S. 271(1)(c) — The constitution of Special Bench itself suggests that there was some force in the claim of the assessee — If there is a debatable issue and action of the assessee is bona fide being based on adoption of one of the possible views, the penal

Pradeep Agencies Joint Venture v. ITO

The assessee was an AOP and during the relevant assessment
years it filed return of income at nil and it was claimed that it had
distributed the profit amongst its members as per their respective shares which
are determined and defined in the joint venture agreement and all of them have
shown their share as income u/s.67A and, therefore, S. 167B(2) was not
applicable. The assessee supported its claim by relying on the decision of the
Supreme Court in the case of CIT v. Murlidhar Jhawar & Purna Ginning & Pressing
Factory, 60 ITR 95 and also by Board’s Circular No. 75/19/191/62-ITJ, dated 24th
August, 1966.

The contention of the assessee was not accepted by the AO and
income was taxed in the hands of the AOP at maximum marginal rate as per S.
167B(2). The matter went up to the Tribunal and Special Bench was constituted.
The Special Bench held that the assessment made on the AOP is valid as reliance
could not be placed on the Circular as the same had lost its validity in the
light of the decision of the Supreme Court in the case of ITO v. Ch. Atchaiah,
218 ITR 239 and also there was amendment in the provisions of the Act by virtue
of which the AO had lost option to the assessee either AOP or its members under
the provisions of the Income-tax Act, 1961 as compared to the provisions of the
1922 Act.

The penalty was levied on the ground that the assessee has
not come clean on the issue of taxing the income received by AOP u/s.167B(2) and
tried to mislead the Department.

It has to be kept in mind that quantum proceedings are
different and distinct from the penalty proceedings. In penalty proceedings,
mere confirmation of addition in quantum proceedings cannot be said to be
conclusive factor to hold that penalty is leviable. According to the facts of
the present case, right from the beginning it has been the case of the assessee
that its claim of filing substantial income in the hands of the members of the
AOP was supported by the decision of the Supreme Court, which was even
interpreted by the CBDT in its Circular to be applicable to the provisions of
the Income-tax Act, 1961. It is also the case of the assessee that even if the
legal position had been settled by the decision of the Supreme Court in the case
of Ch. Atchaiah (supra), then also the Circular being a benevolent one could not
be refused to be applied by the Department unless the same is withdrawn. The
constitution of the Special Bench itself suggests that there was some force in
the claim of the assessee or at least the view taken by the assessee could not
be said to be totally devoid of merit. The reference of issue to the Special
Bench is indicative of the fact that there was a lot of debate on the issue
whether the benevolent Circular will prevail even after the decision of the
Supreme Court in the case of Ch. Atchaiah (supra). Thus, it is certainly a case
where two views of the matter were possible. Where there is a debatable issue
and action of the assessee is bona fide being based on adoption of one of the
possible views, the penalty is not leviable even if in the quantum proceedings
it was not finally accepted by the Tribunal.