Validity of penalty imposed under section 271(1)(c ) for disallowance of business expenses

Penalty is one of the weapon which is now used by Income tax department (ITD) for each & every kind of addition they are making during the assessment. Provisions of section 271(1)(c) provides for imposition of penalty for concealment of income i.e. such a penalty can be imposed only when the assessee has:

(a) Concealed the particulars of his income; or

(b) Furnished inaccurate particulars of income.

  

In CIT v. Raj Trading Co., explaining the difference between the two held that the words ‘furnishing inaccurate particulars of income’ refer to the particulars which have been furnished by an assessee of his income and the requirements of concealment of income is that income has not been declared at all or is not even been recorded in the books of accounts or in a particular case the concealment of the particulars of income may be from the books of accounts as well as from furnished. - [CIT v. Raj Trading Co. (1996) 217 ITR 208 (Raj)]

Mere making of a claim which had not been accepted, would not per se tantamount to furnishing of inaccurate particulars to attract penalty proceedings under section 271(1)(c) of Income Tax Act, 1961

Bare perusal of explanation furnished by the assessee went to prove that it had come up with bona fide claim with no actual or conscious furnishing of inaccurate particulars, therefore, levy of penalty was not justified. Assessing Officer levied penalty under section 271(1)(c) after making disallowance on account of expenditure on impairment of assets being treated as capital loss. Assessee submitted that on analysis of market value of goods held for disposal, management of company had decided to write off balance 18% value of earlier impaired goods, there being no realizable value since the goods had become obsolete and were neither saleable in market nor were carrying any market value. In view of this impairment of assets was allowable as business expenditure. Held: Mere making of a claim which had not been accepted, would not per se tantamount to furnishing of inaccurate particulars to attract penalty proceedings under section 271(1)(c). Bare perusal of explanation furnished by the assessee went to prove that it had come up with bona fide claim with no actual or conscious furnishing of inaccurate particulars, therefore, levy of penalty was not justified. (Related Assessment year : 2011-12) - [Jain Studios Ltd. & Anr. v. DCIT (2018) TaxPub(DT) 2419 (ITAT Delhi)]

Additions made by the Assessing Officer are on estimate basis - Penalty levied by the Assessing Officer under section 271(1)(c) cannot survive

It was held that in so far as additions towards unexplained cash credit on account credit found in partners' capital account, although the ITAT has confirmed the additions, the assessee has filed explanations before the Assessing Officer that the partners have enough source to explain credits found in capital account. Therefore, we are of the considered view that the Assessing Officer was incorrect in levying penalty under section 271(1)(c) on adhoc disallowance of expenses, un-reconciled contract receipts, unexplained cash credit when the assessee has explained with necessary evidences. (Related Assessment years : 2003-04 and 2004-05) - [Vishwakarma Enterprises v. ITO – Date of Judgement : 25.05.2018 (ITAT Mumbai)]

Penalty under section 271(1)(c) not justified merely for disallowance of claim

The assessee had an arguable case or had taken a bonafide plea. The assessee had given his explanation and categorically and clearly stated the true and full facts in the return itself. He did not try to camouflage or cover up the expenses claimed. It is not uncommon and unusual for an assessee to bonafidely claim a particular expenditure as a revenue deduction and expense but not succeed. Every addition or disallowance made does not justify and mandate levy of penalty for concealment under Section 271(1)(c) of the Act. Levy of penalty is not an automatic consequence when an addition is made by disallowing an expense and by not accepting the interpretation given by the assessee. The plea and contention raised by the assessee has to be examined before it is decided whether or not the assessee has been able to bring his case within the four corners of the Explanation." It is thus obvious that the respondent-assessee having furnished all the details of its expenditure as well as income in its return, it was upto the authorities to accept his claim or to reject it. But merely because the respondent assess had claimed an expenditure which was not accepted by the revenue, that by itself would not attract the penalty of Section 271(1)(c). (Related Assessment year :  2009-2010) – [PCIT v. Manzoor Ahmad Walvir - Date of Judgement : 31.07. 2017 (J & K)]

Deduction disallowed by the Assessing Officer and assessment order confirmed by the CIT (A) - It does not amount to concealment of income or furnishing of inaccurate particulars

It was held that when the assessee has claimed any deduction by not concealing anything and in case the deduction has been disallowed by the Assessing Officer and assessment order has been confirmed by the CIT (A) it does not amount to concealment of income or furnishing of inaccurate particulars.

