No section 271(1)(c) penalty applies if a section 54F claim is merely disallowed
Facts and Issue of the case
The facts of the case are the Assessing Officer(AO) , we have noted from the assessment order passed dated 23-11-2015 ,had initiated penalty proceedings on account of the assessee having wrongly claimed capital gains , earned by it on a transaction of sale of property, as long term capital gains and thereafter having claimed exemption of the same u/s. 54F of the Act by investing the long term capital gains in a residential house, when, as per the AO the long term capital gain had in fact been claimed on a depreciable business asset, and was therefore in the nature of short term capital gain as per section 50 of the Act and the assessee was not therefore entitled to exemption u/s. 54F of the Act which was allowed as per law only on long term capital gains.
But subsequently in appellate proceedings, the ld. CIT(A) held that the assessee was entitled to exemption u/s. 54F of the Act, taking the view that the deeming fiction created u/s. 50 of the Act, with respect to depreciable assets being treated as short term capital gains, would be confined for the purposes of mode of computation of capital gain contained in Section 48 & 49 of the Act and would not cover the claim of exemption u/s. 54F of the Act. Accordingly, the ld. CIT(A) directed the Assessing officer to verify the claim of the assessee for deduction u/s. 54F of the Act and if the conditions were found fulfilled he directed the AO to allow the same to the assessee.
That subsequently, in the order of the AO giving effect to the order of the ld. CIT(A), the A.O. denied the claim of deduction u/s. 54F noting that the assessee did not fulfill the conditions mentioned in Section 54F for the following reason:
- that the assessee had booked under- construction property, whose construction had started more than two years before the date of sale of original assets and also most of the payments for the same had been made before the date of the sale of original assets, while as per Section 54F, the assessee could have started the construction only after the sale of the asset.
- that the assessee had not deposited the amount not utilized for construction of the new asset in the capital gain account scheme before the date of furnishing of return of income u/s. 139(1) of the Act as per the provisions of Section 54F of the Act.
- that the assessee had claimed deduction u/s. 54F of the Act on account of purchase / construction of two residential house properties which is not allowable .
The satisfaction for initiation of penalty proceedings was initiated by the A.O. in the original order passed wherein he had made addition of the entire consideration received as short term capital gain and denied u/s. 54F to the assessee. In the order giving effect to the Ld. CIT(A) wherein he found that the assessee was not eligible to claim exemption u/s. 54F, no satisfaction for initiation of penalty was recorded. However the A.O. proceeded/ went ahead with the penalty proceedings on the basis of the satisfaction recorded in his initial assessment order.
Clearly what emerges from the above is that while the Assessing Officer had recorded satisfaction of the assessee having furnished inaccurate particulars of income /concealed particulars of income with regard to returning short term capital gain earned by it as long term capital gains and thereafter incorrectly claiming exemption u/s. 54F of the Act, the proceedings for levy of penalty were conducted on account of the assessee having been found ineligible to claim exemption u/s. 54F of the Act since it failed to fulfil the conditions specified therein. Thus penalty proceedings were conducted and penalty levied on a charge totally different from the charge on which it was initiated.
Penalty proceedings being quasi criminal proceedings, the charge in relation to which the assessee is being subjected to levy of penalty has to be clear and all proceedings have to be conducted on the basis of that charge only. It cannot be the case where the proceedings are initiated on account of one charge but conducted and levied on account of a totally different charge. The entire proceedings therefore for levy of penalty are illegal and against all tenets of law.
The Ld.DR though was unable to controvert the facts as noted above, he however contended that no grounds were raised by the assessee in this regard before us and therefore this aspect could not be considered for adjudicating the appeal.
Observation by the court
The court had considered the contention of the Ld.DR before us. We are not convinced with the same. A glaring illegality in the proceedings conducted by the Revenue authorities which comes to the notice of the bench cannot be allowed to subsist merely for the reason that the assessee did not point out the same. A patently illegal order cannot be allowed to survive for this reason. The contention of the Ld.DR is therefore dismissed. And considering our findings as above, that the penalty proceedings were conducted and penalty levied for a charge totally different from that for which the penalty was initiated, we have no hesitation in holding that the order passed was not in accordance with law. The penalty order passed is therefore set aside as illegal.
Even otherwise and without prejudice to what we have stated above, we find that the Ld. CIT(A) has rightly deleted the levy of penalty noting that the assessee had furnished all particulars with respect to the claim of exemption u/s. 54F and the denial of claim under law cannot lead to the levy of penalty.
As is evident from a perusal of the above, the Ld.CIT(A) deleted the penalty levied on the disallowance of exemption u/s 54F of the Act noting that the assessee had furnished all particulars relating to the claim of exemption by way of investment in residential properties, that the claim was made under the boanfide belief that all investment would be made within the period specified but could not be done so for reasons beyond his control as the construction was not completed in time and noting that on the requirement of investment in capital gains account scheme there was a judgment of the Hon’ble Karnataka high court holding the requirement to be merely procedural and directory in nature. The Ld.CIT(A) accordingly deleted the penalty on the ground that all particulars with respect to the claim having been truly furnished ,mere disallowance of claim in law would not tantamount to charging the assessee with concealing/furnishing inaccurate particulars of income so as to levy penalty u/s 271(1)(c) of the Act. In view of the above, the order passed by the A.O. is set aside and the order of the Ld.CIT(A) deleting penalty levied amounting to Rs.2,92,210/-upheld.
The appeal of the assessee is dismissed by the court.ITO-Vs-Ashif-Mehbbobelahi-Rushnaiwala-ITAT-Ahmedabad