DCIT vs. SRI. P. SUBRAMANI,

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH “ B ” BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T.A. No.96/Bang/2014 (Assessment Year : 2006-07) Dy. Commissioner of Income Tax, Circle 7(1), Bangalore. …. Appellant Vs. Shri P. Subramani, No.317, Sai Sannidhi Layout, Kadugodi, Bangalore-560 067. ….. Respondent. Appellant By : Dr. P.K. Srihari, Addl. CIT (D.R.) Respondent By : Shri Narendra Sharma, Advocate. Date of Hearing : 25.11.2014. Date of Pronouncement : 9.1.2015 O R D E R Per Shri Jason P. Boaz : This appeal by revenue is directed against the order of the Commissioner of Income Tax (Appeals) – III, Bangalore dt.23.12.2013 for Assessment Year 2007-08, in respect of the issue of levy of penalty under section 271(1)(c) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). 2. The facts of the case, briefly, are as under :-

ITA No.96/Bang/2014 2 2.1 The assessee is an individual engaged in the business of civil contracts and real estate. A search under section 132 of the Act was conducted in the assessee's case on 24.3.2010. Notice under section 153A of the Act was issued to the assessee on 20.10.2010 and in response thereto, the assessee filed a return of income on 7.4.2011 declaring income of Rs.30,39,861. The Assessing Officer examined the case and completed the assessment under section 153A r.w.s. 143(3) of the Act vide order dt.28.10.2011 wherein the income of the assessee was determined at Rs.79,88,081 as against returned income of Rs.30,39,861 in view of the following additions / disallowances thereto :- (i) Disallowance of Agricultural Income : Rs.3,25,500. (ii) Inadequate Drawings : Rs.1,00,000. (iii) Disallowance of Exemption claimed u/s.54B : Rs.45,22,760. 2.2 The assessee did not prefer any appeal against the order of assessment for Assessment Year 2006-07, in which the main disallowance was the denial of the assessee's claim for exemption under section 54B of the Act. The Assessing Officer denied the assessee's claim holding that since the assessee had got the said land converted from agricultural to non- agricultural lands for residential use on 28.10.2005 and sold it on 28.3.2006, he was not eligible for exemption under section 54B of the Act and recomputed the Long Term Capital Gains (LTCG) accordingly. The Assessing Officer while passing the order of assessment, simultaneously initiated penalty proceedings under section 271(1)(c) of the Act. The penalty

ITA No.96/Bang/2014 3 proceedings resulted in the levy of penalty of Rs.10,24,846 under section 271(1)(c) of the Act, vide order dt.26.4.2012 only on the issue of denial of the assessee's claim for exemption under section 54B of the Act made in the computation of capital gains on sale of lands.

2.3 Aggrieved by the order dt.26.4.2012 levying penalty of Rs.10,24,846 under section 271(1)(c) of the Act for Assessment Year 2006-07, the assessee preferred an appeal before the CIT (Appeals) – III, Bangalore. The learned CIT (Appeals) disposed off the assessee's appeal by the impugned order dt.23.10.2013 deleting the penalty levied under section 271(1)(c) of the Act, holding as under at paras 3.0 and 3.1 of the order :- “3.0 I have carefully considered the submissions of the appellant. It emerges that the appellant has filed a return making a claim under 54B being amount invested in agricultural land out of sale proceeds. In the course of assessment proceedings, it emerged that the land in question was initially agricultural land and later converted for residential purposes. The Assessing Officer has denied the claim of exemption under section 54B. This order under section 153A has been accepted by the appellant and not disputed in appeal. ; in penalty proceedings Assessing Officer has held that there is no requirement of mens rea to be established and relied on the decision of the Supreme Court in Union of India and Others Vs. Dharmendra Textiles Processors (306 ITR 277) levied penalty for furnishing of inaccurate particulars of income. The appellant’s contention is that he was under the bona fide impression that a claim under section 54B could be made. This claim was made even at the stage of the 132 proceedings and reiterated while filing the return of income. Appellant has reiterated that all relevant particulars of the claim have been furnished in the return of income itself and that mere fact that the claim has been made which is not admissible would not attract the levy of penalty. Appellant has relied on the decision of the Hon'ble Supreme Court in the case of CIT Vs. Reliance Petro Products Pvt. Ltd. 322 ITR 158. The ratio of this decision is as follows : “We must hasten to add here that in this case, there is no finding that any details supplied by the assessee in its return were found to be incorrect or erroneous or false. Such not being the case, there would be no question of inviting the penalty under section 271(1)(c) of the Act. A mere making of the claim, which is not sustainable in law, by itself, will not

