Brief of the case
Delhi High Court in the case of CIT vs. M/s Jain Export Private Ltd. held that, to initiate proceedings under Section 271(1)(c), it requires proper investigation and higher satisfaction of proof, which confirmed the basis for the initiation of necessary proceedings. In the absence of it the penalty provision can’t be invoked.
Facts of the Case
The assessee for sale of shares have acquired such shares which was duly reported and accepted by the AO concerned. The Company of which the shares were bought was eventually directed to be wound up and was in the Board of Industrial and Financial Reconstruction (BIFR), for the purposes of rehabilitation. Ultimately, those efforts failed. In the quantum proceedings, the assessee’s contentions were rejected and the amount of ₹44,20,250/-, which was claimed as loss was disallowed.
Contention of the Revenue
The Revenue urges that the assessee accepted the additions made in the circumstances since there was no explanation as to how the shares were purchased, the disallowance was justified, as was the penalty.
Contention of the Assessee
The assessee contended that the shares became worthless and the assessee could manage to sell these shares for a paltry sum of ₹6000, the AO carried out no investigation to bring on record some material to disprove the facts stated by the assessee.
Held by CIT(A)
The ld. CIT(A) has proceeded to confirm the penalty by holding that the purchase price of such shares was doctored.
Held by ITAT
The Hon’ble ITAT by the impugned order directed the deletion of penalty amount based on reasoning that the AO did not make any effort to discharge the burden placed upon him to investigate and to bring on record some material to dispute the assessee’s contentions with regard to the actual sale being at Rs.6000/-.
When AO found was that company was registered with BIFR even prior to the date stated by the assessee. Despite these facts and the assessee making it clear that the shares became worthless and the assessee could manage to sell these shares for a paltry sum of ₹6000, the AO carried out no investigation worth the name to bring on record some material to disprove the facts stated by the assessee. AO has not discharged onus on him, the AO has not even taken pains in explaining that the market price of the shares was more than that realized by the assessee.
Held by the Hon’ble High Court
In the above case the Hon’ble High Court while dismissing the Appeal held that, Section 271(1)(c) of the Act does not compel the Revenue to initiate proceedings, imposing penalty in all cases where findings were adverse against the assessee at a given point of time, leading to addition of amounts or disallowance. Possibly, an explanation may have been required from assessee in the given facts of this case as to why it acquired the shares even when the company was facing winding up proceedings but the fact remains that the efforts to rehabilitate the company were undertaken. The lack of proper explanation undoubtedly might have justified the addition. The reasoning of the ITAT in holding that the penalty proceedings required satisfaction of a higher threshold of proof, which confirmed the basis for it, ultimately cannot be faulted.