Section 271(1)(c) penalty cannot be imposed merely for incorrect income head treatment

D. C. Polyester Limited Vs DCIT (ITAT Mumbai)

Introduction: D.C. Polyester Limited recently secured a noteworthy victory in its appeal against the imposition of a penalty under Section 271(1)(c) of the Income Tax Act. The Income Tax Appellate Tribunal (ITAT) Mumbai, in its order dated August 25, 2023, emphasized that penalties cannot be imposed solely on the grounds of wrong treatment to the head of income.

Detailed Subheading-Wise Analysis:

1. Background of the Appeal: The appeal by D.C. Polyester Limited challenges the order of Ld. CIT (A)-54, Mumbai, dated November 24, 2022, concerning the assessment year 2015-16. The appeal focuses on the penalty imposed under Section 271(1)(c) of the Income Tax Act.

2. Grounds of Appeal: The appellant raised specific grounds of appeal, contesting the imposition of a penalty for allegedly furnishing inaccurate particulars of income. The appeal argues that no inaccurate particulars were provided.

3. Brief Case Facts: D.C. Polyester Limited filed its income tax return, declaring a total income of Rs. 16,10,320. Subsequently, a search action was conducted on D’ Décor Group, including the appellant. The appellant filed a revised return, maintaining the same income figure, in response to a notice under Section 153A of the Act.

4. Penalty Proceedings: Simultaneously, penalty proceedings under Section 271(1)(c) were initiated. The penalty was levied at 100% of the tax sought to be evaded. The appellant appealed this penalty order, leading to the current case.

5. Disallowance under ‘Income from House Property’: The appellant faced a disallowance of Rs. 11,88,000 under the head ‘Income from House Property’ due to different treatment compared to the previous year. The appellant argued that the change in treatment was in line with legal requirements.

6. Disallowance for Fixed Assets Written Off: Additionally, a disallowance of Rs. 9,32,326 was made for writing off fixed assets under the head ‘Income from Business or Profession.’ The appellant contended that such accounting treatments are subject to verification by statutory auditors.

7. ITAT’s Ruling on Disallowances: The ITAT found no merit in the department’s case for levying a penalty on the disallowance made under both heads. It emphasized that the selection of the appropriate income head is a legal mandate and should not be changed arbitrarily.

8. Judicial Precedents: The ITAT relied on judicial precedents, including CIT vs. Reliance Petro Products and Price Water House Coopers Pvt. Ltd. vs. CIT, to support its decision. These cases emphasized that mere disallowances do not warrant penalties under Section 271(1)(c) without conclusive evidence of concealment or inaccurate particulars of income.

9. Conclusion: D.C. Polyester Limited’s appeal was successful, and the ITAT directed the deletion of the imposed penalty. The tribunal’s decision underscores the importance of adhering to legal mandates for income head treatment and the need for clear evidence to impose penalties under Section 271(1)(c).

Conclusion: The ruling in favor of D.C. Polyester Limited by the ITAT Mumbai sets a precedent for cases involving penalties under Section 271(1)(c) of the Income Tax Act. It reinforces the principle that penalties cannot be imposed solely based on the wrong treatment of income heads and highlights the significance of established legal positions in tax matters. This decision underscores the need for a robust assessment process and the requirement for clear evidence to justify penalties, ultimately promoting fairness and clarity in tax assessments.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal by assessee is directed against the order of Ld. CIT (A)- 54, Mumbai dated 24.11.2022 u/s. 250 of the Income Tax Act, 1961 (in short ‘the Act’) for A.Y. 2015-16. The assessee has raised the following grounds of appeal:-

1. The Hon’ble Commissioner of Income Tax (Appeal)-54, Mumbai [hereinafter referred as CIT(A)] erred in confirming the penalty of Rs. 6,55,180/- levied under section 271(1)(c) of the Income Tax Act, 1961 (Act) being 100% of tax sought to be evaded by allegedly furnishing inaccurate particulars of income.

The Appellant, on the facts and circumstances of the case, submits that it has not furnished any inaccurate particulars of income; hence, the penalty levied by the AO and confirmed by the CIT (A) shall be deleted.

2. The AO has erred in levying the penalty and CIT(A) has erred in confirming the same without mentioning the specific charge against the Appellant as to whether it has concealed the income or furnished in accurate particulars of income.

The Appellant craves leave to add, amend and modify above grounds of appeal.