ITA No.96/Bang/2014 4 amount to furnishing inaccurate particulars regarding the income of the assessee, such claim made in the return cannot amount to the inaccurate particulars.” 3.1 It is apparent that all the facts relevant to the computation of income have been disclosed by the appellant at the time of filing of the return. The claim of the appellant under section 54B was negative by the Assessing Officer relying on the decision of the Hon'ble Supreme Court in the case of Dharmendra Textile Processors and Others. In my opinion the decision of the Hon'ble Apex Court (supra) relied on by the appellant is squarely applicable to the appellant’s case. The Assessing Officer is directed to delete the penalty levied under section 271(1)(c).” 3. Revenue, aggrieved by the order of the CIT (Appeals) – III, Banglaore dt.23.10.2013 deleting the penalty levied under section 271(1)(c) of the Act for Assessment Year 2006-07, is in appeal before this Tribunal raising the following grounds :- “1. The order of the learned CIT (Appeals) is opposed to law and facts of the case. 2. On the facts and in the circumstances of the case the learned CIT (Appeals) erred in law in deleting the penalty on account of concealment / furnishing inaccurate particulars without appreciating the fact that the assessee has claimed the deduction wrongly even after converting the land from agricultural use to no agricultural purpose. 3. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT (Appeals) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 4. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above.” 4. The grounds at S.Nos.1, 3 & 4 are general in nature and therefore no separate adjudication is called for thereon. 5.1 Therefore, Ground No.2 is the only ground for our consideration raised by revenue as to whether or not the cancellation / deletion of the penalty of Rs.10,24,846 levied under section 271(1)(c) of the Act by the learned CIT (Appeals) in the facts and circumstances of the case is correct.

ITA No.96/Bang/2014 5 5.2 The learned Departmental Representative for revenue contended that the learned CIT(A) was not correct in law in deleting the penalty amounting to Rs.10,24,846 levied by the Assessing Officer under section 271(1)(c) of the Act. It was submitted that in the return of income for Assessment Year 2006-07, the assessee had furnished inaccurate particulars of income in claiming exemption under section 54B of the Act, which claim after being disallowed by the Assessing Officer in the order of assessment, was not challenged in appeal by the assessee. This acceptance by the assessee, the learned Departmental Representative contends, warranted the levy of penalty under section 271(1)(c) of the Act. The learned Departmental Representative submits that the assessee had sold land, the use of which was converted from agricultural land to that for residential purposes, and claimed exemption under section 54B of the Act after investing the sale proceeds thereof to the extent of Rs.45,22,710 in another agricultural land. It is submitted that this claim of the assessee was rightly denied by the Assessing Officer, as the assessee was not entitled to the exemption claimed. Consequently, the claim for exemption under section 54B of the Act preferred by the assessee amounts to furnishing of inaccurate particulars of income and therefore the levy of penalty of Rs.10,24,846 under section 271(1)(c) of the Act is justified. The learned Departmental Representative prays, that, in view of the above, this is a fit case for levy of penalty under section 271(1)(c) of the Act and therefore the order of the learned CIT(A) be reversed and that of the Assessing Officer be restored.

ITA No.96/Bang/2014 6 5.3.1 The learned Authorised Representative supported the impugned order of the learned CIT(A) and reiterated the submissions put forth before the learned CIT(A). It was submitted that the facts of the case show that the assessee's acceptance of the Assessing Officer’s disallowance of his claim for deduction under section 54B of the Act was wrong. The provisions of section 54B of the Act stipulate that the said land, which is the capital asset sold by the assessee, should have been used by the assessee for agricultural purposes in the two years immediately preceding the date on which the transfer took place. The learned Authorised Representative submitted that the land in question was purchased by the assessee on 12.8.2002 as agricultural land and was used for agricultural purposes which is evidenced by the declaration of agricultural income for those years by the assessee. The land in question was converted by the assessee for usage from agricultural to non-agricultural purposes on 28.10.2005 and were thereafter sold by the assessee vide registered sale deed dt.28.3.2006. The learned Authorised Representative submitted that the fact that the assessee was deriving agricultural income from lands held by him was not disputed by the Assessing Officer. The learned Authorised Representative further submitted that the Assessing Officer has also not disputed the fact that the capital gains derived from sale of the said land has been re- invested by the assessee in the purchase of agricultural lands. It is contended that the provisions of section 54B of the Act require that what is to be looked into is that the land which is transferred was put to use for agricultural purposes in the immediately preceding two

