No Penalty can be imposed in Income Tax for making a claim which may be erroneous

Introduction

Many a times while filing returns and claiming deduction there are chances that we make errors or claim wrong deduction. Can these be termed as concealment of income and thereby imposition of penalty be justifiable. We will understand the ground for imposition of penalty under section 271 (1)(c), with a very interesting case of Ventura Textiles Ltd. Vs CIT (Bombay High Court).

Provisions of Law

Section 30 to 37 of the Income Tax Act, states the amounts expressively allowed as deduction while computing income under the head “Profits and Gains of Business or Profession”.

According to Section 36(1)(vii), the amount of any Bad Debt or part thereof, which has been written off as irrecoverable in the accounts of the assessee for the previous year, shall be allowed as a deduction.

Section 37(1) states the provisions of general deductions. According to Section 37(1), any expenditure (not being expenditure of the nature described in sections 30 to 36) and not being in the nature of capital expenditure or personal expenditure of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession, shall be allowed as deduction in computing the income chargeable under the Head “Profits and Gains of Business or Profession”

According to Section 271(1)(c), If the Assessing Officer 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, then he may direct that such person shall pay by way of penalty in addition to tax, if any, payable by him, 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.

Whether the levy of penalty u/s.271(1)(c) is justified in law for making a claim which may be erroneous or wrong?

Let us refer to the case of Ventura Textiles Ltd. Vs CIT (Bombay High Court) where this  issue was taken into consideration.

Facts of the Case

1.  Respondent is an assessee under the Act having the status of resident company.
2. Assessee filed its return of income declaring a loss. The case was selected for scrutiny assessment.

Assessment Proceedings

1.  During the assessment proceedings it was found that assessee had debited an expense under the head ‘selling and distribution expenses’ and claimed it as bad debt in the books of account thus claiming it as a deduction under Section 36(1)(vii).
2. Subsequently it was found that the aforesaid amount was paid to M/s. JCT Ltd. as compensation for the supply of inferior quality of goods.
3. Thus Assessing Officer (AO) held that the amount claimed as bad debt was not actually a debt and therefore it was not allowable as a deduction under Section 36(1)(vii).
4. Also the said claim was also not admissible under Section 37(1) of the Act, with the observation that payment made to M/s. JCT Limited was not wholly and exclusively for business purposes but for extraneous considerations.
5. In view thereof, assessee’s claim was rejected and the said amount was added back to the total income of the assessee.
6. Taking the view that assessee had furnished inaccurate particulars of income, AO ordered that penalty proceedings under Section 271(1)(c) of the Act be initiated separately.

Appeal to Commissioner of Income Tax (Appeals) [CIT(A)]

1. Assessee had challenged the disallowance of bad debt along with other disallowances in the assessment order by filing appeal before the Commissioner of Income Tax (Appeals) who by confirmed the disallowance of bad debt while deleting other disallowances.
2. In the penalty proceedings, AO took the view that assessee’s claim was not actually bad debt but represented payment made to M/s. JCT Limited which was also not incurred wholly and exclusively for the purposes of business.
3. Had the case not been selected for scrutiny, income to the said extent would have escaped assessment.
4. Thus, AO held that by making an improper and unsubstantiated claim of bad debt, the assessee had willfully reduced its incidence of taxation, thereby concealing its income as well as furnishing inaccurate particulars of income.
5. Therefore, invoking Section 271(1)(c) of the Act, the AO imposed the minimum penalty being 100% of the tax. Aggrieved by such imposition of penalty, assessee preferred appeal before CIT(A).
6. CIT (A) held that assessee had made a wrong claim by submitting inaccurate particulars of income by claiming bad debt which was not actually a debt and also not an expenditure allowable under Section 37(1) of the Act.
7. Thus it was held that the assessee had willfully submitted inaccurate particulars of income which had resulted into concealment. Therefore, penalty levied by the AO on the amount of ‘bad debts’ was upheld.

