2010 (9) TMI 1142 - AT - Income Tax

Summary

Issues Involved:
1. Levy of penalty under section 271(1)(c) of the Income Tax Act, 1961.
2. Applicability of the proviso to section 36(1)(viia)(c) of the Income Tax Act.
3. The bonafide nature of the assessee's claim.
4. The impact of legal advice on the assessee's claim.
5. Explanation 1 to section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Levy of Penalty Under Section 271(1)(c):
The central issue in the appeal is the levy of penalty amounting to Rs. 8,35,26,111/- under section 271(1)(c) for furnishing inaccurate particulars of income. The Assessing Officer (AO) disallowed the assessee's claim for deduction of Rs. 23,37,28,200/- under the proviso to section 36(1)(viia)(c), allowing only Rs. 9,02,904/- under the substantive section. The AO deemed the claim as patently wrong and untenable, indicating a degree of deliberateness in making the claim.

2. Applicability of Proviso to Section 36(1)(viia)(c):
The assessee, a State Financial Corporation, claimed a deduction for bad and doubtful debts under the proviso to section 36(1)(viia)(c). The proviso, introduced by the Finance Act, 2002, allowed a deduction not exceeding 10% of such assets for any two consecutive assessment years starting from 1st April 2003 and ending before 1st April 2005. The CIT(A) and the Tribunal held that this proviso was not applicable for the assessment year 2005-06, thus disallowing the claim.

3. Bonafide Nature of the Assessee's Claim:
The assessee argued that the claim was made under a bonafide belief based on legal advice. The original return did not claim the deduction, but a revised return did, following the legal opinion. The AO and CIT(A) rejected this explanation, considering it an afterthought and not bonafide. However, the Tribunal noted that the assessee had disclosed all material facts and the claim was based on a plausible interpretation of the law, thus not amounting to furnishing inaccurate particulars.

4. Impact of Legal Advice on the Assessee's Claim:
The assessee contended that the claim was made based on legal advice, which should be considered bonafide. The Tribunal found merit in this argument, noting that the assessee acted on the advice of its legal counsel. The Tribunal referenced the Hon'ble Punjab & Haryana High Court's ruling in CIT Karnal Vs. Deepak Kumar, which held that acting on legal advice in good faith does not attract penalty under section 271(1)(c).

5. Explanation 1 to Section 271(1)(c):
The authorities below invoked Explanation 1 to section 271(1)(c) to justify the penalty. However, the Tribunal found that the assessee provided a bonafide explanation and no material facts were found to be false. The mere non-acceptance of a claim does not justify invoking the Explanation to section 271(1)(c). The Tribunal emphasized that a claim made in good faith, even if disallowed, does not constitute furnishing inaccurate particulars.

Conclusion:
The Tribunal concluded that the assessee's claim, though disallowed, was made under a bonafide belief based on legal advice. The disallowance was due to a difference in interpretation of the law, which does not amount to furnishing inaccurate particulars. Consequently, the Tribunal set aside the CIT(A)'s order and directed the AO to delete the penalty levied under section 271(1)(c). The appeal of the assessee was allowed.