2020 (12) TMI 229 - HC - Income Tax

Penalty u/s 271(1)(c) - Revised return filed - expenditure being operating and administrative expenses and finance charges being interest on loan taken by the Assessee claimed by the Assessee were not allowable expenditure, because the Assessee had not yet commenced its regular business operations - HELD THAT - If the Assessee had declared Nil income in its original return of income, as it had not commenced the business, but filed revised return of income to fairly disclose its foreign exchange gain made during the year, even prior to commencement of business, but, at the same time bona fide claimed the expenditure incurred during that year in the form of interest or finance charges or administrative expenses against such income, and disclosed all these facts in audited Balance Sheet filed with the Return of Income and filed a Loss Return before the authority, the authority concerned was entitled to take a different view of the matter that such expenditure was not allowable, as the Assessee had not commenced its business operations and on that issue, there was no serious dispute from the side of the learned counsel for the Assessee before us also and that is why, the Assessee seems to have accepted the income tax liability fixed upon him and paid the said tax without a demur. The considerations for imposition of penalty under Section 271(1)(c) of the Act are however entirely different. It requires existence of mens rea on the part of the Assessee and either of the twin conditions of (i) concealment of income or (ii) filing of inaccurate particulars by Assessee, are required to be satisfied and the burden of proving that lies upon the revenue authority and not on the Assessee. Merely because the claim of expenditure made by the Assessee is found to be a wrong claim and is disallowed, it does not per se attract imposition of penalty under Section 271(1)(c). One fails to understand how the reduction of loss in the Assessment order would amount to income on which tax payment could have been evaded by Assessee. No positive income could result by such disallowance and therefore, no tax in fact could ever be imposed on such assumed reduction of loss considered by the Assessing Authority. This is just a hypothetical figure of income taken by the authority concerned in order to impose somehow penalty under Section 271(1)(c) upon the Assessee. In the present case, we are of very clear and firm view that it was not at all a fit case for the imposition of penalty under Section 271(1)(c) of the Act as the basic requirement for invoking that provision are not at all satisfied in the present case and the appeal of the Assessee therefore deserves to be allowed.

Summary

Issues Involved:
1. Legality of the penalty imposed under Section 271(1)(c) of the Income Tax Act.
2. Interpretation of "concealment of income" and "furnishing inaccurate particulars."
3. Applicability of Explanation 1 to Section 271(1)(c) of the Income Tax Act.
4. Validity of the rectification order under Section 154 of the Income Tax Act.

Detailed Analysis:

1. Legality of the Penalty Imposed under Section 271(1)(c) of the Income Tax Act:
The central issue was whether the Income Tax Appellate Tribunal (ITAT) was correct in reversing the order of the Commissioner of Income Tax (Appeals) [CIT(A)] and restoring the penalty under Section 271(1)(c). The ITAT had set aside the CIT(A)'s order, which had deleted the penalty imposed by the Assessing Officer (AO). The AO had imposed a penalty of ?39,63,854/- for the alleged concealment of income and furnishing inaccurate particulars, which was later increased to ?43,60,239/- under Section 154.

2. Interpretation of "Concealment of Income" and "Furnishing Inaccurate Particulars":
The CIT(A) had observed that the disallowance of the Assessee's claim was due to a difference of opinion between the Assessee and the AO, not because of any concealment or inaccurate particulars. The CIT(A) relied on the Supreme Court's decision in CIT vs Reliance Petroproducts Pvt. Ltd., which held that making an incorrect claim does not tantamount to furnishing inaccurate particulars. The CIT(A) concluded that the Assessee had furnished all details of its expenditure and income in its return, and the AO's disallowance was based on a different interpretation of the law.

3. Applicability of Explanation 1 to Section 271(1)(c) of the Income Tax Act:
The ITAT's decision was based on the premise that the Assessee's explanation was not bona fide and fell under category (B) of Explanation 1 to Section 271(1)(c), which covers situations where the Assessee offers an explanation but fails to prove its bona fides. The ITAT relied on the Supreme Court's judgment in Mak Data (Pvt) Ltd. vs. CIT, which held that surrendering income to avoid litigation does not exempt the Assessee from penalty if the surrender was not voluntary.

4. Validity of the Rectification Order under Section 154 of the Income Tax Act:
The AO had initially imposed a penalty of ?39,63,854/- and later increased it to ?43,60,239/- under Section 154, which allows rectification of mistakes apparent on the face of the record. The Assessee argued that the penalty could not be based on "reduction of loss" as it does not constitute income. The High Court found that the AO's computation of penalty based on "reduction of loss" was erroneous and lacked understanding of the penalty provisions.

Conclusion:
The High Court allowed the Assessee's appeal, holding that the ITAT erred in restoring the penalty. The Court emphasized that the Assessee had disclosed all relevant facts in its return and the disallowance of expenses was due to a difference in interpretation of the law, not due to concealment or inaccurate particulars. The Court also criticized the AO's computation of penalty based on "reduction of loss" and the subsequent rectification order under Section 154. The High Court concluded that the requirements for imposing a penalty under Section 271(1)(c) were not met and thus, the penalty was unjustified. The appeal was allowed, and the question of law was answered in favor of the Assessee.