The author goes ballistic over the recent judgement of the Supreme Court in PWC‘s case that s. 271(1)(c) penalty cannot be imposed if the assessee carelessly makes a wrong claim. He argues that the judgement neutralizes the deterrent effect of s. 271(1)(c) and is prone to abuse in the present regime of no scrutiny assessments. He fears that in the absence of a deterrent effect, assessees will be encouraged to ‘take a chance’ with bogus claims
The judgement of the Supreme Court in Price Waterhouse Coopers vs. CIT makes for startling reading and leads to unsatisfactory consequences. An assessee caught red-handed trying to smuggle in an untenable claim for deduction is able to escape penalty u/s 271(1)(c) for concealment/ filing inaccurate particulars of income by putting on a sheepish face and pleading that the untenable claim was because of some confusion at his end.
What makes the situation worse is that the assessee concerned is not some ignorant person unaware of the legal provisions but a professional firm of Chartered Accountants who get paid heavy fees for being auditors and tax experts.
I put the blame for this fiasco on the totally inept handling of the case by the department. The matter was not presented in the proper perspective nor were the statutory provisions explained.
First, lets’ understand the facts. The Tax Audit Report (obviously prepared by another firm of Chartered Accountants) clearly declared that an amount of Rs. 40 lakhs debited to the P&L A/c was not allowable as a deduction u/s 40A(7). All that a person preparing the computation of income has to do is to scan the TAR to identify the issues red-flagged by the tax auditor and disallow it.
The person who prepared the computation lost sight of it.
The partner who signed the return is supposed to be a vigilant auditor. Even he lost sight of something so obvious. Maybe he had more pressing things on his mind.
Doesn’t matter. It can happen to the best of us. But when a notice of reassessment u/s 148 came; surely that would have warranted a second and closer look at the return that was furnished to see if there was something wrong somewhere.
How could the same return that was filed earlier be filed again in response to the s. 148 notice? Was everybody still in a stupor? Nobody bothered to cross check the computation and the Tax Audit Report? Is this not the height of incompetence and carelessness?
Not surprisingly, the assessee’s plea met with no sympathy at the lower levels. The High Court sternly observed that a well known and reputed firm of Chartered Accountants could not afford to behave in such an irresponsible manner and get away with it. "The assessee has failed to discharge its strict liability to furnish their true and correct particulars of accounts while filing the return" the Court solemnly observed.
The assessee’s defense before the Apex Court was as facile as it can get.
The first defense was that its partner who signed the return had "proceeded on the basis that the return was correctly drawn up and so did not notice the discrepancy between the Tax Audit Report and the return of income". Who asked this worthy gentleman to "proceed on the basis that the return was correctly drawn up"? He is an auditor – always supposed to sniffing for trouble like a watchdog or a blood hound. He is not paid to assume that everything is hunky dory.
The second defense was that the assessee had over 1000 employees and a separate accounts department and that there was "some confusion" in the person who prepared the computation.
Surprisingly, both these facile arguments met with the Court’s approval. Worse, the Court virtually made excuses for the assessee. Yes, so what if the assessee is a reputed firm and has great expertise. It is entitled to make a "silly mistake". The assessee had "disclosed" the factum of disallowance in the TAR so there is the question of the assessee being guilty of concealment or filing inaccurate particulars of income. The assessee had committed a "human error" that "all of us are prone to make", the Court added magnanimously.
But wait! What about when the notice for reassessment came and you were asked to file a return of income. Didn’t anybody bother to open the file and see if there is something wrong somewhere? How could you have dared to file the same return a second time and repeat the claim for a wrong deduction? Is this also a "silly mistake"?
Nobody bothered to ask the Question. Neither the department nor the learned Judges.
Also, to justify the judgement, the learned Judges observed that the facts of the case were “rather peculiar and somewhat unique“. I don’t see what is “peculiar” or “unique” about an assessee forgetting to make a disallowance. It happens day-in and day-out. They also made something out of the fact that “even the AO made a mistake in overlooking the contents of the Tax Audit Report“. This, again, is an irrelevant consideration. How does the AO’s omission justify the assessee’s negligence? Also, the AO did notice it the second time when he issued the s. 148 notice. The assessee still overlooked it. So, what is to be made of it?
Anyway, so it is that the law has been laid down that it does not matter how careless or negligent or irresponsible you are whilst filing your return. If you can somehow manage to give the wrong claim the label of "human error/ silly mistake", you can go scot free.
Now, there are two things wrong with the judgement.
The first is that the department did not point out the deeming provision in Explanation 1 to s. 271(1)(c) which reads as follows:
"Where in respect of any facts material to the computation of the total income of any person under this Act ,—
(A) such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the Commissioner to be false, or
(B) such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed".
Courts have considered Explanation 1 to s. 271(1)(c) in a number of judgements and the consensus is that the "explanation" for the wrong claim should be a plausible one. Any and every explanation cannot be accepted as being "bona fide" (see CIT v. Mussadi Lal Ram Bharose 165 ITR 14 (SC)).
