CA Hiral Raja
If the Assessing officer or Commissioner (Appeals) in the course of any proceedings under the Act is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income, then he can direct that such person shall pay by way of penalty u/s. 271(1) (c), a sum not less than 100% but not exceeding 300% of the amount tax sought to be evaded by reason of concealment of his income or furnishing inaccurate particulars of his income. This section is used as a weapon by the assessing officers. In fact in the orders passed u/s. 143(3) of the Income Tax Act, they have been mentioning “Initiate Penalty proceedings u/s. 271(1) (C) of the I T Act” by default on additions/disallowances done without providing any reasons irrespective of whether the assessee really tried to conceal his income or furnished inaccurate particulars of his income or even if additions/disallowances are on account of legally debatable issues.
Larger Bench of Supreme Court in the case of Union of India and Ors., vs. M/s. Dharmendra textile processors and Ors. [2008 306 ITR 227] had while reversing the supreme court judgement of Dilip N Shroff Vs. Joint CIT, Special Range, Mumbai [2007 291 ITR 519] held that “It is a well-settled principle in law that the court cannot read anything into a statutory provision or a stipulated condition which is plain and unambiguous. A statute is an edict of the legislature. The language employed in a statute is the determinative factor of legislative intent”. Also it further held that “The Explanations appended to Section 271(1)(c) of the IT Act entirely indicates the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing return. The judgment in Dilip N. Shroff’s case (supra) has not considered the effect and relevance of Section 276C of the I.T. Act. Object behind enactment of Section 271(1)(c) read with explanations indicate that the said section has been enacted to provide for a remedy for loss of revenue. The penalty under that provision is a civil liability. Willful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution under Section 276C of the I.T. Act”. Hence the supreme court in this judgement had concluded that ‘’Mens Rea’’ or ‘’Willful concealment’’ is not a criteria for determining leviability of penalty. Based on this judgement, department had been taking a view that once additions/disallowances are confirmed, penalty is to be automatically levied.
Under Income Tax Act, there are many issues which are debatable and hence assessee takes a legal position based on judicial pronouncements existing at the time of filing returns. An assessee also prefers making a claim in a transparent manner by providing on record all relevant facts, reasoning and judicial pronouncements considered while deciding on the making a claim.
The moot question that arises is whether making of an incorrect claim/claim which is not sustainable in law tantamounts to furnishing of inaccurate particulars of income and penalty u/s. 271(1)(c) can be levied for the same.
Hon’ble Mumbai ITAT in the case of ACIT vs. VIP Industries Ltd. [2009-(122)-TTJ -0289 –TBOM] had after considering the judgement of Dharmendra Textiles (supra) held as under:
- Mere fact that an addition is confirmed cannot per se lead to the confirmation of the penalty because quantum and penalty proceedings are independent of each other;
- For the deeming provision of Explanation 1 to s. 271(1)(c) to apply, it must be shown either that (a) the assessee fails to offer an explanation, or (b) he offers an explanation which is found to be false, or (c) he offers an explanation which cannot be substantiated or shown to be bona fide.
- The judgement of the Supreme Court in Dharmendra Textiles Processors which holds that penalty u/s.271(1)(c) is a civil liability and that “willful concealment” and “mens rea” are not essential ingredients for imposing penalty cannot be read to mean that in all cases where addition is confirmed, penalty shall mechanically follow. If penalty is imposed under such circumstances also there will remain no course open to an assessee to raise disputed claims and such proposition is beyond recognized canons of law.
Similarly, Hon’ble Pune ITAT in the case of Kanbay Software India Pvt. Ltd. vs. DCIT [2009-(122)-TTJ -0721 –TPUN] after considering Dharmendra Textiles Judgement had explained that there can be three distinct and mutually exclusive situations in the case of disallowances/addition to income:
|Sr. No.||Situation||Penalty Leviable|
|1.||Where the addition is on account of contumacious conduct of the taxpayer and his wrongful intention is established.||Penalty was always imposable.|
|2.||Where it can neither be established that the addition is on account of contumacious conduct of the taxpayer nor is it established that the taxpayer’s conduct and explanation is bona fide.||Penalty is leviable on account of judgement of Dharmendra Textiles.|
|3||Where it is established that the taxpayer’s conduct and explanation is bona fide.||Penalty will not be leviable.|
However Income Tax department had still been contending that once the addition is confirmed/wrong claim is made by the assessee, penalty has to be levied u/s. 271(1)(C) of the Income Tax Act, 1961.
This issue once again come up for consideration before the Hon’ble Supreme Court in the case of Commissioner of Income Tax vs. Reliance Petro Products Pvt. Ltd., (SLP(C) No. 27161 of 2008), wherein after going through the meaning of the words “furnishing of inaccurate particulars” it held as under;
- Mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing of inaccurate particulars regarding the income of the assessee. Such claims made in the return of income cannot amount to furnishing of inaccurate particulars.
- Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the Revenue, that by itself, would not attract penalty u/s. 271(1) (c) of the Income Tax Act.
- Unless there is a finding that any details supplied by the assessee in its return of income were found to be incorrect or erroneous or false, there is no question of levying penalty u/s. 271(1)(c).
- If the contentions of the revenue are accepted, then in case of every return where claim is not accepted by the Assessing Officer for any reason, the assessee will invite penalty u/s. 271(1)(c). That is clearly not the intendment of the Legislature.
This judgement clearly indicates that penalty can be levied by the assessing officer only once he proves that assessee has concealed the particulars of income or he has furnished inaccurate particulars of income at the time of filing of return of income or in any submissions thereafter (whether willfully or otherwise).
This judgement is surely a welcome judgement and will help the genuine and honest tax payers in a long way to make appropriate claims in the return of income. Also this will put an end to a lot of disputes, where in department has initiated penalty proceedings in case of assessees, purely based on the disallowances/additions made in the return of income.