Appeal to Income Tax Appellate Tribunal (ITAT)

1. Aggrieved with the order of CIT(A), assessee carried the matter in further appeal before the Tribunal.
2. Tribunal upheld the order of CIT (A) and rejected the appeal of the assessee.
3. According to the Tribunal, it was rightly held by the CIT (A) that the assessee had made a wrong claim by submitting inaccurate particulars of income by claiming a bad debt which was not actually a debt and also not an expenditure allowable under Section 37(1).
4. Therefore, the finding recorded by the CIT (A) that the assessee had willfully submitted inaccurate particulars of income which had resulted into concealment was affirmed.

Proceedings of High Court

1. Imposition of penalty is under Section 271(1)(c) of the Act. The two key expressions in Section 271(1)(c) of the Act are “concealment of particulars of his income” and “furnishing inaccurate particulars of such income”. These two expressions comprise of the two limbs for imposition of penalty under Section 271(1)(c) of the Act.
2. In the assessment order, AO had ordered that since the assessee had furnished inaccurate particulars of income, penalty proceedings under Section 271(1)(c) were also initiated separately. Therefore, it was apparent that penalty proceedings were initiated for furnishing inaccurate particulars of income.
3. In the instant case, penalty proceedings under Section 271(1)(c) of the Act were initiated on the ground that assessee had furnished inaccurate particulars of income.
4. Assessee disclosed that it had debited an amount under the head ‘selling and distribution expenses’ and claimed it as bad debt in the books of account.
5. As per the explanation given by the assessee it was exporting fabrics through M/s. JCT Ltd, a recognized export house for which assessee had an ongoing account with M/s. JCT Ltd.
6. Assessee clarified during the assessment proceedings that the said amount which was written off was actually not bad debt but in the nature of rebate and discounts given to M/s. JCT Ltd. on account of quality claims made by it from time to time.
7. This explanation of the assessee was not accepted by the AO by holding that subsequent payment made to M/s. JCT Ltd. would not be covered by Section 36(1)(vii) of the Act since the amount claimed as bad debt was actually not a debt.
8. Thereafter AO examined as to whether such payment would be covered under Section 37(1) of the Act as per which an expenditure would be allowable as a deduction if it pertains to that particular year and incurred wholly and exclusively for the purpose of business.
9. AO held that the assessee’s claim was not admissible even under Section 37(1) of the Act as the circumstances indicated that the payments were not made wholly and exclusively for business purpose.
10. While disallowing the claim of the assessee, AO took the view that since the assessee had furnished inaccurate particulars of income, penalty proceedings under Section 271(1)(c) of the Act was also initiated separately.
11. In the statutory show cause notice, AO did not indicate as to whether penalty was sought to be imposed for concealment of income or for furnishing inaccurate particulars of income though in the assessment order it was mentioned that penalty proceedings were initiated for furnishing inaccurate particulars of income.
12. However, in the order of penalty, AO held that assessee had concealed its income as well as furnished inaccurate particulars of income.
13. Concealment of particulars of income was not the charge against the appellant, the charge being furnishing inaccurate particulars of income.
14. Penalty cannot be imposed for alleged breach of one limb of Section 271(1)(c) while penalty proceedings were initiated for breach of the other limb of Section 271(1)(c).
15. In appeal, CIT (A) took a curious view that submission of inaccurate particulars of income resulted into concealment, thus upholding the order of penalty. This blurred view of the CIT (A) was affirmed by ITAT.
16. While the charge against the assessee was of furnishing inaccurate particulars of income whereas the penalty was imposed additionally for concealment of income, the order of penalty as upheld by the lower appellate authorities could be justifiably interfered with.
17. However, the HC wanted to examine whether there was furnishing of inaccurate particulars of income by the assessee in the first place because that was the core charge against the assessee.
18. It is quite evident that assessee had declared the full facts. The complete facts were before the AO while passing the assessment order. It is another matter that the claim based on such facts was found to be inadmissible. This is not the same thing as furnishing inaccurate particulars of income as contemplated under Section 271(1) (c) of the Act.

Thus, on a careful examination of the entire matter, the appeal was allowed and the order of penalty as affirmed by the two lower appellate authorities was set aside as the claim made for imposing the penalty was erroneous.

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