Learning from case of Price Waterhouse Coopers (P.) Ltd- avoid casual and careless approach- be more careful.

[C.A. DEV KUMAR KOTHARI]

Penalty – Liberal view taken by the Supreme Court in special circumstances- should not be considered as a guide to be careless.

The Supreme Court has taken liberal view in special circumstances and held that in the given case and its peculiar facts, penalty was not justified because there was no will full concealment of income or furnishing of inaccurate particulars, but inadvertent mistake took place while computing income in which a disallowance for gratuity provision was not made though there was disclosure in accompanying documents like tax audit report (TAR). Thus the Supreme Court reversed concurrent findings, orders and judgments of all authorities and court below.

However, this should not be considered as a freedom to be careless, make mistakes, take a chance to get a deduction allowed, though not allowable and then plead a silly mistake if and when caught.

Judges are also human being

Judges are also human being therefore, judgments also depend on various circumstances affecting thinking and mood of judges while reviewing documents, orders and judgments of lower authorities and courts, hearing arguments of concerned parties, and various other factors which can have some effect on thinking process, reasoning, analysis, and outcome in form of judgment. It is said and learned that the counsel appearing before the court must have good skills to go with mood of judges and also must be capable to change thinking process and mood of judges so that desired emphasis is placed on favorable factors and unfavorable factors are not taken seriously or are ignored, while taking overall picture of factual and legal position at the time of drawing conclusions and rendering judgment.

In case of PWCC, the lower authorities and courts took view that an assessee like PWCC cannot be expected to claim deduction of gratuity which was not funded in a recognized fund and claiming the same amounted to furnishing of inaccurate particulars, particularly because disallowance was pointed out in the Tax Audit Report (TAR).

Whereas the Supreme Court took view that even assessee like PWCC could err and there can be a mistake. The Supreme court took this in a favorable fashion for the reason that assessee had disclosed unallowable amount in TAR, and therefore there was information provided about disallowable amount and non-disallowance was a mistake while computing income. Furthermore when assessee paid tax, immediately on becoming aware of mistake, was also considered favorably.

Therefore, one judgment cannot be seen in isolation of overall picture of the case.

In some circles, discussions and in articles on some websites some learned authors have expressed views that The PWC Case suggest that you Can Just Plead “Some Confusion” & Escape Penalty. Because as per the Supreme Court in PWC‘s case s. 271(1)(c) penalty cannot be imposed if the assessee carelessly makes a wrong claim. That the judgment neutralizes the deterrent effect of s. 271(1)(c) and is prone to abuse in the present regime of no scrutiny assessments. Feelings have been expressed that in the absence of a deterrent effect, assessee will be encouraged to ‘take a chance’ with bogus claims.

In view of author this is not so, because in case of PWCC there were some favorable aspects which were fortunately viewed with more weight age, by the Supreme Court than the weight age laid by lower courts.

Judgments does not relate to CA firm:

The judgment relates to Price Waterhouse Coopers (P.) Ltd. which is a Private limited company. This does not relate to CA firm of PWC which carries activities of a CA firm like audit and attestation functions, tax consultancy etc. The return of income was signed by a director of private limited company and not by a person as a CA of partner of CA firm.

The honorable Supreme Court has observed that “the assessee provides multi-disciplinary management consultancy services and has a worldwide reputation.” Therefore, one point to be distinguished is that PWC CA was not the party before the Supreme Court. The assessee was a body corporate and had to rely on human agencies in compliance of its statutory requirements. The human agent committed an inadvertent mistake or mistake of omission of making a disallowance, which was called for in view of Tax Audit Report prepared specifically to assist the assessee and the AO to correctly compute income.

In this case, regular assessment was completed under section 143(3) on 26-3-03 at. a total income of Rs. 24,42,91,550/-. This shows that the company was carrying activities in large scale and was equipped with many experts. Besides it had advantages of PWC, CA as an associate.

It cannot be doubted that there was gross negligence, and such negligence continued even at the time of scrutiny assessment, when assessee should have come-forward to offer a disallowance, but that was not done and may be assessee took advantage of negligence or oversight of the AO. The representative of assessee ignored that there is a system of revenue audit, and also supervision by senior authorities and apparently took a chance that the required disllowance may not surface.

A case of allowability could be made out:

In this case, depending on real facts, perhaps a case for allowability of claim could be made out and may be that the same could be allowed also.

However, unfortunately at reassessment stage, at the time of notice, filing of return, and even during hearing any effort was not made to make out a case of deduction for provision for gratuity made in accounts.

 Depending on facts, probabily a strong claim could be made that inspite of report in TAR about disallowance, subsequent event entitle assesee to get deduction of gratuity provided as on closing day of PY.

During reassessment on receiving reasons for reopening the assessment, assessee realized that a mistake had been committed and accordingly by a letter dated 20-1-2005 the Assessing Officer was informed that there was no wilful suppression of facts by the assessee but that a genuine mistake or omission had been committed which also appears to have been overlooked by the Assessing Officer before whom the Tax Audit Report was placed. Accordingly, the assessee filed a revised return on the same day. A reassessment was passed on the same day and the assessee then paid the tax due as well as the interest thereon.

Thus assessee could not detect mistake until reasons for reopening were received.

One important aspect which need further consideration is that assessment year involved was AY 2000-01, by that time provisions of S.40A (7) were quite old however, before some High Courts disputes were pending on the issue that what is disallowable u/s 40A (7) can still be allowed u/s 28 read with S. 145. However, assessee had not raised this aspect in the reply to the AO.

In fact assessee could have contended that assessee had made compliance  or substantial compliance or had taken steps and had expected compliance with S. 40A (7) soon and that therefore the  sum could be allowed u/s 28 read with S.145  and the same shall not be claimed again u/s 40A (7), or that the deduction has been claimed only once and not again when compliance of S.40A(7) was made etc. That on such issue two views are possible. However, that was not contended by the assessee even during penalty proceeding.

