41 taxmann.com 165 (Article)
PENALTY UNDER SECTION 271(1)(c) NOT LEVIABLE WHEN AN ASSESSEE ACTED IN BONA FIDE BELIEF OR THE ISSUE WAS CONTROVERSIAL?
AKHILESH KUMAR SAH
1. The penalty under section 271(1)(c) has remained the most vexing one for the assessees. A lot of cases have been decided on the imposition of penalty while many rulings have also relieved assessees. The basic thing to save penalty is that there should not be mens rea and there should not be deliberate action on the part of the assessee to evade tax. Many a times an assessee acts honestly without having any mala fide intention of evading tax under his bona fide belief or where a particular circumstance remains the controversial, i.e., more in favour of assessee, in those cases the penalty levied under section 271(1)(c) of the Income- tax Act, 1961(hereinafter referred to as 'the Act') can be deleted on the facts & circumstances of the case.
2.1 Relevant Case Laws - The Supreme Court in Price Waterhouse Coopers (P.) Ltd. v. CIT  348 ITR 306/25 taxmann.com 400/211 Taxman 40, : held that all that happened in the present case was that through a bona fide and inadvertent error the assessee failed to add the provision for gratuity to its total income. This could only be described as a human error which we are all prone to make. The calibre and expertise of the assessee had little or nothing to do with the inadvertent error. That the assessee should have been careful could not be doubted, but the absence of due care, would not mean that the assessee was guilty of either furnishing inaccurate particulars or was attempting to conceal its income. Consequently, given the peculiar facts of this case, the imposition of penalty on the assessee was not justified.'
2.2 In Dy. CIT v. Rural Electrical Co-operative Society Ltd.  152 Taxman 237/ 279 ITR 319 (M.P.), the AO imposed penalty of Rs.1 lakh; it was set aside by CIT (Appeals) and the order of CIT (appeals) was maintained by the Tribunal holding, inter alia, that no case for imposing penalty under section 271(1)(c) was made out, so far as applicability of the Explanation to section 271(1)(c) was concerned, the same was not attracted. The issue of Explanation was considered on facts and it was held that the same was properly explained on facts, every concealment would not attract the rigour of section 271(1)(c); it must be deliberate and intentional being in the knowledge of assessee so as to evade payment of income-tax. The assessee, being a non-profit organization, managed and controlled by the Government of India for supply/distribution of electricity in the State, it could not be held that they had any deliberate intention to evade payment of tax. If due to some accountancy system maintained, one entry could not be subjected to tax, the same was rightly not made basis for imposing a penalty of Rs.100,000 under section 271(1)(c).
2.3 Pandit Govind Prasad Mishra v. CIT - The Allahabad High Court, in the case of Pandit Govind Prasad Mishra v. CIT  238 ITR 338/ 109 Taxman 160, held that a reading of section 271(1)(c) made it abundantly clear that the amount added or disallowed as a result of the rejection of any explanation offered by such person, if such explanation is bonafide and all the facts relating to the same and material to the computation of his total income are disclosed, no penalty proceedings could be initiated.
2.4 Bharat Rice Mill v. CIT -In Bharat Rice Mill v. CIT  278 ITR 599/148 Taxman 145 (All.), while completing the reassessment, the AO issued penalty notice to the applicant-rice miller in terms of section 271(1)(c). It was explained on behalf of the applicant before the AO that "non-disclosure of closing stock of Ghuta (rice) was not intentional and it was only a mistake by the accountant not to have included it in the closing stock".
The AO did not accept the explanation to be satisfactory and he imposed the penalty of Rs. 33,380. The Allahabad High Court held that the word "concealment" inherently carried with it the element of mens rea. The explanation offered by the applicant in the present case was bona fide also stood substantiated specially when the closing stocks of Ghuta rice and Kinki rice though omitted to had been disclosed in the previous year relevant to the assessment year in question had been voluntarily disclosed in the revised return filed by the applicant and which stocks had been bona fide disclosed by the applicant in the subsequent assessment year, i.e., 1982-83, and had also been subjected to tax in that year also, apart from being subjected to tax in the assessment year 1981-82 by the re-assessment order. Thus, the Tribunal was not justified in upholding the levy of penalty.
