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:

• The learned counsel for the assessee contended that the assessee was under genuine and bona fide belief that amount of sale consideration received should be paid to the three daughters as per partner as per his ‘will’ and who were his legal heirs and, therefore, the payment was made to them after calculating the on grossing-up the amount, that is, the gross amount paid and the taxes thereon.
• This treatment made by the assessee ,infact, resulted in payment of taxes more than assessee liable to pay on total sale consideration. As such there was no intention to evade the payment of taxes.
• Therefore, invoking the penalty provisions are not justified in the present case.

Contention of the Revenue:

• Assessee had filed the computation of long-term-capital-gain and thereby had claimed huge deduction of Rs. 17 crores from such computation by reducing the sale consideration. It is only when the matter was taken-up during the scrutiny proceedings, the assessee was forced to withdraw the claim of deduction and showed the correct income in the hands of the assessee. Thus, it was assessee who was liable to pay tax on its own account.

• The issue was not at all debatable as to assessee’s liability to pay tax , therefore, penalty u/s 271(1)(c) was rightly levied for concealment of income and furnishing inaccurate particulars.

   Held by ITAT Mumbai:

• 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 legal heirs. This disallowance of tax at Rs. 17,74,22,707/- is the subject matter of penalty.
• The Assessing Officer had taxed the whole amount in the hands of the assessee, even the assessee agreed to this proposition and made an application before the Assessing Officer that the taxes paid by the firm on behalf of legal heirs should be given credit to the assessee. The claim of assessee was processed u/s 154 and as a result of which a refund of 13,97,526/- was determined for excess tax paid by assessee.
• In this case assessee instead of receiving the whole amount in the hands of the partnership firm and including it as its income and paying taxes thereon, and then paying to the legal heirs which would have been the correct manner, assessee firm chose to give the amount directly to the legal heirs after paying the taxes.
• The concealment of income or furnishing of inaccurate particulars, as stated in section 271(1)(c) has to be seen with reference to amount of tax sought to be evaded. Here, in case there is no tax which has been sought to be evaded, because here the assessee had paid more taxes.
• Thus, the declaration of lesser capital gain in return of income was a bonafide mistake made by assessee without evading any taxes , penalty therefore cannot be sustained.
• In result the appeal of assessee was allowed.