ITO Vs Sarsan Developers (ITAT Pune Bench)
Retiring Partner Took the Exit, but Penalty Entered u/s 271(1)(c): Pune ITAT Restores ₹1.73-Crore Penalty on Capital Expenditure Claim
Summary: The Pune Bench of the ITAT has held that where payment made to a retiring partner under a registered settlement deed was claimed as development expenditure, though it represented consideration for relinquishing the partner’s interest in the firm, the assessee had furnished inaccurate particulars of income. The Tribunal accordingly reversed the order of the CIT(A) & restored penalty of ₹1,73,26,656 u/s 271(1)(c).
Facts of the Case
The assessee, a partnership firm engaged in the business of property development & construction, filed its return for AY 2014-15 declaring nil income. In the Profit & Loss Account, it debited a sum of ₹5,60,73,319 as development expenses.
During scrutiny assessment, the assessee explained that the expenditure represented the settlement amount payable to its retiring partner, Kumar Housing Corporation Ltd. (KHCL). According to the assessee, the amount was incurred in connection with the development activity & was consequently allowable as a revenue deduction.
The AO, however, examined the arrangement, including the construction area, price realisation, capital accounts & settlement terms, and found that the payment arose on the retirement of KHCL from the partnership firm. The amount comprised the retiring partner’s fixed capital, closing capital & settlement consideration.
The AO concluded that the payment was made for extinguishment of the retiring partner’s interest in the partnership firm & was, therefore, capital expenditure. The deduction of ₹5,60,73,319 was disallowed & the corresponding amount was adjusted in the closing work-in-progress. Since the resultant assessed income remained nil, the assessment u/s 143(3) was completed at nil income.
Quantum Appeal Travelled a Full Circle
In the first round, the CIT(A) accepted the assessee’s contention & treated the payment as revenue expenditure. However, in the Revenue’s quantum appeal, the Pune ITAT, vide order dated 10.10.2023 in ITA No. 386/PUN/2020, reversed the CIT(A)’s finding.
The Tribunal examined the registered settlement deed & noticed that ₹4,99,90,000 had been paid to the retiring partner specifically for giving up its interest in the partnership firm. It held that such payment could not be characterised as ordinary business or development expenditure.
Relying upon CIT v. Sangam Enterprises [240 ITR 13 (AP)] & CIT v. Standard Makings & Allied Products Corporation [226 ITR 1 (Guj.)], the Tribunal held that payment made to a retiring partner for relinquishing its interest in the firm constituted capital expenditure. The Revenue’s quantum appeal was accordingly allowed.
Following the quantum decision, the AO imposed the minimum penalty of ₹1,73,26,656 u/s 271(1)(c) for furnishing inaccurate particulars of income.
CIT(A) Deletes Penalty: Two Views Made the Issue Debatable
The CIT(A) deleted the penalty primarily on the ground that the controversy concerned only the characterisation of expenditure as capital or revenue. The CIT(A) observed that all material facts, including the payment to the retiring partner, had been disclosed in the return & audited financial statements.
Significantly, the CIT(A) had initially allowed the expenditure in the quantum proceedings, though that decision was subsequently reversed by the ITAT. According to the CIT(A), the existence of two different views demonstrated that the matter was debatable & interpretational.
Relying upon CIT v. Reliance Petroproducts Pvt. Ltd. [322 ITR 158 (SC)], the CIT(A) held that mere rejection of a claim would not amount to furnishing inaccurate particulars where the underlying facts had been truthfully disclosed. The penalty was accordingly deleted.
ITAT: Registered Deed Left No Room for Ambiguity
In the Revenue’s appeal against deletion of penalty, the ITAT did not accept the theory that the claim involved merely a debatable distinction between capital & revenue expenditure.
The Tribunal emphasised that the registered settlement deed clearly recorded the purpose of payment. The sum of ₹4,99,90,000 was paid to KHCL for giving up its interest in the partnership firm. The nature of the payment had already been crystallised in the quantum proceedings, where it was categorically held to be capital expenditure.
According to the Tribunal, there was no ambiguity regarding the capital character of the payment. The assessee could not produce any fresh or cogent material to demonstrate that its claim as revenue expenditure was bona fide or that the matter continued to be debatable after examination of the settlement deed.
The Tribunal, therefore, held that the assessee had furnished inaccurate particulars of income by claiming capital expenditure as development expenditure. It set aside the order of the CIT(A), allowed the Revenue’s appeal & restored the penalty levied u/s 271(1)(c).
Author’s Comments
The decision adopts a rather strict approach to penalty. The mere fact that the CIT(A) had accepted the assessee’s claim in the quantum proceedings ordinarily provides considerable support to the proposition that the issue was capable of two reasonable views. Further, the payment itself was apparently disclosed in the books & audited accounts; the dispute related principally to its legal character.
