No Penalty u/s 271(1)(c) for mere Incorrect Claim

Hardik Mahendrabhai Patel Vs DCIT (ITAT Ahmedabad)

ITAT Ahmedabad held that making of incorrect claim in law cannot tantamount to furnishing of inaccurate particulars or concealment of income. Therefore, the penalty under section 271(1)(c) of the Income Tax Act not sustainable.

Facts- The assessee filed his return of income on 29.10.2016 declaring total income of Rs.11,58,840/-. AO vide Assessment Order dated 20.12.2017 made addition of Rs.5,62,893/- in respect of gross receipt as per Form No.26AS. The Assessing Officer also made addition of Rs.54,01 0/- on account of vehicle repairing expenses and addition of 10,69,021/- thereby disallowing the claim u/s. 36(1)(va) read with Section 2(24)(x) of the Act as employee’s contribution credited in employees’ account of respective funds. The Assessing Officer further made addition of Rs.87,436/- thereby disallowing the payment specified in Section 40A(3) of the Act. Subsequently, the Assessing Officer issued notice u/s. 274 read with Section 271(1)(c) of the Act. The Assessing Officer imposed penalty of Rs.5,20,951/- in respect of all the additions for concealment of income.

Being aggrieved by the penalty order, the assessee filed appeal before the CIT(A). The CIT(A) dismissed the appeal of the assessee.

Conclusion- Hon’ble Supreme Court in the case of CIT vs. Reliance Petroproducts (P) Ltd. held that making of incorrect claim in law cannot tantamount to furnishing of inaccurate particulars or concealment of income. Therefore, the penalty levied under the same does not sustain.

As regards to penalty in respect of disallowance u/s. 40A(3) of the Act, for Vehicle Expenses, the same cannot be said as concealment of income as the assessee has genuinely claimed the vehicle expenses and, therefore, the penalty in respect of this item does not sustain. As regards to penalty in respect of disallowance u/s. 40A(3) of the Act for cash payment for purchase of Gold Ornaments, the assessee has genuinely claimed the said expenditure and, therefore, it cannot be treated as concealment of income or furnishing of inaccurate particulars of income. As regards to disallowance u/s. 36(1)(va) for delay in depositing employees Provident Fund, the same does not sustain as the issue at the time of assessment proceedings was a debatable issue and certain decisions of Hon’ble High Courts were in favour of the assessee. Therefore, this cannot be treated as concealment of income or furnishing of inaccurate particulars of income. The penalty on this disallowance also does not sustain.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

This appeal is filed by the Assessee against order dated 12.10.2022 passed by the CIT(A)-1 1, Ahmedabad for the Assessment Year 2015-16.

2. The Assessee has raised the following grounds of appeal :-

“1.1 That on the facts and in the circumstances and as per law the learned CIT(A) erred in sustaining the penalty of Rs.5,20,951/- under section 271(1)(c) of the Act on the ground of providing inaccurate particulars of income and solely on the ground that first and second appellate authorities had sustained the additions/disallowance to the returned income.

1.1 That learned CIT(A) failed to consider the fact that additions of Rs.5,62,893/- on the ground of difference in income as disclosed in the return and as per 26AS was due to bona-fide reasons as explained during the assessment proceedings and due to volume of contract receipts from various sites and from various parties the mistake had occurred and income was under reported by that amount which is only 0.20% of gross contract receipts of Rs.27, 14,97,374/-. Hence, bona-fides as explained by the appellant should have been accepted and penalty under Section 271(1)(c) should not have been levied nor sustained by the learned CIT(Appeals).

1.2 The learned CIT(A) erred in sustaining the penalty in respect of disallowance of otherwise genuine expenditure under Section 40A(3) of the Act. As per settled law penalty under section 271(1)(c) is not leviable in respect of disallowance of an item of expenditure.

1.3 The learned C!T(A) further erred by sustaining penalty in respect of disallowance aggregating to Rs. 10,69,021/- under section 36(1)(va) of the Act. Learned C!T(A) was ought to have considered the fact that appellant had deposited the employee’s contribution to PF & ES! before due date of return of income under section 139(1) and accordingly deduction was otherwise allowable under Section 43B in the opinion of the appellant. Considering the fact that issue was highly debatable and different courts of the country had given divergent views about the allowability of the same under section 43B of the Act, penalty under Section 271(1)(c) is not leviable, in respect of disallowance of otherwise genuine expenditure, as per settled law.”

