The Commissioner of Income Tax and Another vs Sandur Manganese and Iron Ores Limited

N. Kumar, J.—This appeal is by the Revenue challenging the order passed by the Tribunal setting aside the order of the Commissioner for Income Tax Appeals imposing penalty for the first time in the appellate proceedings. The assessee filed returns on 29-11-1996 claiming loss of Rs. 26,03,43,978/-. Assessment was completed on 19-9-1997 showing loss of Rs. 25,15,67,622/-. The said loss was reduced on account of certain disallowances including contribution to pension scheme in a sum of Rs. 19,21,640/- and interest on penal charges levied for alleged excess consumption of electricity in a sum of Rs. 30,74,627/-, in all a sum of Rs. 49,96,267/-.

The Assessing Authority disallowed the said disallowances and brought the said amounts to tax. Aggrieved by the said order the assessee preferred an appeal to the Commissioner of Income Tax Appeals, who has affirmed the said order. But he observed that, on due application of mind he finds that in respect of grounds of appeal dealt with in paras 2 and 4 above, the appellant has furnished inaccurate particulars of income within the meaning of Section 271(1)(c) read with Explanation 1 of income tax Act, 1961 by claiming unfounded deductions and was liable to penalty u/s 271(1) read with Explanation 4(a) thereto. I fence he directed penalty proceedings u/s 271(1)(c) be initiated.

After initiating an independent proceedings for levy of penalty by an order dated 22-12-1999 he imposed a minimum and maximum penalty on the concealed income of Rs. 49,96,267/- at Rs. 22,98,284/- and Rs. 68,94,852/- respectively and a penalty of Rs. 22,98,284/- is imposed.

Aggrieved by both the orders the assessee preferred an appeal before the Tribunal. The Tribunal upheld the disallowance but it interfered with the order imposing the penalty. The Tribunal held it is not a case of furnishing inaccurate particulars of income as observed by the Appellate Authority in the penalty order, so far as the contribution to pension scheme is concerned, the assessee claimed deduction following the decision of the jurisdictional High Court. On the facts of the case, they have held that the decision is no longer applicable in the present years. Therefore, the claim of the assessee was based on a decision and hence it cannot be said that there was any mala fide or that inaccurate particulars were furnished by the assessee.

Similarly, interest on penalty charges was claimed by the assessee under the impression that the Company was maintaining accounts under the mercantile system. Here also they found there was no material to support the observations of the Appellate Authority that the assessee had furnished inaccurate particulars of income. At best, it may be a case of wrong claim made by the assessee which was rejected by the authorities below. Further it held, it is settled law that levy of penalty u/s 271(1)(c) is not automatic and therefore in the absence of any mala fides being established against the assessee, imposition of penalty was bad in law and therefore it set aside the order imposing the penalty. Aggrieved by the said order, the Revenue has preferred this appeal.

Learned Counsel appearing for the Revenue assailing the impugned order contended, the assessee admittedly claimed deduction by showing these provision. Now three Courts have concurrently held, the assessee was not entitled to the aforesaid deduction and therefore the Appellate Authority was justified in initiating penalty proceedings and in imposing the penalty and therefore he submits the Tribunal erred in interfering with the order imposing the penalty.

Per contra, learned Counsel appearing for the assessee supported the impugned order.

While imposing the penalty the Commissioner of Income Tax Appeals has relied on Explanation 1 to Section 271(1)(c). Explanation 1(A) deals with a case of assessee failing to offer an explanation or the explanation offered is found to be false. The present case do not fall under that provision. There is no finding recorded by the Assessing Authority or the lower Appellate Authority that the explanation offered by the assessee is false, their case of furnishing of inaccurate particulars. Therefore, it is Explanation 1(B) which is attracted. The said provision makes it clear if the assessee offers an explanation and he is not able to substantiate the said explanation and if the said Act is bona fide and all the facts relating to the same material to the computation of total income have been disclosed by him. Then no penalty could be imposed.

Though in the instant case a wrong claim is made for deduction and an explanation was offered, in the absence of a finding that he has failed to prove such explanation as bona fide, no penalty can be imposed. In the instant case, a particular stand is taken based on the decisions of the High Court and is not able to substantiate the same. But as long as there is no finding by the Appellate Authority that the explanation offered is not a bona fide one, the imposition of penalty is illegal. That is precisely what the Tribunal has held. It is settled law, imposition of penalty is not automatic. It is only when there is an attempt to evade tax by offering explanation which is found to be false or not bona fide the penalty can be imposed. In the facts of the case we are also satisfied that the imposition of penalty by the lower Appellate Authority was not justified or the material on record and the Tribunal was justified from setting aside the order of imposing penalty. No merits. Dismissed.