Advocate Akhilesh Kumar Sah
When there was no willful concealment and mistake involved human error, penalty under section 271(1)(c ) deleted
Recently, in Jefferris India Pvt. Ltd. vs. ACIT [ITA No. 7397/Mum/2018 (A.Y. 2011-12), decided on 28-03-2019], brief facts of the case were that the assessee company filed its return of income for A.Y. 2011-12 declaring income of Rs. 9,78,51,166/-. The return of income was revised on 25.05.2012 declaring income of Rs. 9,58,51,166/-. In the revised return of income, the assessee revised reduction of disallowance under section 40(a)(ia) of Rs. 20,00,000/-, withdrawal of Minimum Alternative Tax (MAT) credit of Rs. 80,77,413/- and deposit of self-assessment tax. The return was selected for scrutiny. The assessment was completed under section 143(3) on 23.12.2015. During the assessment, the AO noted that the authorised capital of the assessee was increased from Rs. 36 Crore to Rs. 230 Crore. The AO called rates and taxes. On perusal of the details, the AO noted that stamp duty of Rs. 97,00,000/-, fee of Registrar of Company (ROC) of Rs.38,80,000/- and franking charge of Rs. 22,50,000/- were debited for increase of authorized share capital. The said expenditure was incurred subsequent to the commencement of business and the same was capital in nature incurred for acquiring benefit for enduring nature not allowable under section 35D. The assessee though disallowed the stamp and ROC fees while computing its income, however, the said franking charge was not disallowed. The AO disallowed the said franking charge Rs. 22,50,000/-. While passing the assessment order, the AO initiated the penalty under section 271(1)(c). The AO levied the penalty of 100% of the tax sought to be evaded. The AO worked out the penalty of Rs. 7,64,775/-. No appeal in quantum assessment was filed by assessee. However, the assessee unsuccessfully challenged the levy of penalty under section 271(1)(c) before the CIT(A).
Thereafter, the assessee filed the appeal before Mumbai ITAT.
The learned Members of the Mumbai ITAT considered the rival submission of the parties and after having gone through the orders of authorities below observed that there was no dispute that during the assessment, the AO disallowed franking charges treating it a capital expenditure. In reply to the show notice under section 274 read with section 271(1)(c), the assessee filed its reply dated 17.08.2015. In the reply, the assessee contended that in course of scrutiny assessment while providing the details in respect of rate and taxes, the assessee realize its error in not disallowing the franking charges and admitted that the aforesaid charges ought to have been disallowed while arriving at the taxable profit. The contention of assessee was not accepted by AO holding that the penalty under section 271(1)(c) is attracted, where the AO is satisfied that any person has concealed the particular of income or furnished inaccurate particular of such income. The case of assessee is squarely falls under Explanation (1) to the proviso of section 271(c). The AO levied the 100% penalty of tax sought to be evaded on disallowance of franking charges of Rs. 22,50,000/-. The CIT(A) upheld the action of AO holding that assessee debited the capital expenditure of franking charges for increase in authorized share capital without adding back the same in its computation of income. It is settled legal position that any expenses incurred for increase of authorized share capital is capital in nature, this fact came to the light only after AO called for details of rates and taxes and was not voluntarily disclosed by the assessee. The contention of assessee was that it had inadvertently mistake to disallowing the franking charges incurred on account of increased in the authorized share capital, while stamp duty and filing of fees paid to RoC for the same purpose of Rs. 1.35 crore was duly disallowed in the computation. The stamp duty and RoC fees were reflected in TAR and franking charges was not reflected in the TAR by the auditor, which was the bonafide mistake. The assessee acted on the TAR bonafidely. The contention of assessee that there was no willful concealment was also repudiated by CIT(A). In the reply to the show-cause notice under section 271(1)(c), the assessee specifically contended that during the scrutiny assessment, the assessee realized its error in not disallowing the franking charge and admitted that the aforesaid charges ought to have been disallowed. The AO has not disputed the contention of assessee in the penalty order. The contention of assessee throughout the proceeding are that the franking charges were inadvertently mistake to be disallowed by the assessee as the same was not reported in TAR. The assessee’s contention is that the error was unintentional and bonafide mistake. In our view the assessee has shown reasonable cause by offering the franking charges during the assessment by offering suomoto disallowance at the cost of repetition, the assessee while filing reply to the show-cause notice that assessee realized its error and admitted that aforesaid franking charges ought to have been disallowed. This fact is duly recorded by AO in para-2.1 of the penalty order. The AO has not countered the bonafide explanation furnished by assessee. The Hon’ble Apex Court in Price Waterhouse P. Ltd. vs. CIT ( 348 ITR 306) held that the penalty under section 271(1)(c) could not be levied, where it involves a mistake by assessee on account of human error. The learned Members of the ITAT taking into account the above decision of Hon’ble Apex Court held that the assessee had shown reasonable cause during the assessment as well as during the penalty proceeding and, therefore, no penalty was leviable on the assessee.