Penalty u/s. 271(1)(c) untenable without concealment of income or furnishing of inaccurate particulars

Amitabha Sanyal Vs ITO (ITAT Kolkata)

ITAT Kolkata held that imposition of penalty u/s. 271(1)(c) of the Income Tax Act untenable without concealment of particulars of income or for furnishing of inaccurate particulars. Accordingly, penalty deleted.

Facts- Vide the present appeal, the appellant has mainly contested the imposition of penalty of ₹4,56,362/-, being without jurisdiction, illegal and invalid, bad in law, without recording proper satisfaction within the meaning of Section 271 of the Act and without appreciating that the amount of ₹22,95,849/-arising in the hands of the assessee was duly included in the return filed u/s 148 of the Act. It is further stated that AO erred in levying the penalty without appreciating that finding in the assessment proceedings are not binding for the penalty proceedings and the penalty cannot be automatically imposed.

Conclusion- Hon’ble Madras High Court in the case of CIT v. K.R. Chinni Krishna Chetty [2000] 246 ITR 121 has held that under section 271(1)(c) of the Act the authority is given the discretion to levy a penalty if there is concealment of particulars of income and even as regards the quantum of the penalty there is a discretion. Of greater importance is the necessity for a definite finding that there is concealment, as without such a finding of concealment, there can be no question of imposing any penalty.

Held that if the compensation amount of ₹79,500/- is excluded, as the same was capital receipt in nature and therefore not liable to be added to the income, there remains no difference between the income returned in response to the notice u/s 148 of the Act and the income assessed u/s 143(3) read with section 147 of the Act. Hence, in view of the Hon’ble High Court’s decision in case of M/s S.A.S. Pharmaceuticals, no penalty was imposable u/s 271(1)(c) of the Act. We accordingly, direct the Ld. AO to delete the penalty levied.

FULL TEXT OF THE ORDER OF ITAT KOLKATA

This appeal filed by the assessee is against the order of the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “the Ld. CIT(A)”] passed u/s 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for AY 2011-12, dated 11.04.2022, which has been passed against the penalty order u/s 271(1)(c) of the Act dated 15.05.2019.

2. The grounds of appeal raised by the assessee are reproduced as under:

“1. That the impugned order dated 11th April 2022 passed by the Ld. National Faceless Assessment Centre, Kolkata (the Assessing Officer) under section 271(1)(c) of the Act, levying penalty of Rs. 4,56,362 is without jurisdiction, illegal, invalid, bad in law being passed against the facts and laws of the case.

2 That the Ld. Assessing Officer erred in confirming the penalty of Rs.4,56,362 levied by the Assessing Officer under section 271(1)(c) of the Act without recording proper satisfaction within the meaning of section 271 of the Income Tax Act, 1961.

3 That on the facts and circumstances of the case, the Assessing Officer erred in levying the penalty of Rs 4,56,362 when the assessee was prevented by reasonable and sufficient cause, within the meaning of section 275 of the Income Tax Act, 1961, to furnish return of total income under section 139(1) of the Act and when the amount of income of Rs. 22,95,849 arising in the hands of the Assessee was duly included in the return filed u/s 148 of the Act.

4 That, without prejudice to the above, the Assessing Officer failed to appreciate that no penalty could be imposed on the sum of Rs. 79,500, being rent paid by Developer on behalf of the Assessee for alternate accommodation during the development period, without appreciating the judicial pronouncements which clearly held that such rent could not be taxed in the hands of the land owner/Assessee

5 That the assessing officer erred in levying penalty of Rs. 4,56,362 without appreciating that findings in the assessment proceeding are not binding on the penalty proceedings and penalty will not be automatically imposed.”

