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Income Tax Appellate Tribunal, DELHI BENCH ‘F’ NEW DELHI
PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER The present appeal is preferred by the Department against the order dated 27.09.2011 passed by the Ld. CIT(A), Faridabad deleting the penalty amounting to Rs. 29,04,614/- imposed u/s 271(1)( c) of the Act for assessment year 2005-06.
The facts in brief are that the assessee filed his return of income declaring income of Rs.4,84,980/- on 27.10.2005, which was processed u/s 143(1) of the Act. The Assessee is proprietor of M/s Neumann Engineering Works and engaged in the business
of manufacturing of sheet metal components. In the return of income, the assessee claimed exemption of Rs.80,31,540/- u/s 10(38) of the Act on account of sale of 50000 shares of M/s.
Quality Synthetic Industries Ltd. (hereinafter referred to as QSIL) during the F.Y. 2004-05, as Long Term Capital Gain. The shares were purchased in F.Y. 2003-04 for Rs. 1,40,800/-. The case was selected for scrutiny and assessment was completed on 20.12.2009, wherein the AO disputed the claim of Long Term
Capital Gains on sale of shares and made additions of Rs.81,72,340/-, being sale proceeds of shares, as income from undisclosed sources and further addition of Rs.4,08,615/-, being commission paid @ 5% on procuring accommodation entries in the wake of sale of shares by holding the transaction as sham and colourable device relying upon the decision of Hon’ble
Supreme Court in the case of Me Dowell 85 Co. vs. CTO (154 ITR
148). The AO initiated penalty proceedings u/s 271 (l)(c) of the Act for concealment of particulars of income and for furnishing inaccurate particulars of income and issued notice u/s 274 r.w.s.
271(l)(c) of the Act dated 20.12.2007. The assessee preferred appeal against the assessment order and the Ld. CIT (Appeals),
Faridabad vide order dated 06.10.2008 in appeal No.229/2007-
08 deleted the additions of Rs.81,72,615/- and Rs.4,08,615/-.
On further appeal preferred by department, the ITAT reversed the order of Ld. CIT (Appeals) and upheld the order of the AO.
Consequently, the AO issued a further show-cause notice dated
19.03.2010 in response to which the assessee filed written submissions contending mainly that there was neither concealment of any particulars of income nor furnishing of inaccurate particulars. The addition was made on account of disagreement of the AO about the share transactions. The AO, after considering the written submissions of the assessee and holding that the seller of shares to the assessee could not give satisfactory reply; the credentials of QSIL were not know; the purchases of shares by the assessee were not shown in the return of income of preceding year and the companies to whom shares were sold by the assessee could not be ultimately traced passed penalty order u/s 271(l)(c) of the Act imposing penalty of Rs.29,04,614/-, being 100% of amount of tax sought to be evaded, for furnishing inaccurate particulars of income.
On appeal before the First Appellate Authority, the Ld. CIT(A)
while deleting the penalty observed in pages 23 and 24 of the impugned order as under:-
“There is no dispute to the fact that the assessee had disclosed all the material facts relating to his claim of exemption u/s 10(38) on account of long term capital gains on sale of shares in the return of income and before the AO. The appellant had offered explanation backed by ample evidences including capital accounts for A.Y.2003- 04 showing withdrawals in cash to establish the purchases of shares, though disbelieved by the AO. The admitted fact remains that neither the sale prices of shares confirmed by Kolkata Stock Exchange in the month of March 2005 nor the contract notes raised by share broker Shri Sunil Kumar Jhunjhunwala nor the share certificates produced by the appellant nor the confirmation submitted by QSIL have been controverted by the AO or otherwise established to be false. The ITO (Inv.) Kolkata has simply opined that the transaction of sale of shares the appellant were sham without establishing any truth of transactions. It is correct that degree of appreciation of facts and material evidences may vary at different appellate levels, as in the present case, where the additions were deleted by Ld. CIT (Appeals) but confirmed by Hon’ble ITAT leading to inference as to the change of opinion. The additions have been sustained by the Hon’ble ITAT on the basis of theory of preponderance of human probability and surrounding circumstances. However, mere confirming the additions does not become conclusive factor for the purpose of levying penalty, as per the rationale laid down in large number of decisions of Hon’ble Courts cited supra. From the facts of the case, it is evident that the AO has not made out any conclusive case of either concealment of particulars of income or furnishing of inaccurate particulars of income while making the addition of Rs.81,72,340/-. Hence, no penalty is exigible on such addition. As regards penalty on the addition of Rs.4,08,615/- made by the AO by estimating the alleged commission @ 5 %, the same addition is based purely on estimation basis and no penalty is leviable in view of the decision of Hon’ble Punjab and Haryana High Court in the case of CIT vs. Ajaib Singh (253 ITR 628). In the light of rationale laid down in the above judicial rulings and facts of the appellant’s case, I hold that the appellant cannot be held to have either concealed the particulars of income or 4 furnished inaccurate particulars of income for imposing penalty. Therefore, the penalty order passed by the AO levying penalty 29,04,614/- u/s 271(l)(c) of the Act is cancelled.”