ITA No.96/Bang/2014 7 years prior to the sale of the capital asset and in the case on hand, the assessee had in fact, declared agricultural income from agricultural operation on the land in question in the said period of two years, which is not disputed by the Assessing Officer. Therefore, the learned Authorised Representative contends, that the assessee was entitled to the exemption claimed under section 54B of the Act and the assessee's acceptance of the denial of this claim by the Assessing Officer was incorrect. 5.3.2 The learned Authorised Representative submitted that while the assessee in penalty proceedings cannot challenge the additions / disallowances made in the order of assessment, he can always demonstrate that the additions / disallowances made in assessment proceedings did not warrant levy of penalty under section 271(1)(c) of the Act. In support of this proposition, the learned Authorised Representative placed reliance on the decision of the Hon'ble Karnataka High Court in the case of CIT V Manjunatha Cotton & Ginning Factory reported in 359 ITR 565 (Kar). It was submitted that the assessee's claim for exemption under section 54B of the Act was in order, and as can be seen from the facts and circumstances of the case, the Assessing Officer’s denial of the assessee's claim being wrong, the levy of penalty under section 271(1)(c) of the Act on such an erroneous disallowance is neither warranted nor justified. 5.3.3 The learned Authorised Representative further contended that, even if assuming for a moment the assessee's claim for exemption under section 54B of the Act is erroneous, the

ITA No.96/Bang/2014 8 same does not tantamount to furnishing of inaccurate particulars since the claim made in the return of income was bona fide, considering that in the facts and circumstances of the case, as demonstrated above, the assessee was entitled to claim exemption under section 54B of the Act. Further, it is submitted that the learned CIT(A) after consideration of the above facts of the case, deleted the levy of penalty under section 271(1)(c) of the Act in respect of the assessee's claim for exemption under section 54B of the Act. The learned Authorised Representative prayed that in view of the submissions made above, the order of the learned CIT(A) calls for no interference and therefore revenue’s appeal be dismissed. 5.4.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial decisions referred to. We concur with the contention of the assessee that since penalty proceedings are proceedings independent of assessment proceedings, the assessee can demonstrate in penalty proceedings that additions / disallowances made in the order of assessment are erroneous and / or that they do not merit the levy of penalty on additions even though they are not challenged by the assessee. In coming to this view, we draw support from the decision of the Hon'ble Karnataka High Court in the case of Manjunatha Cotton & Ginning Factory (supra). The submission of the learned Authorised Representative on merits was that for claiming exemption under section 54B of the Act, the land in question should have been used for agricultural purposes for the immediately preceding two years from the date of sale. In the case on hand undisputed facts are that the

ITA No.96/Bang/2014 9 said land was purchased by the assessee on 12.8.2002, was converted for non-agricultural use on 28.10.2005 and sold on 28.3.2006 and the assessee has re-invested the sale proceeds in the purchase of another agricultural land within the time provided in section 54B of the Act. According to the provisions of section 54B of the Act, the requirements are that – (i) capital gain arises on transfer of land by the assessee, (ii) of a capital asset being land; (iii) such land should have been used by the assessee or a parent of the assessee for agricultural purposes in the two years immediately preceding the date of transfer and (iv) the assessee has within a period of two years after the date of transfer purchased any other land for being used for agricultural purposes. In our opinion, on an appreciation of the facts of the case on hand, the assessee has fulfilled the conditions envisaged in the provisions of section 54B of the Act for grant of exemption thereunder and the levy of penalty on such a wrong appreciation of law is not warranted. 5.4.2 Further, as observed by the learned CIT(A), the assessee has filed the return of income for the period under consideration making a claim for exemption under section 54B of the Act thereon, on account of the amount invested in purchase of agricultural lands out of the sale proceeds of lands sold on 28.3.2006. The learned CIT(A) has also noted that this claim was put forth by the assessee even at the stage of proceedings under section 132 of the Act.

ITA No.96/Bang/2014 10 We agree with the observations of the learned CIT(A) that all relevant particulars of the claim for exemption under section 54B of the Act having been furnished in the return of income itself, the mere fact that the claim made has been held to be inadmissible, this would not attract the levy of interest under section 271(1)(c) of the Act as has been held by the Hon'ble Apex Court in the case of CIT V Reliance Petro Products Pvt. Ltd. reported in 322 ITR 158. The Hon'ble Karnataka High Court in the case of Manjunatha Cotton & Ginning Factory (supra) has also held, that mere additions and disallowances made in the assessment order does not automatically warrant the levy of penalty under section 271(1)(c) of the Act. In view of the facts and circumstances of the case on hand, as discussed above, we concur with the view / finding and observations of the learned CIT(A) in the impugned order that the levy of penalty under section 271(1)(c) of the Act was not sustainable and therefore uphold the order of the learned CIT(A) deleting the penalty of Rs.10,24,846 levied under section 271(1)(c) of the Act. Consequently, revenue’s Grounds at S.No.2 is dismissed. 6. In the result, Revenue’s appeal for Assessment Year 2006-07 is dismissed. Order pronounced in the open court on 9th Jan., 2015.

Sd/- Sd/- (RAJPAL YADAV) (JASON P BOAZ) Judicial Member Accountant Member *Reddy gp