ITAT Special Bench Judgment On Section 14A of the Income Tax Act, 1961

Income Tax – Penalty – law permits the contracting parties to lawfully change their stipulations – What is material in the tax jurisprudence is the evasion of tax, not the beneficial lawful adjustment therefor . In the commercial world, the parties are always free to vary the terms of contract and, therefore, the assessee and the vendee had no legal impediment in modifying the terms of their contract. Merely because by Resolution the assessee agreed to defer the payment of interest, would not mean that it tried to evade tax.

Mens rea has to be shown for penalty under Section 273(2)(a): there has to be a satisfaction of the Assessing Officer that the estimate of advance tax furnished by the assessee was not only untrue, but the assessee also knew or had reason to believe the same to be untrue. While the levy of interest under Section 215 of the Act is automatic, that is not the case with the penalty under Section 273(2 )( a) of the Act, where the mens rea on the part of the assessee would have to be shown to the extent, it has been indicated in the language of the Section, where, therefore, there was some scope for the assessee to justify the estimate given by it and that the penalty could not be inflicted : SUPREME COURT ;