COMMISSIONER OF INCOME TAX-II vs. KARNAVATI CLUB LTD

1 In both these appeals, the appellant has raised the following common question proposing it as substantial question of law:- “Whether the Appellate Tribunal has substantially erred in cancelling the penalty levied u/s.271(1)(c) of the Act?”

We heard learned Senior Counsel Mr. M.R. Bhatt assisted by learned advocate Ms. Mauna M. Bhatt, learned advocate for the appellant.

Before the Tribunal, the Revenue challenged deletion of penalty levied under section 271(1)(c) of the Act of Rs.4,99,490/- and Rs.14,48,186/- for the assessment years 1993-94 and 1995-96 respectively.

1 The only issue involved in the appeal is with regard to penalty imposed by the Assessing Officer under section 271(1)(c) of the Income Tax Act, 1961 (hereinafter referred to as `the Act' for the sake of brevity). The facts in brief are that the respondent assessee, which was a limited company running a club for its members filed its return of income for the assessment years under consideration declaring loss. The case was reopened under section 147 of the Act and the assessment was framed under section 143(3) read with section 147 of the Act, in which addition in the income was made.

2 The Assessing Officer made various additions in respect of life membership fees and entrance fees by the assessee and also on the count of income received towards the annual subscription, maintenance subscription, fees, etc. The Assessing Officer also initiated penalty proceedings. Against the additions made, the assessee filed an appeal before the CIT(A) who by his order dated 22.09.2002 deleted all the additions except the addition made in respect of bank interest. Against that order the Department went in appeal.

3 The Appellate Tribunal deleted the addition made in respect of life membership fee, the entrance fee, but confirmed the additions made under the other heads. After receipt of that order of the Tribunal, the Assessing Officer continued the penalty proceedings in respect of the items for which the additions were confirmed. He imposed penalty of Rs.4,99,490/- and Rs.14,48,186/- for the two assessment years respectively.

4 Thereafter, the assessee preferred appeals against the order of the Assessing Officer imposing penalty. The CIT(A) confirmed the order of penalty holding that the assessee had furnished inadequate figures of income and that there was a concealment. Thereafter, the assessee approached the Tribunal and the appeal of the assessee culminated into the impugned order.

Before the authorities, the explanation offered by the assessee was that it was under impression that no tax was leviable since it was a club and that in his belief the concept of mutuality would apply in relation to the receipts of various incomes.

In view of explanation to section 271(1)(c) of the Act, it cannot be said that mere confirmation of addition in the assessment proceedings would ipso facto justify levy of penalty. The relevant portion of section 271(1)(c) and the Explanation 1 thereto is extracted hereinbelow: “271(1) If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person - (a) omitted (b) has failed to comply with a notice under sub-section (2) of section 115WD or under sub-section (2) of section 115WE or under sub-section (1) or section 142 or sub-section (2) of section 143 or fails to comply with a direction issued under sub-section (2A) of section 142 or (c) has concealed the particulars of his income or furnished inaccurate particulars of such income or (d) has concealed the particulars of the fringe benefits or furnished inaccurate particulars of such fringe benefits, he may direct that such person shall pay by way of penalty, - (i) omitted (ii) in the cases referred to in clause (b), in addition to tax, if any, payable by him, a sum of ten thousand rupees for each such failure; (iii) in the cases referred to in clause © or clause (d), in addition to tax, if any, payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or fringe benefits or the furnishing of inaccurate particulars of such income or fringe benefits. Explanation 1. - Where in respect of any facts material to the computation of the total income of any person under this Act, - (A) Such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) to be false, or (B) Such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub- section be deemed to represent the income in respect of which particulars have been concealed.”

1 Section 271(1)(c) of the Act inter-alia provides for imposition of penalty on the contumacious or fraudulent assessees. Explanation 1 to sub- section (1) of section 271 provides that where in respect of any facts material to the computation of total income, the assessee (a) fails to offer an explanation or (b) offers an explanation which is false or (c) offers an explanation which unsubstantiated and fails to prove that the material facts required to be disclosed were not disclosed, he is deemed to have concealed the particulars of income. In other words, it is permissible for the assessee to offer an explanation explaining that there was no concealment and that he acted bonafide. The onus is on the assessee to show that there is no concealment. Where the assessee has a reasonable explanation, it is taken to be in discharge of the burden by the assessee.

It is seen from the perusal of the facts of the present case that the major part of the income of the assessee was in respect of life membership fees and entrance fees. After they were deleted, the resultant figure was in loss. Therefore, it could not be considered to be a concealment of income by the assessee with malafide intention. Another relevant aspect was that the assessee being a club, it was legitimate on its part to believe that the principle of mutuality would come into play and apply. It was recorded by the Tribunal that there was no tampering or any other addition in the receipts shown by the assessee. The income was duly disclosed before the Department and the accounts submitted with income tax returns reflected all the incomes. It was further noticed that the nature of receipts were not different than what was shown in the books of accounts. These were the these primary facts with which the assessee successfully discharged its burden.

1 On the basis of such relevant considerations, the Tribunal came to the conclusion that the assessee had offered a proper explanation and that it was bonafide. Having regard to all these aspects, the Tribunal did not commit any error in accepting the explanation offered by the assessee and resultantly deleting the penalty.

2 In view of the above, no interference is called for in the impugned order of the Tribunal. No substantial question of law arises for consideration.

This Tax Appeal is accordingly dismissed. (V.M. SAHAI, J.) (N.V. ANJARIA, J.) (SN DEVU PPS)