|DATE:||(Date of pronouncement)|
|DATE:||September 26, 2012 (Date of publication)|
|Click here to download the judgement (pricewaterhouse_coopers_271_1_c_penalty.pdf)|
No s. 271(1)(c) penalty for a “bona fide/ inadvertent/ human error”
The assessee filed a ROI together with the Tax Audit Report. In the Tax Audit Report, it was disclosed that an amount of Rs. 23 lakhs towards provision for gratuity was not allowable u/s 40A(7). However, in the computation of income, the said amount was not disallowed. The AO also overlooked the item and omitted to make a disallowance. Subsequently, he reopened the assessment u/s 147, disallowed the expenditure and levied penalty u/s 271(1)(c). The assessee explained that the omission to make a disallowance had occurred because it had a separate accounts department and there was “some confusion” and that the return was prepared by a non-CA and was signed a director who proceeded on the basis that the return was correctly drawn up. The CIT (A), Tribunal and High Court affirmed the levy of penalty on the ground that since the assessee was a well known and reputed Chartered Accountant firm and a tax consultant, it was not expected to make such a mistake and that there had been a failure to discharge the strict liability to furnish true and correct particulars of income. On appeal by the assessee to the Supreme Court, HELD reversing all the lower authorities:
Notwithstanding the fact that the assessee is undoubtedly a reputed firm and has great expertise available with it, it is possible that even the assessee could make a “silly” mistake. The fact that the Tax Audit Report was filed along with the return and that it unequivocally stated that the provision for payment was not allowable u/s 40A(7) indicates that the assessee made a computation error in its return of income. Apart from the assessee, even the AO who framed the original assessment order made a mistake in overlooking the contents of the Tax Audit Report. The contents of the Tax Audit Report suggest that there is no question of the assessee concealing its income. There is also no question of the assessee furnishing any inaccurate particulars. All that happened in the present case is that through a bona fide and inadvertent error failed to add the provision for gratuity to its total income. This can only be described as a human error which we are all prone to make. The calibre and expertise of the assessee has little or nothing to do with the inadvertent error. That the assessee should have been careful cannot be doubted, but the absence of due care, in a case such as the present, does not mean that the assessee is guilty of either furnishing inaccurate particulars or attempting to conceal its income. Consequently, given the peculiar facts of this case, the imposition of penalty on the assessee is not justified.
Though the judgement is in favour of taxpayers, it raises other issues as well. Today, the Tax Returns are not to be accompanied by any Annexure in the Efiling era. So, there is no Annual report/Tax Audit Report/ certificate etc to guide the Assessing Officer to check the correctness of claims/computation of tax liability.He has to rely only on the E return prepared by the taxpayer himself . So, this judgement may have limited application under the paperless era.The Efiling process needs to be strenghtened by requiring filing of other relevant documents, like Annual Report/Tax Audit report etc as applicable. Also, imagine a case where the Taxpayer inputs an erroneous Profit figure in the Electronic Return Form prepared by him, say by omitting the last two digits ( whereby crores become lakhs) …. it is arguable whether l it will still qualify as a “silly mistake” ??
for the purpose of imposing penalty u/s 271(1)(c), whether mens rea is required or not, is still not clear.
this judgement has limited application as far as mensrea is concerned.
This judgement is may not have serious implications on enforcement of penal provisions as it given on the peculiar facts of this case. the fact that disallowable amount is mentioned in the audit report and that report was submitted by the assessee to the dept go to support the plea of the assessee that he had not concealed particulars of income or furnished inaccurate particulars of income.
The judgement upholds that a bona-fide, inadvertent error can be committed by even experts in a field thus giving legal recognition to the age-old dictum `to err is human’ and thus extending the horizon of the term `conceal income’ and `furnishing inaccurate particulars of income’ used in section 271(1)(c) of the I.T.Act.