Pramod Kumar, A.M.:— 1. By way of this appeal, the assessee appellant has challenged correctness of the order dated 17th February 2010, passed by the learned CIT(A) in the matter of penalty of Rs. 25,40,000 imposed on the assessee under section 271(1)(c) of the Income Tax Act, 1961, for the assessment year 1995-96. Grievance of the assessee, in short, is that the learned CIT(A) erred in confirming the said penalty.
2. We may mention that this is second round of proceedings before us. Vide order 5th July 2013, this Tribunal had deleted the penalty on a short technical ground but that stand of the Tribunal was disapproved by the Hon'ble jurisdictional High Court. Their Lordships, vide judgment dated 9th July 2014, vacated the order of the Tribunal and remitted the matter back to the Tribunal for fresh adjudication on merits. That is how we have come to be in seisin of the matter once again.
3. To adjudicate on this appeal, only a few material facts need to be taken note of The assessee before us is an individual and he was carrying on business of manufacturing machinery and equipment in the name of his sole proprietorship concern by the name of Oswal Machinery & Equipment Co. On 1st April 1994, he converted his proprietorship business into a partnership firm. Thereafter on 31st March 1995, he revalued certain assets. It is in this backdrop that an addition under section 45(3) was made in his hands in respect of long term capital gain on transfer of assets of proprietorship business to the partnership firm. The addition so made was for Rs. 64,05,788. This has been confirmed by the CIT(A) and the Tribunal. The matter is, right now, pending before Hon'ble High Court. In connection with this quantum addition a penalty of Rs. 25,40,000, being roughly equivalent to one hundred percent of the tax sought to be evaded, was imposed. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. The assesse is not satisfied and is in appeal before us.
4. We have heard the rival contentions, perused the material on record and duly considered the factual matrix of the case in the light of applicable legal position.
5. We have noted that while the date of revaluation is 31st March 1995, the proprietorship firm was converted into the partnership firm on 1st April 1994. The revaluation was thus done much after the conversion of proprietorship concern into the partnership firm. It would thus indeed seem, at least at the first sight, that the profit, arising on revaluation, is not the profit on transfer of the asset to the partnership firm. It is a subsequent act that the assets are revalued and the credits have been given to the partners. As we say so, we are alive to the fact that, on merits, this issue has been decided against the assessee by a coordinate bench and it is held that even though revaluation was done on 31st March 1995, on peculiar facts regarding the manner in which credit entries are said to be afforded, the profit on revaluation is liable to be treated as profit on transfer of assets liable to be taxed under section 43(5). However, so far as penalty proceedings are concerned, all we have to see is whether the assessee had a reasonable explanation for not offering this amount, even if it is liable to be taxed as income on merits, to tax at the point of time when the income tax return was filed. We are of the considered view, for the reasons set out above and keeping in mind the date on which profit on revaluation arose, that the assessee had a reasonable explanation for not offering this amount to tax as income of the assessee. Once the explanation for not offering an income to tax is found to be reasonable, as is the settled legal position, there cannot be any occasion to impose penalty for concealment of that income.
6. In view of the above discussions, as also bearing in mind entirety of the case, we are of the considered view that it was indeed not a fit case for the imposition of penalty. The CIT(A) should have deleted this penalty. We, therefore, delete the impugned penalty. The assessee gets the relief accordingly.
7. In the result, the appeal is allowed.