No s. 271(1)(c) penalty even if explanation unproved if it is not disproved by AO

The assessee had a cash credit of Rs. 7.33 lakhs in his books. He also claimed agricultural income of Rs. 1 lakh. He offered an explanation on both issues which was not accepted by the AO. He accordingly surrendered both amounts to tax to buy peace. The AO imposed penalty u/s 271(1)(c) which was confirmed by the CIT(A). Before the Tribunal, the assessee claimed that the additions were made on “voluntary surrender” and to avoid further litigation and to buy mental peace and that the same could not be considered as furnishing of inaccurate particulars of income or concealment of income. HELD by the Tribunal allowing the appeal:

If the assessee gives an explanation which is unproved but not disproved i.e. it is not accepted but circumstances do not lead to the reasonable and positive inference that the assessee’s case is false, then the penalty is not imposable. In the present case, the assessee’s explanation remained unproved but it cannot be said as disproved. Further, s. 68 is an enabling provision for making an addition where the assessee fails to give an explanation regarding the cash credit but such addition does not automatically justify imposition of penalty u/s 271(1)(c) r/w Explanation 1 thereto. In order to justify levy of penalty, there must be some material or circumstances leading to a reasonable conclusion that the amount does represent the assessee’s income and the circumstances must show that there was a conscious concealment or act of furnishing of inaccurate particulars. From a bare reading of s. 271, it is clear that the provisions of Explanation 1 to s. 271 do not make the assessment order conclusive evidence that the amount assessed was, in fact, the income of the assessee and that the assessee did not satisfactorily explain the cash credits by producing evidence and documents. Accordingly, penalty u/s 271(1)(c) is not leviable (Upendra V. Mithani (Bom) (included in file) and National Textile 249 ITR 125 (Guj) followed)