2024 (4) TMI 666 - AT - Income Tax

Levy of penalty - Penal proceedings for misreporting of income u/s 270A - Excess exemption claimed on Gratuity u/s 10(10)(i) and Leave Encashment receipts u/s 10(10AA)(ii) - HELD THAT - Levy of penalty in this case in our considered view was not warranted for the reasons that; (i) admittedly for part of the service the appellant was State Government employee whose employment by enforcement of electricity Act, 2003 and MSEDCL employee Service Regulation 2005 was converted into nongovernmental service/employment. Therefore, the belief under which full exemption of retirement benefit claimed in the ITR filed was in first not incorrect in its entirety and certainly it was bonafied and not synthetic one (ii) secondly, the explanation offered by the appellant in support of his mistaken but bonafied belief and disclosed all material facts of his service the circumstance which swayed to claim full exemption in his ITR in our considered view squarely falls within clause (a) of s/s (6) of section 270A of the Act, therefore pardonable (iii) and finally, the imposition of penalty is at the discretion of Ld. AO, since s/s (1) of section 270A of the Act, refers to the word 'may' and not as shall . However, the tax authorities below in our considered view were failed to appreciate the facts and circumstance of the present case holistically and further in right spirit of law, but dealt therewith without application of mind and perfunctory imposed / confirmed the penalty @ accelerated rate of 200% u/s 270A of the Act in unwarranted case like this. As in respect of penalty in fiscal laws the principle followed is more like the principle in criminal cases. That is to say the benefit of doubt is more easily given to the assessee, and this finds expounded in VV. IYER VERSUS COLLECTOR OF CUSTOMS 1972 (9) TMI 52 - SUPREME COURT . In view of this, we set-aside the impugned order of Ld. NFAC and quashed the order of penalty. Appeal of assessee allowed.

Summary

Issues Involved:
- Exemption of gratuity and leave encashment claimed by the assessee
- Imposition of penalty under section 270A of the Income-tax Act, 1961

Summary:

Exemption of Gratuity and Leave Encashment:
The appellant, a former employee of a state-owned company, claimed full exemption for gratuity and leave encashment in the income tax return. However, the Assessing Officer restricted the exemption based on the maximum ceiling applicable to non-government employees. The appellant accepted the disallowance and paid the taxes. The Tribunal noted that the appellant had served both as a State Government employee and later as an employee of a PSU. The portion of gratuity accrued during the government service was entitled to full exemption, while the balance accrued during the PSU service was subject to the prescribed limit. Similarly, the leave encashment attributable to service with the PSU should have been partially exempt. The tax authorities applied the ceiling without a holistic analysis, leading to the penalty proceedings.

Imposition of Penalty:
The penalty under section 270A was imposed at an accelerated rate due to misreporting of income. The appellant argued that the penalty was unjust as the belief in claiming full exemption was genuine and supported by the circumstances of service history. The Tribunal found that the penalty was not warranted as the appellant's belief was bonafide, and all relevant facts were disclosed in the return. The authorities failed to appreciate the case holistically and imposed the penalty without proper consideration. The Tribunal highlighted that penalties in fiscal laws should be treated akin to criminal cases, where the benefit of doubt favors the assessee. Citing legal precedents, the Tribunal set aside the penalty order and ruled in favor of the appellant.

In conclusion, the Tribunal allowed the appeal of the assessee, quashed the penalty order, and emphasized the importance of considering all aspects before imposing penalties in tax matters.