Whether when assessee revises return after being confronted by AO but before issue of notice for filing accurate particulars, penalty is warranted in such a case - YES: HC

THE issue before the Bench is - Whether when assessee revises return after being confronted by AO but before issue of notice for filing accurate particulars, penalty is warranted in such a case. YES is the answer of the High Court.

Facts of the case

The assessee company had gone into liquidation and the Official Liquidator had been appointed.

Assessee had filed e-return declaring loss of Rs.1,89,44,380/-. It had also claimed business loss amounting to Rs.2,33,07,349/- on account of sale of fixed assets. During assessment, assessee filed a revised return declaring total income of Rs.33,62,974/-. In the revised return, the loss of Rs. 2,33,07,349 on account of sale of fixed assets was not treated as "business loss", rather shown as capital loss. The AO made some additions and assessed the total income of assessee at Rs.40,19,974/- and taxable income at "NIL" after giving benefit of brought forward losses. Pursuant to the satisfaction recorded in the assessment order, penalty proceedings for concealment u/s 271(1)(c) were initiated and penalty equal to 100% of the tax payable of Rs. 80,66,400/- on the concealed income was imposed. On appeal, Tribunal had deleted the penalty on the basis that as the assessee had not been specifically asked for filing details regarding assets sold and DR was not been able to place on record any communication from the AO to the assessee seeking explanation regarding the claim of loss occurring on account of sale of assets. Therefore, it was held that the revised return was bona-fidely filed u/s 139(5).

Tribunal while passing his order had relied on the case of Reliance Petro Products Pvt. Ltd., the ratio of the case was that a claim in respect of which all facts have been disclosed will not lead to inference of furnishing inaccurate particulars of income under Explanation-1 of section 271 (I)(c). In this case, the assessee had furnished all facts along with the 'return of income. In particular, the details filed by it include the profit & loss account, statement of income and the schedule of fixed assets. The schedule of fixed assets showed deduction of assets. It had also been explained that the return was prepared by the then CA and, thus, the assessee was not properly advised by the CA. In view thereof, his services were dispensed with and a new CA was engaged. In the case of Zoom Communication (P) Ltd., assessee had not explained the circumstances in which patently wrong claim of deduction was made. It was also not explained as to who had committed the mistake. In this case the person and the circumstances had been specified by the assessee. Further, the Tribunal had not recorded a finding on the plea of the bona fides of the explanation rendered by the assessee. This was the crux of the matter as per Tribunal, as the bona-fides of the explanation had to be examined in view of the decision of SC in the case of Dharmendra Textile Processors. It was observed that the assessee cannot be expected to be well-versed in intricacies of the law. The loss was actually incurred. However, in view of the concept of block of assets, the loss could not have been claimed. Only the sale proceeds could have been deducted from the WDV of the block of assets. Obviously, the claim was patently wrong. But, the circumstances leading to such a wrong claim have been explained. All facts relating to the claim exist on record. No falsity has been found in the accounts in this regard. Therefore, Tribunal held that the explanation rendered by the assessee was bona fide notwithstanding the fact that a wrong claim had been made. In such a situation, the claim can be said to be wrong only and not false. The mistake was rectified as soon as it was noticed by the assessee without any specific query from the AO. Thus, Tribunal held that assessee had discharged the onus cast on it under Explanation-1 and, therefore, it was not liable to be penalized u/s 271(1 )(c).