3. In this case initially the coordinate Bench of the Tribunal had decided the appeal in ITA No. 359/KOL/2022 for A.Y. 2011-12 vide order dated 13t^h March, 2023. The assessee filed a Miscealleneous Application (“MA”) u/s 254(2) of the Act, stating that the assessee had raised five grounds of appeal and the aforesaid appeal was disposed of by the Tribunal vide order dated 17th Jan 2018 and the said order was uploaded online and served upon the assessee for the first time on 13th March, 2023. However, this statement of the assessee is not correct as the order in ITA No.359/KOL/2023 for A.Y. 2011-12 was pronounced on 13th March, 2023 and not on 17t^h January, 2018, as is mistakenly stated. It was further stated in the MA that the Tribunal had only adjudicated ground no. 4 and decided the appeal in favour of the assessee. However, the Tribunal did not adjudicate other ground nos. 1, 2, 3 and 5 under the assumption that these grounds were connected and consequential and Ground no. 4 was the only ground adjudicated by the Tribunal. The assessee contended vide the MA filed that the Tribunal had failed to appreciate that the ground nos.1, 2, 3 and 5 would require separate adjudication and the same was essential to decide as to whether any penalty can at all be levied on ₹22,95,849/-, which was the amount declared as the income in the return filed in response to the notice u/s 148 of the Act. The assessee prayed for recalling of the order dated 13th March, 2023 for adjudicating ground nos. 1, 2, 3 and 5 as pressed by the assessee. Consequently, vide order in MA No.48/KOL/2023 for A.Y. 2011-12 (arising out of ITA No. 359/KOL/2022) dated 23rd August, 2023, the MA was allowed. The relevant extract from the order of the Tribunal is as under: –

“4. We have heard the rival submission and perused the records placed before us. We find that the appeal of the assessee was heard by us on 20.12.2022 and issues were discussed on merits in detail. However, while deciding the issues involved in the appeal by us, we have adjudicated ground no. 4 and did not adjudicate ground no. 1, 2, 3 & 5 on wrong assumption that these grounds are connected and consequential to ground no. 4 of the appeal. Since issues were dealt on merits and same ought to have been dealt by this Tribunal, we find that apparent mistake has occurred in framing the impugned order which needs to be rectified and the grievance of the assessee can be addressed only by recalling the impugned order. We therefore find merits in the contention of the Id. counsel for the assessee and thus recall our order dated 13.03.2023. The registry is directed to restore ITA No. 359/Kol/2022 at its original number and fixed it for hearing in due course by issuing notice to the parties. In terms of the above, miscellaneous application of the assessee is hereby allowed.”

4. Consequently, the appeal was taken up afresh. Rival contentions were heard and the submissions made have been examined.

5. Ground nos.1, 2, 3 and 5 are related to the imposition of penalty of ₹4,56,362/-, being without jurisdiction, illegal and invalid, bad in law, without recording proper satisfaction within the meaning of Section 271 of the Act and without appreciating that the amount of ₹22,95,849/-arising in the hands of the assessee was duly included in the return filed u/s 148 of the Act. It is further mentioned in ground no. 5 that the Ld. AO erred in levying the penalty without appreciating that finding in the assessment proceedings are not binding for the penalty proceedings and the penalty cannot be automatically imposed. In this context, it would be relevant to refer to the penalty order in which the Ld. AO has mentioned as under: –

“In this case, an assessment order was passed u/s 147/143(3) on 19.11.2018 at a total income of Rs. 23,75,350/-. During the year under consideration the assessee entered into a joint development agreement in respect of his landed property for developing premises. As per agreement, the assessee was entitled to receive 50% built up area, which he took possession on 05.06.2013 and received Rs. 22,75,000/- as consideration in lieu of his old property. Although having taxable income, the assessee did not submit his return of income u/s 139 of the Income-tax Act, 1961 and had not disclosed his true and fair view of his total income and also had not paid due tax on the same. During the year under consideration, the developer paid rent on behalf of the assessee towards alternative accommodation to the tune of Rs. 79,500/-, which the assessee did not consider as part of his total income in his return of income filed u/s 148 of the Income-tax act, 1961. On being confronted, the assessee submitted that he has no objection to treat the same as his other source of income. Consequently, the said amount of Rs.79,500/- was added back to total income of the assessee. Since the assessee failed to disclose his actual income and also failed to pay the due taxes, penalty proceedings u/s 271(1)(c) of the IT Act, 1961 was initiated for concealment of income.”

