2025 (6) TMI 568 - AT - Income Tax

Penalty proceedings u/s 271(1)(c) - addition u/s 43B(f) - disallowance of provision for leave encashment - HELD THAT - It is an admitted fact that the assessee in the note at the end of the computation has stated that the provisions of section 43B(f) of the Act are not applicable in the case of provision for leave encashment based on actuarial valuation. At the same time it is also an admitted fact that the amendment to provisions of section 43B was held to be ultra vires case of Exide Industries Ltd. vs. Union of India 2020 (4) TMI 792 - SUPREME COURT reversing the decision of the Hon ble Calcutta High Court 2007 (6) TMI 175 - CALCUTTA HIGH COURT Under these circumstances we find merit in the submission of assessee that since the matter was in favour of the assessee till the reversal of the decision by the Hon ble Supreme Court the assessee made a claim to keep the innings open. We find in the case of CIT vs. Reliance Petroproducts Pvt. Ltd. 2010 (3) TMI 80 - SUPREME COURT has held that a mere making of claim which is not sustainable in law by itself will not amount to furnishing of inaccurate particulars regarding the income of the assessee. Such a claim made in the return cannot amount to furnishing of inaccurate particulars of income. NFAC is not justified in sustaining the penalty levied by the Assessing Officer u/s 271(1)(c) of the Act on account of the claim of leave encashment. The grounds raised by the assessee are accordingly allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

• Whether the penalty imposed under section 271(1)(c) of the Income Tax Act, 1961 ("the Act") on the disallowance of leave encashment provision under section 43B(f) of the Act is justified.
• Whether the notice issued by the Assessing Officer (AO) under section 271(1)(c) of the Act was valid or null and void.
• Whether the assessee concealed particulars of income or furnished inaccurate particulars amounting to penalty under section 271(1)(c) by claiming leave encashment deduction based on actuarial valuation despite the disallowance under section 43B(f).
• Whether the issue regarding disallowance under section 43B(f) was a matter of difference of opinion or a legal issue, and if so, whether penalty is leviable in such circumstances.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of penalty notice issued under section 271(1)(c)

The assessee challenged the validity of the penalty notice dated 25.10.2016 issued by the AO under section 271(1)(c). However, the Tribunal did not specifically dwell on the procedural validity of the notice, focusing instead on the substantive issue of penalty levy. The absence of detailed discussion indicates that the Tribunal found no merit in the procedural objection or considered it subsumed within the broader penalty issue.

Issue 2: Whether the assessee concealed particulars of income or furnished inaccurate particulars to attract penalty under section 271(1)(c)

Legal framework and precedents: Section 271(1)(c) penalizes concealment of income or furnishing inaccurate particulars thereof. The Supreme Court in CIT vs. Reliance Petroproducts Pvt. Ltd. (2010) clarified that mere making of an incorrect claim, which is not sustainable in law, does not amount to furnishing inaccurate particulars or concealment of income. The Court emphasized that inaccurate particulars mean details supplied in the return which are "not accurate, not exact or correct; not according to truth; erroneous." The Court further held that if the particulars supplied in the return are not found to be incorrect or false, penalty cannot be invoked merely because the claim was disallowed.

Court's interpretation and reasoning: The Tribunal noted that the assessee disclosed the leave encashment claim in its return and provided detailed notes explaining the claim and the legal position. The assessee relied on the then-prevailing judicial position, including a Calcutta High Court decision which struck down the amendment to section 43B(f) as ultra vires, and the matter was sub judice before the Supreme Court. The Tribunal found that the assessee did not conceal any particulars or furnish inaccurate particulars, as all details were disclosed and the claim was made in good faith based on a legal opinion.

Key evidence and findings: The assessee's return and computation included the leave encashment provision, with a note stating that section 43B(f) was not applicable due to actuarial valuation. The earlier judicial pronouncement in favor of the assessee and the fact that penalty was not levied in assessment year 2010-11 despite similar addition further supported the assessee's position.

Application of law to facts: Applying the Supreme Court's reasoning, the Tribunal concluded that since the particulars were fully disclosed and the claim was a bona fide legal position, penalty under section 271(1)(c) was not justified.

Treatment of competing arguments: The Revenue argued that the claim was wrong and thus penalty was warranted. The Tribunal rejected this, holding that a difference of opinion or a legal issue does not amount to concealment or furnishing inaccurate particulars.

Conclusion: The penalty under section 271(1)(c) on the leave encashment claim was not sustainable as there was no concealment or inaccurate particulars.

Issue 3: Whether disallowance under section 43B(f) was a legal issue and whether penalty is leviable on such a difference of opinion

Legal framework and precedents: Section 43B(f) mandates that certain expenses, including leave encashment, are allowable only on actual payment basis. However, the Calcutta High Court in Exide Industries Ltd. vs. Union of India struck down this provision as arbitrary and ultra vires, allowing accrual-based leave encashment deduction. The Supreme Court reversed this decision only in 2020. Thus, for the assessment year 2014-15, there was a bona fide legal controversy with two possible opinions.

Court's interpretation and reasoning: The Tribunal acknowledged this legal controversy and held that the assessee's claim was based on the then-prevailing judicial view. The Tribunal emphasized that the assessee's claim was made to keep the innings open pending final adjudication by the Supreme Court.

Key evidence and findings: The Tribunal noted the prior judicial decisions, the assessee's disclosure in accounts and returns, and the absence of any concealment or suppression of facts.

Application of law to facts: Given the legal controversy, the Tribunal applied the principle that penalty cannot be levied merely because the Revenue's view differs from the assessee's bona fide legal position.

Treatment of competing arguments: The Revenue contended that the claim was wrong and penalty was warranted. The Tribunal rejected this, holding that a difference of opinion on a legal issue does not attract penalty under section 271(1)(c).

Conclusion: The disallowance under section 43B(f) was a legal issue with two opinions, and penalty was not leviable on such a bona fide difference of opinion.

3. SIGNIFICANT HOLDINGS

The Tribunal, relying heavily on the Supreme Court decision in CIT vs. Reliance Petroproducts Pvt. Ltd., held:

"A mere making of claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such claim made in the Return cannot amount to the inaccurate particulars."

"If we accept the contention of the Revenue then in case of every Return where the claim made is not accepted by Assessing Officer for any reason, the assessee will invite penalty under Section 271(1)(c). That is clearly not the intendment of the Legislature."

"Where certain items which are not included in the turnover are disclosed in the dealer's own account books and the assessing authorities include these items in the dealer's turnover disallowing the exemption, penalty cannot be imposed."

Core principles established include:

• Penalty under section 271(1)(c) requires concealment or furnishing inaccurate particulars of income, not merely a disputed or incorrect claim.
• Full disclosure of facts and bona fide legal positions preclude penalty even if the claim is ultimately disallowed.
• Legal controversies with two possible opinions do not warrant penalty for the assessee making a claim based on one such opinion.

Final determination:

• The penalty levied under section 271(1)(c) on the leave encashment provision disallowance was quashed.
• The grounds raised by the assessee challenging the penalty were allowed.