2022 (5) TMI 514 - AT - Income Tax

Penalty u/s 271(1)(c) - non-recording of clear satisfaction for levy of penalty - depreciation disallowance and vehicle insurance expense disallowance - scope of word used under section 271(1)(c) of the Act May - Assessee challenged that penalty levy on the reasoning that there was no satisfaction/ direction for initiating the penalty recorded by the AO before levying the penalty as provided under the provisions of section 271(1B) - HELD THAT - The provisions of section 271(1)(c) of the Act authorizes the AO to levy the penalty if a satisfied that the assessee has concealed the particulars of his income or furnished inaccurate particulars of such income, then he may levy the penalty. The word used under section 271(1)(c) of the Act May gives an authority to levy or not to the penalty. Since the main purpose of introduction of the penalty sections is to check tax evasion, the provisions of sections 271(1)(b), 271(1)(c), 271 A, 271B, 271BB and 273 are discretionary and a discretion is vested in the authority, by the use of word 'may', to impose or not to impose penalty when there is no loss of revenue and there is only a venial breach of the provisions of law. When the returned income is accepted and neither there is found to be an evasion of tax, nor the revenue is put to any loss, the officer is empowered not to impose any penalty. The use of the word 'may' in these sections also makes the intention of the Legislature clear in this regard. At this juncture, it is also important to note that the penalty was finally levied by the AO in the penalty order for 2 additions namely deemed dividend and interest paid on the housing loan. Thus, there was no penalty finally levied qua the depreciation disallowance and vehicle insurance expense disallowance. There was the need for the AO to record the clear satisfaction with respect to each addition/disallowances made during the assessment proceedings for initiating the penalty. Accordingly, in the absence of necessary satisfaction of the AO, we hold that the penalty order is not sustainable. Thus, we reverse the order of the learned CIT-A and direct the AO to delete the penalty levied by him under the provisions of section 271(1)(c) - Decided in favour of assessee.

Summary

Issues:
Validity of penalty under section 271(1)(c) of the Income Tax Act, 1961 for Assessment Year 2005-2006.

Detailed Analysis:

Issue 1: Validity of Penalty
The assessee challenged the penalty levied under section 271(1)(c) of the Act, arguing that there was no satisfaction or direction for initiating the penalty recorded by the Assessing Officer (AO) before imposing the penalty, as required by section 271(1B) of the Act.

Analysis:
The AO issued a penalty notice under section 274 read with section 271(1)(c) of the Act for concealment of income and furnishing inaccurate particulars of income. The penalty was imposed on two additions - deemed dividend and interest on housing loan, totaling Rs. 7,68,900. The Commissioner of Income Tax (Appeals) upheld the penalty. The assessee contended that the penalty lacked the necessary satisfaction recorded by the AO during the assessment proceedings, as mandated by the Act.

Judgment:
Upon review, it was noted that the AO did not specify in the assessment order whether the penalty was for all additions made during the assessment proceedings. The discretion to impose a penalty under section 271(1)(c) is vested in the authority, and penalties are not to be imposed unless there is a deliberate defiance of the law. The penalty was only levied for two out of four additions, and there was no clarity on the initiation of penalty proceedings for each addition. The High Court emphasized the need for a clear direction to initiate penalty proceedings. Consequently, the Tribunal held that without the necessary satisfaction of the AO for each addition, the penalty order was not sustainable. The order of the CIT(A) was reversed, and the AO was directed to delete the penalty. The appeal was partly allowed based on technical grounds.

Conclusion:
The Tribunal found that the penalty order lacked the required clarity and satisfaction from the AO regarding the initiation of penalties for each addition. As a result, the penalty imposed under section 271(1)(c) of the Act was deemed unsustainable, leading to the direction to delete the penalty. The appeal was partly allowed, emphasizing the importance of procedural compliance in penalty proceedings.