Now, what is contemplated by Explanation 1 to s. 271(1)(c) is an "explanation" on the "merits" of the claim for deduction. If that explanation has some merit, then, even if one does not agree with that explanation, you can say that it is a bona fide explanation and so penalty cannot be levied. But, if the explanation is ex-facie bogus, then, even if there is no concealment of income or furnishing of inaccurate particulars, penalty is still attracted.
This is exemplified in the judgement in CIT vs. Escort Finance Ltd 328 ITR 44 (Del). The assessee, a finance company claimed deduction u/s 35D even though that deduction is available only to an "industrial undertaking". The claim was disclosed in the Tax Audit Report. To prove that its claim was "bona fide", the assessee obtained the opinion of a Chartered Accountant. However, the Court rejected the argument of "bona fide" by pointing out that when it was clear to even a layman that there was no scope for getting a deduction, it was not understood how a Chartered Accountants who is supposed to be an expert in tax laws could give such an opinion. The assessee’s claim was held to be false and as liable for penalty despite due disclosure and a so-called opinion of a CA.
Now, in the present case, the assessee did not even have a fig leaf of an explanation to defend its claim. It straightaway admitted that it was wrong and blamed the whole thing on carelessness on his part.
So, how are the ingredients of Explanation 1 to s. 271(1)(c) satisfied? Is it now the law that a plea of carelessness/ negligence/ mistake will suffice to constitute a "bona fide" explanation?
Secondly, the Court’s attention was not drawn to the fact that penalty was intended to be a deterrent to prevent an assessee being casual about his responsibility to make a full and true disclosure of income.
This is particularly relevant in the present legislative scheme in which the assessees are trusted to do the right thing and a bulk of the returns are not picked up for scrutiny. If there is no deterrent, what is to prevent the assessee from "taking a chance"?
Now, lets see how the law laid down in Price Water House Coopers can be abused. Suppose you have incurred expenditure that you know is not deductible. Instead of straight away disallowing it and paying up the tax thereon, why not try your luck and take a chance without any incremental cost or risk. Here’s what you have to do:
(i) Make sure that the expenditure is prominently displayed in the P&L A/c and there is a reference to it in the audited accounts and the tax auditors’ report;
(ii) In the computation of income, "forget" to disallow the expenditure;
(iii) If your luck holds and the return gets processed u/s 143(1) and there is no scrutiny assessment, you are on velvet;
(iv) If your luck runs out and the AO hauls you up by the collar, just put up a sheepish face and say "Sorry Sir, I forgot. There was some confusion. I made a "silly mistake". Please forgive me".
That’s it. Even in the worst case scenario that you are caught red handed, you are only liable to pay the tax on the amount. No risk of penalty because you have "disclosed" in the accounts and audit report the fact that the expenditure is not allowable and only committed a "silly mistake".
So, why bother being honest & straightforward when there is such a premium on carelessness/ dishonesty?
Vellalapatti Swaminathan Iyer
Why it cannot be treated as Human error why commenting on the honourable judge and go to the extent of alleging that the said judge retired immediately there after. The fact still remains that earlier one officer looked into the return of income and has not made addition. Is there no mistake on him. Is it only on PWC. It is not that in every case of 148 assessments penalty is not being confirmed. Recently Hyderabad ITAT confirmed penalty in a case of 148 assessment to the extent the income returned as the income assessed is on estimate basis. Also all the professional are aware as to how recently the very same Supreme Court confirmed penalty in a case of survey on the ground that there is no bonafide explanation. Therefore being professional it will not be correct to comment like the author who started this debate.
Some wrong doers take advantage of the law and it result into that even genuine errors are trapped under penalty. but like the case of PWC. yes you are right absolutely, there has to be some integrity. You cant just run by saying sorry or accepting your mistake. there has to be pinch by law.
mistakes take place due to human error. So SC view is correct and revenue view is tacitly hyper sensitive. Law is a unruly horse.Advocate need to be like jockey of a race horse. So to CAs. But mistakes happen that need to be well highlighed that happened in PWC matter. SC view is real valuable judgement and in fact is a ratio decidenti for all tribunals,CIT(Appeals), HCs.
Swaminathan view is deficient considering on issues of mistakes. See for instance when AOs issue Notices by earrror of understanding their own laws, we need to cancel the Notices is judicial view. Nothing hyper sensitive in SC judgement but revenue several times is hyper sensitive
Only Humans can make mistakes but not experts. Experts are having knowlwdge above human. They need to be perfect in their work when they do because the same thing is expected from them thats why they have been considered has experts.
Its a good case cited here.
Let’s accept the argument that it was a silly mistake by the assessee. The lower court have not accepted the plea.
Wonder why the Supreme Court has to accept the plea of the assessee. This case and judgement becomes the quintessential that will be cited in future cases and even lower courts are bound by this judgement to decide any such future case. In essence this section becomes redundant in future given the SC judgement.
