No penalty imposable u/s 271(1)(c) where High Court accepted substantial question of law u/s 260A against quantum appeal showing that issue is debatable

In a recent judgment, ITAT Delhi has stated that where High Court accepted substantial question of law u/s 260A, against the quantum appeal, itself shows that issue was debatable and in such a case no penalty was imposable u/s 271(1)(c) of the Income-tax Act, 1961.

Case Law Details:
ITA No. 5556/Del/2011 AY: 2005-06
Asstt.Commissioner of Inome Tax vs. Pawan Kumar Malhotra
Date of Judgment/Order: 29/04/2016

Important Case Laws referred:
Me Dowell 85 Co. vs. CTO (154 ITR 148) SC
CIT vs. Ajaib Singh (253 ITR 628) P&H 
CITI vs Liquid Investment & Trading Co Delhi HC
CIT vs. Nayan Builders, 368 ITR 722 Bom HC
Santosh Hazari vs. Purshottam, 251 ITR 84 (SC

Brief Facts of the Case:
The Assessee was proprietor of M/s Neumann Engineering Works and was engaged in the business of manufacturing of sheet metal components. In the return of income, the assessee claimed exemption u/s 10(38) on account of sale of shares of M/s. Quality Synthetic Industries Ltd. (QSIL) as Long Term Capital Gain. The case was selected for scrutiny and the AO treated the sale proceeds of shares, as income from undisclosed sources holding the transaction as sham and colourable device. The AO also initiated penalty proceedings u/s 271(1)(c) for concealment of particulars of income and for furnishing inaccurate particulars of income.  The assessee preferred appeal against the assessment order and the CIT (Appeals) deleted the additions but on Revenu’s appeal, the ITAT upheld the order of the AO.

Consequently, the AO issued a further show-cause notice u/s 274 rws 271(l)(c). The AO, after considering the 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) imposing penalty @ 100% of amount of tax sought to be evaded, for furnishing inaccurate particulars of income.

The penalty order was challenged before CIT(A) who deleted the penalty holding as under:

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.

The Revenue approached ITAT against the order of CIT(A) deleting penalty u/s 271(1)(c).

Before ITAT the assessee submitted that the he had preferred an appeal before the 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 (jurisdictional High Court) for consideration of the substantial questions of law. He urged that by the admission of appeal by High Court, it was evident that the issue was debatable and is subject to interpretation and  in view of the issue being a debatable one, the penalty was not sustainable and as such the same should be cancelled. 

Important Excerpts from ITAT Judgment:

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. 

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