No Penalty- When deeming provisions are applied for assessing income

CA Prarthana Jalan

Hon’ble Allahabad High Court has in the case of Hariom Steels Pvt Ltd has held that penalty cannot be levied when deeming provisions are applied for assessing income.

Certain scrap was sold by Hariom Steels Pvt Ltd to parties not covered under Section 40A (2)(b) of the Act @ Rs. 17,340/- per metric tone whereas it was sold @ Rs. 5000/- per metric ton to parties covered under Section 40A (2)(b) of the Act. The value of the difference of the scrap sold was added to the income of the assessee and accordingly, penalty of Rs. 46,25,000/- was imposed under Section 271 (1)(c) of the Act.

The Hon’ble High Court  has held that the assessee cannot be held guilty for non-disclosure of income, which was determined by invoking discretionary jurisdiction under Section 40A (2)(b) of the Act.

The Hon’ble High Court has observed as under:-

“In S.V. Kalyanam Vs. Income Tax Officer (2011) 237 CTR (Mad) 491, the Division Bench of the Madras High Court has held that where additions are made in the income by applying the deeming provisions the department cannot presume that there is concealment of income so as to attract penalty proceedings.

In other words, where income is assessed on the basis of deeming provisions it would not amount to non-disclosure and as such it is not proper to impose penalty under Section 271 of the Act.

In Commissioner of Income Tax Vs P. Rojes (2013) 260 CTR (Mad) 397, again a Division Bench of the Madras High Court has held that penalty under Section 271 (1)(c) of the Act cannot be imposed on the basis of estimation of income. In the aforesaid decision, reliance was placed upon the decision of the Supreme Court in C.I.T. vs. Reliance Petroproducts Pvt.Ltd (2010) 230 CTR (SC) 320 in which it was observed that in order to bring the case under Section 271 (1)(c) of the Act there has to be concealment of particulars of the income of the assessee and the assessee must have furnished inaccurate particulars of his income.

It further held that making an incorrect claim in law cannot tantamount to furnishing of incorrect particulars so as to attract the penalty provisions. In view of the aforesaid facts and circumstances, as in the present case, there is no concealment of income or furnishing of an incorrect particulars of the income, the penalty cannot be imposed on account of addition of income by applying the deeming provisions. 

Accordingly, we are of the opinion that the Tribunal has not committed any error of law in removing the penalty imposed by the Assessing Authority.”