Section 271(1)(c) r.w 274 – For valid initiation of penalty proceedings it is essential that (i) Prima facie, the case may deserve the imposition of penalty should be discernible from the Order passed; and (ii) Notice must specify as to whether the Assessee was guilty of having “furnished inaccurate particulars of income” or of having “concealed particulars of such income”.
Facts
The assessee is a professional artist having created many paintings. For AY 2006-07, the Assessee filed return of income declaring income of Rs.6.73 lakh. During the course of assessment proceeding, the AO found that the assessee had invested the sum of Rs. 68.79 lakh in units of mutual fund out of income from sale of paintings which was not disclosed in his return of income. The AO assessed the income of the assessee at Rs. 80.89 lakh and issued a show cause notice u/s.274. The assessee accepted the order of the AO and paid taxes due thereon. In his reply to Notice u/s. 274, the assessee submitted that the additional income assessed was out of the sale of art which was in the nature of personal effects and hence not a capital asset within the meaning of the definition of the said term u/s.2 (14) (ii). He explained that the paintings were kept for years over because of his aesthetic sense and also it gave him tremendous pleasure and pride of possession. Thus, the paintings were his “personal effects”. The assessee further explained that the sale of paintings was for the purpose of making investments in the units of mutual funds and to earn income from such investments for his livelihood. Therefore, it was contended by him that the incidence of sale cannot be construed as the adventure in the nature of trade. Thus, according to him, income earned out of the sales of paintings, which were nothing but the personal effects, was not taxable and the very basis of addition by the AO was not correct. It was pointed out that in the course of assessment proceedings, the facts were placed before the AO. However, to avoid litigation, the taxes were paid. It was contended that sine the assessment and penalty proceedings are two different proceedings, the Assessee is not precluded from urging the correct position in law during the penalty proceedings. The assessee thus submitted that imposition of penalty was unsustainable.
The above submissions did not find favour with the AO. The AO held that the assessee had deliberately tried to conceal his professional receipt by depositing it in the bank account not disclosed to the department. Such information was found out by the department. He had no option but to disclose it fully as the bank details were already with the department. The mistake was neither due to ignorance nor bona fide. The AO referred to the decision of the Supreme Court in the case of Dharmendra Textile Processors and others 306 ITR 277 and held that mens rea is not essential for attracting civil liabilities. Accordingly, he levied a penalty of Rs. 71.88 lakh u/s. 271(1)(c). On appeal by the Assessee, the CIT(A) confirmed the order of the AO.
Before the Tribunal, the assessee further submitted that the AO had not recorded his satisfaction in the order of assessment that the assessee is liable to be proceeded against u/s.271(1)(c). Further, the show cause notice issued u/s.274 did not specify as to whether the Assessee was guilty of having “furnished inaccurate particulars of income” or of having “concealed particulars of such income”.
Held:
The Tribunal noted that the source of funds for making investments in units of mutual funds was the starting point of enquiry by the AO. It was not in dispute that the source of funds for making such investments was the sale of assessee’s own paintings. Thus, if the painting are considered as “personal effects” then they cannot be regarded as “capital assets” within the meaning of section 2(14)(ii). Consequently, the receipts on sale of paintings would not be chargeable to tax.
Referring to the meaning of the term “personal effects” as per section 2(14)(ii), it noted that by the Finance Act, 2007, the definition of the term “personal effects” was substituted w.e.f. the 1st day of April, 2008 to exclude from its meaning the items of amongst others, drawings and paintings. Thus, till 31st March, 2008, drawing and paintings were considered as “personal effects” and hence, not as capital assets till then.
The Tribunal further noted that the sale of paintings was not done by the assessee as an adventure in the nature of trade. The paintings were kept for years over because of his aesthetic sense. It gave him tremendous pleasure and pride of possession. This aspect had not been disputed by the AO. Therefore, according to the tribunal, the paintings were his “personal effects”. Further, in the statement recorded u/s.131, the assessee had stated that the paintings were made as per creation desire of the assessee. Therefore, it accepted the contention of the assessee that the paintings were his “personal effects” and held that the penalty imposed qua the income from the sale of painting was not sustainable.
As regards the alternate contention of the assessee, the Tribunal agreed with the assessee that the order of assessment nowhere spells out or indicates that the AO was of the view that the assessee was guilty of either concealing particulars of income or furnishing inaccurate particulars of income. The offer to tax of income by the assessee has just been accepted. Relying on the Delhi High Court decision in the case of Ms. Madhushree Gupta vs. Union of India 317 ITR 107, the Tribunal observed that the position of law, both pre and post introduction of section 271(1B) is similar, inasmuch, the AO has to arrive at a prima facie satisfaction during the course of assessment proceedings with regard to the assessee having concealed particulars of income or furnished inaccurate particulars, before he initiates penalty proceedings. Prima facie, the case may deserve the imposition of penalty should be discernible from the Order passed.
As regards the contention of the assessee that the show cause notice u/s.274 which is in a printed form does not strike out as to whether the penalty is sought to be levied for “furnishing inaccurate particulars of income” or “concealing particulars of such income”, the tribunal, relying on the Karnataka High Court decision in the case of CIT & Anr. vs. Manjunatha Cotton and Ginning Factory, 359 ITR 565 agreed that the Notice did not satisfy the requirement of law in as much as that it had not struck out the irrelevant part. Thus the show cause notice u/s. 274 was defective hence, the order imposing penalty was invalid and therefore, the penalty imposed was cancelled.
