2010 (5) TMI 34 - HC - Income Tax

Penalty u/s 271(1)(c) Bonafide mistake - During penalty proceedings, the assessee claimed that it had committed a bona fide mistake and all the facts material to the computation were disclosed. The Assessing Officer was of the view that there was no difference of opinion as regards disallowance of these expenses and the incorrect computation given by the assessee was an act of paying less tax than what was due from it. He was of the view that the assessee was a big company, assisted by a team of Tax Auditors and, therefore, it was a case of concealment of income as well as of furnishing wrong particulars for computation of income. CIT(A) confirmed the penalty but ITAT deleted the penalty Held that It is true that mere submitting a claim which is incorrect in law would not amount to giving inaccurate particulars of the income of the assessee, but it cannot be disputed that the claim made by the assessee needs to be bonafide. If the claim besides being incorrect in law is malafide, Explanation 1 to Section 271(1) would come into play and work to the disadvantage of the assessee. - The Court cannot overlook the fact that only a small percentage of the Income Tax Returns are picked up for scrutiny. If the assessee makes a claim which is not only incorrect in law but is also wholly without any basis and the explanation furnished by him for making such a claim is not found to be bonafide, it would be difficult to say that he would still not be liable to penalty under Section 271(1)(c) of the Act. - The explanation offered by the assessee company was not accepted either by the Assessing Officer or by the Commissioner of Income Tax(Appeals). The view of Income Tax Appellate Tribunal regarding admissibility of the deduction on account of written off of certain assets, under Section 32(1)(iii) of the Act is wholly erroneous Penalty confirmed ITAT order is not correct decided in favor of revenue.

Summary

Issues Involved:
1. Whether the Income Tax Appellate Tribunal (ITAT) erred in deleting the penalty imposed under Section 271(1)(c) of the Income Tax Act for two specific deductions claimed by the assessee.

Detailed Analysis:

Issue 1: Deduction Claimed for Income Tax Paid
The assessee company, engaged in hiring audio and video equipment, filed a return declaring an income of Rs 1,21,49,861/-. During scrutiny, it was noticed that Rs 1 lakh was debited under "income tax paid" in the Profit & Loss Account. The assessee claimed this was an oversight and it should have been added back in the computation of income. The Assessing Officer (AO) added this amount back and initiated penalty proceedings under Section 271(1)(c) of the Income Tax Act for concealment of income and furnishing inaccurate particulars.

The Commissioner of Income Tax (Appeals) upheld the penalty, stating the mistake was not bona fide. However, the ITAT accepted the assessee's contention of a bona fide mistake and deleted the penalty, arguing no person would claim income tax as a deduction to evade taxes.

The High Court disagreed with the ITAT, stating that the specific provisions of Section 40(ii) of the Act clearly prohibit claiming income tax as a deduction. The court emphasized that the assessee did not provide any explanation for the oversight, nor did it argue that the issue was debatable or that it acted under a bona fide belief. The court concluded that the claim was not bona fide and upheld the penalty imposed by the AO.

Issue 2: Deduction Claimed for Equipment Written Off
The assessee also debited Rs 13,24,539/- under "equipment written off" in the Profit & Loss Account. The AO added this amount back, stating it should have been adjusted in the block of assets. The ITAT, however, accepted the assessee's explanation that the equipment had become unusable and discarded, and held that the deduction could have been claimed under Section 32(1)(iii) of the Act. The ITAT thus deleted the penalty for this item as well.

The High Court found the ITAT's view incorrect, explaining that Section 32(1)(iii) applies only to assets for which depreciation has been claimed and allowed under Clause (i), which pertains to assets of undertakings engaged in power generation/distribution. Since the assessee was not engaged in such activities, the provisions of Clause (i) did not apply, and therefore, the deduction under Clause (iii) was not permissible. The court noted that the assessee did not argue that claiming such a deduction was debatable or that it acted under a bona fide belief. Consequently, the court held that the claim was unjustified and upheld the penalty.

Legal Principles and Precedents:
The court referred to the Supreme Court's decision in Commissioner of Income Tax vs. Reliance Petro Products Pvt. Ltd., which held that mere submission of an incorrect claim does not amount to furnishing inaccurate particulars unless the claim is found to be malafide. The High Court distinguished the present case from Reliance Petro Products, noting that the assessee did not provide any bona fide explanation for the incorrect claims.

Conclusion:
The High Court concluded that the ITAT erred in deleting the penalty for both deductions. It held that the assessee's claims were not bona fide and upheld the penalties imposed by the AO. The court emphasized the importance of maintaining the deterrent effect of penalty provisions to prevent unscrupulous claims by assessees.

The appeal was disposed of in favor of the revenue, reinstating the penalties for the amounts claimed as deductions for income tax paid and equipment written off.