Bolar Jayaraj Shetty Vs ITO (ITAT Bangalore)
Fraudulent Deduction Claimed by Tax Consultant Without Assessee’s Knowledge-Penalty Cannot Be Levied Without Examining Assessee’s Bona Fides: ITAT Bangalore
Summary: The Bangalore Bench of the Income Tax Appellate Tribunal has held that where false deductions and refund claims were allegedly made by a tax consultant without the assessee’s knowledge, penalty under Section 271(1)(c) could not be sustained without first examining whether the consultant was solely responsible for the fraudulent claims and whether the conduct of the assessee was bona fide.
The Tribunal, however, did not finally delete the penalties. It restored the matter to the Assessing Officer for a fresh factual enquiry.
Facts of the case
The assessee had filed returns of income for Assessment Years 2014-15 to 2016-17. In those returns, certain TDS credits and deductions under Chapter VI-A were claimed. The returns were filed through one Shri Nagesh Shastri, a tax consultant, using the consultant’s email address.
Subsequently, the Income-tax Department conducted a survey at the premises of the tax consultant. During the survey, the consultant allegedly admitted that he had made various bogus or false claims in the returns filed on behalf of his clients. Such claims were made either to reduce their tax liability or to obtain excessive refunds.
Based upon the information found during the survey, notices under Section 148 were issued to the assessee. The reassessments were completed under Section 148 read with Section 143(3). The Assessing Officer found that certain deductions claimed in the returns were not supported by proper evidence and consequently disallowed the excess claims.
The Assessing Officer thereafter initiated penalty proceedings under Section 271(1)(c) on the ground that the assessee had furnished inaccurate particulars of income. Penalties were levied for all the three assessment years.
The CIT(A) confirmed the penalty orders. The assessee, therefore, approached the Tribunal.
Assessee’s contention
The assessee contended that Shri Nagesh Shastri was involved in making fraudulent refund claims by inserting fictitious deductions in the returns filed on behalf of several clients. The objectionable claims in the assessee’s returns were also allegedly introduced by the consultant without the assessee’s knowledge.
It was submitted that the tax consultant had filed the revised returns himself and had retained control over the relevant password and other filing credentials. The mobile number and email address appearing in the original returns and revised returns were stated to be different. According to the assessee, the particulars used in the revised returns belonged to or were controlled by the consultant.
The assessee requested the authorities to verify these electronic details to test the truthfulness of his explanation. It was argued that the entire fraudulent exercise was carried out by the tax consultant and that the assessee neither instructed nor authorised him to claim fictitious deductions or fraudulent refunds.
Therefore, the assessee claimed that his conduct was bona fide and that penalty should not be imposed for the unauthorised acts of the consultant.
Revenue’s contention
The Revenue contended that the fraudulent refund claims could not have been made without the assessee’s knowledge. According to the Department, the assessee could not escape the consequences of an incorrect return merely by attributing the false claims to the tax consultant.
It was accordingly argued that the penalties imposed for furnishing inaccurate particulars of income were justified.
Earlier decision in Ravikiran Netla
The assessee relied upon the earlier decision of the Bangalore Tribunal in Shri Ravikiran Netla v. ITO, ITA No. 2123/Bang/2018, order dated 10 September 2020.
In that case also, Shri Nagesh Shastri was alleged to have been instrumental in filing a revised return containing fraudulent claims. The Tribunal had held that the authorities were required to examine whether the tax consultant was solely responsible for the fraudulent refund claim and whether the assessee’s conduct was bona fide.
It was specifically observed that if the consultant was found solely responsible for the fraudulent act and the assessee had acted bona fide, penalty could not be levied upon the assessee.
Findings of the Tribunal
The Tribunal noticed that the deductions claimed under Chapter VI-A were not supported by documentary evidence. The assessee had also claimed a loss under the head “Income from house property” on account of housing-loan interest without producing sufficient supporting evidence.
However, the crucial question in the penalty proceedings was not merely whether the deductions were ultimately allowable. The authorities were also required to determine who was responsible for making the false claims and whether the assessee had knowingly participated in the act.
Following its earlier decision in Ravikiran Netla, the Tribunal held that the assessee’s explanation regarding the role of the tax consultant required proper factual verification.
The Assessing Officer was directed to examine the entire matter afresh and determine whether the impugned deductions and refund claims were made solely by the consultant without the assessee’s knowledge. The Assessing Officer was also required to consider the assessee’s bona fides and provide a proper opportunity of hearing.
All three appeals were accordingly allowed for statistical purposes.
Author’s comments
This decision draws an important distinction between an incorrect claim in the return and the assessee’s conscious participation in furnishing inaccurate particulars.
The disallowance of a deduction during assessment does not automatically justify penalty. Assessment proceedings and penalty proceedings are separate. While the addition may be sustained because supporting evidence was not produced, the penalty authority must still examine whether the assessee deliberately made the false claim or whether there was a bona fide explanation for the incorrect return.
At the same time, the judgment does not lay down that every assessee can avoid penalty by blaming the tax consultant. A return is ordinarily verified by the assessee, and the assessee is expected to exercise reasonable care before its filing. Therefore, a mere self-serving statement that the consultant committed the fraud would not be sufficient.
