2025 (5) TMI 2129 - AT - Income Tax

Penalty proceedings u/s 271(1) - deduction u/s 80IA and deduction u/s 80HHC - HELD THAT - AO should have levied the penalty on difference of the income not on the basis of the disallowances. The assessee restricted the deductions to business income and the appeal of the assessee was allowed by the Hon ble Income Tax Appellate Tribunal and matter was restored to the AO to decide as a fresh in regards the deduction u/s 80IA of the Act. The assessee has not concealed any particular of income at the time of filing the return of income. Deductions claimed u/s 80HHC and 80IA - There is nothing to show that the CA has committed the mistake to issue wrong certificate or any action has been taken by the department against the CA. Even after considering its proviso to section 80HHC(3) of the Act and deduction u/s 80HHC computed then also the assessee restricted its claim of deduction in under chapter VA to the gross total income of Rs. 1, 99, 54, 739.30 leaving long term capital gain income of Rs. 6, 20, 054/-to tax. Thus claiming total deduction under chapter VIA to 1, 93, 34, 684.88 which inter alia included of claim of deduction u/s 80HHC 80G and 80IA of the Act. It is also not the case of revenue that gross total income as declared by the assessee has been enhanced by the AO and so far as claim of deduction u/s 80IA is concerned is same restored by the tribunal to AO. Since the assessee has not concealed income nor furnished inaccurate particulars of income then no penalty can be imposed on the assessee. Thus we allowed the appeal of the assessee and deleted the penalty levied by the AO. Appeal of the assessee is allowed.

Summary

Issues Presented and Considered

The core legal questions considered by the Tribunal in this appeal against the penalty order under section 271(1)(c) of the Income Tax Act, 1961, are as follows:

• Whether the penalty imposed under section 271(1)(c) for concealment of particulars of income and furnishing inaccurate particulars of income is justified in the facts and circumstances of the case.
• Whether the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] erred in computing the quantum of income sought to be evaded, particularly with respect to the deduction claimed under section 80HHC of the Act.
• Whether the penalty order is valid in the absence of a final assessment order in compliance with directions of the Income Tax Appellate Tribunal (ITAT).
• Whether the notice issued under section 274 read with section 271(1)(c) of the Act for initiation of penalty proceedings is valid and not vitiated by any procedural defect.
• Whether the assessee's reliance on certificates issued by Chartered Accountants in support of deductions claimed under sections 80HHC and 80IA negates any mens rea or willful concealment required for penalty imposition.

Issue-wise Detailed Analysis

1. Validity of Penalty Imposition under Section 271(1)(c) for Concealment or Furnishing Inaccurate Particulars of Income

Legal Framework and Precedents: Section 271(1)(c) penalizes concealment of particulars of income or furnishing inaccurate particulars. The Supreme Court and various High Courts have held that penalty under this section requires a finding that the assessee either concealed material facts or furnished inaccurate particulars not bona fide. The case of Commissioner of Income-Tax XVI v. S. Dhanabal was cited, emphasizing that penalty cannot be imposed if the assessee's explanation is bona fide and all material facts were disclosed.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee had claimed deductions under sections 80HHC and 80IA based on certificates issued by Chartered Accountants, which were relied upon in good faith. There was no evidence of malafide intention or willful concealment. The Tribunal observed that the assessee had disclosed all material facts from which income could be computed, and the dispute related only to the quantum of deduction allowable.

Key Evidence and Findings: The assessee's return declared total income after claiming deductions, and the AO restricted the deduction under section 80HHC. The penalty was imposed on the difference in deduction claimed and allowed. However, the assessee relied on CA certificates for the claimed deduction. No action was taken against the CA, and no evidence suggested that the certificates were incorrect or fraudulent.

Application of Law to Facts: Since the explanation was bona fide and the assessee disclosed all relevant facts, the Tribunal concluded that no penalty under section 271(1)(c) could be levied. The Tribunal relied on the precedent that absence of mens rea or concealment negates penalty imposition.

Treatment of Competing Arguments: The Revenue contended that the deduction claimed was excessive and constituted concealment. However, the Tribunal found that the assessee's reliance on expert advice and CA certificates was genuine. The Tribunal also noted that the AO did not demonstrate any mala fide intent or concealment by the assessee.

Conclusion: The penalty imposed for concealment or furnishing inaccurate particulars was deleted as the assessee's claim was bona fide and all material facts were disclosed.

2. Computation of Quantum of Income Sought to be Evaded and Penalty Calculation

Legal Framework and Precedents: Explanation 4 to section 271(1) requires that the quantum of penalty be based on the amount of tax sought to be evaded. The penalty amount must be proportionate and correctly calculated on the income concealed or inaccurately declared.

Court's Interpretation and Reasoning: The AO calculated penalty based on the difference between the deduction claimed (Rs. 2,64,67,883) and the deduction allowed (Rs. 1,61,05,733), resulting in income sought to be evaded of Rs. 1,03,62,149 and penalty of Rs. 36,26,752 (minimum 100% of tax on concealed income). The assessee argued that penalty should have been based on the actual difference in income, not deduction, amounting to Rs. 29,78,916.

Key Evidence and Findings: The Tribunal noted that the AO's penalty calculation was on the deduction difference rather than the income difference. Additionally, the ITAT had restored the matter for fresh examination of deduction under section 80IA, indicating that the issue was not finally settled.

Application of Law to Facts: The Tribunal found that penalty should be imposed on the difference in income, not merely on the deduction difference. Since the matter was pending fresh determination, and the assessee had not concealed income but disputed the deduction quantum, the penalty calculation was flawed.

