Monday, March 29, 2010

Landmark Judgment by Supreme Court On Penalty u/s 271(1)(c). Dharnendra ....

Landmark Judgment by Supreme Court On Penalty u/s 271(1)(c) in Favour Of Taxpayers !

March 27, 2010 

Very recent judgment of Supreme Court in CIT vs Reliance Petroproducts Pvt Ltd delivered on 17/3/2010, is a great relief to taxpayers as it has cleared the confusion in minds of Authorities regarding the imposistion of penalty. In fact the decision of Apex Court in Dharmendra Textile embolden Authorities to the extent that penalty proceeding was turned into just a procedure contrary to the scheme framed by law makers .  In the very recent judgment, the facts of the case was as under

The assessee is a company and the relevant Assessment Year is 2001-02. The Return was  filed  on 31.1.2001 declaring loss of Rs.26,54,554/-. This assessment was finalized under Section 143(3) of the Act on 25.11.2003 whereby the total income was determined  at  Rs.2,22,688/-.  In  this  assessment  the  addition  in  respect  of  interest expenditure was made. Simultaneously penalty  proceedings under Section 271(1)(c) of the Act were also initiated on account of concealment of income/furnishing of inaccurate particulars of income. The said expenditure was claimed by the assessee on the basis of expenditure made for paying the interest on the loans incurred by it by which amount the assessee  purchased  some  IPL  shares  by  way  of  its  business  policies.  However, admittedly, the assessee did not earn any income by way of dividend from those shares.

The company  in  its  Return  claimed  disallowance  of  the  amount  of  expenditure  for Rs.28,77,242/- under Section 14A of the Act.

5.         By way of response to the Show Cause Notice regarding the penalty in its reply dated 22.3.2006, the assessee claimed that all the details given in the Return were correct, there was no concealment of income, nor were any inaccurate particulars of such income furnished. It was pointed out that the disallowance made by the Assessing Authority in the Assessment Order under Section 143(3) of the Act were solely on account of different views taken on the same set of facts and, therefore, they could, at the most, be termed as difference of opinion but nothing to do with the concealment of income or furnishing of inaccurate particulars of such income. It was claimed that mere disallowance of the claim in  the assessment proceedings could not be the sole basis for levying penalty under Section 271(1)(c) of  the Act

The Supreme Court made following observation while dismissing the  petition by Income Tax Department.

1. For every penalty u/s 271(1)(c) , one of the two conditions must be satisfied

If none of these are alleged by A.O vide his order of assessment, penalty u/s 271(1)(c) can not be imposed.

2. The decision of Supreme Court in Dharmendra Textile Processors & Others [2008] 306 ITR 277 merely overrules the decision of Dilip N Shroff vs JCIT  [2007] 291 ITR 519 (SC) related to mense rea i.e A.O need noot prove that the concealment or inaccurate particluars of income was done by assessee with an intention to evade tax and in guilt mind. The decision in Dharmendra Textile does not make the penalty proceeding a mere procedure , but the two conditions given in section 271(1)(c) are fundamental for imposing penalty.

3. The word "inaccurate particulars"  must mean the details supplied in the Return, which are not accurate, not exact or correct, not according to truth or erroneous.

4. Most important was this observation

It was, therefore,  reiterated before us that the Assessing Officer had correctly reached the conclusion that since the assessee had claimed excessive deductions knowing that they are incorrect; it amounted to concealment of income. It was tried to be argued that the falsehood in accounts can take either of the two forms; (i) an item of receipt may be suppressed fraudulently; (ii)  an item of expenditure may be falsely (or in an exaggerated amount) claimed, and both types attempt to reduce the taxable income and, therefore, both types amount to concealment of particulars of one's income as well as furnishing of inaccurate particulars of income. We do not agree, as the assessee had furnished all the details of its expenditure as well as income in its Return, which details, in themselves, were not found to be inaccurate nor could be viewed as the concealment of income on its part. It was up to the authorities to accept its claim in the Return or not. Merely 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.

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