Kanbay Software vs. DCIT (ITAT Pune)

SC judgement on s. 271 (1)(c) penalty in Dharmendra Textiles explained

In respect of AY 2002-2003, the assessee claimed by a revised return that the loss suffered in respect of one s. 10A unit was not liable to be set-off against the profits of another s. 10A unit. The AO rejected the claim and the assessee accepted the decision of the AO. On the question whether the assessee was liable for penalty u/s 271 (1) (c) for “furnishing inaccurate particulars of income”, especially in the light of UOI vs. Dharmendra Textile Processors 306 ITR 277 (SC), HELD allowing the appeal:

(1) On first principles, penalty u/s 271(1)(c) is not simply a consequence of an addition being made to the income of the assessee. Penalty u/s 271(1) (c), irrespective of whether it is a civil liability or a criminal liability can only be imposed when the scheme of the Act permits or requires so. It is not an automatic consequence of an addition being made to the income. An addition made during the course of assessment proceedings, by itself, cannot be enough to initiate, leave aside conclude, penalty proceedings u/s 271(1)(c).

(2) The judgement in UOI vs. Dharmendra Textile Processors has to be understood in the correct perspective. It does not make a radical change in the law nor does it affect the basic scheme of s. 271 (1) (c). Even in K P Madhusudanan vs. CIT 251 ITR 99, the assessee’s plea to the effect that ‘revenue was required to prove mens rea of a criminal offence’ before penalty u/s 271(1)(c) can be imposed was rejected. Penalty u/s 271 (1) (c) has been held to be ‘civil liability’ in contradistinction to prosecution u/s 276C. It is wrong to infer that because the liability is a “civil liability”, it ceases to be penal in character. There is no contradiction in a liability being a civil liability and the same liability being a penal liability as well, though a civil liability cannot certainly be a criminal liability as well. As observed in Om Prakash vs. UOI AIR 1984 SC 1194 @ 1209 “A penalty imposed by the sales tax authorities is a civil liability, though penal in character”.

(3) The impact of penalty being held to be a civil liability is that mens rea need not be proved. A mere contravention of a statutory obligation, whether wilful or not, is enough to trigger the penalty provision. However, there has to first be a contravention of the statutory obligation even for a civil liability to be invoked;

(4) An assessee’s statutory obligation u/s 139 (1) is to give correct and complete information with the return of income. If this is complied with, then there is no contravention which can attract even a civil liability. The fact that additions and disallowances are made by the AO does not mean that there is a breach of the obligation. The proposition that just because penalty under section 271(1)(c) is a civil liability, it must mean the penalty can automatically be levied on the basis of any addition to income is not correct;

(5) The observations in Dharmendra Textile to the effect that penalty is to provide a remedy for loss of revenue cannot be construed to mean that penalty can be imposed as an automatic consequence for addition to returned income, given the scheme of s. 271 (1)(c);

(6) Accordingly, Dharmendra Textile is not an authority for the proposition that penalty is an automatic consequence of an addition being made to the income of the taxpayer for the reason that whether it is a civil liability or a criminal liability, penalty can only come into play when the conditions are satisfied. Even Expl. 1 to s. 271 (1) (c) raises a rebuttable presumption and shifts the onus on the assessee to establish the bona fides of the claim;

(7)There can be three distinct mutually exclusive situations in case of an addition to income: (a) Where the addition is on account of contumacious conduct of the assessee and mens rea is established; (b) Where it can neither be established that the addition is on account of contumacious conduct of the assessee nor is it established that the assessee’s conduct and explanation is bonafide; (c) Where it is established that the assessee’s conduct and explanation is bonafide. In situation (a), penalty was always leviable. In situation (c), penalty was never leviable. In situation (b), under Dilip Shroff, penalty would not have been leviable since the onus of establishing mens rea could not have been discharged by the AO. However, pursuant to Dharmendra Textile penalty in such a case will be leviable since it is not necessary for the AO to establish mens rea. That is the area in which legal position has changed;

(8) The expression ‘concealment of income’ implies that an income is being hidden, camouflaged or covered up so as it cannot be seen, found, observed or discovered. The expression ‘furnishing of inaccurate particulars of income’ implies furnishing of details or information about income which are not in conformity with the facts or truth. It does not extend to subjective areas such as the taxability of income, admissibility of a deduction and interpretation of law. The making of an incorrect claim does not amount to furnishing inaccurate particulars;

(9) The deeming fiction of Expl. 1 to s. 271 (1) (c) applies only with respect to “facts material to the computation of income” and not with the computation per se. The fiction does not apply where the controversy is regarding the legality of the claim made by the assessee. Further, when the assessee offers an explanation in discharge of the onus cast upon him by Expl. 1 to s. 271(1)(c), the AO must consider the explanation objectively and unless he finds the same against the human probabilities or unless there are any real inconsistencies or factual errors in such an explanation, the AO ought to accept the same. The assessee cannot be expected to prove the claim of bona fides to the hilt;

(10) On facts, as all relevant facts were furnished and the claim was bona fide, penalty could not be levied.

See Also: ACIT vs. VIP Industries (ITAT Mumbai)