The Supreme Court in Reliance Petroproducts has clearly distinguished an unsustainable claim from furnishing inaccurate particulars. An incorrect legal classification, without suppression or falsification of the underlying facts, does not automatically attract penalty.
The present ruling nevertheless indicates that where the governing document unmistakably reveals the capital nature of a payment, describing it as a routine development expense may be regarded as more than a mere interpretational error. Full disclosure of the amount may not protect the assessee if the description or character attributed to it is considered contrary to the very document on which the claim is founded.
Cases Discussed
- ITO, Ward-7(1), Pune Vs. M/s. Sarsan Developers (ITAT Pune), ITA No. 386/PUN/2020, order dated 10.10.2023 — the earlier quantum decision holding the payment to the retiring partner to be capital expenditure. ITO Vs. Sarsan Developers
- CIT v. Sangam Enterprises, 240 ITR 13 (AP) — cited on the capital character of payment made to a retiring partner for giving up interest in the partnership firm.
- CIT v. Standard Makings & Allied Products Corpn., 226 ITR 1 (Guj.) — cited on the capital character of payment made to a retiring partner.
- CIT v. Reliance Petroproducts Pvt. Ltd., 322 ITR 158 (SC) — relied upon by the CIT(A) for the proposition that a mere incorrect or unsustainable claim does not by itself amount to furnishing inaccurate particulars where material particulars are disclosed.
- SSA’s Emerald Meadows — referred to in the assessee’s submissions concerning specification of the charge in the penalty notice under section 274 read with section 271(1)(c).
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT PUNE
1. The appeal is filed by the Revenue against the order of the NFAC/CIT(A),Delhi passed u/sec 271(1)(C) and u/sec 250 of the Act. The revenue has raised the following grounds of appeal:-
“1. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the penalty of ₹. 1,73,26,556/- was levied for furnishing inaccurate particulars of the income by relying on the decision of the Hon’ble supreme court of India in the case of CIT Vs. Reliance Petroproduct in spite of the fact of the case is different.
2. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in law and f acts that the payment of Rs. 5,60,73,319/- paid by the assessee to Partner (Kumar Housing Corporation limited/KHCL) for giving up its interest in the partnership f irm as retiring partner and claimed by assessee as development expenses in the prof it and loss account is nothing but f urnishing of inaccurate particular of income inspire of the fact that the Hon’ble ITAT has conf irmed the action of the Ld.AO by treating this expenses as capital expenditure .”
2. The brief facts of the case are that, the assessee is a partnership firm engaged in business of development and construction of properties.. The Assessee has filed return of income for the A.Y. 2014-15 on 29.11.2014 disclosing a total income of Rs.NIL. Subsequently, the case was selected for scrutiny under CASS and the notice under Section 143(2) and u/sec 142(1) of the Act are issued to the assessee along with the questionnaire. In compliance to notices, the Ld.AR of the assessee appeared from time to time and filed the submissions. The Assessing officer on perusal of the schedule 6 of the Profit & Loss account find that the assessee has debited development expenses of Rs. 5,60,73,319/- and the assessee has filed explanations vide letter dated 17.11.2016 mentioning that the said development expenses pertains to retiring partner i.e., Kumar Housing corporation Ltd. (KHCL) towards settlement cost and the new partner has brought in capital of Rs.50,000/- only. Whereas the A.O is of the opinion that the amount paid to the retiring partner, (KHCL) constitutes capital expenditure and issued show cause notice. And the assessee has filed the explanations on 30.11.2016 referred at Para4.1 of the order. The A.O was not satisfied with the explanations and dealt on the facts of the construction area, price realization, amortization under section 35D of the Act, and is of view that the amount paid to the retiring partner i.e fixed capital, closing capital and any amount towards settlement cost is a capital expenditure and disallowed the claim of deduction of Rs.5,60,73,319/- and reduced the Closing Work In Progress(WIP) to that extent and determined the Closing (WIP) at Rs. 20,48,41,542/- and assessed the total income of Rs. Nil and passed the order u/sec 143(3) of the Act dated 23.12.2016.
3. Subsequently the Assessing officer has issued penalty notice u/sec 274 r.w.s u/sec 271(1)(c) of the Act and the assessee has filed the explanations, Further the A.O in the penalty proceedings has dealt on the facts of CIT(A) in quantum addition/ disallowance allowing the assessee appeal. Subsequently, the revenue preferred appeal against the CIT(A) order before the Honble Tribunal and the order of the CIT(A) was reversed vide order dated 10.10.2023 and the revenue appeal was allowed. The A.O was not satisfied with the explanations of the assesse and levied penalty for furnishing inaccurate particulars of income of Rs.1,73,26,656/- vide order u/sec271(1)(c) of the Act dated 05.10.2024.