6. Further in the order, while imposing the penalty, the Ld. AO has mentioned as under: –

“3.1. The assessee submission is considered but it is found to be devoid of any merit because of the following reasons:

1) The assessee had mentioned in his submission dated 09.01.2019 during hearing of penalty proceedings that the amount received by him during the venture was mainly spent for his mother’s medical expenditure who was a cancer patient, whereas during scrutiny assessment stage the assessee submitted in his submission dated 08.10.2018 that her mother was a high diabetic patient suffering since early 2010. During course of time she had heart problem & had pace maker implantation. Subsequently she suffered from mild cerebral attack with multi organs failure as well as coma. Therefore, it is seen that the assessee has taken different plea at different point of time. So the version of the assessee cannot be relied upon. Further, the assessee never submitted any medical documents in support of his claim.

ii) The assessee had taken the plea that the amount received by him during the venture was mainly spent for his mother’s medical expenditure. The assessee received the amount of Rs. 22,75,000/- during the F.Y. 2010-11. Therefore, the assessee was supposed to submit his return of income for the A.Y. 2011-12 within the month of July, 2011. The assessee’s mother was expired on 01.08.2015. Thus the assessee’s plea that most of the amount was spent by him towards his mother’s medical expenditure (i.e. within March, 2012) is not at all acceptable. Further, from the details of investment submitted by the assessee during assessment stage, it is noticed that the assessee made fixed deposits to the tune of Rs. 8,30,000/- during the F.Y. 2010-11 with various banks. It is also noticed from the deed of conveyance that the assessee received Rs.1,01,00,000/- and Rs.1,20,00,000/- on 27/12/2017 from sale of two flats. But, still the assessee did not submit his return of Income for the A.Y. 2011-12 after making payment of due taxes. He paid the taxes and submits his return of income only after receipt of notice u/s 148 from the Department.

iii) Onus is on the assessee to furnish complete disclosure of income voluntarily before filing return of income u/s 139 of the Income-tax Act, 1961. The mistake was detected by the Department for this A.Y. In this case, the assessee had not filed his return of income u/s 139 of the Income-tax Act, 1961. Further, he had not produced any proof of payment of taxes before the issue of notice u/s 148. Had the case not been scrutinized the whole taxable amount would have gone tax free.

iv) Regarding addition of Re 79,500 in respect of alternative accommodation, the assessee had mentioned that he was in the mis-conception that the rent paid by the developer is a part of contract agreement and for that reason he did not consider the monetary value of alternative accommodation as his income. In this context it is worth mentioning that our important legal principle is that “ignorance of the law is no excuse”. Thereby this rule really means actions by claiming that they didn’t know the people can’t defend their actions by claiming that they didn’t know the law.”

The Ld. AO accordingly imposed a penalty of Rs. 4,56,362/-.

7. The assessee contested this penalty order before the Ld. CIT (A) who dismissed the appeal by giving the following findings: –

“5. I have considered the facts of the case and written submissions of the appellant as against the observations/findings of the AO in the penalty order. The points are being discussed and decided as under:-

5.1 There is no doubt that assessee has not field original return u/s 139(1) for the A.Y. 2011. The due date under section 139(1) was 31.07.2011. Notice u/s 148 was issued on 27.03.2018. Assessee field his return under section 148 on 25.04.2018 showing total income of Rs. 22,95,849/-, The assessee has field his return after a period of more than six years from the due date u/s 139(1), Thus, it is an undoubted fact that the assessee had no intention to declare his return of income and pay due taxes had the department not issued the notice under section 148. Department had credible information which could not have been disputed. Thus, filing of return u/s 148 by the assessee was not voluntary.

5.2 AO has explained in detail that assessee received money in F.Y. 2011-11. Return for this was to be filed by 31.07.2011. Mother of the assessee died on 01.08.2015. It cannot be the case of the assessee that he spent the 92% of the money received by 31.07.2011. Hence, he had no money left to pay due taxes. Further, there is no documentary evidence filed by assessee to prove this claim. In any case, there can’t be any excuse to avoid the due government taxes.

5.3 As stated by the AO, the assessee had no objection to the addition of 79,500 when pointed out during assessment proceedings. This was over and above the amount shown in the return u/s 148. The facts that there was no explanation with the assessee for not disclosing the same. Infact nothing was voluntary by the assessee. The plea that payment were made to the third party is not acceptable. He was part of the arrangement/agreement and enjoyed the benefits in cash& kind of the arrangement with joint developer. He was liable to disclose the true and correct income in his return u/s 139(1) which was never filed.

