Safeguard measures: Utmost care is required to substantiate claims made in return of income or loss in view of fact that in cases of loss also penalty u/s 271(1)(c) can be levied as per recent ruling from the Supreme Court of India.

[Uma Kothari]

Whether tax is payable or not penalty can be levied:

As per recent ruling from the apex court, even in case of loss penalty can be levied for furnishing inaccurate particulars.  See C.I.T Vs. Gold Coin Health Food Pvt. Ltd. reported 2008 -TMI - 30245 - SUPREME COURT in which  earlier judgment of the Supreme Court in case of  VIRTUAL SOFT SYSTEMS LTD. Versus COMMISSIONER OF INCOME-TAX reported in 2008 -TMI - 2873 - (SC) has been dissented.

Therefore, it is very important that any claim made in the computation of income should satisfy the test of a bonafide claim and should not fall in category of inaccurate particulars of income or loss. If a claim is not allowed, and it is not found bonafide, reasonable or as per normal intelligence on the subject, then penalty may be levied for furnishing inaccurate particulars. Therefore, it has now become more important to take care while computing income and explaining claims.

Bonafides of claim:

There is no doubt that the tax laws are very complex and more than one view can be possible in relation to any claim, however, still the claim must satisfy the test of possibility of two or more views. We find several instances of dissenting judgments in Tribunal, high Courts and the Supreme Court by one or more judges, and then the matter is decided according to the majority view. History also shows that many judgments of the Supreme Courts Division Bench were modified by larger Bench of the Supreme Court. Thus, complexity of law is such a factor  that one cannot be fully sure  of eligibility of a particular claim in particular circumstances.

Safer way:

In view of above legal position, it is advisable for the assessee to explain his claims in the return to establish his bonafide. However, in case of paperless returns filed on line or returns filed in physical form but being annexure less return it may not be possible to submit explanations in the return, Therefore, explanations can be filed by way of letter explaining the claims.

How to satisfy test of a bonafides of claim:

Bonafide of a claim can be established by giving a logical explanation about claim. If any order passed in favor of assessee or other assessee helps the claim of assessee the same can be relied on. Judgments of appellate authorities or courts which are on similar issued can also be relied on.  In case of a complex issue, having no precedence in form of decisions, the assessee can obtain and keep legal opinion about the claim so that in case of enquiry he can produce opinion before authorities.    

Claim in return is necessary:

Now in view of  Goetz India Ltd. v. CIT, (2006) 284 ITR 323(SC) it is almost  settled that a claim in return or revised return is necessary, and assessee may be denied to claim relief  by way of letters if the claim was not made in return or a validly revised return.  Opportunity to file a valid revised return is also subject to several limitations and practical difficulties..Therefore, assessee may be in dilemma because if he does not make a claim, he loose chance to get the claim adjudicated and allowed. If he makes a claim and it is denied, he is exposed to penalty proceedings.

Claim in return on contentious issues:

 In view of the law laid down by the Supreme Court in  Jute Corporation of India Ltd. v. CIT, (1991) 187 ITR 688(SC) = [2008 -TMI - 5320 - SUPREME Court] , National Thermal Co. Ltd. v. CIT (1998) 229 ITR 383 (SC) = [2008 -TMI - 5626 - SUPREME Court]  read with Goetz India Ltd. v. CIT, (2006) 284 ITR 323(SC),  it is likely that if a claim is not made before the assessing officer in the return of income or revised return of income, the CIT (A) may not entertain any additional claim.  Therefore, to avoid controversy it is necessary that there must be claim in the original return or revised return validly filed before the assessing officer.  There is no specific manner prescribed or restriction as to manner of making a claim in the return otherwise than making a claim in computation it self, therefore, claims made by way of notes to the computation or otherwise in the return will be sufficient to press the claims before the assessing officer failing which before the appellate authorities or revisionary authorities. On contentious issues, the assessee may adopt safe play approach and pay tax under protest and make claim by way of further claims for consideration of the A.O. When a return is filed electronically, the assessee can file a explanatory letter with supporting documents to substantiate his claims after filing the return giving reference of return filed.

Suggested manner to claim in case of doubtful claims:

The assessee may want to play safe to avoid burden of tax, interest and penalty liabilities, which may arise if the claim made is disallowed.  However, as noted above in view of judgment of the Supreme Court, it is necessary that the claim must be preferred in the return.  Therefore, the following course of action may be adopted: -

Without prejudice:

On the cover of the return and on the acknowledgment "WITHOUT PREJUDICE", should be written.

Below the computation it should be mentioned that the above computation of income is without prejudice to the following further claims for deductions, benefits and advantages, which are, as per assessee admissible, but have not been claimed in the computation due to disputes raised by the revenue. 

Claims for consideration of the assessing officer

In addition to the computation as given above, the learned assessing officer is requested to consider the following claims which have not been made in the computation to play safe, and because of difference of opinions. Please allow proper relief:

a) Normal depreciation on new electrical generators costing Rs. one crore has been claimed at general rate of 15% amounting to Rs.15 lakh instead of 80% allowable as per the judgment of Rajasthan High Court in the case of CIT V Agarwal Transformers P. Ltd  (2002) 258 ITR 251. Please consider allowing 80% depreciation and allowing further relief of Rs.65 lakh.

b) Interest on loan taken from a bank has not been claimed in the above computation because the suit filed by the bank is still pending before the court.  In earlier year the CIT (A) / Tribunal has allowed such interest.  However, the appeal of the Revenue is pending before the Tribunal / High Court. Please allow further deduction of Rs…

c) Deductions of provident fund, ESI has not been made as payment was made after 15^th April but before the due date for filing of the return.  In view of several decisions of the Tribunal and decision of the CIT (A) in assesses own case, rendered on this aspect and in view of amendment in section 43B, these payments may be allowed.

d) The estimated disallowance of interest and administrative expenses has been made u/s 14A in respect of tax-free income earned by way of dividend and long-term capital gain.  However, it is submitted that shares and securities were acquired in the course of share trading business few years ago and when the nature was changed from stock to investment they were transferred to investment account.  Therefore, capital was borrowed for purchasing shares and securities as a stock-in-trade.  Furthermore, even investment activity is an adventure in nature of commerce and therefore though shares and securities held as investment are capital assets of the business. Just like fixed assets used in business, shares and securities are also capital assets of the business of investment. Tax paid by way of security transaction tax and tax paid by companies at the time of distribution of dividend is nothing but tax on income and cannot be called income which is exempt altogether under the Act. Therefore, interest and administrative expenses are necessary business outgo and may be fully allowed while computing business income. 

Claims in respect of such items which have a chance of being disallowed by the assessing officer can properly be claimed before the assessing officer in computation itself or below the computation and thereafter if the assessing officer does not consider the same or considers but disallows, the assessee can prefer a rectification petition, appeal or revision

C. A general clause for consideration of the AO

Below the computation following general clauses in form of prayer may be given.

We have made the computation of income as per our understanding and as advised by our tax consultant.  We have made some claims for your kind consideration as noted above.  However, there may be some more relief, benefit, and advantage allowable to us, which we have not claimed due to ignorance.  We request you to kindly allow us all admissible relief, benefit, advantage so as to compute our income and our tax liability correctly and also to work out the amount of refund and interest allowable to us correctly.

When a return is filed electronically, or  a physical return is filed without enclosures, the assessee can file a follow up and explanatory letter with supporting documents to substantiate his claims after filing the return giving reference of return filed.