2019 (4) TMI 1522 - AT - Income Tax

Levy of penalty u/s 271(1)(c) - excess claim of gratuity expense - Reasonable cause - Auditors failed to exercise proper professional care in detecting the irregularity while finalizing the accounts and their report u/s. 44AB - HELD THAT - As clearly a dereliction of duty on the part of the Auditors who had apparently also not reported correctly u/s. 44AB. Equally, the tax professional/s preparing the return failed to detect the anomaly which is patent inasmuch as there is no fresh provision for gratuity while the brought forward provision continues to outstand in accounts despite payment of gratuity, and even as the assessee makes a claim for gratuity for the year in a higher than normal sum of ₹ 214.91 lacs. No doubt that the excess claim of gratuity expense (Rs. 47.30 lacs) was a result of a bona fide mistake by the assessee, saving penalty. The assessee has also raised a Ground qua the invalidity of the penalty proceedings on the basis that in the notice u/s. 274, show causing the assessee therefor, the specific limb of s. 271(1)(c) is not struck off, even as, admittedly, the satisfaction recorded by the AO in the assessment order is for furnishing inaccurate particulars of income. The same was, in view of our acceptance of the assessee s appeal on the principal issue, not pressed nor, consequently, responded to by the Revenue. The impugned penalty is accordingly directed to be deleted. - Decided in favour of assessee.

Summary

Issues:
- Appeal against penalty under section 271(1)(c) of the Income Tax Act, 1961 for Assessment Year 2014-15.

Analysis:

Issue 1: Explanation 1 to section 271(1)(c) and the burden on the assessee to explain inaccuracies in the return
- The law mandates that the burden is on the assessee to explain inaccuracies in the return, as clarified by various court decisions. The Apex Court's rulings emphasize the importance of disclosing all relevant facts and substantiating explanations to avoid penalty under section 271(1)(c). The explanation provided by the assessee must demonstrate bona fides and disclosure of material facts to escape penalty. The case law cited supports the view that penalty is not automatic and can be avoided with a plausible explanation.

Issue 2: Determining mistakes and reasonable cause to avoid penalty
- A mistake without intent to evade tax can still attract penalty under section 271(1)(c) as per Explanation 1. However, a bona fide mistake can eliminate the element of deliberateness required for penalty imposition. The concept of 'reasonable cause' under section 273B further excludes cases where a mistake is made unintentionally. The assessment of 'reasonable cause' involves considering all facts and circumstances, including the conduct of the assessee.

Issue 3: Application of law to the case at hand
- The case involved a cooperative society claiming gratuity expenses mistakenly due to a clerical error by the Accountant. The surrounding facts and circumstances, such as the nature of the organization, its financial situation, and the role of auditors and professionals, were considered. The mistake was deemed bona fide, attributing the error to the Accountant's oversight and the auditors' failure to detect the irregularity. The failure of professionals to identify the anomaly in the return further supported the assessee's claim of a genuine mistake.

Conclusion:
- The excess claim of gratuity expense was found to be a result of a bona fide mistake by the assessee, leading to the deletion of the penalty. The appeal against the penalty under section 271(1)(c) for the Assessment Year 2014-15 was allowed, and the penalty was directed to be deleted. The decision was based on the acceptance of the assessee's explanation and the invalidity of the penalty proceedings due to procedural errors in the notice issued under section 274.