5.4 The assessee has relied upon the certain case laws. But none of them are applicable in the given facts of the assessee’s case. Further, assessee has not controverted the Apex Court ruling in the case of K.P. Madhusudhan, Therefore, I found that penalty levied by the Assessing Officer is reasonable and deserves to be upheld. Further reliance is placed on the case laws given below:

CIT V. HANDLOOM EMPORIUM [2006] 282 ITR 431(ALL.)

Penalty under section 271(1)(c) is applicable even when concealment of income is admitted by filing a revised return after detection of concealment.

M. S. MOHAMMED MARZOOK (LATE) AND ANOTHER (REPRESENTED BY LEGAL HEIRS) v. INCOME-TAX OFFICER, [2006] 283 ITR 254 (MAD)

Penalty- concealment of income-revised return filed after search proceedings – Finding by Tribunal that there had concealment of income-levy of penalty valid-Income-tax Act, 1961, s. 27(1)(c). Held that the Tribunal on the facts of the case, found that the omission or wrong statement by the assessee in the original return was not bona fide or due to any inadvertence or mistake on his part, but the revised return was filed only after the search action. The levy of penalty was valid.

ASHOK KUMAR GUPTA V COMMISSIONER OF INCOME-TAX, [2006] 287 ITR 376 (P&H).

Penalty-Concealment of Income Search and seizure-Effect of Explanation 5 to section 271(1)(c) Surrender of income found during search No filing of return in respect of such income and no payment of tax-Levy of penalty-Valid-Income-tax Act, 1961, s. 271(1)(c) would have protected the assessee.

KAMAL CHAND JAIN v INCOME TAX OFFICER (2005) 277 ITR 429 (DEL)

When there is no proper explanation from the assessee except surrendering certain amount for taxation to buy peace and avoid further litigation, it was held that levy of penalty u/s 271(1)(c) was justified.

6. Considering the above discussion Ground No 1 and 2 of the appeal one dismissed. Since no change for alteration in the grounds are made during proceedings therefore, Ground No. 3 is dismissed as it need no adjudication.”

8. We find that the decision relied upon by the Ld. CIT(A) are distinguishable on facts as they relate to the surrender of income during search and seizure proceedings and consequential imposition of penalty and are not applicable to the facts of the case of the assessee who had filed the return of income in response to the notice issued under section 148 of the Act. In the course of the appeal, the assessee has relied on the decision of the Tribunal in the case of Smt. Delilah Raj Mansukhani Vs. ITO in ITA No. 3526/MUM/2017 vide order dated 29t^h January, 2021, in which the compensation amount received for alternative accommodation has been held to be a receipt not in the nature of income by observing as under: –

“5. After hearing the rival submissions and perusing the material on record, we find that compensation received by the assessee towards displacement in terms of Development Agreement is not a revenue receipt and constitute capital receipt as the property has gone into re- development. In such scenario, the compensation is normally paid by the builder on account of hardship faced by owner of the flat due to displacement of the occupants of the flat. The said payment is in the nature of hardship allowance /rehabilitation allowance and is not liable to tax. The case of the assessee is squarely supported by the decision of the Co-ordinate Bench in the case of Shri Devshi Lakhamshi Dedhia Ms. Delilah Raj Mansukhani vs. ACIT in ITA No.5350/Mum/2012 wherein similar issue has been decided in favour of the assessee, the relevant operative portion is reproduced hereunder:-

15. We have considered the rivals submissions and perused the materials on records. We note that the assessee received compensation of Rs. 19,50,873/-from the developer when the building in which the assessee owned flat went for re-development as per the agreement between the developers and flat owners dated 28.03.2008. The said compensation was paid towards hardship Rs.13,45,278/-; rehabilitation Rs, 5,90,625/- and for shifting Rs. 15,000/-. We also note that the assessee paid Rs. 18,63,000/- to Joys Developers for acquiring additional area of 138 Sq Ft. It was also noted that the assessee shifted to his own house when the building went for re-development. Now the question before is whether the compensation upon re-development of property towards hardship, rehabilitation and shifting received by the assessee is taxable if the potential TDR/FSI is available to the land owner or society which owns the land depending upon the terms of the re-development agreement without transferring the land. In the present case the assessee who was flat owner in the building was member of the society. As per the agreement each member of the society including the assessee was to be given a flat in lieu of the old one and the each member including the assessee was given compensation. We also note that In the decisions in ITA No 72/Mum/2012 assessment year 2008-09 Bench E and ITA No 5271/Mum/2012 assessment year 2008-09 Bench “D” the Tribunal held that the amounts received as compensation for hardship, rehabilitation and for shifting are not liable to tax We, therefore, respectfully , the above decisions are of the considered view that the amounts received by the assessee as hardship compensation, rehabilitation compensation and for shifting are not liable to tax and the order passed by the first appellate authority can not be sustained. Thus the order of CIT(A) is reversed and ground is allowed in favour of the assessee.

