CIT vs. Splender Construction (Delhi High Court)

DATE: (Date of pronouncement)
DATE: September 30, 2011 (Date of publication)

Click here to download the judgement (spender_271_1_c_penalty.pdf)

Despite disclosure of conversion of stock into investment and acceptance by AO, claim that gains is LTCG attracts s. 271(1)(c) penalty

The assessee owned a plot of land which in the earlier years was treated as “stock-in-trade”. In the year of sale, the assessee converted the stock into “investment” and offered the gains as LTCG. The AO accepted the conversion of stock into investment but held that the gains was a STCG as the period of holding had to be reckoned from the date of conversion. This was upheld by all the authorities inclusing the High Court. The AO levied penalty u/s 271(1)(c) which was deleted by the Tribunal on the ground that as the High Court had admitted the assessee’s appeal on the merts, it showed that the issue whether the gain was LTCG or STCG was debatable and could not be treated as frivolous or mala fide to attract the levy of penalty u/s 271 (1) (c). On appeal by the department, HELD reversing the Tribunal:

The Tribunal has side tracked the main issue. It was obvious that conversion of the land into investment just before the sale of the property was made to avoid payment of full taxes. Though the AO accepted the conversion, the assessee’s claim that the gains was a LTCG amounted to furnishing inaccurate particulars of income. The issue was not debatable as held by the Tribunal. Though the appeal was admitted by the High Court, the Tribunal glossed over a very important and fundamental fact that the appeal was admitted and dismissed on the same date. Accordingly, when the order of the AO in quantum proceedings was sustained by all successive authorities and the High Court also dismissed the appeal at the admission stage, albeit after admitting the same, it cannot be said that the issue was debatable.

Note: Reliance Petroproducts 322 ITR 158 (SC) was not considered where it was held that if there was a disclosure of facts, then s. 271(1)(c) penalty was not leviable merely because the claim is unsustainable. Contrast with Nayan Builders (ITAT Mumbai) & M/s. Khanna & Annadhanam (ITAT Delhi)

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