From the facts of this case it is clear that the assessee disclosed all the particulars of his income. The Assessing Officer has disallowed his claim without holding it to be bogus or false. Hence, the genuineness of the loss occurred is not at question here.

It is settled law that where there is no finding that any details supplied by the assessee in its return are found to be incorrect or erroneous or false there is no question of inviting the penalty under section 271(1)(c). A mere making of a claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such a claim made in the return cannot amount to furnishing inaccurate particulars.” (Related Assessment year : 2008-09) - [M. S. Mindmill Software Ltd. v. ITO - Date of Judgement : 10.02.2017 (ITAT Delhi)]

Disallowance of expenditure claimed by the Assessee does not amount to ‘Concealment of Income’, Hence, Penalty is not leviable;
The Income Tax Appellate Tribunal, Delhi division has ruled that mere disallowance of expenditure claimed by the assessee will not contribute to ‘concealment of income’ and therefore, penalty under section 271 of the Income Tax Act, 1961 will not be sustained. The Tribunal was considering an appeal filed by the assessee challenging the penalty proceedings initiated against them. The grievance of the assessee is that the penalty proceedings were initiated on the ground that assessee has concealed income. The assessee challenged the said proceedings on the ground that since the Assessing Officer made an addition by taking net profit at 10% which was reduced to 4% by the ITAT, it does not amount to concealment of income. The assessee further contended that disallowance of expenditure of Rs. 32,658/- claimed by the assessee also does not amount to concealment of income. On appeal, the Commissioner of Income Tax also confirmed the order. The matter was further brought before the Appellate Tribunal. The Court found that to impose penalty under section 271(1)(c) of the Act, two conditions must be satisfied. Firstly, the assessee must have furnished inaccurate particulars of income and secondly, the assessee must have concealed particulars of income from the tax authorities. While rejecting the impugned order, the Tribunal observed that “First of all, so far as question of applying the gross profit rate of 10%, further reduced to 4% by the Appellate Tribunal, after rejecting the books of account by the Assessing Officer on estimation basis is concerned, the same does not amount to concealment of income by the assessee because the assessee during the assessment proceedings put forth book results, audited balance sheets, etc. before the Assessing Officer but the same has been rejected by Assessing Officer by invoking the provisions contained Assessing Officer 145(2) of the Act. In case, books of account have been rejected, the Assessing Officer has to assess the income on the basis of comparative study and not on the basis of guesswork and estimation. So, to our mind, this cannot be concealment of income by any stretch of imagination even.” The Tribunal further added that, “disallowance of expenditure of Rs.32,658/-, for argument sake even if assumed to be wrongly claimed by the assessee, does not amount to concealment of income in any manner, because allowability of expenditure claimed by the assessee is to be examined by the Assessing Officer and mere claim of assessee is not concealment.” - (Related Assessment year : 1990-91) – [M/s. Perfect Spray Pac (P) Ltd. v. ITO – Date of Judgement : 08.08.2016 ( ITAT Delhi)]

In the case of  DCIT v. Abhishek Export, the assessee claimed deduction of expenditure under the head ‘wages’. The Assessing Officer made disallowance at a flat rate of 20% on account of cash payments in the wages account and imposed penalty. It was held that merely because certain expenses had been claimed by the assessee to have been incurred in cash and were not supported by documentary evidence to the satisfaction of the revenue authorities, it could not be said that the revenue had proved that expenses claimed were inflated or nongenuine. No penalty could be imposed under section 271(1)(c) on preponderance of probabilities and revenue had to prove that the claim of expenses by the assessee was not genuine or was inflated to reduce its tax liability. Since no such material had been produced by the revenue to suggest that the assessee had in fact inflated its expenses or non genuine expenses were claimed under the head ‘wages to workers’, no penalty under section 271(1)(c) can be levied. – [DCIT v. Abhishek Export (2014) 148 ITD 20 (ITAT Ahmedabad)]

Disallowance of a genuine claim made during the assessment proceeding does not amount to concealment hence, the levy of penalty not justified as there was no furnishing of inaccurate particulars of facts

It was held that Law does not bar or prohibit an assessee for making a claim, which he believes may be accepted or is plausible. When such a claim is made during the course of regular or scrutiny assessment, liberal view is required to be taken as necessarily the claim is bound to be carefully scrutinized both on facts and in law. Full probe and appraisal is natural and normal. Threat of penalty cannot become a gag and/ or haunt an assessee for making a claim which may be erroneous or wrong, when it is made during the course of the assessment proceedings. Normally, penalty proceedings in such cases should not be initiated unless there are valid or good grounds to show that factual were provided in the computation. Law does not bar or prohibit a person from making a claim, when he knows the matter is going to be examined by the Assessing Officer. - [CIT v. DCM Limited (2013) 359 ITR 102 : 262 CTR 295 (Del)]