16. In the result, appeal of the assessee is partly allowed, as above.

6. Respectfully following the co-ordinate Bench decision, we set aside the findings of the Ld. CIT(A) on this issue and direct the AO to delete the addition made of Rs.2,60,000/-. Accordingly, the ground No.6 is allowed.”

9. Thus, the penalty is not automatically levied on the basis of the finding in the assessment order. The assessee had conceded the compensation of ₹79,500/- to be included as income from other sources, however, when examined in view of the judicial pronouncements in this regard (supra), the same is not liable to be included in the total income of the assessee as being compensatory and capital in nature. Thus, no penalty is leviable on the amount of ₹79,500/- and ground no. 4 is allowed in favour of the assessee.

10. As regards ground no. 2, the Ld. AO had recorded the satisfaction in the assessment order as under: –

“I am satisfied that it is a fit case for initiation of penalty u/s 271(1)(c) in respect of Income from Capital Gain and Income from Other Sources with a motive to avoid payment of taxes and defraud the exchequer. Penalty proceedings u/s 271(1)(c) of the 1.T. Act is being initiated separately.

Considering the facts and circumstances as discussed above, total taxable income of the assessee is assessed u/s 147/143(3) of the 1.T. Act, 1961 of Rs.2,375,350/- Computation of Total Income is made as below:

Issue copy of order, demand notice and penalty notices to the assessee. Tax payable is computed as per separate sheet enclosed.”

10.1 Recently, Hon’ble Calcutta High Court in case of Principal Commissioner of Income-tax v. Thakur Prasad Sao & Sons (P.) Ltd. [2024] 163 taxmann.com 449 (Calcutta) have held in Para 39 that when the Assessing Officer had recorded in the assessment order the particulars of concealed income/undisclosed income of the assessee and on that basis initiated penalty proceeding under section 271(1)(c) then consequential notice under section 274 issued by Assessing Officer to the assessee to afford him opportunity of hearing, was specifically a notice for penalty for concealment of particulars of income/undisclosed income. Such a notice complied with the principles of natural justice and was a valid notice under section 274. Hence, ground no. 2 of the appeal is hereby dismissed.

11. However, as regards ground nos. 1, 3 and 5, on the issue of penalty on the returned income, the coordinate bench of the Tribunal, Delhi Bench, while deciding the appeal in the case of Meeta Gutgutia Vs. ACIT in ITA No. 327/Del/2014 A.Y. 2008-09 vide order dated 31st March, 2023, have held as under: –

