Dhanuka Agritech Ltd. Vs ACIT (ITAT Delhi)
The Income Tax Appellate Tribunal (ITAT), Delhi, allowed the assessee’s appeal against the order of the Commissioner of Income Tax (Appeals) for Assessment Year 2017-18, which had upheld the levy of penalty under Section 270A of the Income-tax Act, 1961 in respect of the disallowance of leave encashment expenditure.
The assessee challenged the penalty on several grounds. It contended that the penalty order was illegal and void, that the claim for leave encashment had been made on a provisional basis relying upon judicial precedents, that the issue was debatable and involved a substantial question of law, that full disclosure of the claim had been made, and that the Supreme Court, while staying the judgment in Exide Industries Ltd. vs. Union of India, had permitted assessees to continue making such claims in their returns. The assessee further contended that the penalty of 200% of tax payable on under-reporting of income due to alleged misreporting was unjustified because its case did not fall under any of the categories specified in Section 270A(9).
The assessee, engaged in the business of manufacturing and trading of Power & Energy, filed its return of income declaring total income of ₹118,61,64,030 and claiming a refund of ₹6,35,89,969. The return was processed under Section 143(1) and was subsequently selected for scrutiny under the Computer Assisted Scrutiny Selection (CASS). Assessment was completed under Section 143(3) on 23.12.2019 by disallowing the claim of leave encashment under Section 43B amounting to ₹4,87,28,296 on the ground that the amount had not been paid on or before the due date for filing the return of income. Penalty proceedings under Section 270A were also initiated.
Before the Tribunal, the assessee reiterated that the claim for leave encashment had been made on a provisional basis by relying upon judicial precedents, including the decision of the coordinate bench in M/s Sicpa India Pvt. Ltd. vs. Addl. CIT. It was argued that the allowability of leave encashment expenditure was a debatable issue and, therefore, penalty was not leviable. The assessee also submitted that while passing the penalty order, the Assessing Officer merely alleged under-reporting and misreporting of income but failed to specify under which clause of Section 270A(9) the case was treated as one of misreporting. It was further submitted that the claim was bona fide in view of the prevailing legal position and that the Commissioner (Appeals) himself had noted that the assessee had paid advance tax on the impugned amount and later claimed deduction.
The Tribunal examined Section 270A(6)(a), which provides that under-reported income does not include income in respect of which the assessee offers a bona fide explanation and discloses all material facts necessary to substantiate that explanation.
The Tribunal noted the assessee’s contention that the Commissioner (Appeals) had incorrectly concluded that the assessee had suppressed facts and that the case fell within Section 270A(9). It observed that neither of the lower authorities had specifically denied that the assessee had furnished a bona fide explanation regarding the claim. The Tribunal further observed that the assessee had adequately disclosed the leave encashment claim in its annual accounts and that the Commissioner (Appeals) rejected the explanation without assigning strong reasons. It also found that although the Commissioner (Appeals) inferred that there was no reasonable cause for making the claim, there was no finding that the claim itself lacked bona fides.
Considering the overall facts, the Tribunal found merit in the assessee’s submissions that the claim for leave encashment was made on a provisional basis, involved a debatable issue, and was supported by bona fide belief. It held that the imposition of penalty under Section 270A was therefore unsustainable.
Accordingly, the Tribunal allowed the appeal and deleted the penalty.
FULL TEXT OF THE ORDER OF ITAT DELHI
The captioned appeal has been preferred by the Assessee against the order of Commissioner of Income Tax (Appeals)-23, New Delhi- 110055, [in short (Ld. CIT(A)] dated 13.04.2023 for Assessment Year 2017-18.
1.1. The Assessee has raised the following grounds of appeal:
“1.0 That on the facts and in the circumstances of the case, the imposition of penalty and interest with reference thereto has been grossly unjustified, erroneous and unsustainable and necessary direction be given to the AO to give appropriate relief in accordance with law.
1.1That on the facts and in the circumstances of the case, the Ld. CIT-(A) erred in upholding the penalty order passed in utter disregard to the provisions of the Act and hence, was illegal and void ab initio.
2.0 That on the facts and in the circumstances of the case, the Ld. CIT-(A) erred in sustaining the penalty imposed_u/s 270A of the Act for disallowance of claim of leave encashment without considering the fact that it was claimed on provisional basis after relying on various judicial pronouncements including that from jurisdictional ITAT.
3.0 That on the facts and in the circumstances of the case, the Ld. CIT-(A) erred in upholding the levy of penalty u/s 270A of the Act without considering the fact that the allowability of leave encashment expenditure on provisional basis was a debatable issue and therefore, no penalty should have been imposed.
