"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, attract the penalty under Section 271(1)(c)" already is an established principal laid down by the Apex Court in the case of Commissioner of income Tax, Ahmadabad V Reliance Petroproducts Pvt. Ltd.1, wherein 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 claim was not accepted by the revenue, it was firmly held by the Hon'ble Supreme Court of India that by any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing inaccurate particulars. The conditions u/s 271(1) (c) must exist before any penalty is imposed.

In a recent case, the Hon'ble ITAT, Mumbai in the case of Dr. Francis P Candes V Income Tax Officer2has taken a similar stand while relying upon the judgment above and has categorically held that mere disallowance of any claim will not make the case fit for levy of penalty.

Briefly stating the facts of the case, the Assessee has paid a sum of Rs. 42 Lacs to the Court receiver as per direction of the Hon'ble High Court for calling bids from the partners for the purpose of fixing royalty and the higher bidder was to be appointed as the Agent of the Receiver who shall carry on the business of Blood bank which was being carried on by the erstwhile Partnership Firm. On the plea that the Assessee had not deducted tax at source u/s 194J on the payment of royalty by invoking provisions of Section 40 (a) (ai), the AO disallowed payment for non deduction.

It was the stand of the Assessee's representative that penalty and quantum proceedings are separate and distinct proceedings, therefore mere disallowance in quantum proceedings cannot be made reason for levying penalty u/s 271(1)(c). However on the other hand, the Representative of the revenue pleaded that there was a failure on the part of the Assessee to deduct tax at source and therefore the AP was justified in levying the penalty. The CIT [A] confirmed the order of the AO, and then the Assessee appealed before the Hon'ble ITAT.

The Hon'ble ITAT, Mumbai after hearing both the sides was very strong on the point that there is no dispute on the fact quantum and penalty proceedings are separate and distinct. Relying on the judgment of Reliance [Supra] and Dilip N. Shroff3and Dharmendra Textile Processors4as there was full disclosure made by the Assessee with respect to the expenditure claimed, therefore, mere disallowance of the legal claim cannot be made the basis for levy of penalty u/s 271(1)(c)of the Act.

Footnotes

1. SLP (C) No. 27161 of 2008

2. ITA No. 5830/Mum/2012

3. 291 ITR 519 [SC]

4. 306 ITR 277 [SC]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.