“6. We have heard the rival submissions and perused the material on record. It is an undisputed fact that the returned income has been accepted, there is no satisfaction recorded by the assessing officer that assessee had concealed income with reference to return of income filed by him in response to notice u/s 148. Hon’ble Supreme Court in Varkey Chacko v. CIT [1993] 203 ITR 885 has held that a penalty for concealment of particulars of income or for furnishing inaccurate particulars of income can be imposed only when the assessing authority is satisfied that there has been such concealment or furnishing of inaccurate particulars. A penalty proceeding, therefore, can be initiated only after an assessment order has been made which finds such concealment or furnishing of inaccurate particulars. The penalty was permissible under the law on the date on which the offence of concealment of income was committed, that is to say, on the date of the offending return. Hon’ble Madras High Court in the case of CIT v. K.R. Chinni Krishna Chetty [2000] 246 ITR 121 has held that under section 271(1)(c) of the Act the authority is given the discretion to levy a penalty if there is concealment of particulars of income and even as regards the quantum of the penalty there is a discretion. Of greater importance is the necessity for a definite finding that there is concealment, as without such a finding of concealment, there can be no question of imposing any penalty. In the assessee’s case, the AO has not given any finding in assessment order that the assessee had concealed any income or furnished inaccurate particulars of such income. He had simply accepted the returned income u/s 148. Hence assessee’s case is covered by the decisions referred to above and penalty u/s 271(1)(c) will not be imposable. In CIT v. Suresh Chandra Mittal [2001] 251 ITR 963 (SC) the assessee filed revised returns showing higher income after search and notice for reopening of assessment, to purchase peace and avoid litigation and Department simply rested its conclusion on the act of voluntary surrender done by the I.T.A. No. 327/Del/2014 Assessment year 2008­09 assessee in good faith, High Court was justified in holding that no penalty could be levied. The assessee’s case is on more strong footing as that of Suresh Chand Mittal (supra) decided by Hon’ble Supreme Court. As held in earlier paragraphs there should be variation in assessed and returned income and such variation should be as a result of concealment. It is not the case of assessing officer that penalty u/s 271(1)(c) has been imposed on certain additions made to the returned income. Hon’ble Delhi High Court in the case of M/S S.A.S. Pharmaceuticals (supra) while deciding the issue levy of penalty u/s 271(1)(c) in paragraph 15 has held as under:

“15. It necessarily follows that concealment of particulars of income or furnishing of inaccurate particulars of income by the assessee has to be in the income tax return filed by it. There is sufficient indication of this Court in the judgment in the case of Commissioner of Income Tax, Delhi-I Vs Mohan Das Hassa Nand 141 ITR 203 and in Reliance Petro products Pvt. Ltd (supra), the Supreme court has clinched this aspect, viz., the assessee can furnish the particulars of income in his return and everything would depend upon the income tax return filed by the assessee.”

7. Therefore, in view of the facts of the case we are of the opinion that no penalty was imposable u/s 271(1)(c) of the Act I.T.A. No. 327/Del/2014 Assessment year 2008-09 and we accordingly direct the AO to delete the penalty.”

12. Similar finding has also been given in the case of Armoury International Vs. Asst. CIT 21(3), Mumbai in ITA Nos. 3299, 3300 & 3301/Mum/2017 for A.Ys. 2009-10 to 2011-12, vide order dated 1st January, 2019, wherein it has been held as under: –

“7. In this case, since the assessed income and the returned income are the same, the machinery provision of penalty u/s 271(1)(c) fails. In this regard, we draw support from the of Hon’ble Delhi High Court decision in the case of CIT vs. SAS Pharmaceuticals [2011] 335 ITR 259 (Del). The Hon’ble High Court has expounded that penalty u/s 271(1)(c) can only be levied if in the course of proceedings, the A.O. is satisfied that there is an concealment or furnishing of inaccurate particulars. The words “in the course of any proceedings under this Act mean the assessment proceedings”. However, the question ‘whether there is concealment or inaccurate particulars’ has to be determined with reference to the returned income. Accordingly, in the background of the aforesaid discussion and precedent, we set aside the order of the Ld. CIT(A) and delete the levy of penalty.”

13. Hence, in view of the finding in the case of Meeta Gutgutia (supra), in which reliance has been placed on the decision of Hon’ble Supreme Court in the case of Varkey Chacko (supra) and the decision of Hon’ble Delhi High Court in M/S S.A.S. Pharmaceuticals (supra), and also in the case of Armoury International (supra), if the compensation amount of ₹79,500/- is excluded, as the same was capital receipt in nature and therefore not liable to be added to the income, there remains no difference between the income returned in response to the notice u/s 148 of the Act and the income assessed u/s 143(3) read with section 147 of the Act. Hence, in view of the Hon’ble High Court’s decision in case of M/s S.A.S. Pharmaceuticals (supra), no penalty was imposable u/s 271(1)(c) of the Act. We accordingly, direct the Ld. AO to delete the penalty levied. Hence, ground nos.1, 2 and 5 of the appeal are allowed.

14. In the result, the appeal of the assessee is partly allowed and the penalty levied is hereby deleted.

Order pronounced in the open court on 6t^hNovember, 2024.