Brief of the case
In the case of Suvaprasanna Bhatacharya vs ACIT, ITAT Kolkata held that although the satisfaction need not be recorded in a particular manner but from a reading of the assessment order as a whole such satisfaction should be clearly discernible. It was further held that ‘concealment of income’ and ‘furnishing inaccurate particulars of income’ carry different connotations. Levy of penalty has to be clear as to the limb for which it is levied.
Facts of the case
The assessee, an individual, was a professional artist. During the course of assessment proceedings, the assessee was asked source of funds for making investment in units of mutual funds. In reply, the assessee submitted that the source of income which was not disclosed to the department was out of sale proceeds of paintings which was accepted by the A.O. The AO also noted investments were made through bank accounts of the Assessee with Standard Chartered Bank, Salt Lake, Kolkata and Kotak Mahindra Bank Ltd., Kolkata which were not disclosed in the balance sheet filed along with the original return of income. Income was assessed u/s 143(3) of the I.T.Act, 1961. Demand notice was issued and also penalty proceeding u/s 271(1)(c) initiated. The Assessee did not raise his concern over the issue of taxability of income from sale of paintings to avoid litigation but challenged the levy of penalty u/s 271(1)(c) in respect of the addition which was imposed by the AO and confirmed by the CIT(A). Before imposing penalty show cause notice u/s 274 was issued, in response of which assessee submitted that he was an eminent artist and not aware of the intricacies of tax laws. He was advised by his tax consultant that income from sale of art is not taxable as it was in the nature of person effects and hence not a capital asset within the meaning of the definition of the said term u/s.2(14)(ii) of the Act. The assessee also pointed out that the sale of paintings was not done by him as an adventure in the nature of trade. The paintings were kept for years over because of his aesthetic sense. It gave him tremendous pleasure and pride of profession. The paintings were therefore his “personal effects”. The sale was effected for the very purpose of making investments in the units of mutual funds and to earn income from such investments for his livelihood. The submissions did not find favour with the AO. The AO held that the assessee had deliberately tried to conceal his professional receipt by depositing it in the bank account not disclosed to the department which was also upheld by CIT(A). Aggrieved assessee filed the appeal before the tribunal challenging the validity of penalty order.
Contention of Assessee
1. The ld. Counsel of the assessee reiterated the stand taken before the AO and CIT(A) that the sale of paintings was not done by him as an adventure in the nature of trade. The receipts on sale of paintings had to be treated as capital receipts not chargeable to tax. This was the reason, according to the assessee that receipts on sale of paintings was not disclosed as “income” in the return of income filed.
2. It was contended that merely recording in the order of assessment “Penalty proceeding u/s 271(1)(c) initiated” is not in accordance with law. A.O. has to record his satisfaction in the order of assessment itself. The ld.AR relied upon the decision of the Hon’ble Karnataka High Court in the case of CIT Vs. MWP Ltd. (2014) 41 taxmann.com 496 (Karn.) in this regard. It was contented that the order of assessment in the present case does not spell out any satisfaction as is contemplated in the decisions. The AO accepted whatever evidence the Assessee produced and also the offer of the assessee to tax investments of units of mutual funds, interest income in SB Account with bank and Short Term Capital Gain on sale of units of mutual funds.
3. It was further contended that the show cause notice issued u/s 274 does not specify as to whether the Assessee is guilty of having “furnished inaccurate particulars of income” or of having “concealed particulars of such income”. He pointed out that the printed show cause notice does not strike out the irrelevant portion viz., “furnished inaccurate particulars of income” or “concealed particulars of such income” and reliance was placed upon the decision of the Hon’ble Karnataka High Court in the case of CIT Vs. Manjunatha Cotton & Ginning Factory (2013) 218 Taxman 423 (Kar.) in this regard.
Contention of Revenue
The learned DR relied on the order of the CIT(A). He placed reliance on the decision of the Hon’ble Supreme Court in the case of MAK Data (P) Ltd. Vs. CIT 358 ITR 593 (SC) wherein it was held that satisfaction is not required to be recorded in any particular manner or reduce such manner of arriving at satisfaction in writing.
