CIT vs Alkesh K. Patel

Dr. D.Y. Chandrachud, J.—The appeal by the revenue u/s 260A of the Income Tax Act, 1961 arises out of an order passed by the Income Tax Appellate Tribunal on 28-7-2006 for assessment year 1995-96. Though the appeal was admitted on two questions of law, the learned counsel appearing on behalf of the revenue and the learned counsel appearing on behalf of the assessee are agreed in stating before the court that basically the following question of law would be sufficient for the purposes of formulation:--

Whether on the facts and the circumstances of the case and in law, the learned Commissioner (Appeals) and Tribunal were justified in deleting the penalty of Rs. 10,08,400 contravening the provisions of Explanation (1) to section 271(1)(c) of the Income Tax Act, without appreciating the facts brought on record by the assessing officer in his order dated 19-3-2003?

The assessee is a partner in a real estate firm by the name of Dharti Estate. According to the assessee, the aforesaid firm had advanced a loan to Dharti Builders and Developers Private Limited in the amount of Rs. 3.45 crores, against which the company had advanced a sum of Rs. 1.31 crores to the assessee. The assessee was a director and shareholder of the company and held in excess of 25 per cent of the equity capital. The assessee filed a return of income on 31-3-1997 declaring an income of Rs. 4,14,270. The return was processed u/s 143(1). The assessment was subsequently rectified by an order dated 5-2-1998. A notice was issued to the assessee u/s 148 on 28-3-2002, in pursuance of which an order of assessment was passed u/s 143(3) read with section 147 on 19th March, 2003. By the order of the assessing officer, total income was computed at Rs. 30,12,440 after making an addition of Rs. 25,21,000 on account of deemed dividend u/s 2(22)(e). A notice to show-cause was issued to the assessee for imposition of a penalty u/s 271(1)(c). The assessing officer imposed a penalty in the amount of Rs. 10,08,400, following which an appeal was filed by the assessee. The Commissioner (Appeals) allowed the appeal and ordered deletion of the penalty. The Tribunal confirmed the order of the Appellate Authority by its order dated 28-7-2006, which is impugned in this appeal.

The only ground which has weighed with the Tribunal in setting aside the penalty is that prima facie it appears that the assessee was not aware of the provisions contained in section 2(22)(e) of the Income Tax Act, 1961 and in view of this the assessee has committed a bona fide mistake, which cannot be penalised by levy of a penalty u/s 271(1)(c). There is merit in the submission which has been urged on behalf of the revenue that the ground that the assessee was not aware of the provisions of section 2(22)(e) can hardly be regarded as sufficient in itself to order the deletion of the penalty in a case such as present, where the assessee is a partner in a partnership firm engaged in the business of real estate, and was also a major shareholder of a private limited company. According to the assessee, the partnership firm had advanced a loan of Rs. 3.45 crores to the private limited company and the company had in turn advanced a loan of Rs. 1.31 crores to the assessee. The assessing officer had adverted to several circumstances in para 9 of his order, which reads as follows :--

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(1) The assessee has a substantial interest in the company.

(2) The company is a company in which public are not substantially interested.

(3) The assessee is a major shareholder in the company.

(4) The withdrawals made by the assessee from the company amounted to grant of loan or advance by the company to the shareholder since the assessee did not have any credit balance with the said company at the material time.

(5) The company had sufficient accumulated profit.

(6) The credit balance of the firm was not debited at all and the amounts are shown as outstanding as against the Directors in the accounts of the company.

(7) The advances/loans received by the assessee during the year 1994-95 ie., assessment year 1995-96 to the tune of Rs. 74,37,000 has been utilised by the assessee for the benefit of his relatives, wife, children and associated concerns by way of advance/loans and investments in shares.

The Commissioner (Appeals), while ordering the deletion of the penalty accepted the contention of the assessee that he had acted under a bona fide belief that all the loans and advances obtained from the company were disclosed in the return of income and that the assessee had already been subjected to the demand of tax as well as interest. All the circumstances, which have been relied upon in the order of the assessing officer in the first instance and in appeal by the Appellate Authority, ought to have been but have not been evaluated by the Tribunal. In these circumstances, since the Tribunal, as an Appellate Authority, ought to have evaluated all the material facts and circumstances before arriving at a decision as to whether the deletion of the penalty should or should not be sustained, we are of the view that it would be appropriate to remand the proceedings back to the Tribunal for a fresh decision. Since we are inclined to remand the proceedings, it would be appropriate to set aside the impugned order of the Tribunal, clarifying at the same time that this court has not expressed its opinion, one way or the other, on the merits of the rival contentions. To facilitate a fresh order being passed on remand, we set aside the impugned order dated 28-7-2006 passed by the Tribunal and restore income tax Appeal No. 1462/Mum./2004 to the file of the Tribunal for a fresh decision.

In view of the aforesaid directions, it is not necessary for this court for the purposes of this appeal to answer the question of law as framed. The appeal is accordingly, disposed of. There shall be no order as to costs.