Section 271(1)(c) Penalty cannot be imposed in absence of Disallowance

Indermal Manaji Vs CIT (Bombay High Court)

The basis for initiation of assessment proceedings by the assessing officer is that the assessing officer disbelieved the claim of the assessee that he was engaged in the business of discounting drafts, whereas the Tri­bunal held that the assessee carries on the business of draft discounting. The assessee has stated that the amount in the account is the amount of the drafts received of which the assessee charges Re. 1 per thousand as commission. Explanation 1 to section 271(1)(c) of the Act states that if a person fails to offer an explanation or offers an explanation which is found by the assessing officer to be false or such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income of such person, as a result thereof shall for the purpose of clause (c) of the said sub-section be deemed to represent the income in respect of which particulars have been concealed. In the present case, no addition of the amount has been made, nor is a case of disallowance. Even the Tribunal had accepted the case of the assessee that he is carrying on the business of draft discounting. It is also observed that in many cases, the Tribunal has taken a view that in case of draft discounting, income is considered at Re. 1 per thousand and in some cases, at Rs. 2 per thousand. In the present case, it considered to Rs. 2 per thousand. The assessee, therefore, was not required to give any explanation as his case was accepted by the Tribunal in appeal. As such, for all the above reasons, Explanation 1 to section 271(1)(c) of the Act would not be attracted.

Considering the aforesaid conspectus of the matter, it is abundantly clear that the very basis of the penalty proceedings was set aside by the Tri­bunal in an appeal against the assessment order. There was no addition of income. On the contrary, the case of the assessee, which was negated by the assessing officer of carrying on the business of draft discounting, is accepted by the Tribunal. Explanation 1 to section 271(1)(c) of the Act, in the facts and circumstances of the present case, would not arise.

Full Text of the High Court Judgment / Order is as follows:-

The reference is made on the following ques­tion :–

Please become a Premium member. If you are already a Premium member, login here to access the full content.