2010 (5) TMI 34 - HC - Income Tax

Penalty u/s 271(1)(c) Bonafide mistake - During penalty proceedings the assessee claimed that it had committed a bona fide mistake and all the facts material to the computation were disclosed. The Assessing Officer was of the view that there was no difference of opinion as regards disallowance of these expenses and the incorrect computation given by the assessee was an act of paying less tax than what was due from it. He was of the view that the assessee was a big company assisted by a team of Tax Auditors and therefore it was a case of concealment of income as well as of furnishing wrong particulars for computation of income. CIT(A) confirmed the penalty but ITAT deleted the penalty Held that It is true that mere submitting a claim which is incorrect in law would not amount to giving inaccurate particulars of the income of the assessee but it cannot be disputed that the claim made by the assessee needs to be bonafide. If the claim besides being incorrect in law is malafide Explanation 1 to Section 271(1) would come into play and work to the disadvantage of the assessee. - The Court cannot overlook the fact that only a small percentage of the Income Tax Returns are picked up for scrutiny. If the assessee makes a claim which is not only incorrect in law but is also wholly without any basis and the explanation furnished by him for making such a claim is not found to be bonafide it would be difficult to say that he would still not be liable to penalty under Section 271(1)(c) of the Act. - The explanation offered by the assessee company was not accepted either by the Assessing Officer or by the Commissioner of Income Tax(Appeals). The view of Income Tax Appellate Tribunal regarding admissibility of the deduction on account of written off of certain assets under Section 32(1)(iii) of the Act is wholly erroneous Penalty confirmed ITAT order is not correct decided in favor of revenue.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

• Whether the Income Tax Appellate Tribunal erred in deleting the penalty imposed under Section 271(1)(c) of the Income Tax Act on the assessee for incorrectly claiming deductions relating to (a) income tax paid and (b) equipment written off, which were not added back in the computation of income.
• Whether the claim of deduction of income tax paid as a revenue expenditure was permissible under the Income Tax Act.
• Whether the deduction claimed on account of equipment written off was admissible under Section 32(1)(iii) of the Income Tax Act.
• Whether the explanation offered by the assessee for the incorrect claims was bona fide and sufficient to absolve it from penalty under Section 271(1)(c).
• The scope and interpretation of penalty under Section 271(1)(c), particularly the meaning of "concealment" and "furnishing inaccurate particulars" of income, and the applicability of Explanation 1 thereto.
• Whether an incorrect claim in law, if bona fide, amounts to furnishing inaccurate particulars or concealment of income attracting penalty under Section 271(1)(c).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legality of claim of deduction of income tax paid as revenue expenditure

Legal framework and precedents: Section 40(ii) of the Income Tax Act explicitly disallows deduction of income tax paid while computing income. This is an undisputed statutory provision.

Court's interpretation and reasoning: The Court held that the assessee was not entitled to claim deduction of income tax paid as revenue expenditure. The claim was contrary to the clear statutory mandate. The assessee did not claim any advice or debatable legal position supporting such a claim.

Application to facts: The assessee had debited Rs.1 lakh as income tax paid under administrative expenses but failed to add it back in income computation. The Court found no justification for this exclusion and rejected the Tribunal's lenient approach that no one would claim income tax paid as deduction to evade tax.

Treatment of competing arguments: The Tribunal had accepted the assessee's plea of bona fide oversight and deleted penalty. The Court disagreed, emphasizing that the explanation was neither substantiated nor shown to be bona fide, especially given the mandatory audit and professional assistance available to the assessee.

Conclusion: The claim was incorrect in law and not bona fide; penalty under Section 271(1)(c) was rightly imposed.

Issue 2: Admissibility of deduction on account of equipment written off under Section 32(1)(iii)

Legal framework: Section 32(1)(iii) provides for deduction of the shortfall between written down value and sale/scrap proceeds of machinery, plant, furniture, etc., but only if depreciation under Clause (i) has been claimed and allowed. Clause (i) applies to assets of undertakings engaged in generation and/or distribution of power.

Court's interpretation: The Court held that since the assessee was not engaged in power generation or distribution, Clause (i) did not apply and thus Clause (iii) could not be invoked for deduction of written off equipment. The Tribunal's view that Section 32(1)(iii) applied was erroneous.

Application to facts: The assessee claimed Rs.13,24,539 as revenue expenditure for equipment written off. The Court found no justification for this claim as revenue expenditure or under Section 32(1)(iii).

Treatment of competing arguments: The assessee did not argue before the authorities that Section 32(1)(iii) applied or that the claim was debatable. The Tribunal had unilaterally applied this provision to justify the claim.

Conclusion: The claim was incorrect in law and not a bona fide error; penalty was justified.

