2020 (4) TMI 436 - AT - Income Tax

Penalty u/s 271(1)(c) - Defective notice - whether the assessee is being visited with penalty for concealment of income or for furnishing of inaccurate particulars of income? - HELD THAT - Deeming fiction would come to play by the failure of the assessee to substantiate his explanation in respect of any fact material to the computation of total income and in addition to this the assessee is not able to prove that such explanation was given bona fide and all the facts relating to the same and material to the computation of the total income have been disclosed by the assessee. These two situations provided in Explanation 1 appended to section 271(1)(c) makes it clear that that when this deeming fiction comes into play in the above two situations, then the related addition or disallowance in computing the total income of the assessee for the purpose of section 271(1)(c) would be deemed to be representing the income in respect of which inaccurate particulars have been furnished. If examine the facts, then it would reveal that before issuance of notice under Section 148 assessee itself has brought certain errors in its computation of income to the notice of the Department. Therefore, it shows that there is no deliberate attempt at the end of the assessee to withhold the information. Similarly, the Assessing Officer has made ad-hoc disallowance out of trade settlement expenses, advertisement expenses and commission income etc. CIT(A) has already reduced the disallowance out of trade settlement expenses in the quantum proceedings. Thus, considering the explanation of the assessee, more so in the light of failure of the AO to record a categorical finding as to whether the assessee is being visited with penalty for concealment of income or for furnishing inaccurate particulars of income, assessee does not deserve to be visited with penalty. The penalty proceedings were initiated for furnishing of inaccurate particulars of income. In the show-cause notice, the AO has used both the options i.e. for concealment of income or for furnishing inaccurate particulars of income. So far as the show-cause notice is concerned, this defect is not fatal to the proceedings in view of the judgment of Hon ble jurisdictional High Court in the case of Snita Transport P. Ltd. Vs. ACIT 2012 (12) TMI 981 - HIGH COURT OF GUJARAT has observed that for providing an opportunity to the assessee for explaining its position, the Assessing Officer may use expression or in between the concealment of income and furnishing inaccurate particulars of income in the show-cause notice; but for visiting the assessee with penalty, the Assessing Officer has to record a conclusive finding. Assessee does not deserve to be visited with penalty. Accordingly, the appeal of the assessee is allowed and the penalty is deleted.

Summary

Issues Involved:
1. Legitimacy of penalty under Section 271(1)(c) of the Income-tax Act.
2. Adequacy and correctness of the explanation provided by the assessee for discrepancies in income.
3. Validity of the penalty notice under Section 274 r.w.s. 271(1)(c) of the Act.
4. Assessment of ad-hoc disallowances and their impact on penalty imposition.

Issue-wise Detailed Analysis:

1. Legitimacy of Penalty under Section 271(1)(c) of the Income-tax Act:
The primary grievance of the assessee revolves around the penalty of ?84,850/- imposed by the Assessing Officer (AO) under Section 271(1)(c) of the Income-tax Act. The penalty was upheld by the CIT(A). The Tribunal noted that for imposing any penalty under this section, the AO or CIT(A) must be satisfied that the assessee has either concealed income or furnished inaccurate particulars of income. The quantification of the penalty can range between 100% to 300% of the tax sought to be evaded. The Tribunal found that the AO failed to record a categorical finding on whether the penalty was for concealment of income or for furnishing inaccurate particulars, which is essential for imposing such a penalty.

2. Adequacy and Correctness of the Explanation Provided by the Assessee for Discrepancies in Income:
The assessee had filed a return declaring income of ?1,42,000/- and claimed a refund of ?1,71,848/-. Upon receiving a notice under Section 148, the assessee filed a revised return declaring income of ?1,85,780/-. The AO determined the taxable income to be ?8,31,581/-. The assessee provided explanations for discrepancies, highlighting that certain errors were identified and communicated voluntarily before the reassessment notice was issued. The Tribunal observed that the assessee had brought certain errors to the Department's notice before the initiation of reassessment proceedings, indicating no deliberate attempt to withhold information.

3. Validity of the Penalty Notice under Section 274 r.w.s. 271(1)(c) of the Act:
The Tribunal examined the penalty notice and observed that the AO used both options—concealment of income and furnishing inaccurate particulars. This ambiguity was addressed by referencing the judgment in Snita Transport P. Ltd. vs. ACIT, where the Hon’ble High Court noted that while the notice may use "or" between the two grounds, the AO must record a conclusive finding for imposing a penalty. The Tribunal found that the AO did not provide a clear finding, making the penalty notice defective but not fatal to the proceedings.

4. Assessment of Ad-hoc Disallowances and Their Impact on Penalty Imposition:
The AO made ad-hoc disallowances, including trade settlement expenses, advertisement expenses, and commission income. The CIT(A) had already reduced some disallowances in quantum proceedings. The Tribunal considered these ad-hoc disallowances and the explanations provided by the assessee, concluding that no penalty should be imposed for these disallowances. The Tribunal emphasized that the penalty proceedings were initiated for furnishing inaccurate particulars of income, and the AO's failure to record a categorical finding further supported the decision to delete the penalty.

Conclusion:
The Tribunal allowed the appeal of the assessee, deleting the penalty imposed under Section 271(1)(c) of the Income-tax Act. The decision was based on the lack of a conclusive finding by the AO, the voluntary disclosure of errors by the assessee, and the nature of ad-hoc disallowances. The Tribunal's order was pronounced on 5th February 2020 at Ahmedabad.