Penalty u/s 271(1)(c) not justified for unsustainable claim which was fully disclosed

Hon’ble High Court held that making of an incorrect claim would not tantamount to furnishing inaccurate particulars of income when Assessee has made full disclosure of relevant Facts and of Claim Made as held by Hon’ble Supreme Court in the case of CIT vs. Reliance Petroproducts  Pvt.  Ltd. 322 ITR 158.

Facts of the Case

The respondent­ assessee had on 27 January 1995 entered into a Development Agreement with the owners of land at Pune by paying a   consideration of Rs.54 Lakhs.  During the previous year relevant to the subject Assessment Year 2005­06 the aforesaid agreement dated 27 July 1995 was canceled and the owners of the land paid the petitioners a sum of Rs.1.65 Crores (including the amount of Rs.54 Lakhs originally paid by the respondent­assessee).   The respondent­ assessee was of the view that the amount of Rs.1.11 Crores (Rs.1.65 Crores less R. 54 Lakhs) was not income but capital receipt which is not chargeable to tax as capital gains.  The aforesaid view was reflected in the notes forming part of the Accounts   as   well   as   in   the   covering   letter   dated   29   October   2005 accompanying its Return of Income.

The   Assessing   Officer   did   not  accept  the   contention   of  the respondent­ assessee and held that the receipt to be taxable under the  head of Capital Gains and after allowing expenses brought to the tax an amount of Rs.69.92 Lakhs as Capital Gains.   The respondent­ assessee being   aggrieved   with   the   order   of   the   Assessing Officer   agitated   the matter   before   the   CIT   (A)   but   without   any   success.     Thereafter,   the respondent­ assessee   accepted   the   finality   of   the   order   passed   by   the Assessing Officer bringing to tax an amount of Rs.69.92 Lakhs under the head Capital Gains.

Thereafter, the Assessing Officer initiated penalty proceedings under Section 271(1)(c) of the Act against the respondent­ assessee.  The Assessing Officer did not accept the respondent­assessee’s contention that as complete disclosure of facts had been made and the claim made is bonafide no penalty is imposable in view of the decision of the Apex Court in CIT Vs. Reliance Petroproducts Pvt. Ltd. reported in 322 ITR 158.   The Assessing Officer held that the respondent­ assessee had filed inaccurate   particulars   and   imposed   penalty   of   Rs.13.13   Lakhs   under Section 271(1)(c) of the Act.

Held by CIT (A)

In   appeal,   the   CIT   (A)   rendered   a  finding   of   fact  that   the assessee has disclosed the receipt of the above amount of Rs.1.11 Crores and   a   claim   unsustainable   in   law   will   not   amount   to   furnishing   of inaccurate particulars.  It further held that the Assessing Officer had not given   any   finding   that   the   receipt   of   the   aforesaid   amount   was   not  intimated to the Assessing Officer.  The CIT (A) was of the view that the decision   of   Apex   Court   in   Reliance   Petroproducts   Pvt.   Ltd.   (supra) applied to the present facts and deleted the penalty.

Held by Tribunal

On   further   appeal   by   the   Revenue,   the   Tribunal,   by   the impugned   order   upheld   the   order   of   CIT   (A).     The   Tribunal   in   the impugned order held that the petitioner had disclosed that an amount of Rs.1.11 Crores was received on account of a project not being fructified, had credited the same to the partner’s capital account and it was not being offered to tax as the same was a receipt on capital account outside the scope of Section 45 of the Act.   The Tribunal also noted that there was letter which accompanied the return of income wherein all facts relating   to   aforesaid   receipt   was   indicated   including   the   fact   that   an amount   of   Rs.54   Lakhs   originally   paid   to   the   vendor   under   the development agreement in 1995 and on cancellation of agreement, the original vendor of the land paid to the respondent­ assessee an amount of Rs.1.65 Crores including an amount of Rs.45 Lakhs which was originally paid by the assessee.  The Tribunal also records that the Assessing Officer was well aware of this letter and the Note to Account being a part of the balance sheet of the assessee filed also disclosed the above facts.  On the aforesaid facts, the Tribunal has held that the decision of the Apex Court in Reliance Petroproducts Pvt. Ltd. (supra) would apply and rendered a finding   of   fact   that   all   facts   had   been   disclosed   by   the   respondent­ assessee alongwith its return of income including its claim of not being chargeable to tax.   This claim was not found to be not bonafide.   The Tribunal also held that the reliance placed on the decision of Delhi High Court in the case of CIT Vs. Zoom Communication P. Ltd. reported in 327 ITR 510 by the Revenue is inappropriate as in that case the assessee had deliberately debited the amount to Profit and Loss Account though not in accordance   with   law   and   the   conduct   of   petitioner   in   Zoom Communication was held to be not bonafide.   Accordingly, the order of the CIT (A) was upheld.

Contention of the Revnue

The revenue’s grievance with the impugned order is that it proceeds on a fundamental error that there has been full and complete disclosure   on   the   part   of   the   respondent­assessee.     This   is   so   as   the disclosure is only of Rs. 1.11 Crores and not of Rs.1.65 Crores which was the amount received by the respondent­assessee on relinquishment of its rights to immovable property.  It is also contended by the revenue that the   decision   of   Delhi   High   Court   in   Zoom   Communication   P.   Ltd.   is applicable to the present facts and the appeal should be admitted.

Held by High Court

We find that the respondent­ assessee had originally paid an amount   of   Rs.54   Lakhs as a consideration for the development agreement in 1995.  In the previous year relevant to assessment year, the respondent­assessee received from the vendor an amount of Rs.1.65 Crores which included an amount of Rs.54 Lakhs which was originally paid in 1995 by the assessee to the vendor. Therefore, only an amount of Rs.1.11 Crores which was received in excess of amount paid by the respondent­assessee to the original vendor could be a subject matter of taxation and we find that the disclosure of Rs.1.11 Crores which was made by the petitioners as a part of its notes to accounts as well as letter   dated 29 October 2005 alongwith its claim of not being taxable was filed along   with   the   Return   of   Income. Thus   there   has   been   a   complete disclosure of all facts as held by CIT(A) and the Tribunal. Besides the claim  made   by the   respondent­assessee  of  not  being   taxable   was  not
found to be not bonafide. As held by the Supreme Court in Reliance Petroproducts Pvt. Ltd. (supra) making of an incorrect claim would not tantamount to furnishing inaccurate particulars of income.  In this case, the assessee bonafide believed that the difference of Rs.1.65 Crores and Rs.55   Lakhs   is   not   chargeable   to   tax   and   had   so   stated   before   the Assessing   Officer.     The   fact   that   the   explanation   of   assessee   is   not accepted in quantum proceedings would not ipso facto visit the assessee with penalty in the absence of the claim being held to be not bonafide. The decision of the Delhi High Court in Zoom Communication P. Ltd. (supra) is not applicable in the present facts for the reason that in this  case, the stand taken by the respondent could be said to be in defiance of law and thus not bonafide. In this case it is not the case of revenue that the claim made by the petitioner was not on the basis of bonafide view. We   find   that on   appreciation   of   the   facts,   two   authorities  have concurrently come to finding of fact that there was complete disclosure of facts and the claim made though not found acceptable was bonafide to conclude that no penalty be visited on respondent­ assessee. In light of the above finding of facts, we find that no substantial question of law arises for our consideration.