Penalty cannot be levied if the assessee discharges the primary burden by a cogent explanation and the Assessing Officer is unable to rebut it. MAK Data (SC) explained

Pursuant to a search conducted under section 132 it was revealed that the assessee had “on-money” transactions in real estate dealings. The assessee accepted the “on-money” but claimed that it was taxable only on completion of the projects under the ‘completed contract method‘. The assessee’s claim was rejected by all the authorities including the High Court. In the section 271(1)(c) penalty proceedings, the assessee claimed that there was a mistake in the entries regarding the sale of flats to J.B. Exports in as much as the rate at which the property was shown as sold to the said party was much higher than the rate at which the property was sold to other parties. The Assessing Officer and CIT(A) rejected the claim but the Tribunal accepted it on the basis that the huge difference in the rate of sale of the flat recorded in other cases and in the case of J.B. Exports supported the assessee’s contention that there may be a mistake in recording the rate. It held that as the department had failed to prove concealment without any doubt, penalty could not be imposed. On appeal by the department to the High Court, HELD dismissing the appeal: Merely because the assessment proceedings have been confirmed does not automatically mean that penalty under section 271(1)(c) is justified. Unless the case is strictly covered by section 271(1)(c), penalty cannot be invoked. For sustaining penalty, the bona fide explanation of the assessee must be looked at so that the contumacious conduct of the assessee for the purpose of sustaining the penalty would be taken as condition that is the main requirement under section 271(1)(c). In Mak Data P. Ltd v. CIT the Supreme Court held that when a difference is noticed by the Assessing Officer between the reported and assessed income, the Explanation to Section 271(1) raises a presumption of concealment and the burden is on the assessee to show otherwise, by cogent and reliable evidence. When the initial onus placed by the Explanation has been discharged by the assessee, the onus shifts on the Revenue to show that the amount in question constituted undisclosed income. On facts, the onus cast upon the assessee has been discharged by giving a cogent and reliable explanation. If the department did not agree with the explanation, the onus was on the department to prove that there was concealment of particulars of income or furnishing inaccurate particulars of income. Such onus has not been discharged by the department and so the Tribunal’s finding cannot be interfered with (UOI & Ors. v. Dharmendra Textiles Processors & ors. (2008) 306 ITR 277 (SC) & CIT v. Reliance Petroproducts (P) Ltd. (2010) 322 ITR 158 (SC) referred) - [CIT v. Gem Granites – Date of Judgement : 12.11.2013 (Karn)]

Cash credits - Mere failure in proving capacity of shareholders to invest in share capital of assessee, could not be a ground for imposing penalty on company

There was an increase in the share capital of the assessee. During assessment proceedings, the assessee submitted confirmatory letters of shareholders to prove genuineness, except in the case of two persons. A number of defects regarding the new loans and shareholders were found in those letters. As assessment was getting barred and the assessee was unable to produce necessary documentary evidence vis-à-vis capacity of shareholders and depositors to full extent, in order to buy peace and avoid litigation, the assessee filed a revised return and surrendered share capital and unsecured loans to certain extent. The loss as declared in the revised return was accepted by the Assessing Officer. However, penalty under section 271(1)(c) was levied on the ground that the assessee had concealed its income to the extent of the share capital and unsecured loans which were surrendered in the revised return. The CIT(A) confirmed the levy of penalty. The Tribunal, however, deleted the penalty. In its appeal to the High Court, the department argued that the revised return filed by the assessee was no return in the eyes of law and filing a revised return cannot absolve the assessee from paying the penalty. The High Court observed that the loss declared by the assessee in the revised return filed, had been accepted in to to and that the bona fide of the assessee is, therefore, established because it was not able to produce the necessary documentary evidence for proving the capacity of the shareholders and depositors to the full extent within a short span of time as the assessment was getting barred by limitation. Accordingly, relying on the decision of Supreme Court in the case of CIT v. Stellar Investment Ltd. (2001) 251 ITR 263 and CIT v. Lovely Exports (P) Ltd. (2008) 216 CTR 195 (SC), and holding that factually, bona fide of the assessee having been established, failure of the assessee in proving the capacity of various shareholders to invest in the share capital, could not have been a ground for initiating penalty proceedings, the High Court dismissed the departmental appeal. (Related Assessment year : 1989-90) – [CIT v. Awadh Fertilisers (P) Ltd. (2013) 35 taxmann.com 453 (All)]

