2013 (4) TMI 802 - HC - Income Tax

Summary

Issues involved:
The issue involves the justification of penalty u/s 271(1)(c) in a case related to Assessment Year 1986-87 where the assessee claimed a payment for violation of FERA as business loss, leading to allegations of concealment of income.

Judgment Details:

Background:
The applicant, a registered firm engaged in the business of manufacturing and exporting carpets, filed a return for the Assessment Year 1986-87 showing a loss of Rs. 75,000. The Assessing Officer initially accepted the loss but later found that the firm was penalized for FERA violations, leading to a penalty of Rs. 1,95,000. The firm had not debited this penalty amount in the Profit and Loss account initially.

Assessment and Appeal:
The penalty was later reduced to Rs. 1,20,000 on appeal. The Assessing Officer initiated proceedings u/s 147(a) and called for a return, which was filed by the assessee maintaining the same income as in the original return. The Assessing Officer questioned the treatment of the penalty amount as business expenditure.

Assessee's Explanation:
The assessee explained that the penalty was a legitimate business expenditure incurred in the course of business due to difficulties in realizing dues from overseas partners and actions by FERA authorities.

Decision:
The Tribunal upheld the levy of penalty under Section 271(1)(c) despite the assessee's explanation. However, the High Court, citing relevant legal precedents, concluded that wrongly claiming an item as a business loss does not amount to concealment of income. Referring to specific court cases, the High Court ruled in favor of the assessee, stating that even a mistake by a knowledgeable entity like a leading firm of Chartered Accountants does not warrant a penalty under Section 271(1)(c) of the Income-tax Act, 1961.

Conclusion:
The High Court answered the question posed by the Income-tax Appellate Tribunal in the negative, favoring the assessee and ruling against the Revenue.