2.5 CIT v. JKA Subramania Chettiar - In CIT v. J K A Subramania Chettiar [Appeal No. 560 of 2009, dated 4-5-2010] the assessee had claimed deduction under section 80-IA under the bona fide belief that it was entitled to deduction under section 80-IA of the Act. Thereafter, the assessee had withdrawn the same vide its revised return. According to the Tribunal, when the assessee had committed the default under a bona fide belief which was rectified by filing a revised return, it could not be held liable for penalty under section 271(1)(c) of the Act.
The Gujarat High Court held that in the light of the concurrent findings recorded by the Commissioner (Appeals) as well as by the Tribunal, it was apparent that the assessee had bona fide made a claim for deduction under section 80-IA of the Act, which came to be rectified by filing a revised return withdrawing the claim and that, as such, there was no concealment or furnishing of inaccurate particulars of income on the part of the assessee.
[Also see CIT v. J.K.A. Subramania Chettiar  110 ITR 602 (Mad.)].
2.6 CIT v. Harshvardhan Chemicals & Minerals Ltd. - The Rajasthan High Court in CIT v. Harshvardhan Chemicals & Mineral Ltd.  259 ITR 212/133 Taxman 320, has held that when the assessee claimed some amount that was debatable, in such cases, it could not be said that the assessee had concealed any income or furnished inaccurate particulars of income for the evasion of tax.
2.7 Dhoolie Tea Co. Ltd. - In the case of CIT v. Dhoolie Tea Co. Ltd.  231 ITR 65, the Calcutta High Court has held that where the assessee had bona fide belief that his income was not taxable and he had failed to disclose such income under bona fide belief, no penalty had to be imposed under section 271(1)(c) of the Act.
2.8 CIT v. Reliance Petroproducts (P.) Ltd. - In CIT v. Reliance Petroproducts (P.) Ltd.  322 ITR 158/189 Taxman 322, the Supreme Court had observed that because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the Revenue, that by itself would not, in our opinion, attract the penalty under Section 271(1)(c). If we accept the contention of the Revenue then in case of every return where the claim made is not accepted by Assessing Officer for any reason, the assessee will invite penalty under Section 271(1) (c). That is clearly not the intendment of the Legislature.
2.9 In CIT v. Sambhav Media Ltd.  32 taxmann.com 371 (Guj.) for the assessment year 2000-01, the assessee claimed deduction under section 24 as well as also for depreciation. The Assessing Officer disallowed deduction on plea that assessee was disentitled to claim double deduction of depreciation as well as deduction under section 24 and made addition to its income. The AO also imposed penalty under section 271(1)(c) upon it. The Gujarat High Court held that this being a matter of bona fide difference of opinion between assessee and department regarding allowability of claim, imposition of penalty was not justified in the case.
2.10 In Dy. DIT (International Taxation)-2(1) v. Satellite Television Asian Region Ltd.  23 taxmann.com 100/ 53 SOT 22 (Mum.) (URO) relying on the decision in CIT v. Eli Lilly & Co. (P.) Ltd.  312 ITR 225/178 Taxman 505 (SC), held that if the assessee had a bona fide belief that it was not required to deduct tax at source even if the amount was held taxable later on, would not result in levy of penalty on it under section 271C of the Act.
2.11 The Apex Court in the case of K.C. Builders v. Asstt. CIT  135 Taxman 461/265 ITR 562 (SC) has observed at page 425 as follows :
"One of the amendments made to the above-mentioned provisions is the omission of the word 'deliberately' from the expression 'deliberately furnished inaccurate particulars of such income'. It is implicit in the word 'concealed' that there has been a deliberate act on the part of the assessee. The meaning of the word 'concealment' as found in Shorter Oxford English Dictionary, third edition, Volume I, is as follows:
'In law, the intentional suppression of truth or fact known, to the injury or prejudice of another'.
The word 'concealment' inherently carried with it the element of mens rea. Therefore, the mere fact that some figure or some particulars have been disclosed by itself, even if it takes out the case from the purview of non-disclosure, it cannot by itself take out the case from the purview of furnishing inaccurate particulars. Mere omission from the return of an item of receipt does neither amount to concealment nor deliberate furnishing of inaccurate particulars of income, unless and until there is some evidence to show or some circumstances found from which it can be gathered that the omission was attributable to an intention or desire on the part of the assessee to hide or conceal the income so as to avoid the imposition of tax thereon. In order that a penalty under section 271(1)(iii) may be imposed, it has to be proved that the assessee has consciously made the concealment or furnished inaccurate particulars of his income. Where the additions made in the assessment order, on the basis of which penalty for concealment was levied, are deleted, there remains no basis at all for levying the penalty for concealment and, therefore, in such a case no such penalty can survive and the same is liable to be cancelled as in the instant case. Ordinarily, penalty cannot stand if the assessment itself is set aside. Where an order of assessment or reassessment on the basis of which penalty has been levied on the assessee has itself been finally set aside or cancelled by the Tribunal or otherwise, the penalty cannot stand by itself and the same is liable to be cancelled as in the instant case ordered by the Tribunal and later cancellation of penalty by the authorities."
