S. 271(1)(c) Penalty | Judgement Of Bombay High Court In Shanti Ramanand Sagar Explained

In Shanti Ramanand Sagar vs. CIT (2018) 402 ITR 245, the Bombay High Court has upheld the levy of penalty u/s 271(1)(c) for concealment of income or furnishing inaccurate particulars of income. Advocate Rahul Hakani has explained the judgement in the proper perspective and pointed out that it does not alter the prevalent legal position that no penalty can be levied in case of rejection of a bona fide legal claim

1. After the decision of the Supreme Court in UOI v. Dharmendra Textiles (2008) 306 ITR 277 (SC) , it was seen that the revenue authorities initiated penalty proceedings in an automatic fashion and also argued at different Appellate stages that penalty is to be levied the moment addition is made or confirmed. This erroneous interpretation was set at naught by the Supreme Court in Union of India vs Rajasthan Spinning & Weaving Mill (2009) 180 Taxmann 609(SC) wherein it was held as under:

“At this stage, we need to examine the recent decision of this Court in Dharamendra Textile (supra). In almost every case relating to penalty, the decision is referred to on behalf of the Revenue as if it laid down that in every case of non-payment or short payment of duty the penalty clause would automatically get attracted and the authority had no discretion in the matter. One of us (Aftab Alam,J.) was a party to the decision in Dharmendra Textile and we see no reason to understand or read that decision in that manner.”

2. Recently the Bombay High Court in the case of Shanti Ramanand Sagar And Ors v CIT (2018) 402 ITR 245(Bom)(HC) has confirmed penalty levied u/s 271(1)(c) on the Assessee. Though it is not unusual for a High Court to either confirm or delete penalty in a given case, but this decision has raised apprehension in the minds of the assessee that the revenue authorities would misconstrue the ratio of this decision and once again impose penalty in an automatic fashion even in cases of bonafide legal claims. This apprehension mainly arises from the fact that penalty was confirmed by the High Court after referring following three judgements which are quoted by the revenue authorities without fail in almost every penalty matter :

(i) Union of India vs. Dharmendra Textiles Processors and Ors., (2008) 306 ITR 277(SC)

(ii) Commissioner of Income Tax vs. Zoom Communication P. Ltd., (2010) 327 ITR 510(Del)(HC)

(iii) Mak Data P. Ltd. vs. Commissioner of Income Tax-II, [2013] 358 ITR 593 (SC)

3. However, on an analysis of the decision in Shanti Ramanand Sagar And Ors v CIT (Supra) it can fairly be concluded that penalty was confirmed in the peculiar facts of that case and the fundamental principle that penalty does-not automatically follow additions/disallowances remains unaltered. The basis for reaching this conclusion is as under:

(i) In this case assesse sold a movie, namely “Charas” to M/s Prakash Pictures on minimum guarantee basis for Rs 13,70,000/-. Assesse offered Rs 3,90,917/- in AY 1977-78 and balance consideration in AY 1978-1979.The balance consideration was shown as advances/deposit in AY 1977-78. M/s Prakash Pictures had claimed entire amount of Rs 13,70,000/- as a deduction in AY 1977-78. The AO made the addition of balance consideration which was confirmed by first appellate authority. No appeal in quantum proceedings was preferred thereafter. The argument of the Assessee for not levying penalty was that (a) it had made bonafide disclosures and that it did not have the agreement between the parties so that it was not clear as to what was the income for AY 1977-78 and (b) there was no tax effect as assesse had huge brought forward losses. Both the arguments were negatived by the tribunal as well as the High court.

Firstly, it was held that it was not possible that the agreement in writing was not available and in any event despite non-availability of agreement assesse ought to have known the nature of transaction as there would certainly have been some prior negotiations. Hence, it could not be said that there was a technical error. Secondly it was held that the argument of no tax effect was factually incorrect as after inclusion of balance consideration there was a positive income and thus by not offering balance consideration in AY 1977-78 assessee was able to thwart tax liability for two years i.e AY 1977-78 and 1978-79.

Hence, the High Court found the arguments of assesse factually incorrect and it was on those peculiar facts that penalty u/s 271(1)(c) was upheld. The legal position that no penalty u/s 271(1)(c) can be levied on rejection of a bonafide legal claim remains unchanged.