Held that,

++ the word "concealment" would refer to somewhat malicious and mala fide conduct on the part of the assessee. The expression "inaccurate particulars" is copiously wider and broader and would include cases where particulars furnished are not accurate and which results in avoidance or evasion of tax. Mens rea is not a necessary attribute to impose penalty under Section under Section 271(1)(c). Penalty under the said section is imposed as a civil liability/obligation. The provision is both remedial and coercive in nature. It is far different and unlike any penalty for a crime or a fine or forfeiture imposed under the criminal and penal laws. Penalty u/s 271(1) (c) refers to blameworthy conduct for contravention of the Act and it equally applies to tax delinquency cases. In Dharmendra Textile Processors, it was held that the earlier decision of SC in Dilip N. Shroff Vs. JCIT, Mumbai and Anr. 2007-TIOL-96-SC-IT was wrongly decided as it did not consider the effect and relevance of Section 271(1) (c). The object behind enactment of Section 271(1)(c) along with Explanations was to provide for a remedy for loss of revenue and imposes a civil liability. Willful conduct etc. is not an essential ingredient. However, it is not necessary that penalty should be imposed in all cases where inaccurate particulars have been furnished. This is the object and purpose behind enacting Explanation 1, which consists of two limbs i.e. clause (A) and clause (B). Clause (A) applies when an assessee fails to furnish an explanation or when the explanation offered is found to be false. In such cases, penalty can be imposed. Clause (B) applies to cases wherein explanation is offered, but the assessee has not been able to substantiate the same. The assessee can escape rigors of penalty, provided he satisfies the two conditions, namely, (1) the assessee should demonstrate that his explanation was bona fide; and (2) he had furnished and disclosed facts and material relating to computation of his income. Onus of establishing that the two conditions are satisfied is on the assessee. Both the conditions are cumulative and when the conditions are satisfied, penalty under section 271(1)(c) should not be imposed. When we refer to the facts of the present case and the return of income originally filed, it is noticeable that the assessee in Schedule-16 "General Expenses" of the profit and loss account had shown a debit of Rs.2,33,07,349/- on account of loss on sale of the fixed assets. Thus, the fact that the assessee had incurred losses was indicated in Schedule-16 of the profit and loss account. To this extent, the facts were stated in the original return. It is plausible for the assessee to urge that material facts were submitted and stated in the original return;

++ we have examined the aforesaid reasoning, but are unable to accept the said finding. All claims or deductions wrongly made cannot be treated as bona fide and protected by Explanation 1 to section 271(1)(c). Whether or not the conduct of the assessee was legitimate or mere legerdemain would depend upon facts of each case, nature and character of the claim, whether the legal provision applicable was capable of two interpretations, whether the claim/exemption was plausible and conceivable etc. In cases where interpretive skills and divergent views are plausible, penalty for concealment should not be imposed. Assessee need not be asked to pay penalty if he has taken a particular legal stand and preferred an interpretation in his favour. However, at the same time, the interpretation put forward or the claim made should not be banal or a ruse, per se or ex facie incorrect or wrong. Platitudinous conduct or claim is not a bonafide conduct. In the facts of the present case, it is noticeable that the assessee had claimed loss on account of sale of plant and machinery i.e. the fixed assets, in the profit and loss account. This should not have been obviously claimed. It was without any debate and discussion a capital loss. The claim cannot be explained and justified by any argument and reasoning. The claim was positively and meaningfully incorrect and contrary to the principles of straight forward and primary accountancy. It is true and correct that an assessee would normally rely upon legal opinion of a Chartered Accountant, who is required to audit accounts of the company and also submit an audit report, but penalty cannot be deleted on guise or pretence of legal opinion as a smokescreen and façade. The claim or the entry in the present case was contrary to elementary and well-known basic principles of accountancy. The present case is not a case of a debatable issue relating to legal or accountancy principle which could have been interpreted differently. We cannot, therefore, accept the contention of the assessee as universal and comprehensive that all claims howsoever untenable, once certified by a Chartered Accountant or the Directors of the company, cannot be made a subject matter of penalty proceedings. This will be stretching and making the requirement to prove bona fide conduct illusionary and ineffective and would fail to, check and stop fanciful and incredible claims. It is noticeable that most of the income tax returns are accepted without scrutiny or regular assessment and self-compliance of tax provisions is a rule required to be followed. The view, which we have taken, is in consonance with the ratio expounded in Reliance Petro Products Pvt. Ltd;

++ the second aspect, which arises for consideration, is whether the revised return was filed voluntarily and before the notice of the inaccurate particulars by the Assessing Officer. Factum of filing a revised return to rectify an earlier mistake is an important and relevant factor to determine whether the conduct of the assessee was bona fide. The Tribunal, in the impugned order has held that the revised return was filed before any specific query was raised by the Assessing Officer. Tribunal at the same time observed that the Assessing Officer had directed the assessee to file tax audit report, depreciation chart, details of all exemptions and deductions as well as details of addition to fixed assets, but no question had been raised about deduction in respect of the assets. The aforesaid reasoning by the Tribunal accepts the fact that the assessee had been asked to furnish details of fixed assets and details of all deductions were called. Therefore, it is clear to us that the assessee had not filed revised return voluntarily, but had filed the revised return after the Assessing Officer confronted the assessee and they were asked to explain how and why loss on account of sale of fixed assets was claimed in the profit and loss account. The said loss, capital in nature and could not have been claimed in the profit and loss account. In view of the aforesaid discussion, we answer the substantial question of law in favour of the Revenue and against the respondent-assessee. We uphold levy of penalty by the Assessing Officer under Section 271(1)(c). The appeal is disposed of.