2. The brief facts of the case are that assessee is a company filed its return of income u/s. 139 of the Act on 27.11.2015 declaring total income of Rs. 16,10,320/-. Subsequently, a search action u/s. 132 of the Act was carried out on D’ Décor Group including assessee company. A notice u/s. 153A of the Act was issued in the case of assessee and in response to the same, assessee filed a return u/s. 153A of the Act on 19.10.2019 declaring same figure of income at Rs. 16,10,320/-. Notice u/s. 142(1) and 143(2) of the Act was issued and additions of Rs. 11, 88,000/- under the head Income from House Property being disallowance made u/s. 24(a) of the Act and Rs. 9, 32,326/- under the head Income under the head Business or Profession, being written off of Fixed Assets were made to the total income declared by the assessee.

3. Simultaneously, penalty proceedings u/s. 271(1)(c) of the Act was also initiated and as the assessee has not challenged the assessment order on merits and quantum, a minimum penalty @ 100% of the amount of tax sought to be evaded was levied vide order Dated: 27.07.2021. Assessee being aggrieved with this order of penalty passed u/s. 271(1) (c) of the Act, preferred an appeal before the Ld. CIT (A), who in turn confirmed the order passed by the Assessing Officer. Assessee being further aggrieved preferred this appeal before us.

4. We have gone through the order of AO (Assessment Order and Penalty Order), Order of Ld. CIT (A) and submissions of the Assessee alongwith case laws relied upon. We observed that cause of addition under the head Income from House Property was different treatment given by the assessee in this year vis-à-vis previous year. In previous year assessee had shown the same under the head Business or Profession, but in this year shown under the head Income from House Property, which is actually correct as per established legal position for income from house property. But rather AO changed the same to income under the head Business or Profession and assessee also agreed and this difference came resulting into addition. What we perceive out of this action of AO, is to enhance the income of the assessee by any mean may be by way of giving wrong treatment to a head of income, i.e., from the head Income from House Property to the head income under the head Business or Profession. Assessee given a wrong treatment last year does not mean that as a matter of consistency or any other principle this year also assessee/AO are supposed to give a wrong treatment to the same. Selection of the head is not an option but a mandate of law to be compulsorily followed by all the concerned. It is also settled position of law that proceedings of penalty always emanate from assessment proceedings but both are separate in nature and have their own specific facts and law applicable. Based on this discussion, we don’t find any merit in the case of department by levying the penalty on this disallowance of Rs. 11,88,000/- being disallowance made u/s. 24(a) of the Act. On this count, i.e., disallowance made under the head Income from House Property, we hold that there are no inaccurate particulars furnished by the assessee, although disallowance was not challenged by assessee on merits and quantum. Hence, penalty on this disallowance is not sustainable.

5. As far as second disallowance of Rs. 9, 32,326/- being fixed assets written off and claimed under the head income under the head Business or Profession is concerned, it is noted that assessee was liable to Tax Audit u/s. 44AB of the Act and also under the Companies Act, 2013. Such type of accounting treatment and further claim under the Income Tax Act are subject to verification of Statutory/Tax Auditor. Assessee may claim certain things inadvertently, but where the process of audit is involved, auditor is supposing to point out such apparent mistakes through qualification in audit report or through Tax Audit Report in form no. 3CD. Based on this discussion, we don’t find any merit in the case of department by levying the penalty on this disallowance of Rs. 9,32,326/-being disallowance made on written off of Fixed Assets. On this count, i.e., disallowance made under the head Income from Business or Profession, we hold that there are no case made out by the department, justifies levy of penalty. Although disallowance, was not challenged by assessee on merits and quantum. Hence, penalty on this disallowance is also not sustainable.

6. In addition to the above findings, we further rely on the judgment of CIT vs. Reliance Petro Products 322 ITR 158 (SC) and Price Water House Coopers Pvt. Ltd. Vs. CIT 348 ITR 306 (SC). Wherein it was held by Hon’ble Supreme Court that mere disallowances made by the AO do not call for levy of penalty under this provision because there is no conclusive evidence of concealment. Moreover as discussed above, the case of the assessee does not fall in the category where allegation of ‘furnishing inaccurate particulars of income’ can be called for. Hence as the basic condition of establishing the allegation leveled against assessee is not fulfilled and in the given preposition, the judicial pronouncements mentioned (supra) is in favour of assessee.

6. In view of above appeal of the assessee is allowed and AO is directed to delete the penalty imposed.

7. In the result, Appeal of the assessee is allowed.

Order pronounced in the open court on 25^th day of August, 2023.