The Revenue is now in appeal before us and has raised detailed and argumentative grounds of appeal, the sum and substance of which is that the Ld. CIT(A) has erred in law and on facts in cancelling the penalty u/s 271(1)(c) of the Income Tax Act, 1961.
The Ld. DR placed heavy reliance on the order of the Assessing Officer and emphasized that in the quantum proceedings, the ITAT had restored the disallowances/additions made by the Assessing Officer and in view of upholding of additions/disallowances by the ITAT, the penalty has been wrongly cancelled by the Ld. CIT (A).
The Ld. AR submitted that the assessee has preferred an appeal before the Hon'ble Punjab & Haryana High Court against the decision of the ITAT in the quantum appeal which has been admitted for hearing by the Hon'ble Punjab & Haryana High Court (which is the jurisdictional High Court of the assessee) for consideration of the following substantial questions of law:-
“Whether the Tribunal was legally correct in restoring the order of the Assessing, Officer without reversing the findings recorded by the CIT (A) which were duly based on the material and evidence on record, thereby perversely sustaining the addition under Section 68 of the Income Tax Act, 1961? 2. Whether on an application of the correct principles of law, was the Tribunal legally correct on the facts and in the circumstances of the case, in upholding the order of the Assessing Officer by applying the test of human probability evolved in the case of Sumati Dayal v. CIT (1995) 214 ITR 801 (SC)? 3. Whether the impugned order passed by the Tribunal reversing the order of CIT (A) thereby having the effect of sustaining the addition under Section 68 of the Income Tax Act. 1961 is based on irrelevant findings, illegal, perverse and a result of wholly erroneous approach not permitted by law?” Admitted.”
The Ld. AR submitted that in view of the appeal of the assessee having been admitted by the Hon'ble Punjab & Haryana High Court on the quantum addition, it is evident that the issue is debatable and is subject to interpretation. He placed reliance on the decision of the Hon'ble Delhi High Court in the case of CIT- II vs Liquid Investment & Trading Co. In and submitted that in view of the issue being a debatable one, the penalty was not sustainable and as such the same should be cancelled.
We have heard the rival submissions and perused the material on record. It is seen from the records that ITAT ‘F’ Bench had earlier confirmed the penalty imposed in its order dated 8.3.2013 in I.T.A. No. 5556/Del/2013. However, the assessee had filed a Miscellaneous Application for the recall of the order on the ground that the appeal against the quantum case stood admitted before the Hon'ble Punjab & Haryana High Court against the order passed by the ITAT. This Miscellaneous Application of the assessee was accepted and the order of recall was passed on 9.3.2015 vide M.A. No. 113/Del/2013 and the present appeal has been heard subsequent to this order of recall as aforesaid. It is settled legal position that no penalty is leviable where two views are possible or where there are debatable issues specially where a question of law has been framed and admitted by the Hon'ble High Court as held in the case of CIT-II vs Liquid Investment and Trading Co. (ITA 240/2009) (Del.) (HC).