3. The assessee is proprietor of First Care Corporation and engaged in the business of providing Manpower Supply Services and also derives income from remuneration from Ask Me LAB Con Services Pvt. Ltd. The assessee filed his return of income on 29.10.2016 declaring total income of Rs.11,58,840/-. The Assessing Officer vide Assessment Order dated 20.12.2017 made addition of Rs.5,62,893/- in respect of gross receipt as per Form No.26AS. The Assessing Officer also made addition of Rs.54,01 0/- on account of vehicle repairing expenses and addition of 10,69,021/- thereby disallowing the claim under Section 36(1)(va) read with Section 2(24)(x) of the Act as employee’s contribution credited in employees’ account of respective funds. The Assessing Officer further made addition of Rs.87,436/- thereby disallowing the payment specified in Section 40A(3) of the Act. Subsequently, the Assessing Officer issued notice under Section 274 read with Section 271(1)(c) of the Act. The Assessing Officer imposed penalty of Rs.5,20,951/- in respect of all the additions for concealment of income.

4. Being aggrieved by the penalty order, the assessee filed appeal before the CIT(A). The CIT(A) dismissed the appeal of the assessee.

5. At the time of hearing none appeared on behalf of the assessee, but vide letter dated 26.05.2023, the assessee has submitted written submissions and requested that the appeal be decided on the written submissions itself. The said written submissions are taken on record and we are proceeding on the basis of the same.

1.1 Appellant is assessed to tax in Individual capacity. He is in engaged in the business of ‘Manpower Supply Services’ in the name of “First Care Corporation” of which he is proprietor. For the year under consideration, appellant had disclosed total income of Rs. 1,158,840.

1.2 As per the assessment order under section 143(3), for the year under consideration, learned A.O. made additions aggregating to Rs. 17,73,360 on various ground to the returned income which were subject to appeal before the first and second appellate authority. Details of additions made to the returned income and decision of CIT (Appeals) and ITA T are as under;

1.5 Learned A.O., after the order of the Honourable ITAT, issued SCN for levy of penalty under section 271(1)(c) of the Act in respect of sustained additions.

1.6 Appellant, through his submission dated 26/02/2022, submitted the explanations, in detail, against levy of penalty under s. 271(1)(c) of the Act in respect of the sustained additions to the returned income. It was pleaded by the appellant that considering the facts and circumstances of the case and settled law, penalty under s. 271(1)(c) is unwarranted and not sustainable as per law.

1.7 However, learned A.O., as per the reasons recorded in the penalty order under section 271(1)(c) of the Act, rejected the explanations furnished by the appellant and levied penalty of Rs. 5,20,951 being 100% of tax sought to be evaded.

With these background of fact, appellant have to submit as under;

2. Submission

2.1 At the outset, your attention is invited to the fact that learned AO have levied the penalty under s. 271(1)(c) of the Act solely on the sole ground that in the quantum appeal filed by the appellant, against the additions in respect of which penalty were initiated, were sustained by the first and second appellate authority.

It is well settled law that Penalty proceedings are distinct from assessment proceedings and merely because additions / disallowance has been made in the assessment proceedings and sustained by the appellate authorities does not automatically empower the A.O. to levy penalty under s. 271(1)(c) of the Act. As per the provisions of section 271(1)(c) of the Act, penalty is levied for either concealment of income or for providing inaccurate particulars of income. From the perusal of the penalty order it is clear that learned A. O. failed to bring on record to substantiate his claim that appellant had provided inaccurate particulars of income. As per the penalty order, learned A.O. have levied the penalty solely on the ground that appellate authorities sustained the additions made to the returned income as per the assessment order.

