2025 (7) TMI 124 - AT - Income Tax

Penalty u/s 270A - disallowing the claim of leave encashment - HELD THAT - As per section 270A(6)(a) of the Act the under reported income shall not include the amount of income in respect of which the assessee offers bona fide explanation and disclosed all the material facts to substantiate the explanation offered. AR emphatically argued that the CIT(A) erroneously concluded that the assessee had suppressed the facts and so the case of the assessee falls u/s 270A(9) of the Act which is quite contrary to facts available on record. Both lower authorities nowhere specifically denied that the assessee has offered a bona fide explanation for under reported or misreported income in it s reply. Despite adequate disclosure in the annual accounts regarding the leave encashments the Learned CIT(A) declined to accept without any strong reasons by quoted it incorrect and fallacious. AR contended that the CIT(A) however inferred that there was no reasonable cause for making the claim but there is no any single whisper in the impugned order that claim in question was not bona fide - On the basis of foregoing fact situation we finds material substance in the submissions advanced on behalf of the assessee that the claim in question was on provisional basis having debatable issue with it s bona fides and so imposition of penalty was not called for. Hence appeal of the assessee deserves to be allowed as imposition of penalty in question is unsustainable. Assessee appeal allowed.

Summary

The core legal questions considered in this appeal revolve around the imposition of penalty and interest under the Income Tax Act, specifically:

• Whether the imposition of penalty and interest on disallowance of leave encashment claimed on a provisional basis was justified.
• Whether the penalty under section 270A of the Income Tax Act was sustainable given the nature of the claim and the legal precedents relied upon by the assessee.
• Whether the claim of leave encashment expenditure was bona fide and adequately disclosed, thus excluding it from under-reporting or misreporting under section 270A.
• Whether the case involved a debatable question of law that would preclude penalty imposition.
• Whether the penalty imposed was proportionate and in accordance with the provisions of section 270A(9) of the Act.

Issue 1: Justification of Penalty and Interest on Provisional Leave Encashment Claim

The legal framework includes section 270A of the Income Tax Act, which empowers the tax authorities to impose penalty for under-reporting or misreporting of income. The proviso under section 270A(6)(a) excludes under-reported income if the assessee offers a bona fide explanation and discloses all material facts.

The Court noted that the assessee claimed leave encashment expenditure on a provisional basis, relying on judicial precedents, including a coordinate bench ruling in M/S Sicpa India Pvt Ltd v/s Addnl CIT. The assessee's position was that such provisional claims were permissible and debatable in law.

The AO disallowed the claim under section 43B due to non-payment on or before the due date of filing the return, and imposed penalty under section 270A. However, the AO did not specify under which clause of section 270A(9) the claim was considered misreporting.

The Court observed that the assessee had disclosed the claim adequately in the annual accounts and had paid advance tax on the disputed amount, indicating transparency and bona fide intent.

Applying the law to facts, the Court found that the claim was made in good faith, based on existing judicial decisions, and that the penalty was imposed without sufficient basis to establish misreporting or suppression of facts.

Competing arguments included the Revenue's reliance on the disallowance under section 43B and the penalty order upheld by the CIT(A), whereas the assessee emphasized the provisional nature of the claim and reliance on judicial pronouncements.

The Court concluded that the penalty and interest imposition was unjustified and unsustainable under the circumstances.

Issue 2: Bona Fide Nature and Adequate Disclosure of Leave Encashment Claim

The assessee contended that the claim was bona fide and fully disclosed, thus excluding it from the ambit of under-reporting or misreporting. Section 270A(6)(a) provides that bona fide explanations with full disclosure negate the applicability of penalty for under-reported income.

The Court scrutinized the record and found no indication that the assessee suppressed material facts or misreported income. The CIT(A) had inferred absence of reasonable cause but did not explicitly find the claim to be not bona fide.

Evidence included the assessee's advance tax payment on the disputed amount and detailed disclosure in the annual accounts. The Court emphasized that mere disallowance of a claim does not ipso facto justify penalty if the claim was made in good faith.

The Court rejected the CIT(A)'s conclusion as incorrect and fallacious, noting the absence of any strong reasons to deny bona fide status to the claim.

Consequently, the Court held that the assessee's claim was bona fide and adequately disclosed, negating the basis for penalty under section 270A.

Issue 3: Debatable Question of Law and Its Impact on Penalty

The assessee argued that the allowability of leave encashment on a provisional basis was a debatable legal issue, supported by judicial precedents and stayed decisions, including that of the Supreme Court in Exide Industries Ltd. vs. Union of India.

The Court recognized that the existence of a substantial question of law and divergent judicial opinions on the issue militated against penalty imposition, as penalty is generally not warranted where genuine legal disputes exist.

The Court observed that the assessee's reliance on judicial pronouncements and the provisional nature of the claim indicated a bona fide attempt to comply with the law, thus precluding penalty.

Issue 4: Applicability of Section 270A(9) and Proportionality of Penalty

Section 270A(9) specifies categories of under-reporting or misreporting that attract penalty, including concealment of income or furnishing inaccurate particulars.

The AO and CIT(A) imposed penalty equal to 200% of the tax payable on under-reported income, apparently treating the case as misreporting. However, the AO did not specify the clause under which misreporting was alleged.

The Court found that the facts did not fit within any clause of section 270A(9) as the assessee had offered bona fide explanation and disclosed material facts. The penalty quantum was thus disproportionate and not in accordance with the statutory provisions.

Significant Holdings

The Court held that:

"As per section 270A(6)(a) of the Act, the under reported income shall not include the amount of income in respect of which the assessee offers bona fide explanation and disclosed all the material facts to substantiate the explanation offered."

"The claim in question was on provisional basis having debatable issue with its bona fides and so imposition of penalty was not called for."

Core principles established include:

• Penalty under section 270A cannot be imposed where the assessee offers a bona fide explanation and fully discloses material facts.
• Claims made on a provisional basis supported by judicial precedents and involving debatable questions of law do not attract penalty for under-reporting or misreporting.
• Disallowance of a claim alone does not justify penalty unless there is clear evidence of concealment or misreporting as defined under section 270A(9).
• Proper identification of the clause under section 270A(9) is essential before imposing penalty for misreporting.

Final determinations on each issue were in favour of the assessee, resulting in the setting aside of the penalty and interest imposed by the AO and upheld by the CIT(A). The appeal was allowed accordingly.