made during the assessment proceedings u/s 41(1) - as outstanding credit balance in the accounts of two parties, holding that the same had ceased to exist - HELD THAT - In the present case we find that both the requirements of the section are not fulfilled. The Ld.CIT(A) himself has recorded a finding of fact that the impugned liabilities do not represent any trading liability since the assessee had never commenced business and had therefore never incurred any operational expense or earned any income. CIT(A) has gone on to mention the assesses explanation that these liabilities represented advances given by the two creditors for setting up business of the assessee, but has not controverted the same nor found any falsity in the same. Therefore even as per the Ld.CIT(A) the liabilities did not represent any expense, allowance or loss claimed earlier by the assessee. Further we find that that there is nothing on record to show that the liabilities ceased to exist in the impugned year. In fact we find the assessee had contended that the parties had written off the amounts in earlier years. And on the basis of this admission of the assessee the Revenue derived that the liabilities ceased to exist, but there is no finding, when. The entire case of the Ld.CIT(A) for treating the same as income u/s 41(1) of the Act, rests on the fact that the amounts represent liabilities and the facts demonstrate that they cease to exist. But this is not sufficient to treat the amount as profits and gains of business for the year as required by section 41(1), as pointed out above by us. There was no legally sustainable basis with the Revenue for making the addition u/s 41(1) of the Act. As a corollary therefore it cannot be said that the assessee had furnished inaccurate particulars of income or concealed particulars of income in relation to the addition made, so as to attract levy of penalty u/s 271(1)(C) of the Act. The penalty so levied is therefore directed to be deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Sustaining penalty under Section 271(1)(c) of the Income Tax Act, 1961 for furnishing inaccurate particulars of income.
2. Applicability of Section 41(1) of the Income Tax Act, 1961 to the facts of the case.

Issue-wise Detailed Analysis:

1. Sustaining Penalty under Section 271(1)(c) of the Income Tax Act, 1961:
The assessee challenged the order of the Commissioner of Income Tax (Appeals) [CIT(A)], which confirmed the levy of penalty under Section 271(1)(c) of the Income Tax Act, 1961, for furnishing inaccurate particulars of income. The penalty was imposed on the addition made during the assessment proceedings under Section 41(1) of the Act, regarding the outstanding credit balance in the accounts of two parties, Air Agro Pvt. Ltd. and Indian Steel Wire Product Limited, holding that the same had ceased to exist.

The assessee argued that the addition made was not sustainable in law and, therefore, there was no case for levy of penalty under Section 271(1)(c) of the Act for furnishing inaccurate particulars of income. It was contended that the addition was wrongly made under the provisions of Section 41(1) of the Act, and the penalty proceedings being distinct and separate from assessment proceedings, the assessee was within its rights to challenge the addition in the penalty proceedings.

The Revenue, on the other hand, argued that the liability of these two parties had ceased to exist, and the assessee, having not written off the liability and brought the same to tax as per the provisions of Section 41(1) of the Act, had clearly concealed/furnished inaccurate particulars of income.

2. Applicability of Section 41(1) of the Income Tax Act, 1961:
The assessee contended that Section 41(1) of the Act, which brings to tax any amount earlier claimed as allowance or deduction by the assessee on account of which any benefit subsequently accrues to the assessee by way of remission or cessation of liability, did not apply to the facts of the present case. The liabilities outstanding were in relation to the amounts advanced by the said concern for setting up the business of the assessee and not for carrying out any business. The assessee company had been operationally inactive since inception and lying dormant with no commercial activities and had therefore never claimed any expense or allowance.

The CIT(A) recorded a finding of fact that the impugned liabilities did not represent any trading liability since the assessee had never commenced business and had therefore never incurred any operational expense or earned any income. The liabilities represented advances given by the two creditors for setting up the business of the assessee.

The Tribunal found merit in the contention of the assessee that the penalty proceedings are distinct and separate from assessment proceedings and the assessee can justifiably challenge the legality of the addition made in penalty proceedings. The Tribunal agreed that the provisions of Section 41(1) of the Act did not apply to the facts of the present case as the liabilities did not represent any expense, allowance, or loss claimed earlier by the assessee. Moreover, there was nothing on record to show that the liabilities ceased to exist in the impugned year. The Tribunal held that there was no legally sustainable basis with the Revenue for making the addition under Section 41(1) of the Act.

Conclusion:
The Tribunal concluded that the penalty levied under Section 271(1)(c) of the Act was not justified as the addition made under Section 41(1) of the Act was not legally sustainable. Consequently, the appeal filed by the assessee was allowed, and the penalty was directed to be deleted.