4.0 That on the facts and in the circumstances of the case, the Ld. CIT-(A) erred in upholding the levy of penalty u/s 270A of the Act without considering the fact that a substantial question of law was involved in the appellant’s claim.
5.0 That on the facts and in the circumstances of the case, the Ld. CIT-(A) erred in sustaining the imposition of penalty u/s 270A of the Act without considering the fact that the appellant adequately disclosed its claim of leave encashment expenditure wherever required.
6.0 That on the facts and in the circumstances of the case, the Ld. CIT-(A) erred in upholding the levy of penalty u/s 270A of the Act without considering the fact that while imposing stay on the decision of Exide Industries Ltd. vs. Union of India [2007] 292 ITR 470 (High Court of Calcutta), Hon’ble Supreme Court simultaneously entitled the assessce to make claim of leave encashment expenditure in its returns.
7.0 Without prejudice to the above, that on the facts and in the circumstances of the case, the Ld. CIT-(A) erred in upholding the levy of penalty equal to two hundred percent of the amount of tax payable on under-reporting of income in consequence of misreporting, without considering the fact that the appellant’s case does not fall under any clause of Section 270A(9) of the Act.
8.0 That the appellant craves leave, to add, to amend, modify, rescind, supplement, or alter any of the grounds stated here-in-above, either before or at the time of hearing of this appeal.”
2. The brief facts of the case are the assessee company, engaged in the business of manufacturing and trading of Power & Energy, had filed its return of income declaring a total income of Rs. 118,61,64,030 by claiming refund of Rs. 6,35,89,969/- and the same was processed u/s 143(1) of the Act, on 16.03.2019.
2.1 Thereafter the case was selected for scrutiny under Computer Assisted Scrutiny Selection (CASS) and the assessment was completed u/s 143(3) of the Act, for the A.Y. 2017-18 on 23.12.2019 at an assessed income of Rs. 1,23,48,92,320/- after making the following additions, by disallowing the claim of leave encashment and imposed penalty u/s 270A:
| Sl.No. | Additions | Amount (Rs.) |
| 1 | Addition on account of disallowance under section 43B (on account of non-payment of leave encashment on or before due date of filing of return of income) | 4,87,28,296/- |
| Total | 4,87,28,296/- | |
3. Heard rival submissions and carefully perused the material available on record. Reiterated the grounds of appeal, the Learned AR submitted that the Ld. AO disallowed the claim of leave encashment without considering the fact that it was claimed on provisional basis after relying on various judicial pronouncement including the jurisdictional ITAT. Further, he submitted that the allowability of leave encashment expenditure on provisional basis is a debatable issue and therefore, no penalty should have been imposed and the Hon’ble Supreme Court, while imposing stay on the decision of Exide Industries Ltd. vs. Union of India [2007] 2923 ITR 470 (high court of Calcutta), simultaneously entitled the assessee to make claim of leave encashment expenditure in its return. The assessee adequately disclosed its claim of leave encashment expenditure wherever required and the Ld. CIT-(A) erroneously upheld the levy of penalty equal to two hundred percent of the amount of tax payable on under-reporting of income in consequence of misreporting, without considering the fact that the appellant’s case does not fall under any clause of Section 270A(9) of the Act
4. Per Contra, Ld. CIT(DR) has relied upon the orders of the authorities below.
5. In the course of hearing, the Learned AR submitted that during the year under consideration, assessee made the provision for leave encashment by relying upon various judicial pronouncements wherein leave encashment has been allowed on provisional basis i.e. by the coordinate bench in the case of M/S Sicpa India Pvt Ltd v/s Addnl CIT (ITA No 704/Kol/2015). It is also submitted that in the impugned order of penalty dated 25-03-2022, the Learned AO alleged that the assessee has under reported and misreported it’s income by way of claiming deduction on account of leave encashment not paid on or before due date of filing of return of income, but the Learned AO has not specifically pointed out as under which clause of section 270A(9) of the Act in which matter has considered appellants claim as misreporting. Further submitted that the claim of the assessee was quite bona fide as per the prevailing legal position and assessee has not under reported the income in consequence of any misreporting. It is also submitted that the Learned CIT(A) also observed that the assessee paid advance tax on the impugned amount and subsequently claimed deduction.
6. 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 Learned AR emphatically argued that the Learned 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. It is also submitted that the 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. It is also submitted that 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. The Learned AR contended that the Learned 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.
7. Consequently, the appeal of the assessee is hereby allowed as indicated above.
Order pronounced in the open court on 30.06.2025