4. Aggrieved by the penalty order, the assessee has filed an appeal with the CIT(A). Whereas the CIT(A) has considered the grounds of appeal, statements of facts, finding of the AO and submissions and has deleted the penalty levied by the A.O and allowed the assessee appeal. Aggrieved by the order of the CIT(A), the revenue has filed the appeal before the Hon’ble Tribunal.
5. At the time of hearing, Ld. DR submitted that CIT(A) has erred in deleting the levy of penalty overlooking the factual aspects and ignoring the facts that the assessee has claimed amount paid to retiring partner as development expenses in the profit & loss and it amounts to furnishing of inaccurate particulars of income. Further the CIT(A) erred in ignoring the decision of the Honble Tribunal confirming the action of the Ld.AO in quantum appeal and the Ld.DR prayed for allowing the revenue appeal. Per contra, the Ld.AR supported the order of the CIT(A) and relied on the submissions, factual paper book and judicial decisions.
6. We heard the rival submissions and perused the material on record. The sole matrix of the disputed issue envisaged by the The Ld.DR submitted that the CIT(A) has erred in deleting the levy of penalty overlooking the findings of the Assessing Officer and the factual aspects that the assessee has claimed amount paid to retiring partner as development expenses in the profit & loss and it amounts to furnishing of inaccurate particulars of income. Further the CIT(A) erred in ignoring the decision of the Honble Tribunal confirming the action of the Assessing Officer in quantum appeal. We find the CIT(A) has considered assessee submissions in support of the claim and deleted the penalty dealt at Page 4 Para 6.2 to 7 of the order read as under:
“6.2. Ground No. 1 to 4 are raised against the AO’s action in levying penalty u/s 271(1)(c) of the Act of Rs. 1,73,26,656/-
6.2.1 The assessment was completed u/s 143(3) on 23 12.2016, wherein the AO disallowed the assessee’s claim of Rs.5,60,73,319/- debited as development expenses, holding that the payment made to the retiring partner, M/s KHCL, was capital in nature and not allowable as revenue expenditure. Penalty proceedings u/s 271(1)(c) were simultaneously initiated for furnishing inaccurate particulars of income in appeal, the CIT(A) vide its order dated 13.12.2019 deleted the disallowance. However, on further appeal by the Revenue, the Hon’ble ITAT, Pune Bench “B”, vide order dated 10.10.2023 in ITA No. 386/PUN/2020, reversed the CIT(A)’s order and confirmed that the payment to the retiringparther represented capital expenditure. Consequently, the AO levied minimum penalty of Rs. 1,73,26,656/-/s 271(1)(c).
6.2.2 During the appellate proceedings, that appellant that the issue involved only a difference of opinion regarding the nature of expenditure i.e, capital or revenue. While the AO treated it as capital, the CIT(A) had initially accepted it as revenue, and later the Hon ble ITAT reversed the relief. Such divergent judicial views show that the matter was debatable and as held in CIT v. Reliance Petroproducts (SC), a mere disallowance or incorrect claim does not attract penalty.
The assessee further argued that all facts were correctly disclosed, and the claim was made in good faith, supported by judicial principles. There was no finding by the AO that any particulars furnished in the return were false. Hence, the basic conditions of section 271(1)(c) and Explanation 1 were not met. It was also submitted that the penalty notice u/s 274 was vague and did not specify whether the charge was “concealment” or “furnishing inaccurate particulars, violating settled law including SSA’s Emerald Meadows. Moreover, no proper opportunity of hearing was granted before passing the penalty order The assessee also contended that the penalty order was time-barred u/s 275, because the proceedings were initiated in December 2016 but the penalty order was passed only in October 2024, far beyond the permissible period. Further the assessee submitted that the expense was genuinely disclosed, the disallowance was only interpretational, and no element of concealment existed, therefore penalty u/s 271(1)(c) was unwarranted and should be deleted.