The assessee would have to establish the explanation through objective evidence, such as differences in the registered mobile number and email address, custody of the login credentials, bank records relating to the refund, communications with the consultant, the assessee’s educational and tax background, and evidence gathered during the survey against the consultant.
The ruling, therefore, provides a valuable but fact-dependent defence: where the consultant is proved to be solely responsible and the assessee’s conduct is genuinely bona fide, penalty should not be imposed merely because an incorrect deduction appeared in the return.
Importantly, the Tribunal only restored the matter for verification. It did not conclusively hold that the consultant alone was responsible or finally cancel the penalties. The ultimate result would depend upon the evidence produced before the Assessing Officer during the remand proceedings.
Cases Discussed
- Shri Ravikiran Netla Vs ITO, ITA No. 2123/Bang/2018, order dated 10.09.2020, A.Y. 2014-15
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, BANGALORE
Present appeals filed by assessee against separate orders passed by NFAC dated 27.02.2023 for A.Ys. 2014-15 to 2016-17.
2. It is submitted by the Ld.AR that assessee had filed return of income for the relevant AYs wherein TDS claim and deduction under chapter VI-A was made. The returns were filed through one Shri Nagesh Shastri, Tax consultant using his email ID. A survey action took place at the premise of Shri Nagesh Shastri where he admitted that, in the returns filed by him on behalf of his clients, various bogus / false claims were made with an intention to either reduce the tax liability or to claim excess refund. Accordingly a notice u/s. 148 is issued to the assessee. The assessing officer based on various replies filed by assessee completed the assessment by observing certain inaccurate particulars in the return of income so filed. The assessing officer while passing order u/s. 148 r.w.s. 143(3) made certain additions by denying certain excess claims made in the return of income for the years under consideration as they were not supported by evidences. Subsequently a notice u/s. 271(1)(c) was issued to assessee and penalty was levied for filing of inaccurate particulars.
Aggrieved by the penalty orders passed by the Ld.AO for the years under consideration, the assessee filed appeal before the Ld.CIT(A).
The Ld.CIT(A) confirmed the penalty order passed by the Ld.AO.
3. Aggrieved by the penalty orders filed for the assessment years under consideration, assessee is in appeal for all the three years before this Tribunal.
4. Before us, the Ld.AR submitted that one Mr. Nagesh Shastri an Income Tax Practitioner was involved in indulging in claim of fraudulent refunds by fictitious claim of deductions that was unearthed by Investigation wing of the Income tax department. It was submitted that, such claims were made without the knowledge of assessee by Mr. Nagesh Shastry. It was submitted that, Shri Nagesh Shastry filed revised return and all requisite password, etc. was kept with him and by giving the mobile number of Mr. Nagesh Shastry only. It was submitted that the Mobile no. & email address given to the department in original return and revised return were different, which can be looked into so as to see the veracity of the assessee’s statement. The Ld.AR submitted that there was no fault of assessee in filing such return so as to claim the fraudulent refund. The entire issue of fraudulent claims was by Mr. Nagesh Shastry only, and the assessee was bonafide in his action and there was no fault from the assessee’s side.
5. The Ld. DR submitted that the entire claim of fraudulent refund was with full knowledge of assessee and the assessee at this stage cannot say that it was handiwork of Mr. Nagesh Shastry.
6. It is submitted by the Ld.AR that an identical issue arose before this Tribunal in case of Shri Ravikiran Netla vs. ITO in ITA No. 2123/Bang/2018 by order dated 10.09.2020 for A.Y. 2014-15 considered this issue as under:
“6. We have heard both the parties and perused the material on record. In the quantum appeal order dated 19.2.2018, the CIT(Appeals) recorded these facts in para 5 of his order that Mr. Nagesh Shastry was instrumental in fling the revised return. However, the same facts and arguments in the penalty proceedings are not considered by the CIT(Appeals). In our opinion, it is proper to examine whether Mr. Nagesh Shastry is instrumental in claiming fraudulent refund on behalf of assessee by indulging in malpractices. If Mr. Nagesh Shastry is found solely responsible for such fraudulent act and that assessee’s act is bonafide, penalty cannot be levied. With these observations, we remand this issue to the file of the CIT(Appeals) to consider all these facts and decide the issue afresh in accordance with law, after affording assessee opportunity of being heard.
7. In the result, the appeal of assessee is allowed for statistical purposes.”
7. Admittedly, in the present facts of the case, the Ld.AO found certain deductions under Chapter VIA which is not supported by documents. The assessee has also claimed loss from house property for interest paid for housing loan which is not supported by evidences. In the interest of justice, we deem it proper to remand this issue back to the Ld.AO with a similar direction as observed by Coordinate Bench of this Tribunal in case of Shri Ravikiran Netla vs. ITO (supra).
8. The Ld.AO is directed to consider the facts and decide the issue afresh in accordance with law.
Needless to say that proper opportunity of being heard must be granted to assessee.
Accordingly, the grounds raised by assessee for all the years under consideration stands allowed for statistical purposes.
In the result, all the three appeals filed by the assessee stands allowed for statistical purposes.
Order pronounced in the open court on 08th May, 2023.