2.12 In Northland Development & Hotel Corpn. v. CIT  349 ITR 363/25 taxmann.com 369/210 Taxman 249 (SC), the outstanding balance of loan was shown by appellant as Rs. 52,07,873 along with interest while the amount payable in the bank books was Rs. 42,45,477. Due to classification by bank the loan as a non-performing asset the interest was probably not charged by bank. The loan was settled to be paid by appellant through consent decree, to the tune of Rs.42,45,477.
On the issue of levy of penalty before the Apex Court (on the appeal against the decision of the Allahabad High Court) it was held, on the facts and circumstances of the case, that the penalty was not leviable under section 271(1)(c).
2.13 The SC in Cement Marketing Co. of India Ltd. v. Asstt. CST  124 ITR 15/4 Taxman 44 has held that a return cannot be "false", unless there is an element of deliberateness in it. If there was omission to include certain item in return of turnover on bona fide belief that it was not taxable, the return was not false (held in respect of S. 43 of M.P. General Sales Tax Act, 1958/s. 9(2) of Central Sales Tax Act,1956).
2.14 DIT v. Asia Attractive Dividend Stock Fund - Penalty for the concealment of income could not be levied in the case of bona fide error which was rectified by the assessee on its own [DIT v. Asia Attractive Dividend Stock Fund  35 taxmann. com 265 (Bom)].
2.15 CIT v. Trident Infotech Corp. Ltd. - Where additions were made on the basis of decision of the High Court, it did not establish that assessee had earlier concealed its income or furnished inaccurate particular of income, penalty was deleted. Also, the assessee claimed deduction on account of bad debt and later on he withdraw this treating it to be an inadvertent mistake and offered same as additional income, it was held that assessee had not furnished particulars of income [CIT v. Trident Infotech Corp. Ltd.  34 taxmann. com 132/216 Taxman 58 (Punj. & Har.) (Mag.)].
2.16 CIT v. Madhushree Gupta - Mere making of claim, which was not sustainable, in law, would not ipso facto, amount to furnishing inaccurate particulars regarding income [CIT v. Madhushree Gupta  33 taxmann.com 286/216 Taxman 65 (Delhi) (Mag.)].
2.17 CIT v. Jaswinder Singh Ahuja - Where issue of capital gains was debatable at the time of filing of return, penalty was deleted [CIT v. Jaswinder Singh Ahuja  34 taxmann.com 116/216 Taxman 67 (Delhi)(Mag.)].
2.18 CIT v. Celetronix Power India (P.) Ltd. - When assessee had claimed deduction relying upon a judgment which was subsequently reverted by the Supreme Court, penalty was deleted [CIT v. Celetronix Power India (P) Ltd.  34 taxmann.com 90/216 Taxman 68 (Mag.)/352 ITR 70 (Bom.)].
2.19 CIT v. Yahoo India (P.) Ltd. - Where the very issue was debatable, penalty was held to be not justified [CIT v. Yahoo India (P) Ltd.  33 taxmann.com 332/216 Taxman 66 (Bom.)(Mag.)].
2.20 CIT v. Sundaram Finance Ltd. - When assessee withdrew excess claim only in view of action initiated by I T Deptt., there being lack of bona fide on the part of the assessee, penalty under section 271(1)(c) levied on the assessee was not deleted [CIT v. Sundaram Finance Ltd.  35 taxmann.com 65/216 Taxman 60/353 ITR 375 (Mad.)].
2.21 Hindustan Steel Ltd. v. State of Orissa - In Hindustan Steel Ltd. v. State of Orissa  83 ITR 26 (SC), the Supreme Court has held that an order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding and penalty will not ordinarily be imposed, unless the party obliged by either acting deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances.
3. It appears that the issue of levy of penalty under section 271(1)(c), where the assessee has acted in a bona fide belief is finally in the favour of him in view of various decisions, but where the assessee lacks bona fide action, penalty can be levied.
• DT - Sec. 271.