No penalty on Ad-hoc Disallowances

It was held that no penalty can be levied on adhoc disallowances. – [CIT v. Nokia India (P) Ltd. (2012) 343 ITR 434 : 254 CTR 139 : 80 CCH 146 : 77 DTR 254 (Del)]

Mere claim made by the assessee or its disallowance by the assessing officer does not amount to furnishing of ‘inaccurate particulars’ in the return for the purposes of imposition of penalty under section 271(1)(c)

In CIT v. Reliance Petroproducts (P) Ltd. (2010) 322 ITR 158 (SC) held that where information given is not found to be incorrect, assessee cannot be held guilty of furnishing inaccurate particulars of income for the purpose of levying penalty under section 271(1)(c). Further held that mere making a wrong claim does not amount to furnishing inaccurate particulars. In the absence of finding that any details supplied by assessee is incorrect or false, penalty cannot be levied.

The Supreme Court while elaborating the scope of section 271(1)(c) in CIT v. Reliance Petroproducts (P) Ltd (2010) 322 ITR 158 held that-

“A glance of provision of section 271(1)(c) would suggest that in order to be covered, there has to be concealment of the particulars of the income of the assessee. Secondly, the assessee must have furnished inaccurate particulars of his income. The instant case was not the case of concealment of the income. That was not the case of the revenue either. It was an admitted position in the instant case that no information given in the return was found to be incorrect or inaccurate. It was not as if any statement made or any detail supplied was found to be factually incorrect. Hence, at least, prima facie, the assessee could not be held guilty of furnishing inaccurate particulars. The revenue argued that submitting an incorrect claim in law for the expenditure on interest would amount to giving inaccurate particulars of such income. Such cannot be the interpretation of the concerned words. The words are plain and simple. In order to expose the assessee to the penalty unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing of inaccurate particulars. ^“

The Supreme Court further held in the Reliance Petrochemicals case that-

The argument of the revenue that “submitting an incorrect claim for expenditure would amount to giving inaccurate particulars of such income” is not correct. By no stretch of imagination can the making of an incorrect claim in law tantamount to furnishing inaccurate particulars. A mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. If the contention of the Revenue is accepted then in case of every Return where the claim made is not accepted by the Assessing Officer for any reason, the assessee will invite penalty under section 271(1)(c). That is clearly not the intendment of the Legislature.

It was held that in case, any claim made by the assessee has not been accepted it would not per se tantamount to furnishing any account of inaccurate particulars to attract the penalty proceedings under section 271(1)(c). Operative part of the aforesaid judgment is extracted as under :-

“Held; dismissing the appeal, that the assessee had filed the return and furnished all particulars. The assessee had explained during the penalty proceedings that the investments were written off in the books of account and were claimed as deduction on account of loss which occurred to the assessee in the computation of total income. The Tribunal analysing the facts had expressed the view that there had been no furnishing of inaccurate particulars of such income and the assessee had declared the entire material. It was a case where a claim put forth by the assessee as regards the loss was not accepted but that would not per se tantamount to furnishing any kind of inaccurate particulars. Thus, there had been no concealment of income or furnishing of inaccurate particulars. Hence, the cancellation of penalty was valid.” – [CIT v. IFCI Limited (2010) 328 ITR 611 (Del)]

Penalty not leviable where the explanation is unproved but not disproved

It was held that even though the assessee had not satisfactorily explained the cash credits by producing documents and evidence nor produced the parties concerned and only explained that the cash credits were temporary advances arranged by the accountant which whom the relations were strained, penalty for concealment could not be levied as there was nothing to suggest that it represented the income of the assessee. – [National Textiles v. CIT (2001) 249 ITR 125 (Guj)]

As there was no fraud and in absence of other evidence, the penalty levied under section 271(1)(c) was cancelled

In the case of CIT v. Inden Bislers, substantial amount was given as commission to the firms in which two of the partners were also partners. As there was no fraud and in absence of other evidence, the penalty was cancelled. It was held by Madras High Court that, if there are additions to income, it does not mean that there has been concealment of income. If a particular expenditure was not justifiable from a commercial point of view and addition is made in the income, penalty under section 271(1)(C) could not be levied. In penalty proceedings the department has to prove that there was fraud or willful neglect on the part of the assessee. The department has to adduce evidence for concealment of income.  – (Related Assessment year : 1965-66) - [CIT v. Inden Bislers (1999) 240 ITR 943 (Mad)]

