Does making an incorrect claim tantamount to furnishing in accurate particulars, liable to penalty u/s 271(1)(c)?

When an assessment order is made under the Income Tax Act, 1961, certain additions and disallowances are made which enhances the total income of the assessee. In addition to the assessment order, the Act has made provision for the imposition of various penalties to be levied by the concerned authority so as to deter the assessee from repetitious blameworthy conduct. A penalty is levied under Section 271(1)(c) of the Income Tax Act, 1961 if the assessee has concealed the particulars of his income or furnishes inaccurate particulars of income.

Explanation 1 defines what constitutes concealment of income. If the assessee fails to offer an explanation or offers an explanation that is false; or an explanation that is not bona fide and which he is not able to substantiate and fails to prove that he has made a full and proper disclosure, then in these circumstances’ penalty would be leviable for concealment of income.

Let us refer to the case of CIT v. Reliance PetroProducts (P) Ltd. (2010), where the issue under consideration was whether the Assessee company is liable to pay the penalty under section 271(1)(c) of the Act or not.

Facts of the Case:

• The Assessee, being a company, filed its return of income (ITR), declaring a loss.
• Scrutiny under section 143(3) of the Income Tax Act, 1961 was conducted whereby an addition in respect of interest expenditure was made.
• Consequently, penalty proceedings under section 271(1)(c) were initiated against the Assessee company by reason of concealment of income/ furnishing of inaccurate particulars of income.
• The justification for this interest expenditure claimed by the Assessee company in its ROI was that the expenditure was incurred towards making payment of interest on loans borrowed by the Assessee company for purchase of IPL shares in light of its business policies.
• The Assessee company received a notice to show cause why such penalty proceedings should not be initiated against it, to which it responded asserting that the details mentioned in its ROI were correct and that neither was there any concealment of income nor were inaccurate particulars furnished.
• The Assessee company contended that the disallowance of the expenditure was made only due to a difference of opinion and further that only disallowance of an expenditure could not be the premise for levying a penalty under the Act.
• It was the submission of the Assessee company that in its own case in AY 2000-2001, the CIT(A) had deleted the disallowance of interest expenditure, the same being upheld by the ITAT on appeal.
• However, this was disputed by the learned Additional Solicitor General since an appeal against the order of the ITAT for AY 2000-2001 was pending before the High Court.
• For the present AY 2001-2002, the CIT(A) deleted the penalty amount under section 271(1)(c) of the Act.
• The revenue department being aggrieved by the order of the CIT(A), filed an appeal before the ITAT, which upheld the order passed by the CIT(A).
• The order of the ITAT was appealed against in the High Court by the revenue department wherein once again, the appeal was decided in favour of the Assessee company.

Observations of the Supreme Court (SC)

• Section 271(1)(c) of the Act is only applicable when the conditions precedent stated therein are fulfilled, i.e., the Assessing Officer (AO) must be satisfied that an Assessee has concealed income or furnished inaccurate particulars of income and only then can penalty be levied.
• A mere making of a claim, which by itself, is not sustainable under law would not amount to furnishing of inaccurate particulars of income.
• Therefore, as a matter of fact, since there was no finding by any authority that the details submitted by the Assessee company were erroneous or false, no question of initiating penalty proceedings against the Assessee company would arise.
• Only the act of the Assessee company in claiming an expenditure in its ROI, whether such claim was acceptable or not to the revenue department, would, in isolation, not invite penalty under the provisions of section 271(1)(c) of the Act.
• Dismissing the appeal, the court held that the CIT(A), the ITAT and the High Court had correctly reached the conclusion that the Assessee company had fully furnished all relevant details of its income and expenditure in its ROI, which were in themselves, not found to be incorrect and therefore could not be viewed as inaccurate or a concealment.
• The words used under section 271(1)(c) of the Act were plain and simple, and unless the case of the Assessee was strictly covered by words in this provision, no penalty could be invoked.
• By any stretch of imagination, making an incorrect claim in law could not tantamount to furnishing in accurate particulars.
• Merely because the Assessee claimed of deduction of interest expenditure had not been accepted by the Revenue, penalty under section 271(1)(c) was not attracted.
• If the contention of the revenue was accepted, the Assessee would be liable to penalty under section 271(1)(c) in every case where the claim made by the Assessee was not accepted by the AO for any reason.
• The court held that this could not be the intention of the legislature.
• In simple words, making an incorrect claim in law cannot tantamount to furnishing in accurate particulars, liable to penalty u/s 271(1)(c).

Penalty u/s 271 cannot not be levied on the basis of estimated additions – ITAT

When an assessment order is made under the Income Tax Act, 1961, certain additions and disallowances are made which enhances the total income of the assessee. In addition to the assessment order, the Act has made provision for the imposition of various penalties to be levied by the concerned authority so as to deter the assessee from repetitious blameworthy conduct. A penalty is levied under Section 271(1)(c) of the Income Tax Act, 1961 if the assessee has concealed the particulars of his income or furnishes inaccurate particulars of income. Explanation 1 defines what constitutes concealment of income.