6.2.3 I have carefully considered the penalty order and the submissions of the appellant. The sole basis for levying penalty u/s 271(1)(c) is the disallowance of expenditure of Rs.5.60.73,319/- claimed as development expenses. It is an undisputed fact that the assessee had fully disclosed the payment made to the retiring partner in the return of income as well as in the audited financial statements. The disallowance ultimately sustained by the Hon’ble ITAT arises only on account of the characterization of the expenditure whether it is Capital or revenue in nature. This is a matter on which two reasonable views were possible, es evident from the fact that the CIT(A) had allowed the claim earlier and the ITAT later took different view. Thus, the dispute is entirely interpretational and does not involve any finding of falsity or suppression of facts by the assessee. The Hon’ble Supreme Court in CIT v Reliance Petroproducts Pvt. Ltd. (322 ITR 158) has categorically held that a mere making of a claim that is not accepted by the Revenue does not amount to furnishing inaccurate particulars of income, and penalty cannot be levied merely because the claim is disallowed. The Court emphasized that where all particulars are correctly disclosed, and the dispute is only about the allowability of a deduction, the ingredients of section 271(1)(c) are not attracted. Applying this binding principle to the present case, I find that the assessee made a bona fide claim, supported by disclosure of all relevant facts. In view of the above and respectfully following the ratio of the Hon’ble Supreme Court in Reliance Petroproducts, I hold that the penalty lavied u/s 271(1)(C) is unsustainable. The penalty of Rs. 1,73,26,656/- is therefore deleted. Therefore, the Ground No. 1 to 4 raised in this regard by the assessee are Allowed.
7. In the result, the appeal filed against the order under Section 271(1)(c) of the Act for the A.Y. 2014-15 is allowed.”
7. We find the coordinate bench of Honble Tribunal Pune bench in the revenue appeal on quantum addition/disallowance in the assessee case for A.Y.2014-15 in ITA No.386/PUN/2020 vide order dated 10.10.2023 has observed that the amount paid to a retiring partner for giving up interest in the partnership firm is a capital expenditure and has reversed the CIT(A) decision and allowed the revenue appeal dealt at Para 3 to 10 of the order read as under :
“3. The Assessing Officer was of the opinion that the amount paid on retirement of partner cannot be allowed as deduction and, accordingly, added to the closing work-in-progress by disallowing the same as deduction u/s 37(1) of the Act.
4. On appeal before the ld. CIT(A), the ld. CIT(A) held that the provisions of section 45(4) of the Act has no application and, therefore, disallowance of payment by holding to be capital expenditure is not justified, it should be allowed as revenue expenditure.
5. Being aggrieved by the decision of the ld. CIT(A), the Revenue is in appeal before us in the present appeal.
6. It is contended on behalf of the Revenue that the ld. CIT(A) without appreciating proper facts of the case wrongly held that the amount paid to the retiring partner is revenue nature.
7. On the other hand, ld. AR submits that the amount was paid to the retiring partner on account of settlement arrived at between two partners towards the expenditure incurred at that time and, therefore, it is not the amount paid to the retiring partner.
8. We heard the rival submissions and perused the material on record. We had carefully gone through the registered settlement deed, wherein, it clearly shows that the amount of Rs.4,99,90,000/- was paid to the retiring partner in terms of settlement arrived at between two partners for giving up his interest in the partnership firm, there cannot be any dispute that the amount paid to a retiring partner for giving up his interest in the partnership firm is a capital expenditure. Reference in this regard can be made to the following decisions :-
(i) CIT vs. Sangam Enterprises, 240 ITR 13 (AP).
(ii) CIT vs. Standard Makings & Allied Products Corpn., 226 ITR 1 (Guj.).
9. The ld. CIT(A) without appreciating proper facts of the case went on to hold that the payment of money to the retiring partner is revenue expenditure. In the circumstances, the findings of the ld. CIT(A) cannot be accepted in the eyes of law. Therefore, the decision of the ld. CIT(A) is reversed. Thus, the grounds of appeal filed by the Revenue stand allowed.
10. In the result, the appeal filed by the Revenue stands allowed.
8. We find on perusal of the CIT(A) order, the CIT(A) has relied on the submissions of the assessee that the payment to retiring partner involves difference of opinion i.e nature of expenditure is capital or revenue, which is debatable and hence provisions of initiating penalty proceedings u/se 271(1)(C) of the Act are not attracted and deleted the penalty. Whereas the Honble Tribunal in the revenue appeal has considered and referred the registered settlement deed, wherein, it was clearly mentioned that the amount of Rs.4,99,90,000/- was paid to the retiring partner in terms of settlement arrived at between two partners for giving up his interest in the partnership firm and there cannot be any dispute that the amount paid to a retiring partner for giving up his interest in the partnership firm is a capital expenditure and relied on the judicial decisions and the disputed issue was crystallized. And there is no ambiguity of claim being a capital expenditure. Further, the Ld.AR could not controvert the submissions of the revenue with any new cogent evidence that the assessee has not furnished inaccurate particulars of income and disallowance of amount paid to a retiring partner as per the settlement deed is revenue expenditure/ debatable and the provisions of section 271(1)(c) of the Act are not attracted. Accordingly, we set aside the order of the CIT(A) and allow the grounds of appeal in favour of the revenue.
9. In the result, the appeal filed by revenue is allowed.
Order pronounced on the open Court on 04th September 2026.