Creditors admitting loan but not accepted by the Assessing Officer - No other material available with the Assessing Officer - No penalty under section 271 (1) (C) was justified

In the case of CIT v. Shree Bajrang Trading and Supply Company, the creditors admitted loans. The assessing officer did not believe the admission of creditors. There was no material available with the assessing officer to prove concealment of income. It was held in this case that no penalty under section 271(1)(C) was justified. (Related Assessment year : 1964-65) - [CIT v. Shree Bajrang Trading and Supply Company (1991) 187 ITR 299 (Cal)]

No Penalty under section 271(1)(c) on disallowance of expenditure, in case assessee had disclosed full facts relating to the claimed expenditure in the notes to accounts which was infact the basis of disallowance by Assessing Officer

FACTS OF THE CASE - PARA 3 & 4 OF THE ORDER

3. The facts in brief are that the assessee, a private Ltd. Company is engaged in the business of web based education services. During the year it had claimed an expenditure of Rs. 4,15,14,394/- on account of cost of WEB site maintenance. Out of this expenditure the assessee had debited an amount of Rs. 1,50,21,941/- in the profit and loss account. The balance of Rs. 2,64,92,553/- was capitalized and transferred to balance sheet under the head “ miscellaneous expenditure” in schedule 7, on which the assessee had claimed depreciation @ 25%. In response to specific query as to why the amount of Rs.1,50,21,841/- should not be capitalized, the assessee could not furnish any satisfactory explanation therefore the amount of Rs. 1,31,44,111/- was added to the income of the assessee after allowing depreciation of Rs. 18,77,730/- allowable under the Act.

4. The assessee had claimed an expenditure of Rs. 1,35,02,409/- towards payment made to FCB ULKA Advertising Ltd. Summons under section 131 were issued to the party to confirm the transaction. In reply, the party i.e. FCB ULKA Advertising Ltd. confirmed that they have booked an income of Rs. 1,32,81,184/-. Therefore, the difference of Rs. 2,21,225/- was added to the income of the assessee on account of unexplained expenditure. The Assessing Officer initiated penalty proceedings under section 271(1)(c) of the Act and being not satisfied with the explanation of the assesee has levied the penalty of Rs. 2,52,85,990/- under section 271(1)(c) of the Act. The Ld. CIT(A) has deleted the same against which the present appeal has been preferred.

ARGEMENTS BY REVENUE - PARA 5 OF THE ORDER

5. In support of the ground the Ld. DR has basically placed reliance on the penalty order. He submitted that the Ld. CIT(A) while deleting the penalty has failed to appreciate that the assessee has deliberately claimed the above expenses which were not allowable. He submitted that the disclosure made by the asseseee in the notes to account only proves that the assessee had claimed such expenses fully knowing that these were not allowable. Thus there was concealment of particulars of income and furnishing inaccurate particulars thereof on the part of the assessee to attract the penal provisions.

HELD BY TRIBUNAL - PARA 15 & 16 OF THE ORDER
15. When we examine the facts of the present case as discussed above in the light of the above decisions we find that there is no doubt on the genuineness of the claimed expenditure, the only question was the treatment given by the assesee to those expenditure which was a debatable issue and further that there was no allegation that the assesee had not disclosed full facts relating to the claimed expenditure as it was disallowed by the Assessing Officer only on the basis of those disclosures. We thus find that the Ld. CIT(A) has rightly deleted the penalty levied by the Assessing Officer in question. (Related Assessment Year : 2001-02)] – [DCIT v. M/s. Learning Universe (P) Ltd. ITA No. 441/Del/2005 (ITAT Delhi)]

No penalty merely because there are certain additions/ disallowances in the assessment

Merely because certain expenses claimed by the assessee has been disallowed it does not mean that the assessee has furnished incorrect particulars of its income. The rejection of the contention raised by the Assessee cannot lead to the conclusion that there has been concealment of particulars of income or furnishing of inaccurate particulars thereof by the Assessee. – [CIT v. Shivlal Desai & Sons (1978) (114 ITR 388 (Bom), CIT v. Ajaib Singh & Co. (2001) 170 CTR 489 (P&H), Devi Dass Sukhani v. ITO (2006) 101 TTJ 551 (ITAT Jodhpur)]