Issue 3: Whether the explanation offered by the assessee was bona fide and sufficient to avoid penalty

Legal framework: Section 271(1)(c) penalizes concealment or furnishing inaccurate particulars of income. Explanation 1 to Section 271(1) clarifies that if the assessee offers an explanation which is bona fide and discloses all material facts, penalty may not be imposed even if the claim is disallowed.

Relevant precedents: The Supreme Court decision in Commissioner of Income Tax vs. Reliance Petro Products Pvt. Ltd. held that an incorrect claim in law, if bona fide and supported by disclosure of material facts, does not attract penalty under Section 271(1)(c). The Court emphasized that "furnishing inaccurate particulars" means supplying details that are factually incorrect or false, not merely making an unsustainable legal claim.

Court's interpretation: The Court distinguished the present case from Reliance Petro Products. Unlike that case where two views were possible and the assessee's explanation was substantiated and bona fide, here the assessee neither substantiated nor showed bona fides regarding the incorrect claims. The assessee failed to explain how the oversight occurred, who was responsible, or why auditors missed the errors.

Application to facts: The assessee's explanation was limited to claiming oversight without any substantiation or demonstration of bona fide belief. The Court noted the mandatory audit and professional assistance, making such oversight improbable without negligence or worse.

Treatment of competing arguments: The Tribunal's acceptance of the bona fide mistake plea and deletion of penalty was found to be perverse and unreasonable in light of the facts and statutory provisions.

Conclusion: The explanation was neither bona fide nor substantiated; penalty under Section 271(1)(c) was warranted.

Issue 4: Interpretation of "concealment" and "furnishing inaccurate particulars" under Section 271(1)(c)

Legal framework and precedent: The Supreme Court in Reliance Petro Products clarified that "inaccurate particulars" means details supplied that are factually incorrect, erroneous, or false. Merely making an incorrect claim in law does not amount to furnishing inaccurate particulars or concealment of income.

Court's reasoning: The Court reiterated that penalty under Section 271(1)(c) requires concealment or furnishing inaccurate particulars of income. If the explanation is bona fide and all material facts are disclosed, penalty should not be imposed even if the claim is unsustainable in law.

Application: This principle was applied to distinguish the present case from the precedent. The Court emphasized that bona fide explanation and disclosure are critical to avoid penalty.

Conclusion: The principle holds, but the assessee failed to meet the bona fide and disclosure requirements here.

Issue 5: Policy considerations and deterrent effect of penalty provisions

Court's observations: The Court highlighted the importance of penalty provisions as a deterrent against unscrupulous claims. Allowing incorrect claims without bona fide explanation to escape penalty would encourage tax evasion and undermine the self-assessment system.

Application: The Court rejected the notion that no person would claim income tax paid as deduction to evade tax, stating that each case must be decided on its facts and bona fides. The absence of any explanation for the oversight and the failure of auditors to detect the errors were significant.

Conclusion: Penalty provisions must be enforced to maintain tax discipline and deter malafide claims.

3. SIGNIFICANT HOLDINGS

"Section 32(1)(iii) of the Act provides for deduction ... only in the case of machinery, plant, etc., in respect of which depreciation has been claimed and allowed under Clause (i). If the plant/machinery is such, to which the provisions of Clause (i) do not apply, no deduction in respect of such plant or machinery, etc. can be claimed under Clause (iii)."

"... so long as the assessee has not concealed any material fact or the factual information given by him has not been found to be incorrect, he will not be liable to imposition of penalty under Section 271(1)(c) of the Act, even if the claim made by him is unsustainable in law, provided that he either substantiates the explanation offered by him or the explanation, even if not substantiated, is found to be bonafide."

"Making a claim which is not sustainable in law, cannot, by itself, amount to giving inaccurate particulars."

"If the explanation is neither substantiated nor shown to be bonafide, Explanation 1 to Section 271(1)(c) would come into play and the assessee will be liable to for the prescribed penalty."

"No such view could have reasonably been taken, on the facts and circumstances prevailing in this case and, therefore, the decision of the Tribunal in this regard suffers from the vice of perversity."

"... if a claim which is wholly untenable in law and has absolutely no foundation on which it could be made, the assessee would not be liable to imposition of penalty only if he was acting bona fide while making such claim."

"The explanation offered by the assessee company was not accepted either by the Assessing Officer or by the Commissioner of Income Tax(Appeals)... The Tribunal has not recorded a finding that the explanation furnished by the assessee ... was a bonafide explanation."

Final determinations:

• The penalty imposed under Section 271(1)(c) for incorrect claim of deduction of income tax paid was justified and rightly upheld.
• The penalty imposed for incorrect claim of deduction on account of equipment written off was also justified and rightly upheld.
• The Income Tax Appellate Tribunal erred in deleting the penalty on both counts.
• The assessee's explanation was neither bona fide nor substantiated; thus, penalty was properly imposed.