In the case of C.I.T., Ahmedabad Versus Reliance Petroproducts Pvt. Ltd. the issue before the SC was in respect of levy of concealment penalty under the Indian Tax Law (ITL) for disallowance of interest expense on borrowed funds. The borrowed funds were used for investment in shares which yielded exempt dividend income. The SC held that merely making a claim in the return of income which is not accepted by the Tax Authority or which is not sustainable under the ITL, in itself, does not amount to furnishing inaccurate particulars by the Taxpayer and, hence, is not liable to penalty.
Background and facts of the case
- Under the ITL, a taxpayer is liable to penalty if it furnishes inaccurate particulars of income or conceals income.
- The Taxpayer, an investment company, filed its return of income for tax year 2000-01, declaring loss. The Taxpayer paid interest on funds borrowed for investing in shares. For the relevant tax year, dividend income was not taxable in the hands of the Taxpayer. The Taxpayer claimed the amount of interest paid as an expense in its return of income.
- During the assessment proceedings, the Tax Authority disallowed interest expense on the ground that this expense was incurred in relation to dividend income which was exempt from tax.
- The Tax Authority levied penalty by holding that the Taxpayer furnished inaccurate particulars by wrongly claiming interest paid as an expense.
- The appellate authorities and the High Court deleted the penalty levied by the Tax Authority. Aggrieved by this, the Tax Authority preferred an appeal before the SC.
Contentions of the Tax Authority
- Under the ITL, dividend income is exempt from tax and expenses in relation to exempt income cannot be claimed as deduction.
- The claim for interest paid as expense was totally unacceptable under the ITL and was an incorrect claim. The Taxpayer consciously claimed incorrect deduction in the return of income.
- Submitting an incorrect claim under the ITL for interest paid as expense amounted to giving inaccurate particulars of income.
Contentions of the Taxpayer
- The disallowance made by the Tax Authority was due to difference of opinion arrived at on the basis of facts disclosed in the return.
- Mere disallowance of the claim made in the return of income cannot be the basis for levy of penalty under the ITL.
- None of the details or statements provided in the return of income or during the assessment was found to be incorrect. Hence, it cannot be said that inaccurate particulars were furnished.
- Furnishing inaccurate particulars can be alleged only if there is a deliberate act or omission on the part of a taxpayer.
Ruling of the SC
- The penalty provision cannot be invoked unless the case is strictly covered by the provision. The onus is on the Tax Authority to show that the Taxpayer has concealed the particulars of its income or furnished inaccurate particulars of such income. Particulars of income are to be seen vis-à-vis return of income furnished.
- The word ‘particular’ means ‘details of a claim’. The word ‘inaccurate’ means ‘not accurate, not exact or correct; not according to the truth; erroneous; as an inaccurate statement, copy of transcript’.
- Conjoint reading of the expressions ‘inaccurate’ and ‘particular’ means that the details provided in the return of income are not exact or correct or are not according to the truth or are erroneous.
- The details furnished by the Taxpayer in its return were neither found to be inaccurate by the Tax Authority nor could they be viewed as concealment of income on the part of the Taxpayer. Hence, there can be no question of inviting penalty under the ITL.
- Merely making a claim in the return of income, which is not sustainable under the ITL, cannot amount to furnishing inaccurate particulars regarding the Taxpayer’s income.
- By itself, mere non-acceptance of claim by the Tax Authority cannot attract any penalty.
- If the Tax Authority’s contention is to be accepted, then, in case of every non-acceptance of claim by the Tax Authority for any reason, a taxpayer will invite penalty, which according to the SC, is not the legislative intent.
Our Comments:- This ruling provides guidance to taxpayers on the issue that merely making a claim in the return of income, which is disallowed by the Tax Authority, cannot tantamount to furnishing inaccurate particulars of income, which would attract levy of penalty.