2015 (4) TMI 1165 - HC - Income Tax

Penalty u/s 271(1)(c) - violation of the one term settlement - Whether the explanation 4 to Section 271(1)(c) of the Income Tax Act (as it stood before the amendment by the Finance Act, 2002) could be invoked for the purpose of penalty where the income remained at loss? - Held that - As per the statement annexed by the assessee with the return, they indicated that as per the one time settlement with the Financial Institute, they were required to pay 8.5 Crores on or before 30.6.92 and one of the conditions of the settlement was that if the amount is not paid by the due date then waiver of interest would be forfeited and liquidated damages would also be imposed. Admittedly, the assessee did not abide by the terms of the one time settlement, could not pay the entire due of 8.5 Crores on or before 30.6.92, they paid it only on 7.4.1993. Till filing of the return they had only paid a sum of ₹ 5.25 Crores and the deduction claimed in the earlier year was deducted and the total deduction claimed was ₹ 3,33,25,278/ - and thereafter under the apprehension that as they have violated the one time settlement, therefore, they are liable to pay compound interest and liquidated damages, the statement was made in the return. It was, therefore, a case whether under the apprehension that due to violation of the one term settlement the appellant was liable to pay compound interest and liquidated damages they made certain statement in the return and that too when they were not liable to pay any tax due no income having accrued on account of sustained loss, therefore, in the facts and circumstances of the case, we are of the considered view that it is not a case where an inaccurate or statement is made deliberately or there is deliberate concealment of fact by the appellant. The error seems to be bonafide therefore, we are of the considered view that the penalty could not have been imposed particularly when on the mistake on the part of the Chartered Accountant, the penalty of ₹ 3,30,195/ - has been made. - Decided in favour of assessee

Summary

Issues Involved:
1. Applicability of Explanation 4 to Section 271(1)(c) of the Income Tax Act for penalty when the income remained at a loss.
2. Tribunal's decision on the alleged mistake of the counsel concerning amounts of Rs. 3,30,195/- and Rs. 1,99,82,000/-.

Issue-wise Detailed Analysis:

1. Applicability of Explanation 4 to Section 271(1)(c) of the Income Tax Act:
The first issue addressed whether Explanation 4 to Section 271(1)(c) of the Income Tax Act, as it stood before the amendment by the Finance Act, 2002, could be invoked for imposing a penalty when the income remained at a loss. The appellant's counsel, Shri Sumit Nema, conceded that this issue had been settled against the assessee by various judgments of the Supreme Court. Therefore, the court held this question as rejected against the assessee.

2. Tribunal's Decision on the Alleged Mistake of the Counsel:
The second issue revolved around the Tribunal's handling of the alleged mistake by the counsel regarding the amounts of Rs. 3,30,195/- and Rs. 1,99,82,000/-. The Tribunal had accepted the explanation for the amount of Rs. 3,30,195/- but upheld the penalty for Rs. 1,99,82,000/-.

The assessee, a Cooperative Society, had credited an amount of Rs. 89,49,367/- for previous years' adjustments, which the Assessing Officer (AO) corrected to Rs. 1,22,45,062/-, resulting in an understatement of Rs. 3,30,195/-. Additionally, the assessee claimed a deduction of Rs. 3,33,25,278/- under Section 43(b) for interest payable to financial institutions. The AO found that the assessee had not disclosed the correct position regarding interest payments and settlement of dues, leading to an excessive interest claim of Rs. 1,32,9,788/-. The AO initiated penalty proceedings, which the Commissioner quashed, but the Tribunal partially upheld.

The Tribunal quashed the penalty for Rs. 3,30,195/- as a mistake by the Chartered Accountant but upheld the penalty for Rs. 1,99,82,000/- as a deliberate act. The assessee argued that the mistake was due to a genuine belief that they were liable for compound interest and liquidated damages as they could not meet the one-time settlement terms with the financial institutions. The financial institutions issued a No Dues Certificate only after the assessment was completed, which the assessee claimed justified their apprehension and the resulting mistake.

The court considered precedents, including the Supreme Court's rulings in *Commissioner of Income Tax, Chennai Vs. Durr India (P) Ltd.*, *Commissioner of Income Tax, Ahmedabad Vs. Reliance Petroproducts (P) Ltd.*, and *Price Waterhouse Coopers (P.) Ltd. Vs. Commissioner of Income Tax, Kolkatta*. These judgments emphasized that mere making of an unsustainable claim does not amount to furnishing inaccurate particulars and that penalties should not be imposed for bonafide errors.

The court found that the assessee's error was bonafide, made under the apprehension of liability for compound interest and liquidated damages due to non-compliance with the one-time settlement. The court held that the Tribunal erred in affirming the penalty and quashed the Tribunal's order, concluding that there was no deliberate attempt by the assessee to conceal facts or make inaccurate statements.

Conclusion:
The court quashed the Tribunal's order affirming the penalty imposed by the AO and allowed the appeal, holding that the explanation provided by the assessee should have been accepted, and no deliberate concealment or inaccurate statement was made. The appeal was allowed and disposed of accordingly.