The issue also arose before the Hon’ble Bombay High Court in the case of CIT vs. Nayan Builders, 368 ITR 722 wherein the court found that the appeal of the Revenue/Department could not be entertained as it did not raise any substantial question of law. In the said case the addition of income of Rs. 1,04,76,050 and disallowance of expenses of Rs.10,79,221 on brokerage and Rs. 2,00,000 on legal fees made by the AO were sustained by the Tribunal and the appeal of the assessee u/s. 260A was admitted by the High Court on ground that the said addition and the disallowances represented a substantial question of law. The AO, pending the disposal of the appeal by the Hon’ble High Court, had levied a penalty of Rs. 37,32,777 u/s. 271(1)(c) of the Act which was confirmed by the Commissioner(Appeals). On a further appeal by the assessee to the Tribunal, challenging the levy of the penalty, the Tribunal held that, when the High Court admitted a substantial question of law on the merits of an addition/disallowance, it became apparent that the issue under consideration on the basis of which penalty was levied, was debatable. It held that the admission by the High Court lent credence to the bona fides of the assessee in claiming deduction.
It held that the mere fact of confirmation of an addition/disallowance would not per se lead to the imposition of penalty, once it turned out that claim of the assessee could have been considered by a person properly instructed in law and was not completely debarred in law. Relying on the decisions in the cases of Rupam Mercantile Ltd. vs. DCIT, 91 ITD 237(Ahd.) (TM) and Smt. Ramilaben Ratilal Shah vs. ACIT, 60 TTJ 171(Ahd.), the Tribunal held that no penalty was exigible u/s. 271(1) (c), once the High Court had held that the issue of addition/disallowance represented a substantial question of law. On an appeal by the Revenue, the Hon’ble Bombay High Court held that the imposition of the penalty was not justified. The court noted that the Tribunal, as a proof that the penalty was debatable and involved an arguable issue, had referred to the order of the court passed in the assessee's appeal in quantum proceedings and had also referred to the substantial questions of law which had been framed therein. It held that where the High Court admitted an appeal on the ground that it involved a substantial question of law, in respect of which penalty was levied, impugned order of penalty was to be quashed. It held that the appeal challenging the order of the Tribunal passed for deleting the penalty levied, raised no substantial question of law and as a consequence dismissed it with no order as to costs.
An appeal u/s 260A of the Income Tax Act, 1961 lies to the High Court from an order of the Tribunal only where the High Court is satisfied that the case involves a substantial question of law. A full bench of the Hon’ble Supreme Court in the case of Santosh Hazari vs. Purshottam, 251 ITR 84 (SC) held that to be a substantial, a question of law must be debatable, not previously settled by law of the land or a binding precedent ...that it was not free from difficulty or that it called for a discussion for an alternate view. It further held that the word "substantial" qualifying "question of law" meant having substance, essential, real, of sound worth, important or considerable. Recently, the Hon’ble Patna High Court in the case of DCIT vs. Sulabh Intemational Social Service Organisation, 350 ITR 189 (Patna) has held that a substantial question of law must be one which was debatable and not previously settled under the law of the land or a binding precedent.
In the context of the appeals of the assessee we are of the considered opinion that the issue on hand is debatable, open and capable of having an alternate view as the same is held to be representing a substantial question of law by the Jurisdictional High Court at the time of admission of appeal. Accordingly, it is appropriate for us to hold, that the assessee was under a bona fide belief for staking its claim and in the presence of these factors, no penalty under section 271(1)(c ) is leviable. The Hon'ble Delhi High Court in the case of CIT vs. Liquid Investment Limited (I.T.A.No. 240/2009 vide its order dated 5.10.2010) has clearly held that where High Court has accepted substantial question of law u/s 260A, this itself shows that issue is debatable and in such a case no penalty was imposable u/s 271(1)(c) of the Income-tax Act, 1961. In view of the above, respectfully following the proposition laid down by Hon'ble Delhi High Court and Hon’ble Bombay High Court, as narrated above, we confirm the order of the Ld. CIT (A). Hence, the appeal of the department is dismissed.
In the result, the appeal of the department is dismissed.
Order pronounced in the Open Court on 29th April, 2016.