If the assessee fails to offer an explanation or offers an explanation that is false; or an explanation that is not bona fide and which he is not able to substantiate and fails to prove that he has made a full and proper disclosure, then in these circumstances’ penalty would be leviable for concealment of income.

Let us refer to the case of Vishnu Tambi Vs DCIT (ITAT Jaipur), where the assessee had contended thatthe AO has erred in imposing the penalty u/s 271(1)(c) of the IT Act, 1961

Facts of the Case:

• The assessee was engaged in the wholesale business of sarees and salwar suits under the name and style of M/s Manish Enterprises.
• A ‘search and seizure operation’ was carried out at the residential and business premises of the assessee.
• The AO has completed the assessment u/s 143(3)/153A of the Income Tax Act, 1961 inter-alia making trading additions by applying the GP rate of 10% as against GP rate declared by the assessee in all the assessment years.
• Aggrieved by the order of the AO, the assessee preferred appeal before the CIT(A) who restricted the G.P. Rate at 8.5% on estimate basis.
• Subsequently, the AO levied the penalty in the above case u/s 271(1)(c) of the Act with respect to addition confirmed by the CIT(A). On appeal, before the CIT(A), he confirmed the penalty levied by the AO.
• Aggrieved by the order of the CIT(A) regarding confirming the penalty u/s 271(1)(c) of the Act, the assessee has preferred an appeal before the Income Tax Appellate Tribunal (ITAT)

Observations of ITAT on whether penalty is leviable or not?

• From the facts, ITAT noticed that the AO had made the addition on account of application of G.P. Rate of 10% whereas no findings were recorded by the AO in the assessment order that the assessee had furnished inaccurate particulars of income or had concealed the income.
• The AO had invoked the provisions of Section 145(3) and estimated the income of the assessee on the basis of earlier history of the case.
• Therefore, ITAT was of the view that it was a case of an estimate against an estimate.
• Hence, no penalty was leviable in such a case where additions were based purely on estimate basis.

Reference to older cases by ITAT

ITAT also drew strength from the following case laws.

• In Gulraj Vaswani Vs. ACIT it was held that, before Tribunal it was submitted that at every level there was an estimation varying as per difference of opinion from authority to authority and hence penalty could not be levied on the estimated addition. Assessee had also submitted that no satisfaction about concealment of income was recorded by the Assessing Officer during the course of assessment proceedings. Tribunal considering these facts, deleted the penalty.
• In Smt. Bitoli Devi Vs. ACIT (2007), it was held that unless any positive concealment is found no penalty is leviable on basis of addition made on estimate
• In Enfield Industries Ltd. Vs. DCIT (2007), it was held that onus would lie heavily with Department to prove concealment for purpose of imposing penalty under section 158 BFA(2)
• In CIT V. P.H.I. Seeds India Ltd, it was held that the act does envisage or explicitly provide that in every case where return is not accepted as correct and assessment is framed at a higher income than that presented, penalty proceedings u/s 271 (1)(c) must be initiated. Section 271(1)(c) is attracted only when the assessee has concealed his income. When two opinions are possible, adopting one of them can scarcely be viewed as malafide, with intent to evade the payment of income tax.
• Penalty cannot be levied only estimated addition and reliance was placed on the following decisions:
  1. CIT Vs. S. Rahamat Khan Birbal Khan Badruddin & Party, (Raj.)
  2. ACIT Vs. Bansiwala Iron & Steel Re-rolling Mills, (JP)
  3. CIT Vs. Subhash Trading Co., (Guj)
  4. Harigopal Singh Vs. CIT, (P&H)
  5. ACIT Vs. Ganpat Lal Goyal, (JP)

Conclusion by ITAT

• ITAT was also of the view that u/s 271(1)(c), the authority was given discretion to levy the penalty in case there was a concealment of particulars of income and also with regard to quantum of penalty.
• However, it was a basic need of the provisions of law that definite finding was required to be recorded by the Revenue Officer for reaching to a conclusion with regard to concealment of income or furnishing of inaccurate particulars of income and without any such findings, there cannot be any question of imposition of any penalty.
• The mere revision of income to a higher figure on estimate basis by the AO did not automatically warrant an inference of concealment of income by the assessee.
• The addition to the income of the assessee in this case was based on estimate basis whereas the concealment in ITAT’s views implies some deliberate act on the part of the assessee in withholding the true facts from the authorities.
• Therefore, ITAT was of the considered view that in this case the additions were made on the basis of estimation and as discussed in the cases referred above, the penalty could not be levied on the basis of estimated additions.
• Therefore, ITAT allowed the appeal raised by the assessee and deleted the penalty levied by the AO and confirmed by the CIT(A).

–Navneet Shukla