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.).
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