As per para 6, page 8, of the Penalty order, learned A.O. have contended as under;

6………………..” Further, no justification was furnished by the assessee as to why it should not be treated as furnishing inaccurate particulars of income. Section 271(1)(c) also provide for levy of penalty for furnishing inaccurate particulars of income, which means negligence in furnishing particulars of income need not require present of ‘Mens Rea’ The findings of the assessing Officer in the assessment order, the findings of the Ld. CIT (A) and the finding in appellate order also clearly prove that the assessee has furnished inaccurate particulars of income and it is a fit case for imposition of penalty u/s. 271(1)(c) of the I. T. Act.

The contentions of the assessing officer, as above, clearly proves that he failed to bring on record any findings about the manner in which appellant had provided inaccurate particulars of income so as to make him liable to penalty under s. 271(1)(c) of the Act.

As per reasoning at para 6 of the penalty order, as above, learned A.O. have further contended as under;

“6………………………….The finding of the assessing Officer in
the assessment order, the finding of the Ld.CIT(A) and the finding in the appellate order also clearly prove that the assessee has furnished inaccurate particulars of income and it is a fit case for imposition of penalty u/s. 271(1)(c) of the I. T. Act.”

From the observations of the learned A.O., as above, it is clear that he has solely relied on the findings in the assessment and appellate orders which were related to the allowability of expenditure claimed by the appellant in the return of income. Whereas, penalty proceedings, as per settled law, is distinct from assessment proceedings and there should be independent findings about concealment of income or about furnishing of inaccurate particulars of income. Merely because additions are sustained in the appellate proceedings it does not leads to the conclusion that assessee had concealed the income or provided inaccurate particulars of income.

2.1.1 Inaccurate Particulars of Income – Reg…

Honourable Supreme Court in the case of CIT V. Reliance Petro products (P) Ltd. [322 ITR 158] held that making of incorrect claim in law cannot tantamount to furnishing of inaccurate particulars.

Applying the ratio laid down by Honourable SC, in above referred case, to the facts of the present case, it is undisputed that expenditure, in respect of which penalty has been initiated, are otherwise genuine expenditure and during the assessment proceedings appellant had furnished the details of the same with explanations. Appellant had substantiated the bona fides of his case in respect of all the additions / disallowance made by the A.O. as per the assessment order.

Hence, as per the facts of the case and as per settled law by Honourable SC, appellant had not provided inaccurate particulars of income so as to make him liable to penalty under s. 271(1)(c) of the Act in respect of additions/ disallowance made to the returned income as per the assessment order.

2.2 Ground No, 1,1

2.2.1 Penalty in respect of Additions of Rs. 5,62,893 on the ground of difference between contract receipts as per books of accounts and as per 26AS statement- Reg…

2.2.2 During the year, gross contract receipts of the appellant, as per the as per books of accounts was Rs.27,09,34,481. As per the findings of the learned A.O. during the course of assessment proceedings, receipts as reported in 26AS statement was Rs.27, 14,97,374. Hence, as per the A.O., there was short disclosure of contract receipts of Rs.5,62,893. Learned A.O., during the assessment proceedings, proposed for the said addition to which appellant accepted the same to buy peace of mind.

During the penalty proceedings u/s. 271(1)(c) it was pleaded by the appellant that there was no intention on his part to conceal the income and considering the volume of contract receipts and volume of transactions it was not possible for the appellant to reconcile the receipts as per books of accounts with the TDS certificates. Hence, he had agreed for the said addition.

2.2.3 Appellant have to submit that considering the fact that non-disclosure of contract receipts aggregating to Rs.5,62,893 was due to bona-fide reasons and appellant had, during the assessment, agreed for the said addition to buy the peace. Hence, it is most humbly requested to delete the penalty levied in respect of said additions of Rs.5,92,83.

2.3 Ground No, 1,2

2.3.1 Penalty in respect of disallowance of Rs.54,010 under s. 40A(3) of the Act- Reg…

2.3.2 During the year, appellant had incurred expenditure on vehicle repairing of Rs.54,010 for which payment was made in Cash. Since, cash payment above Rs.20,000 was in violation of provisions of section 40A(3) of the Act, same was disallowed by the assessing officer on agreed basis.

