PENALTY CANNOT BE IMPOSED BASED ON CONJECTURES, POSSIBILITIES OR SURMISES

[DR.MARIAPPAN GOVINDARAJAN]

Penalty for failure to file returns

Section 271 of the Income Tax Act, 1961 (‘Act’ for short) provides penalty for the failure to file returns, comply with the notices issued by the Department, concealment of income etc.  Section 271(c) of the Act provides that If the Assessing Officer or the Joint Commissioner (Appeals) or the Commissioner (Appeals) or the Principal Commissioner or Commissioner in the course of any proceedings under this Act, is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income he may direct that such person shall pay by way of penalty  a sum which shall not be less than, but which shall not exceed  3 times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or fringe benefits or the furnishing of inaccurate particulars of such income or fringe benefits in addition to tax, if any, payable by him.

Case laws

In COMMISSIONER OF INCOME-TAX VERSUS SAS PHARMACEUTICALS - 2011 (4) TMI 888 - DELHI HIGH COURT held that no penalty can be imposed unless the conditions stipulated in the said provisions are duly and unambiguously satisfied. Since the assessee was exposed during survey, may be, it would have not disclosed the income but for the said survey. However, there cannot be any penalty only on surmises, conjectures and possibilities. Section 271 (1) (c) of the Act has to be construed strictly. Unless it is found that there is actually a concealment or non-disclosure of the particulars of income, penalty cannot be imposed. There is no such concealment or non-disclosure as the assessee had made a complete disclosure in the income tax return and offered the surrendered amount for the purposes of tax.

In RAGHURAM HUME PIPES PRIVATE LIMITED VERSUS ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-2 (1) , GUNTUR. - 2025 (3) TMI 455 - ITAT VISAKHAPATNAM, the assessee is engaged in the business of executing contract works in the Government Departments like Irrigation, Public Health, Rural Water Supply and various Municipal Corporations as Special Class Contractor.  The assessee filed its return of income for the AY 2016-17 admitting a total income of Rs. 3,38,91,662/-. 

A survey was conducted in the premises of the assessee on 25.03.2019.  On the result of survey, the Department initiated proceedings under section 147 of the Act.  A show cause notice was also issued under section 148 of the Act on 30.03.2019.  The assessee filed a return declaring its income as Rs.4.03 crore.   The assessee also furnished the required information as asked by the Department.  The final assessment was made accepting the income declared by the assessee.

Thereafter, the Department initiated penalty proceedings against the assessee under section 271(1) (c) of the Act.  A show cause notice was issued to the assessee on 22.02.2021.  The assessee filed its reply on 09.03.2021.  Considering the reply of the assessee, the Assessing Officer found that the assessee concealed the income to the extent of Rs.64,25,000/-.  The Assessing Officer imposed penalty on the assessee for Rs.24,18,000/- with the approval of Additional Commissioner.

The assessee, being aggrieved against the order of the Assessing Officer, filed an appeal before the Commissioner of Income Tax (Appeals).  Before the Commissioner of Income Tax (Appeals) the assessee contended that the assessee accepted voluntarily the low profits declared while filing the original return of income and thereafter filed the return of income in response to the notice under section 148 of the Act admitting the income accepted during the survey proceedings.  The First Appellate Authority confirmed the order of Assessing Officer holding that the assessee has failed account for its income while filing the original return of income.

The appellant filed the present appeal before the ITAT against the order of the Assessing Officer as confirmed by the First Appellate Authority.  The appellant submitted the following grounds of appeal-

• The order passed by the Assessing Officer under section 271(1)(c) of the Act, dated 23.03.2022 upheld by the Commissioner of Income Tax (Appeals) vide order under section 250 of the Act dated 08.03.2024 is not in accordance with the facts of the case and the provisions of law.
• The Commissioner of Income Tax (Appeals) erred in upholding the actions of the Assessing Officer in levying the penalty under section  271(1)(c) of the Act despite there being no concealment of income or furnishing of inaccurate particulars the essential ingredients required to be established before levying such penalty.
• The Commissioner of Income Tax (Appeals) ought to have acknowledged that the assessee company had offered additional income in the return of income filed in response to notice under section 148 of the Act and this return of income was duly accepted by the Assessing Officer. Therefore, the levy of penalty under section 271(1)(c) is unwarranted and uncalled for.
• The assessee had voluntarily and in good faith disclosed the addition income in response to the reassessment notice, and there was no deliberate act of concealment of furnishing of inaccurate particulars of income.
• The Commissioner of Income Tax (Appeals) failed to consider the submissions and explanations provided by the assessee, instead, the appeal was dismissed in summary and casual manner, which cannot sustain the test of legal scrutiny.

The appellant contended that the assessee has voluntarily accepted the additional income by enhancing the profit percentage in order to avoid litigation and to buy peace with the Department.  According to the assessee there is no concealment of income or furnishing of inaccurate particulars of income.   Hence levy of penalty under section 271(1) (c) is unsustainable.  The Assessing Officer has not specified under which limb of section 271(1)(c) of the Act, the penalty has been initiated.  Therefore, the appellant prayed the ITAT to quash the impugned order in view of the above said arguments. 

The Revenue submitted the following before the ITAT-

• Had there been no survey operation, the assessee would not have admitted the additional income.
• The assessee filed the return of income after the issue of notice under section 148 of the Act with a delay of more than eight months.
• It cannot be considered as a voluntary submission.

Therefore, the Revenue contended that the order of First Appellate Authority to be upheld. 

The ITAT considered the submissions of both the parties.  The ITAT found that the assessee has been confronted by the Survey Team and accepted disclosing of lower profits in the range of 3.5% to 4% on the turnover when compared to the other assessees in the same line of business which were showing a profit percentage of 8% to 10%.  The assessee in his reply explained that they are Special Class Contractors attributed the low profits to increase in the cost of raw material year after year. Further, the assessee stated that to buy peace and to avoid litigation with the Department, it has voluntarily offered profit percentage of 6% for the AY 2016-17, 6.5% for the AY 2017-18 and 7% for the AY 2018-19.

The ITAT observed that the Assessing Officer has purely relied on the admission made during the survey proceedings under section 133A of the Act by the assessee.  The assessee has declared the additional income which was accepted by the Assessing Officer and brought to tax.  The Assessing Officer cannot impose penalty under section 271(1)(c) of the Act based on the voluntary disclosure by the assessee.   The Assessing Officer has also not brought on record any corroborative evidence but has purely proceeded to levy the penalty based on assumptions that the assessee  has concealed the income or furnished the inaccurate particulars of income while filing the original return of income wherein if the survey was not conducted on the assessee, this income would not have been admitted by the assessee.

The ITAT held that There cannot be any penalty based on surmises, conjectures and possibilities.  the penalty provisions of section 271(1)(c) of the Act have to be construed strictly.   Unless it is found that there is an actual concealment or non-disclosure of the particulars of income, penalty cannot be imposed.  In this case there is no such concealment or non-disclosure as the assessee has made a complete disclosure in the return of income offered, surrendered the amount for the purpose of tax.

The ITAT further analysed the explanation 5 and 5A to this section which provides that are also an exception to the Rule that the income is ultimately brought to tax is declared in a return of income, there can be no question of treating the assessee as having concealed particulars of income or furnished inaccurate particulars of income.  The ITAT considered that there is no justification in the case of the assessee for imposition of penalty on the income declared in the return of income filed by the assessee.

The ITAT allowed the appeal filed by the appellant.