Penalty u/s 271(1)(c) cannot be levied in absence of intention to evade taxes & if treatment made by assessee was revenue neutral

Brief of the case:

The ITAT Mumbai in the case of M/s Goldfilled Mercantile Company vs. DCIT held that when the assessee shown lesser capital gain in its return of income under a bonafide belief of a deduction from it but paid due taxes then the assessee cannot be penalized u/s 271(1)(c) as there was no intention to evade the payment of taxes and entire exercise was revenue neutral.

Facts of the case:

• The assessee is a partnership firm which has shown income from capital gain on sale of assets, income from interest and dividend. Return of income was filed on a total income of Rs. 26,80,99,047/- for the assessment year 2009-10 on 31.03.2010. An immovable property situated at Chakala, Andheri (East), Mumbai was owned by Shri Pyarali Dholakia in his proprietorship concern, later on, the said property was converted into property of partnership firm in year 1975.

• A part of the property was owned by Mrs. Pravin Dholakia, who entered into a Memorandum of Understanding with the assessee firm granting of her share of property to the partnership in 2003, for a consideration of Rs. 35,05,000/-.This consideration was neither paid nor transferred to Mrs. Pravin Dholakia during her lifetime (she passed away on 26th November, 2006).
• On 8th May, 2006 the partnership firm entered into joint venture agreement for the development of the property and introduced the Development Rights to the property into joint venture with M/s Prestige Properties (Developer).
• After the death of Mrs. Pravin Dholakia on 20.11.2006, daughter Meenaz was appointed as Executrix of her Will. Later on, Mr. Pyarali Dholakia also expired on 19.09.2007 and again daughter Meenaz was appointed as Executrix of his Will and Estate. As per his Will, it was mentioned that, in the event of development of the property by the firm, each of his three daughters would be entitled to 10% of the sale proceeds and the balance after the payment of taxes, will belong to his son Mateen.
• On 21.05.2008, the firm retired from Joint venture and received consideration of Rs. 70 crores from the said Joint Venture in lieu of the transfer of the land. Post this event, the partnership firm paid the amount to the three legal heirs (daughters) sum of Rs. 4.50 crores each and over and above, tax amount of Rs. 1,31,40,690/- each was paid by the assessee.
• The assessee in the return of income, declared the long-term-capital-gain received from the Developer under the Retirement Deed and claimed deduction of Rs. 17,74,22,707/- paid to/on behalf of legal heirs.
• The assessee firm has calculated the tax by grossing-up the whole amount and also paid the tax in the government treasury from its own account. It claimed the deduction of Rs. 17,74,22,070/- on the ground that the transfer of price in the land to legal heirs on retirement from Joint Venture, was due to testament of the “will” of the father and family arrangement under an impression that it amounts to diversion by overriding title to the three legal heirs of Mr. Pyarali Dholakia.

• However, AO disputed such treatment and held that payment made to the legal heirs of the partner, Shri Pyarali Dholakia & Mrs. Pravin Dholakia cannot be allowed to be reduced from the gross consideration received, as the same belongs to the partnership and the entire amount should have been shown in the hands of the firm. AO levied penalty of incorrect deduction claim of Rs. 17,74,22,070/- u/s 271(1)(c). CIT(A) also confirmed the same.
  

Contention of the Assessee: