Understanding Penalty under Income tax with latest case laws – Part –II.

Now a days, in case of any addition whether justified or unjustified, the Income tax department in parallel initiated penalty proceedings on the taxpayer. Hence it is very important to deal with this penalty proceedings at the assessment stage only for the benefit of taxpayer. In this respect, given below few recent judgments which enable yourself to deal with penalty proceedings in the tax department.

·         Bona fide claim:   It is only when there is an attempt to evade tax by offering an explanation which is found to be false or not bona fide, that penalty can be imposed. A wrong claim was made for deduction and an explanation was offered; in the absence of a finding that the assessee had failed to prove such explanation was bona fide, no penalty could be imposed. As long as there was no finding by the Commissioner (Appeals) that the explanation offered was not a bona fide one, the imposition of penalty for the first time in the appellate proceedings was illegal. Refer, CIT .v. Sandur Manganese and Iron Ores Ltd., 362 ITR 160. 

Supreme court in the landmark case of CIT v. Larsen and Toubro Ltd, 366 ITR 502, held that Court held that merely because the assesse raised a claim which was eventually disallowed that did not mean that the ingredients of clause (c ) were satisfied or fulfilled so as to justify imposing of a penalty. Such a finding essentially based on the facts and in the circumstances peculiar to the assesse , did not raise any substantial question of law. Court awarded cost of Rs 1lakh each on the revenue for filing unwarranted appeals. Followed CIT v. Reliance Petro products Pvt Ltd ( 2010) 322 ITR 158 (SC). 

At the relevant time, there was a Tribunal decision and in view whereof the assessee was under a bona fide belief that tax was not liable to be deducted on commission/trade discount. It was held that there being a reasonable cause, penalty was rightly deleted. Refer, CIT .v. G.M. (Telecom) BSNL, 101 DTR 401

Addition was made by the AO on shortage of stock. It was the case that the assessee has given  reasonable explanation for excess of stock. It was also the case that the assessee had disclosed in the return and also had paid tax on the surrendered income and the AO had accepted the return filed by  the assessee in this regards. Both the appellate authorities observed that there was no deliberate or  intentional concealment and therefore on this count penalty could not be imposed. On appeal by revenue the court held that it was not a deliberate intention of  the assessee and interference with the  penalty imposed would arise only if it is found and established that the concealment was deliberate.  Once the concurrent findings with regards to excess stock is held not to be a concealment, no question  of law arises.  Refer, CIT .v. Home De Royal, 97 DTR 374.  

Assessee filed its return of income electronically. Assessing Officer made certain inquiry and found that assessee did not offer capital gain on sale of shares of Mumbai SEZ to tax. He, accordingly, brought to tax capital gain and levied penalty upon assessee for concealment of income. It was held that where assessee was under a bona fide belief that capital gains arising on sale of SEZ shares were exempt from taxation and application under section 10(23G) to that effect was pending with CBDT, levy of penalty for concealment of income was not justified. Refer, Skil Infrastructure Ltd. v. ACIT, 139 ITD 25 (Mum.)(Trib.).

The assessee was engaged in the business of copyrights of motion pictures. The assessee received consideration on transfer of its ownership rights of the movie in the previous year relevant to the assessment but agreement was signed in next year. Addition was made on this account and penalty was initiated. It was held that the factual matrix of the case no where proves that the assessee had either concealed the income or furnished any inaccurate particulars. The fact that it had mentioned the consideration in the year of receipt itself proved its bona fide. It was further held that every instance of addition does not ispo facto led to a conclusion that the assessee was guilty of concealment as penalty proceedings were altogether different in nature. Refer, ITO v. Jain Associates, 19 ITR 824 (Mum)(Trib.).

The assessee claimed depreciation on a building which was being used by the firm in which the assessee was a partner. In quantum proceedings it had been held that the assessee was not entitled to depreciation on the building as it was being used by the firm and not by the assessee. Imposition of penalty u/s. 271(1)(c) of the Act, is not akin to or like criminal proceedings and the question of mens rea or mala fides on the part of the assessee need not be examined and is not relevant. At the same time, it is not mandatory that in each case where addition or disallowance is made by the AO, penalty must and should be imposed. When an assessee establishes that he had acted bona fide and all facts and material were disclosed by him penalty should not be imposed. A wrong deduction claimed can amount to furnishing of inaccurate particulars. However, a distinction must be drawn between a false claim, which cannot be countenanced and claims which are made on the basis of legal provisions which are debatable and quite plausible. When a legal issue arises for consideration, which is debatable but the claim made by the assessee is not accepted, there is no jurisdiction to invoke the penalty provisions u/s. 271(1)(c). Divergent legal views on legal interpretation of a statute can take place, but it is not necessary that there should be uniformity or consensus of opinion on the aspects of law. Refer, Karan Raghav Exports P. Ltd. v. CIT, 349 ITR 112.

A search was carried out in the business premises of the assessee on Sept. 20, 1989. During the course of search, it was discovered that the assessee had invested an amount of Rs.11 lakhs in two properties and this had not been disclosed. The assessee admitted the purchase of the property out of income which was not disclosed. The non disclosure of the income was due to the circumstances that he was an uneducated and illiterate petty contractor who received payments only after deduction of tax at source. Thereafter, the assessee field returns for the asst. years 1985-86 to 1989-90. These returns were accepted as they were, without any further payment of tax and regularized after issuance of a notice u/s. 148 of the Act. The assessee paid the tax due and made an application for waiver of interest. Waiver was granted. The A.O. was of the view that the assessee did not fulfil the requirements of clause (2) of Explanation 5 to sec. 271(1)(c) and, therefore, was liable to pay penalty. The Tribunal held that penalty could not be levied. The Tribunal also concluded that the conduct of the assessee was not contumacious. On appeal to the High Court:Held, dismissing the appeals, that since both the Commissioner (Appeals) and the Tribunal were satisfied about the bona fides of the assessee and the assessee had complied with the provisions of clause (2) of explanation 5 to section 271(1)(c) of the Act, no case for imposition of penalty was made out. Refer, CIT v. B. Venkatesam, 349 ITR 413.

AP High court confirmed in the case of Sania Mirza that Levy of concealment penalty under section 271(1)(c ) is not justified if income not offered to tax due to “bona fide mistake”.

Where the income of the assessee is exempt under section 10 (20) of the Act, the Assessee is not liable to audit under section 44 AB of the Act consequently, no penalty under section 271 B was leviable. Refer, CIT v. Market Committee, Sirsa, 80 DTR 213 (P&H)(High Court).

·         Party confirmation: Assessee could not obtain confirmation letters from five out of 15 traders as those traders left the town  during communal riots or otherwise refused to give confirmation letters.The case of the assessee was not  a case of mentioning of inaccurate particulars or concealment. Appeal of revenue was dismissed. Refer, CIT .v. Mathura Commercial Co, 361 ITR 380.

An amount was Rs 10.81 lakhs was paid to PM (P) Ltd which was assessees sister concern. These payments were made through a debit note raised at the close of the year. Tribunal has given the finding that no such amounts were paid. This finding of Tribunal was accepted by assessee . On appeal by the assessee against the confirmation of penalty the court held that where Tribunal had reached a finding of fact that appellant had filed inaccurate particulars regarding its income by showing false/exaggerated expenses, it would be concluded that there was a concealment of income on part of appellant, leading to imposition of penalty under section 271(1)(c) upon appellant .Appeal of assessee was dismissed. Refer, Sanghvi Swiss Refills (P.) Ltd. v. ACIT, 81 DTR 40/ 212 Taxman 66 (Mag.) (Bom.).

·         Bogus Transactions: Depreciation was claimed on lease. However, the lease was found to be bogus. Hence, penalty was rightly levied. Refer, CIT .v. BPL Sanyo Finance Ltd, 362 ITR 630.

Assessee filed return of income declaring long term capital gain arising from sale of shares. Getting  information of bogus transaction of shares, capital gain transactions in question were sham, AO issued notice u/s. 148, in response to said notice, assessee surrendered income earned on sale of shares as income  from undisclosed sources. AO made addition u/s. 68 and levied penalty order u/s. 271(1)(c). Tribunal held  that the assesse had conducted enquiries into matter of sale of said shares prior to surrender made by  assessee and duly established on record that share transactions were sham and bogus. Tribunal held that  the assesse intentionally and deliberately filed inaccurate particulars of his income in original return and,  therefore, penalty was justified as per law. Refer, Dy. CIT .v. Mukesh Kumar Agarwal, (HUF), 146 ITD 562.

·         Disclosure: When the transactions & other details were disclosed in the balance sheet & tax return, then there cannot be any case of not disclosure & hence penalty not justified.   Refer, Vrajlal T. Gala (HUF) .v. ACIT, 146 ITD 742.   

In the case of Prem Chand v. Asst. CIT, VOL 35 PG 174, the taxpayer disclosed all stock details and there cannot be any penalty on additions based on estimations.

Reliance to be placed in the case of CIT .v. Blue Star Ltd, 357 ITR 669, where it was held that During assessment, deduction claimed under section 80-IB of the Act was curtailed, duty draw back was disallowed and dividend income from foreign companies was taxed. Thereby Penalty was levied. CIT(Appeals) and Tribunal deleted the penalty on the basis that amounts were offered to tax by the assessee on its own and not after detection on the part of the Assessing Officer. On appeal by revenue to High Court, Tribunal’s order was upheld 

AO made certain addition to total income of assessee on account of Unexplained Jewellery and  Unexplained investment in Property. Based on said addition, penalty under section 271(1)(c) was also  imposed upon assessee. ITAT Held that, “Adverting to the facts of this case, when we apply the above  law to the facts of this case we are of the considered opinion that no penalty under s. 271(1)(c) can  survive. The assessee has made certain claims which could not be found to be plausible and additions  have been made. But levy of penalty under s. 271(1)(c) is not automatic. In fact the assessee has not  concealed any particulars of income as has been alleged. Therefore, we cannot sustain the impugned  penalty and thus, hold that this penalty cannot survive and has to be deleted”. Refer, Om Prakash Lohiya v. Dy. CIT, 61 SOT 15.   

Assessee hospital treated its entire equipments as 'life saving devices' and claimed depreciation at 40  per cent. A.O. found that entire equipment could not be treated as 'life saving devices' disallowed  excess depreciation claimed on normal equipment and levied penalty under section 271(1)(c) for  claiming excess depreciation. Since assessee had furnished entire details of medical equipments  deployed in its hospital and there was no concealment or furnishing of any inaccurate particulars,  penalty under section 271(1)(c) was not leviable. Refer, Dy.CIT v. Apollo Hospitals Enterprise Ltd, 58 SOT 158(URO) (Chennai)(Trib.).

·         Revised return: surrender of bogus income in the revised return cannot justified bonafide act of the tax payer & hence levy of penalty is justified. Refer, Dy. CIT .v. Mukesh Kumar Agarwal(HUF), 146 ITD 562.

However in the case of PoonamMarbale (P) Ltd..v. Dy.CIT, 62 SOT 137, it was held that In the course of search various documents were found and seized which indicated unaccounted sales.The  assesse declared the unaccounted receipts in the revised return. Revised return was accepted by the AO and certain other additions were made on estimate basis. The AO levied the penalty. Tribunal held that levy of penalty on the basis of revised return was held to be not valid and other additions were on estimate basis hence penalty cannot be levied 

Income not fully declared in original return but in return filed pursuant to notice under section 148. Conduct of assessee in furnishing inaccurate particulars. Doctrine of continuity and concurrence. Assessee liable for penalty in first assessment year instead of all assessment years. Refer, Dr. Bapuji Cherukuri v. Deputy CIT (Chennai), VOL 21 Pg 714.  

Assessee’s case was taken up for scrutiny and concealment of income had been detected by Assessing Officer. Assessee filed revised return. An amount was surrendered on ground of buying peace with department. However, it was a specific concealment for a particular month which was detected by Assessing Officer and not a case where addition was made in income on estimate and surmise. Since it was clear case of concealment of income and furnishing of wrong particulars of income, penalty was correctly imposed. Appeal of assessee was dismissed. Refer, Standard Hind Co. v. CIT, 212 Taxman 74 (Mag.)(All.)(High Court).

Original return was filed without disclosure. Capital Gain is arising out of the sale of share. Revised return filed showing Capital Gain on sale of share amounts to concealment as it is a subsequent act of the Assessee. Hence, penalty deserves to be confirmed. Refer, N. Ranjit v. CIT, 91 DTR 17(Mad.)(HC).

·          ITAT Order: When additions deleted by Tribunal thren no penalty imposable under section 271(1)©. Refer, Deputy CIT v. Delhi Transco Ltd, VOL 34 PG 669.

·         Carry- forward of loss: Denial of carry forward of long-term capital loss on ground of change in majority shareholding in assesse. This not a case of furnishing of inaccurate particulars or concealment of income in return & accordingly Penalty not warranted. Refer, Century Metal Recycling P. Ltd. v. Deputy CIT, VOL 35 PG 143.

Assessee succeeded to business of a partnership firm by way of family settlement. He claimed set off of losses of erstwhile firm. Claim of assessee was disallowed by Assessing Officer, Commissioner and Tribunal on ground that section 78(2) did not entitle assessee to set off losses. High Court however, held that such claim was not allowable in view of section 170(1). Meanwhile, penalty was imposed on ground that assessee had made a false claim .High Court, on appeal, noted that there was absolutely no discussion of section 170 in order of Commissioner (Appeals) and Tribunal which was applicable provision as regards succession. Moreover, Assessing Officer as also Commissioner (Appeals) was under misapprehension that assessee was not a successor .There was lack of clarity by income-tax authorities right up to Tribunal itself and, hence, imposition of penalty was not warranted. Appeal of assessee was allowed. Refer, Pramod Mittal v.CIT, 212 Taxman 64 (Mag.)(Delhi)(High Court).

·         Loss return: The Tribunal deleted the penalty on the ground that the assessed income is loss. On appeal by revenue to High Court, penalty was confirmed on the basis that as per Explanation 4(a) to section 271(1)(c) (which was substituted by the Finance Act, 2002, with effect from April 1, 2003) is retrospective in operation as held by decision of Apex Court in CIT .v. Gold Coin Health Food (P.) Ltd. [2008] 304 ITR 308]) penalty  is leviable not only in a case where after addition of concealed income, a loss returned, after assessment  becomes positive income but also in a case where addition of concealed income reduces the returned loss and finally the assessed income is also a loss or a minus figure. Refer, CIT .v. Balaramakrishna Engineering Contractor Corporation, 356 ITR 524.

Penalty for concealment under section 271(1)(c ) is leviable even where the assessed income is loss. (Followed CIT v. Gold Coin Health Food (P) Ltd. ( 2008) 304 ITR 308 (SC). Refer, CIT v. Unipol Chemicals Intermediates Ltd, 80 DTR 145.

·         Debatable issue: Mere admission of Appeal by High Court on substantial question of law is sufficient to disbar levy of concealment penalty. [S.260A]. Refer, CIT .v. Nayan Builders and Development, Bombay High Court.

Reliance to be placed on the judgement of CIT v. Tudor Knitting Works P. Ltd, 366 ITR 236, it was held that there cannot be any penalty for debatable issues.

Relief by CIT(A) on merits (though reversed by ITAT) means claim is debatable. Refer, Salman Khan .v. ACIT, Mumbai ITAT.

The court held that admission of a tax appeal by the High Court, in many a cases is ex parte and  without recording even prima facie reasons. Further the admission of a tax appeal by the High Court  only indicates that a prima facie case has been made out and the court feels that the issue requires  further consideration, Mere admission of an appeal by the High Court cannot be an indication that the  issue is debatable one so as to delete the penalty under section 271(1)(c), unless there is some  indication in the order of admission itself that the issue is a debatable one. (ITA no 189 of 2014 dt 9-  06-2014). Refer, CIT v. Dharamshi Shah, Guj HC. 

The query raised by the Assessing Officer revealed the doubt in the mind of the Assessing Officer as to whether the expenditure was allowable one or not. However, the assessee filed a letter offering the expenditure as income, which, by itself, would not make this a case of concealment. The declaration of the enhanced income thus belied the claim of the Assessing Officer that there was concealment. Hence, penalty was not leviable. Refer, CIT v. Shriram Properties and Constructions (Chennai) Ltd, 356 ITR 700 (Mad.)(HC). 

           

·         Process : -Levy of penalty for failure to compute capital gains as per section 50C is not justified. Refer, Harish Vooyaya Shetty .v. ITO, Mumbai ITAT. 

When there is no addition or disallowance to income,  question of penalty not arises. Refer, Pramila D. Astekar v. ITO, 61 SOT 113.  Same was also held in the case of ITO v. V.R. Rathish, The Chamber’s Journal  

Suit by bank settled by consent terms for sum less than sum shown as outstanding to bank in assessee’s books. Not a case of concealment of income or furnishing inaccurate particulars of income hence penalty is not attracted. Refer, Northland Development and Hotel Corporation v.CIT, 349 ITR 363.

No valid return filed within time allowed under section 139 or notices issued under section 142. Entire assessed income to be considered as concealed income. Refer, T. V. Magaadevan v. Deputy CIT (Chennai), Vol 22 Pg 343.

Surrender of income without explanation attracts penalty. Refer, CIT v. MAK Data Ltd, Delhi High court.

Assessee-company engaged in business of sale and purchase of shares claimed certain loss on sale of shares. Assessing Officer disallowed amount for not complying with provisions of section 94(7) and assessed it as income of assessee. Assessing Officer, thereafter imposed penalty under section 271(1)(c).On appeal, Commissioner (Appeals) deleted penalty but on appeal by revenue Tribunal reversed order of Commissioner (Appeals).When assessee-company had been availing services of a chartered accountant and in spite of that no reply was filed by it for non-compliance with provisions of section 94(7) while working out income shown in income-tax return, Explanation 1 to section 271(1)(c) was directly applicable and penalty was rightly imposed by Assessing Officer. Appeal of assessee was dismissed. Refer, VSB Investment (P.) Ltd. v. CIT, 212 Taxman 59 (Mag.)(P&H)(High Court).  

In the case of Ajay Jain, 21 ITR 41 (Delhi)(Trib.) it was held that surrender of income attracts penalty.

Under Explanation 1 to s. 271(1)(c), voluntary disclosure of concealed income does not absolve assessee of s. 271(1)(c) penalty if the assessee fails to offer an explanation which is bona fide and proves that all the material facts have been disclosed. Refer, MAK Data P. Ltd. v. CIT, Supreme Court.    

Civil Contractor is not liable to penalty as the CBDT has not prescribed the books of account. Refer, K.V. Ramachandran v. Dy.CIT, 58 SOT 264 (Cochin)(Trib.).

·         PAN : Penalty for failure to comply with section 139A is  linked to the deductor and not to the number of defaults and hence, it cannot be imposed by calculating the number of defective entries in each return and by multiplying them with Rs.  10,000[S. 139A]. refer, CIT (TDS) .v. DHTC Logistics Ltd., 221 Taxman 83.

Obligation to quote permanent account number is on deductee and not on deductor hence penalty imposed was cancelled.(S.139A, 273B). Refer, CIT(TDS) superintendent of Police, 349 ITR 550 (P & H) (High Court).

·         Revision:  Commissioner directed the AO to complete the assessment. Commissioner neither recorded the  satisfaction about the concealment nor gave any such directions to the AO for initiation of penalty proceedings. Assessment in pursuance to revision initiated the penalty proceedings . Court held that in an assessment pursuant to section 263 , the AO cannot levy penalty , in absence of any satisfaction recorded by Commissioner.( ITA no 541 of 2013 dt 27 -05-2014). Refer, CIT v. Padmini Mishra, Delhi HC.

·         Direction in the assessment order : There being no specific direction  in the AO’s order for initiation of penalty proceedings, Tribunal was justified in setting aside  the order imposing penalty , more so when there was no finding as to concealment. [S.271(IB)]. Refer, CIT v. MWP Ltd, 97 DTR 395

The Assessing Officer has added a sum of Rs.11,000 to the income returned by the assessee as per the revised return. Sub-section (1B) of sec. 271 creates a fiction by which the satisfaction of the Assessing Officer is deemed to have been recorded in cases where an addition or disallowance is made by the Assessing Officer and a direction for initiation of penalty proceedings is issued. This provision is made effective retrospectively with effect from April 1, 1989. As the assessment order for the asst. year 1984-85 had been passed on March 27, 1987, prior to April 1, 1989, the revenue could not rely on sub section (1B) of sec. 271. The Assessing Officer should, before imposing penalty, record in the assessment order his satisfaction that the assessee had either concealed the income or furnished inaccurate particulars of income in his return. There was no finding in categorical terms in the assessment . order that the assessee had furnished inaccurate particulars or had concealed income. Appeal of assessee was allowed. Refer, Chennakesava Pharmaceuticals v. CIT, 349 ITR 196.

·         In genuine Cash: The assessee received substantial amount in cash from his creditors. The assessee was not able to demonstrate with sufficient material that he required cash urgently to meet his requirements. Thus, in   absence of proof to show that the transaction was genuine and there was a reasonable cause for  receiving the amount in cash, penalty under section 271 D was leviable.  Refer, K.V.George v. CIT, 102 DTR 167.

·         Writ : The petitioner filed the annual information return with a delay of 202 days. In the absence of any satisfactory explanation for late filing of the annual information return, the authority imposed a penalty of Rs. 20,200 at the rate of Rs. 100 per day during which the default continued. On a writ petition :

Held, dismissing the petition, that there was no illegality or perversity in the order and it was just and in accordance with the provisions of section 271FA of the Income-tax Act, 1961. No fundamental right or personal right of the petitioner was infringed. Otherwise too, the petitioner had an efficacious alternative legal remedy to challenge the order, but the petitioner did not challenge the order. The petitioner could not be permitted to invoke the extraordinary jurisdiction of the court under article 227 of the Constitution. Refer, State of Rajasthan v.Dy. CIT (CIB), 349 ITR 536(Raj) (High Court).

·         Transfer Pricing : Assessee, engaged in providing market support services, returned nil income and computed arm’s length price of its transactions on basis of multiple year data. TPO being of opinion that current year data was to be used, added some comparables and made transfer pricing adjustment. The Assessing Officer made addition to assessee’s income and initiated penalty proceedings. It was held that where at time of filing return, there was a legal debate as to whether current year data can be used or multiple year data has to be used, assessee’s adopting multiple year data was a bona fide exercise. The assessee acted in bonafide manner in conducting its transfer pricing study and arriving at arm’s length price . The explanation is bonafide hence levy of penalty under section 271(1)(c ) is not warranted. Refer, Verizon Communication India (P.) Ltd. v. Dy. CIT, 140 ITD 122 (Delhi)(Trib.).

·         Others :  Assessee is engaged in online buying and selling commodities through commodity exchange, as a speculative activity, wherein no physical delivery was taken or given, total transaction booked with such commodity exchange could not be considered as ‘turnover’ for purpose of considering liability of assessee to get accounts audited u/s.44AB. Buying and selling the units was a speculative transaction .No delivery has taken place hence Levy of penalty was deleted. Refer, Banwari Sitaram Pasari HUF v. ACIT, 140 ITD 320 (Pune)(Trib.).   

·         Tax Treaty: Where there had been no avoidance of tax by  assessee by availing benefit of treaty, penalty under section 271(1)(c) was not leviable. Refer, Satellite Television Asian Region Ltd. v. DCIT, 58 SOT 109 (Mum.) (Trib.).