2025 (4) TMI 1257 - AT - Income Tax

Penalty u/s 271(1)(c) - mistake in making of a claim in the return of income -assessee has claimed excess carry forward loss - Assessee in the revised return had claimed remuneration and interest paid to the partners twice which was rectified only in the return filed in response to the notice issued u/s 148 - HELD THAT - A perusal of the computation statement shows that no such claim of carry forward of loss has been made by the assessee. What the assessee has done is that he has claimed the same without adding interest and remuneration paid to the partners and then claimed the same as has been done in the original computation of income. The assessee has inadvertently omitted to add the same in the revised return of income but claimed the salary and interest paid to the partners. We therefore find some force in the arguments of assessee that it was an inadvertent human error and there is no deliberate attempt on the part of the assessee to evade taxes. It is also an admitted fact that the assessee has not claimed the benefit of carry forward of such loss on account of interest and remuneration paid to the partners. We are of the considered opinion that this is not a fit case for levy of penalty on account of human error. CIT(A) / NFAC and delete the penalty levied by the AO. The grounds raised by the assessee are accordingly allowed.

Summary

The core legal questions considered in this appeal relate to the imposition of penalty under section 271(1)(c) of the Income Tax Act, 1961, specifically:

• Whether the double claim of remuneration and interest paid to partners in the revised return constituted furnishing of inaccurate particulars of income warranting penalty.
• Whether the penalty proceedings were correctly initiated and sustained given the nature of the error-whether it was a bona fide human error or a deliberate concealment.
• Whether the Assessing Officer and the Commissioner of Income Tax (Appeals) / National Faceless Assessment Centre correctly applied the provisions of section 271(1)(c) in light of the facts and the law.
• Whether the mismatch between the limb of penalty proceedings initiated (Limb-2: furnishing inaccurate particulars) and the limb of penalty levied (Limb-1: concealment of particulars) vitiates the penalty.
• Whether the particulars of income were truly concealed or were available on record, negating the basis for penalty.
• The applicability of section 40(b) of the Income Tax Act regarding remuneration and interest to partners and its impact on the penalty issue.

Issue-wise Detailed Analysis:

1. Nature of the Error: Bona Fide Mistake or Deliberate Concealment

Legal Framework and Precedents: Section 271(1)(c) penalizes concealment of income or furnishing inaccurate particulars of income. The Supreme Court has held in various decisions, including the cited Reliance Petroproducts case, that mere mistakes or bona fide errors do not attract penalty unless there is a deliberate attempt to evade tax or conceal particulars.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee had initially filed a correct original return but inadvertently made a double claim of remuneration and interest paid to partners in the revised return. This error was rectified only during reassessment proceedings. The Tribunal accepted the assessee's explanation of a genuine human error and found no malafide intention or deliberate concealment.

Key Evidence and Findings: The assessee did not carry forward the loss arising from this double claim to subsequent years, indicating no attempt to gain undue benefit. The particulars related to income computation were available on record, and the error was corrected once noticed.

Application of Law to Facts: Since the error was inadvertent and corrected, and there was no benefit taken, the Tribunal held that the penalty under section 271(1)(c) was not justified.

Treatment of Competing Arguments: The Department relied on the Assessing Officer and CIT(A) orders to uphold the penalty, emphasizing the double claim and non-voluntary correction. The Tribunal, however, gave weight to the bona fide nature of the error and absence of concealment.

Conclusion: The Tribunal concluded that the error was a bona fide inadvertent mistake, not attracting penalty.

2. Correctness of Penalty Proceedings and Levy

Legal Framework and Precedents: Penalty under section 271(1)(c) requires proof of concealment or furnishing inaccurate particulars. The initiation of penalty proceedings must correspond to the limb under which penalty is sought to be levied.

Court's Interpretation and Reasoning: The assessee contended that the Assessing Officer initiated penalty proceedings under Limb-2 (furnishing inaccurate particulars) but levied penalty under Limb-1 (concealment of particulars), which was argued to be a fatal defect. The Tribunal observed this mismatch but did not find it determinative given the overall facts.

Key Evidence and Findings: The Tribunal found that the particulars of income were not concealed but available on record, and the error was rectified during reassessment.

Application of Law to Facts: The Tribunal held that since there was no concealment or deliberate furnishing of inaccurate particulars, the penalty proceedings and levy were not sustainable.

Treatment of Competing Arguments: The Department maintained that the penalty was justified due to the double claim and non-voluntary correction. The Tribunal disagreed based on the nature of the error and availability of particulars.

Conclusion: The Tribunal set aside the penalty on this ground as well.

3. Availability of Relevant Particulars and Non-Concealment

Legal Framework and Precedents: For penalty under section 271(1)(c), concealment or furnishing inaccurate particulars must be established. Mere errors where all particulars are available do not attract penalty.

Court's Interpretation and Reasoning: The Tribunal noted that all relevant particulars related to the income computation were on record. The assessee did not conceal any particulars but made a computational error in the revised return.

Key Evidence and Findings: The assessee's books and returns showed the relevant details, and the error was an omission in adding back remuneration and interest in the revised return.

Application of Law to Facts: The Tribunal applied the principle that absence of concealment negates penalty under section 271(1)(c).

Treatment of Competing Arguments: The Department argued for penalty based on the error; the Tribunal found no concealment.

Conclusion: No penalty was warranted as particulars were not concealed.

4. Application of Section 40(b) and Partnership Deed to the Double Deduction

Legal Framework and Precedents: Section 40(b) restricts deductions of remuneration and interest to partners as per the partnership deed and limits prescribed under the Act.

Court's Interpretation and Reasoning: The assessee argued that the double deduction was inconsistent with section 40(b) and the partnership deed, supporting the view that it was a mistake rather than deliberate concealment.

Key Evidence and Findings: The Tribunal accepted that the double claim was contrary to section 40(b) but this fact underscored the inadvertent nature of the error rather than intent to evade tax.

Application of Law to Facts: The Tribunal found that the error was a computational mistake and not a wilful concealment, consistent with the provisions of section 40(b).

Treatment of Competing Arguments: The Department did not dispute the applicability of section 40(b) but relied on the error to justify penalty.

Conclusion: The error was a bona fide mistake in application of section 40(b), not attracting penalty.

Significant Holdings:

"It is an admitted fact that the assessee has not claimed the benefit of carry forward of such loss on account of interest and remuneration paid to the partners. Under these circumstances, we are of the considered opinion that this is not a fit case for levy of penalty on account of human error."

"The very basis for levy of penalty is that the assessee has claimed excess carry forward loss amounting to Rs. 22,49,410/-. However, a perusal of the computation statement shows that no such claim of carry forward of loss has been made by the assessee."

"We find some force in the arguments of the Ld. Counsel for the assessee that it was an inadvertent human error and there is no deliberate attempt on the part of the assessee to evade taxes."

"The grounds raised by the assessee are accordingly allowed."

The Tribunal established the core principle that inadvertent human errors, especially those rectified during reassessment and not resulting in undue benefit or concealment, do not warrant penalty under section 271(1)(c). It emphasized the necessity of a deliberate act or intention to evade tax for penalty imposition.

On all issues, the Tribunal concluded that the penalty was not justified and set aside the orders of the lower authorities, allowing the appeal of the assessee.