Held by Tribunal
1. The tribunal firstly tried to determine the basis of such professional advice claimed to be received by the assessee and held that the term capital assets as defined in cl.(14) of sec 2 does not include interalia ‘personal effects’. The term ‘personal effects’ would ordinarily mean physical chattels having some personal connection with the assessee. The essential feature, thus appears to be that article in question should have intimate relation with the person and should be of personal use, that is to say, should be normally, ordinarily and commonly in such use. Even though prior to 01.04.2008, a painting could be regarded as a “personal effect“, but, before a painting can be regarded as a “personal effect” there must be evidence on record to show that it was intimately and commonly used by the assessee, for the purpose of exclusion from the definition of capital asset. In the penalty proceedings, the Assessee pointed out that the sale of paintings was not done by him as an adventure in the nature of trade. The paintings were kept for years over because of his aesthetic sense. It gave him tremendous pleasure and pride of profession. The tribunal pointed that in the statement recorded u/s.131 of the Act by the AO in the course of assessment proceedings, in answer to Question No.11 the assessee has stated that the paintings are made as per creation desire of the assessee. Therefore, it would be proper to accept the contention of the assessee that the paints were his “personal effects”. The AO has not disputed the position that the source of funds for investment in units of mutual funds was the sale of paintings which were personal effects and therefore income from sale of paintings were capital receipts not chargeable to tax. Therefore, the plea of the assessee that the on the basis of professional advice, receipts from sale of paintings was treated as capital receipt not chargeable to tax, is found to be bona fide and acceptable. Consequently imposition of penalty in so far as, it relates to the addition of Rs.60,99,454/- in view of the tribunal was unsustainable, as there was neither concealment of particulars of income or furnishing of inaccurate particulars of income.
2. With regard to the question whether proper satisfaction was arrived at by the AO for initiating penalty proceedings u/s.271(1)(c), the tribunal noticed that order of assessment nowhere spells out or indicates that the AO was of the view that the assessee was guilty of either concealing particulars of income or furnishing inaccurate particulars of income. The offer to tax of income by the assessee has just been accepted. It is no doubt true that it is not the requirement of the law that the satisfaction has to be recorded in a particular manner, the AO will have to arrive at a prima facie satisfaction during the course of proceedings with regard to the assessee having concealed particulars of income or furnished inaccurate particulars, before he initiates penalty proceedings ‘prima facie’ satisfaction of the AO that the case may deserve the imposition of penalty should be discernible from the order passed during the course of the proceedings. Acceptance of all the contentions and income offered by the assessee that has not been declared in the original return without indicating either directly or indirectly that the assessee has concealed particulars of income or furnished inaccurate particulars of income, it cannot be said that satisfaction for initiation of penalty proceedings is discernible from the order of assessment.
3. The Tribunal found that in the show cause notice issued u/s.274 of the Act the AO has not struck out the irrelevant part. It is therefore not spelt out as to whether the penalty proceedings are sought to be levied for “furnishing inaccurate particulars of income” or “concealing particulars of such income”. The Hon’ble Karnataka High Court in the case of CIT & Anr. v. Manjunatha Cotton and Ginning Factory, 359 ITR 565 (Karn), has held that notice u/s. 274 of the Act should specifically state as to whether penalty is being proposed to be imposed for concealment of particulars of income or for furnishing inaccurate particulars of income. The Hon’ble High court has further laid down that certain printed form where all the grounds given in section 271 are given would not satisfy the requirement of law. The Court has also held that initiating penalty proceedings on one limb and find the assessee guilty in another limb is bad in law. It was submitted that in the present case, the aforesaid decision will squarely apply and all the orders imposing penalty have to be held as bad in law and liable to be quashed.
From the fact of the present case, the show cause notice was found to be defective as it does not spell out the grounds on which the penalty is sought to be imposed. Following the decision of the Hon’ble Karnataka High Court, the order imposing penalty was held to be invalid and consequently penalty imposed was cancelled.