Mistake committed by concerned persons:

In this case the assessee being body corporate, the omission to disallow can be called a mistake committed by concerned persons, however, till which stage it can be considered as a permissible mistake is an important aspect?

Further why alternate contentions to claim deduction were not made is a surprising point.

In this case there was concurrent finding of the AO, the CIT(A) , the Tribunal and the High Court that there was case for penalty. The AO and CIT(A) considered 300% penalty the Tribunal reduced it to 100% of tax sought to be avoided.

The Supreme court observed and held” The caliber and expertise of the assessee has little or nothing to do with the inadvertent error. That the assessee should have been careful cannot be doubted, but the absence of due care, in a case such as the present does not mean that the assessed is guilty of either furnishing inaccurate particulars or attempting to conceal its income.” taxmanagementindia.com

The reasoning of the Supreme court is correct, in light of fact that assesses is a body corporate and dependent on concerned person. A concerned person may be a CA or other expert, mistake can take place, however, the fact that the mistake continued very long and at various stages, and any attempt for a review was not made by assesses and its concerned persons. This is unfortunate.

Mistakes of concerned persons, can in case of corporate assessee can be a reasonable ground to get relief.

From the judgment of the Supreme court:

Para 14 onwards from the judgment are reproduced below with highlights in red colour for an analysis:

14. During the course of hearing this appeal against the judgment and order of the Calcutta High Court, we had require the assessee to explain to us how and why the mistake was committed?

15. The assessee has filed an affidavit dated 14th September, 2012 in which it is stated that the assessee is engaged in Multidisciplinary Management Consulting Services and in the relevant year it employed around 1,000 employees. It has a separate accounts department which maintains day to day accounts, payrolls etc. It is stated in the affidavit that perhaps there was some confusion because the person preparing the return was unaware of the fact that the services of some employees had been taken over upon acquisition of a business, but they were not members of an approved gratuity fund unlike other employees of the assessee. Under these circumstances, the tax return was finalized and filled in by a named person who was not a Chartered Accountant and was a common resource.

16. It is further stated in the affidavit that the return was signed by a director of the assessee who proceeded on the basis that the return was correctly drawn up and so did not notice the discrepancy between the Tax Audit Report and the return of income.

17. Having heard learned counsel for the parties, we are of the view that the facts of the case are rather peculiar and somewhat unique. The assessee is undoubtedly a reputed firm and has great expertise available with it. Notwithstanding this, it is possible that even the assessee could make a "silly" mistake and, indeed this has been acknowledged both by the Tribunal as well as by the High Court

18. The fact that the Tax Audit Report was filed along with the return and that it unequivocally stated that the provision for payment was not allowable under section 40A(7) of the Act indicates that the assessee made a computation error in its return of income. Apart from the fact that the assessee did not notice the error, it was not even noticed even by the Assessing Officer who framed the assessment order. In that sense, even the Assessing Officer seems to have made a mistake in overlooking the contents of the Tax Audit Report.

19. The contents of the Tax Audit Report suggest that there is no question of the assessee concealing its income. There is also no question of the assessee furnishing any inaccurate particulars. It appears to us that all that has happened in the present case is that through a bona fide and inadvertent error, the assessee while submitting its return, failed to add the provision for gratuity to its total income. This can only be described as a human error which we are all prone to make. The calibre and expertise of the assessee has little or nothing to do with the inadvertent error. That the assessee should have been careful cannot be doubted, but the absence of due care, in a case such as the present does not mean that the assessed is guilty of either furnishing inaccurate particulars or attempting to conceal its income.

20. We are of the opinion, given the peculiar facts of this case, that the imposition of penalty on the assessee is not justified. We are satisfied that the assessee had committed an inadvertent and bona fide error and had not intended to or attempted to either conceal its income or furnish inaccurate particulars.

21. Under these circumstances, the appeal is allowed and the order passed by the Calcutta High Court is set aside. No costs.

An analysis:

As per observations of their lordship also:

1. the assessee should have been careful cannot be doubted.
2. the absence of due care, in a case such as the present does not mean that the assessed is guilty of either furnishing inaccurate particulars or attempting to conceal its income.
3. Notwithstanding  competence,  it is possible that the assessee could make a "silly" mistake and, indeed this has been acknowledged both by the Tribunal as well as by the High Court.
4. Apart from the fact that the assessee did not notice the error, it was not even noticed even by the Assessing Officer who framed the assessment order. In that sense, even the Assessing Officer seems to have made a mistake in overlooking the contents of the Tax Audit Report.
5. That similar mistake was also made by the Assessing Officer while framing original assessment goes to suggest that mistake was such which could be made even with delegence.
6. The mistake can only be described as a human error which we are all prone to make.

Thus, while recognizing carelessness; the Supreme Court has also considered human factors that human being are prone to commit errors.

PWC as a role model must be more careful:

Various organizations of PWC group and associates are definitely role model for many. A large number of people are employed and also get training at PWC. The work at PWC is such that it requires continuous and regular studies. The reports of PWC are relied on by all concerned. Thus, individuals working in PWC or for PWC must bear this in mind and should be much more careful to safeguard the goodwill and reputation of PWC. Instances like mistake in making a patently wrong claim as was before the Supreme Court is definitely a serious lapse of concerned persons and raises doubts about seriousness and diligence of PWC team rather this also can be a reason to doubt seriousness of Chartered Accountants because when we think about CA, the PWC first occur in mind of many of us.

Price Waterhouse Coopers (P.) Ltd. Versus Commissioner of Income-tax, Kolkata – I 2012 (9) TMI 775 - SUPREME COURT