The main legal point established in the judgment is the requirement to offer a bona fide explanation and disclose all material facts under Section 271(1)(c) of the Income Tax Act.

Sanjiv Khanna, J.

This appeal by the Revenue under Section 260A of the Income Tax Act, 1961 (‘Act’, for short) pertains to assessment years 2006-07 and was admitted for hearing vide order dated 7th December, 2012, on the following substantial question of law:-

“Whether the ld. ITAT was correct in law in allowing the appeal of the assessee in holding that the assessee had discharged the onus cast upon it under Explanation-I Section 271(1)(c) of the IT Act?”

We note that the assessee company has gone into liquidation and the Official Liquidator has been appointed. Accordingly, we have heard the counsel for the Official Liquidator, who has appeared for the assessee.

2. The order impugned passed by the Income Tax Appellate Tribunal (Tribunal, for short) is dated 13th September, 2010 and deletes the penalty imposed under Section 271(1)(c) of the Act.

3. The respondent-assessee had filed e-return for the assessment year in question on 30th November, 2006, declaring loss of Rs.1,89,44,380/-. In the return, under head profit and loss, the assessee had claimed business loss amounting to Rs.2,33,07,349/- on account of sale of fixed assets.

4. During the course of assessment proceedings, details of which we will refer to subsequently, the assessee filed a revised return on 8th March, 2008 declaring total income of Rs.33,62,974/-. In the revised return, the loss of Rs. 2,33,07,349 on account of sale of fixed assets was not treated as “business loss”, rather shown as capital loss. The Assessing Officer, vide its assessment was order dated 5th June, 2008, made some additions and assessed the total income of assessee at Rs.40,19,974/- and taxable income at “NIL” after giving benefit of brought forward losses.

5. Pursuant to the satisfaction recorded in the assessment order, penalty proceedings for concealment under Section 271(1)(c) of the Act were initiated and penalty equal to 100% of the tax payable of Rs.80,66,400/- on the concealed income was imposed.

6. We will be referring to the reasoning given by the Assessing Officer and Commissioner of Income Tax (Appeals), who affirmed the penalty order subsequently.

7. The Tribunal by the impugned order, as recorded above, deleted the penalty recording the following reasons:-

“6.1 Coming to the issue of the claim of loss on sale of assets, the facts are that the assessee sold machinery and plant in this year due to circumstances beyond its control. Actual loss was incurred in the transaction of sale. This loss was debited to profit and loss account. The schedule of fixed assets showed deduction of the assets on account of sale. According to the existing position of law, this loss could not have been claimed while computing the total income. The correct course of action would have been to reduce the amount of sale proceeds from the written down value of the block of assets relating to machinery and plant. As against the aforesaid, the assessee reduced the WDV of the machinery and plant sold in this year from the block of assets. The chartered accountant, who prepared the audit report and the return of income did not deduct the loss from the profit as per profit & loss account to reflect the correct state of loss in the computation of total income. The assessee has changed the chartered accountant since then, which is an admitted fact as per record.

6.2 x x x x x

6.3 x x x x x

6.4 We have considered the facts of the case and the submissions made before us in respect of this issue also. We have also perused the letters written by the AO to the assessee and replies furnished thereto. We find that the assessee was not asked to furnish the details of loss occurring on account of sale of assets specifically. The assessee was also not required to explain how the loss is admissible in computing the total income. General questions were asked. The assessee was required to file tax-audit report and depreciation chart. Further, the assessee was required to furnish details of all exemptions and deductions. The ass