Treatment of Competing Arguments: The Revenue maintained that the deduction difference justified penalty. The Tribunal rejected this, emphasizing that the penalty must be based on actual concealment of income and not on disputed deductions subject to further verification.

Conclusion: The penalty quantum was excessive and incorrectly calculated; thus, the penalty was not sustainable on this ground.

3. Validity of Penalty Order without Final Assessment Order

Legal Framework and Precedents: Penalty proceedings under section 271(1)(c) ordinarily follow the completion of assessment. The absence of a final assessment order may vitiate the penalty order.

Court's Interpretation and Reasoning: The assessee contended that the penalty order was void ab initio as it was passed without a final assessment order in compliance with ITAT directions. The Tribunal noted that the ITAT had restored the matter for fresh examination of deduction under section 80IA, and no final assessment order was passed thereafter.

Key Evidence and Findings: The record showed that penalty was imposed after the ITAT's order but before final assessment on the restored issue.

Application of Law to Facts: The Tribunal held that penalty cannot be imposed in the absence of a final assessment order on the disputed issue, as the penalty depends on the correctness of the assessment.

Treatment of Competing Arguments: The Revenue did not dispute this point explicitly but relied on the validity of notice and penalty proceedings.

Conclusion: The penalty order was not sustainable in the absence of a final assessment order on the disputed deduction.

4. Validity of Notice Issued under Section 274 read with Section 271(1)(c)

Legal Framework and Precedents: Notices initiating penalty proceedings must comply with statutory requirements, including specifying grounds for penalty. Defective notices can vitiate penalty proceedings unless no prejudice is caused. The case of Sundaram Finance Ltd. v. ACIT was cited, holding that mere procedural defects without prejudice do not invalidate penalty proceedings.

Court's Interpretation and Reasoning: The assessee challenged the notice as defective for not specifying grounds under section 271(1)(c). The Tribunal referred to the Sundaram Finance Ltd. decision, noting that the assessee did not raise this plea earlier and no prejudice was caused.

Key Evidence and Findings: The notice clearly indicated concealment of particulars and furnishing inaccurate particulars of income. The assessee understood the nature of proceedings and participated fully.

Application of Law to Facts: The Tribunal held that the notice was valid and not vitiated by any procedural defect, especially since no prejudice was demonstrated.

Treatment of Competing Arguments: The Revenue argued for validity of notice and penalty proceedings, which the Tribunal accepted.

Conclusion: The notice initiating penalty proceedings was valid and did not vitiate the penalty order.

5. Reliance on Chartered Accountant's Certificate and Absence of Mens Rea

Legal Framework and Precedents: The law requires that penalty under section 271(1)(c) cannot be imposed if the assessee's explanation is bona fide and there is no concealment or inaccurate particulars furnished intentionally. Reliance on professional advice and certificates can negate mens rea.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee claimed deductions based on CA certificates in Form 10CCA and 10CCB, which were not challenged as incorrect or fraudulent. The assessee's conduct was consistent with bona fide claim of deductions.

Key Evidence and Findings: No departmental action was taken against the CA, and no evidence suggested the certificates were false. The assessee restricted deductions to gross total income and did not conceal income.

Application of Law to Facts: The Tribunal applied the principle that absence of mens rea and bona fide reliance on expert advice precludes penalty under section 271(1)(c).

Treatment of Competing Arguments: The Revenue's contention of concealment was rejected on the basis of bona fide explanation and reliance on CA certificates.

Conclusion: The penalty could not be imposed as the assessee's explanation was bona fide and there was no concealment or inaccurate particulars furnished knowingly.

Significant Holdings

"From the aforesaid decision of the Supreme Court, it is clear that de hors the question of mens rea and the question of the effect the deletion of the word 'deliberate' from the provisions of section 271(1)(c) would have on the issue of mens rea, as per the terms of the said Explanation 1(B) before penalty can be imposed upon an assessee, it has to be found as a question of fact that the explanation offered by the assessee is not only not bona fide, but it must also be found as a fact that the assessee has not disclosed all the facts which were material to the computation of his income. If either of these two ingredients are missing, then penalty cannot be imposed upon the assessee."

"Accordingly, in view of the above facts, I hold that the assessee has concealed income on account of deduction u/s. 80HHC rightly not shown in ITR for the year under consideration. Under the Act, penalty u/s. 271 (1)(c) is leviable for furnishing inaccurate particulars of such income. I am satisfied that the assessee company has not furnished accurate particulars of its income to the extent of Rs. 1,03,62,149/- and is a fit case for imposition of penalty u/s. 271(1)(c) of the Act... The minimum penalty of Rs. 36,26,752/- is imposed u/s. 271(1)(c) of the Income Tax Act for not furnishing accurate particulars of its income."

However, the Tribunal held: "Since, the assessee has not concealed income nor furnished inaccurate particulars of income then no penalty can be imposed on the assessee. Thus, we allowed the appeal of the assessee and deleted the penalty levied by the AO."

The Tribunal established the core principle that bona fide claim of deductions based on professional certificates, full disclosure of material facts, and absence of mens rea preclude imposition of penalty under section 271(1)(c). Further, penalty calculation must be based on actual concealment of income, not disputed deductions subject to further verification. Procedural defects in notices do not vitiate penalty proceedings unless prejudice is demonstrated. Penalty orders passed without final assessment on the disputed issue are not sustainable.

The final determination was that the penalty imposed under section 271(1)(c) was deleted, the appeal was allowed, and no penalty was leviable on the assessee in the facts of the case.