2.3.3 Appellant have to submit that expenditure is otherwise genuine one and only due to payment of cash, in violation of provisions of s. 40A(3) of the Act, same has been disallowed. There was not concealment of income nor appellant had provided inaccurate particulars of income to conceal the income. The addition to the returned income has been made by invoking provisions of s. 40A(3) of the Act in respect of expenditure which was otherwise accepted as genuine expenditure. There is no finding on record that expenditure was not genuine or appellant had made incorrect claim of expenditure. Hence, there was no concealment of income nor appellant had provided inaccurate particulars of income. Penalty under s. 271(1)(c) is not leviable in respect of said disallowance and same is requested to be deleted.

The disallowance under s. 40A(3) is statutory disallowance and there is no dispute about the genuineness of the expenditure. As per settled legal propositions, on such statutory disallowance there can-not be imposition of penalty under s. 271(1)(c) of the Act.

Penalty in respect of disallowance of expenditure under s. 40A(3) of the Act is, therefore, not sustainable as per law.

2.3.4 Appellant relies on ratio laid down by various courts as under:

ITAT, Pune Bench – Income tax Officer Vs. Karad Janata Sahakari Bank Ltd. [93ITR(Trib)0079]

2.4 Ground No. 1.3

2.4.1 Penalty in respect of disallowance of Rs. 10,69,021 under s. 36(1)(va) of the Act- Reg…

2.4.2 During the year, there were delay in deposit of Provident Fund Amount of which Rs. 10,69,021 were related to the employee’s contribution. Learned A.O. disallowed the same as per the provisions of s. 36(1)(va) r.w.s. 2(24)(x) of the Act. Details of delay in payment are as under;

–

Learned A.O., initiated the penalty proceedings in respect of disallowance of Rs. 10,69,02 1 made under s. 36(1)(va) of the Act. !n reply to the Show cause notice for penalty under section 271(1)(c) of the Act, appellant submitted explanations against levy of penalty in respect of said disallowance under s. 36 (1)(va) of the Act. However, learned A. O. rejected the explanations furnished by the appellant, solely on the ground that first and second appellate authority had dismissed the appeal of the appellant in respect of said disallowance.

2.4.3 Appellant have to submit that assessment proceedings and penalty proceedings are wholly distinct from each other. Merely because additions are made to the returned income, and sustained by the appellate authority, does not automatically give jurisdiction to the A.O. to levy penalty under section 271(1)(c) of the Act.

Penalty under section 271(1)(c) is levied in the case of either concealment of income or in the case of providing inaccurate particulars of income. As per the assessment order, learned A.O. initiated penalty, in respect of the said disallowance, on the ground of providing inaccurate particulars of income. From the perusal of the penalty order it is clear that learned A. O. failed to substantiate his ground that appellant had provided inaccurate particulars of income. Sole ground for levying penalty is that appellate authorities have sustained the disallowance under s. 36(1)(va) made in the assessment order.

Further, fact remains that addition by way of disallowance has been made due to delay in deposit of employee’s contribution to Provident Fund. Expenditure claimed by the appellant is otherwise genuine. Hence, penalty under s. 271(1)(c) is not sustainable as per settled legal propositions.

2.4.4 Whether, delay in deposit of employees contribution to PF and ES! are allowable or not, when same is delayed but deposited before due date of return u/s. 139(1), is a controversial issue and certain courts and tribunals have opined in favour of the assessee holding that if payment is made before due date of return of income under s. 139(1) same is allowable as per the provisions of section 43B of the Act.

Due to divergent views of different courts and tribunals of the country, on the issue, Finance Act, 2021 clarified the position of law by inserting explanation 2 to section 36(1)(va) clarifying the position of law that provisions of section 43B shall not apply and shall be deemed never to have been applied for the purpose of determining the ‘due date’ under said clause.

2.4.5 There are series of decisions of different High Courts holding that payment of employees contribution in regard to PF & ES! if made before the due date of filing return of income under section 139(1) of the Act, same is allowable as deduction as per the provisions of section 43B of the Act. Some of the decisions, in favour of the assessee on the issue, are as under;

2.4.6 Further, even after amendment to provisions of section 36(1)(va) by the Finance Act, 2021 various tribunals have decided the issue in favour of the assessees by holding that amendment is applicable prospectively i.e. in respect of assessment year 2021-22 onwards only and assessee is entitled to deduction under s. 36(1)(va) of the Act as per the provisions of section 43B for pre-amendment period.