(ii) The decision of the Supreme Court in Union of India vs. Dharmendra Textiles Processors and Ors (Supra) has been considered at Para 22 of the judgement. The High court has simply reiterated the legal position that mens-rea is not essential for Section 271(1)(c).

The Pune Tribunal in Kanbay software India P Ltd v DCIT [2009] 122 TTJ 721 (Pune) while dealing with the observation of the Supreme Court in case of Union of India v. Dharamendra Textile Processors (supra) to the effect that penalty under section 271(1)(c) is to provide remedy for loss of revenue and is a civil liability held that judgment in Dharamendra Textile Processors case (supra) does not make a radical change in scheme of section 271(1)(c) but it re-emphasizes paradigm shift on burden of proof as brought about by Explanation to section 271(1)(c).

The above position of law still continues and has not been disturbed by this judgment.

(iii) The decision of the Supreme Court in Mak Data P. Ltd. vs. Commissioner of Income Tax-II (supra) has been considered at Para 23 of the judgement. The High Court has agreed that reliance on said decision by the revenue was accurate. However, it also recorded to the effect that each and every case of voluntary disclosure will not absolve assessee from rigours of penalty i.e in other words there will be facts and circumstances wherein assessee will also be absolved of penalty in case of voluntary disclosure.

Thus, the decision is not in conflict with the earlier decision of the Bombay High court in CIT v Shri Hiralal Doshi [2016] 383 ITR 19 (Bom)(HC) wherein after considering Supreme Court decision in MAK Data(P) Ltd v CIT (Supra) it was held that said decision is not universally applicable and penalty on income surrendered during survey was liable to be deleted in the facts of the said case. Hence, cases of voluntary disclosure will have to be decided on a case to case basis in accordance with law.

(iv) The decision of the Delhi High Court in Commissioner of Income Tax vs. Zoom Communication P. Ltd (supra) though was cited by the ITD, the High Court did not refer the same. In any event the Bombay High Court in CIT vs. S.M. Construction (2015) 233 Taxman 263 (Bom)(HC) has deleted penalty u/s 271(1)(c) after considering the decision of the Delhi High Court in CIT vs. Zoom Communication Ltd(Supra) on the grounds that wrong claim of assessee if made Bonafide and all relevant facts are disclosed is not exigible to penalty u/s 271(1)(c).

(v) The decisions of the Supreme Court in CIT v Reliance Petroproducts Pvt Ltd (2010) 322 ITR 158(SC) and Price Waterhouse Coopers Pvt Ltd v CIT (2012) 348 ITR 306(SC) have been analysed at Para 20 & 21 of the judgement respectively. The High Court concurred with the ratio laid down by the Supreme Court in both the decisions that (a) an unsustainable claim by itself does not amount to furnishing inaccurate particulars of income and (b) genuine or silly mistake or omission will not entail penalty, but held that on facts both the decisions were distinguishable particularly in the facts of the present case it was established that there was an attempt to avoid tax liability.

(vi) The Supreme Court in CIT v Sun Engineering [1992] 198 ITR 297 (SC) has held as under:

“It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it to be the complete ‘law’ declared by this Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this Court. A decision of this Court takes its colour from the questions involved in the case in which it is rendered and while applying the decision to a latter case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasonings.”

Thus, any interpretation that the decision in Shanti Ramanand Sagar And Ors v CIT (Supra) is not to be restricted to the facts of said case and penalty is to be levied automatically irrespective of a bonafide legal claim or a debatable claim would tantamount to reading the judgment totally out of context.

4. In view of the above, it is legitimately expected by the assesse that this decision will not be used as a tool by the revenue authorities for automatic initiation and consequent levy of penalty as same will otherwise only give rise to proliferation of litigation. In this regard the following observations of Supreme Court in CIT Vs. Reliance Petro Products (Supra) may be kept in mind:

“If we accept the contention of the revenue then in case of every return where the claim made is not accepted by the Assessing Officer for any reason, the assessee will invite penalty under Section 271(1)(c). That is clearly not the intendment of the legislature”.