Some of the judgments of Tribunals, after amendment to s. 36(1)(va) and 43B, in favour of the assessee for pre-amendment period are as under;

2.4.7 From the perusal of the decision of various courts and tribunals, as above, it is clear that issue whether delay in deposit of employees contribution to PF & ES! is otherwise allowable or not as per the provisions of section 43B of the Act is highly debatable considering the divergent views and decisions of different courts and tribunals.

it is settled law that penalty under section 271(1)(c) of the Act shall not be levied in the case of debatable issues.

Appellant relies on the decision of jurisdictional courts as under :

Accura Enterprise Pvt. Ltd. Vs. Deputy Commissioner of !ncome-tax 65 CCH 0351 AhdTrib

Date: Jul 20,2022

Gujarat State Road Corporation Vs. Assistant Commissioner of !ncome-tax 32 CCH 0209 AhdTrib

2.4.8 Considering the facts of the case and settled law, as discussed above, your honour is requested to direct the assessing officer to delete the penalty under s. 271(1)(c) in respect of disallowance under s. 36(1)(va) of the Act.

3. In nutshell:-

(i) Penalty in respect of additions on the ground of difference between receipts disclosed as per books of accounts and receipts as reported in 26AS statement is not sustainable considering the nature of business and quantum of difference;

(ii) Penalty in respect of disallowance of expenditure under s. 40A(3)is not sustainable as expenditure was otherwise genuine and as per settled law, penalty under s. 271(1)(c) can-not be levied in respect of disallowance of an item of expenditure;

(iii) Penalty in respect of disallowance of employee’s contribution of PF & ES!, as per the provisions of s. 36(1)(va), is not sustainable as issue of allowability is highly debatable considering the divergent views of various high courts and tribunals. As per the settled law, penalty under s. 271(1)(c) is not sustainable in respect of debatable issues.

4. Considering the facts of the case, submissions in support of grounds of appeal, as above, and also considering the settled law, your honour is hereby requested to direct the assessing officer to delete the penalty aggregating to Rs.5,20, 951 and oblige.”

7.  The Ld. DR relied upon the penalty order and the order of the CIT(A).

8. Heard the Ld. DR and perused all the relevant material available on record. There is a delay of 17 days in filing the present appeal for which the assessee has filed a delay condonation application. After taking cognisance of the reasons stated therein, it appears that the delay is genuine and, therefore, the delay is condoned.

9. As regards the penalty imposed by the Assessing Officer in respect of difference between contract receipt as per books of accounts and as per Form 26AS statement, the same mistake was a bonafide mistake due to volume of contract receipts from various sites and from various parties certain receipts were not taken into account by the assessee. The assessee relied upon the decision of Hon’ble Supreme Court in the case of CIT vs. Reliance Petroproducts (P) Ltd., 322 ITR 158 wherein it is held that making of incorrect claim in law cannot tantamount to furnishing of inaccurate particulars or concealment of income. Therefore, the penalty levied under the same does not sustain.

10. As regards to penalty in respect of disallowance under Section 40A(3) of the Act, for Vehicle Expenses, the same cannot be said as concealment of income as the assessee has genuinely claimed the vehicle expenses and, therefore, the penalty in respect of this item does not sustain.

11. As regards to penalty in respect of disallowance under Section 40A(3) of the Act for cash payment for purchase of Gold Ornaments, the assessee has genuinely claimed the said expenditure and, therefore, it cannot be treated as concealment of income or furnishing of inaccurate particulars of income. This penalty also does not

12. As regards to disallowance under Section 36(1)(va) for delay in depositing employees Provident Fund, the same does not sustain as the issue at the time of assessment proceedings was a debatable issue and certain decisions of Hon’ble High Courts were in favour of the assessee. Therefore, this cannot be treated as concealment of income or furnishing of inaccurate particulars of income. The penalty on this disallowance also does not sustain.

13. In the result, appeal of the assessee is allowed.

Order pronounced in the open Court on this 7^th June, 2023.