Though the assessee’s claim of ‘silly mistake’ is accepted, the law should have been applied by the SC to penalise any wrong, irrespective of clerical errors, wrongful ommission, etc. We need to blame the legal system which embeds allowing incorrect interpretation of the law in its origin itself.
You are right.
Even small CA firms filing tax returns of individual clients goof up.
in a case the CA was given ROI for say AY 2007-2008 and he files the ROI of his individual client in december 2008 instead of march or june 2008.
That means the ROI is filed after mandatory time limit, then say AO selects the same under scrutiny, instead of rejecting the ROI then both CA and A O commit wrongs and such wrongs can we call okay!
Reason is if some one i mean a CA by mistake files a wrong ROI, should the client be penalized.
that way very income tax law is some what deficient.
Sec 143 is clear when a ROI was filed on a particular date then after expiry of 12 months of filing, the AOs scrutiny is untenable as it is prima facie void, as the deptl circular 621 of dept dtd 19 december 1991 makes it mandatory to assess that return first and after 1st assessment within time the AO can take for scrutiny provided AO is with in 12 months of such filing of ROI .
scrutiny if done after and issues 143 notice that to within 12 months of ROI filed date, then AO is within limitation of jurisdiction.
But if AO says as ROI filled is delayed then he need not fall under 12 months rule of limitation is a preposterous claim by AO, can we support AO with his error.
After all, Natural justice calls for ‘audi alteram partem ‘ law which if not followed by A O then A O has violated rule of law is the Administrative law which law is followed by very courts scrupulously, under methods of ‘hearing’ the parties.
And courts set aside exparte orders several times.
After all law is an ass , like a beast of burden and law if not properly applied naturally law will not take cognizance is it not friends?
i do not find anything wrong with supreme court as the department went whole hog some how to collect some revenue.
Revenue collections are based on natural justice and rule of law and revenue cannot be collected, at some one else’s mistake pls is my view, may be wrong to erudite minds possibly.
If someone investigates, the amount when paid must have been taken as expenses and it would have been a clear case of double deduction claimed.one in th eyear of Provision, and one in th eyear of payment.
If this is pardonable please remove the sectin 271(1)(c) from the statute
you and I cannot go upto the supreme court.. you know the cost. No body bothered even to find out wheter the sme amount has been allowed in the year of payment also ” by a silly mistake”
We have to be careful in spite of the supreme court judgement as below the level of High court in the normal circumstance you will not get the relief from the penalty
So much vitriol!!! LOL, clearly the author is peddling the Department’s line an analogy of which can be drawn that a doctor should be refused treatment simply because doctors being doctors, should not fall sick!
Quite clearly, all facts were disclosed in the return of income by way of tax audit report – where is the concealment??? This judgment is clearly based on the facts of the case and is not a blanket judgment that every assessee can use the argument of “silly mistake” as an excuse.
Unless of course you mean to say that the assessee thought at the very outset that the AO would not read the tax audit report and it would get away with the “alleged” false claim.
Rubbish article … I hope you are not getting paid for this … Sheesh … get a life!
We are very liberal in all respects. one simple question arose in my mind, why are we being called a soft state? judiciary is one of the three pillars of democracy and such kind of decision given by Honorable supreme court of India is having wider ramification, which may lead to generate more Black money or paves the way to become fearless to conduct against the law of this country. In India, Tax crime is civil crime, where in many developed countries it is treated as criminal offence and they deal with these kind of offence very strictly if any comes to the notice. we also have a very weak deterrent system. People who are dishonest and practice illegal things feel more encouraged. I fully agree with Mr. V. Swaminathan Iyer’s article.
I think we must celebrate this decision. at least this will throw some dust upon the zoom and escorts finance decisions from Delhi High Court and also strike down the department theory of taking up scrutiny cases in small number. the judgement is categorical that u cannot impose penalty in every case. prove guilt and malafide then penalise.
Congratulations for writing an exceptional article. The closing lines are really punching and conclusive. It is quite interesting to know the decision is rendered by a judge who retired within few days of rendering this extraordinary judgement. This decision just dilutes the very deterrent purpose of section 271(1)(c) and facilitates the tax evaders to treat the taxmen as buffoons and clowns.
The judgment relates to Price Waterhouse Coopers (P.) Ltd. which is a Private limited company. This does not relate to CA firm of PWC which carries audit functions.
The honorable Supreme Court has observed that “the assessee provides multi-disciplinary management consultancy services and has a worldwide reputation.” Therefore, one point to be distinguished is that PWC CA was not the party before the Supreme Court. The assessee was a body corporate and had to rely on human agencies in compliance of its statutory requirements. The human agent committed an inadvertent mistake or mistake of omission of making a disallowance, which was called for in view of Tax Audit Report prepared specifically to assist the assessee and the AO to correctly compute income.
In this case, regular assessment was completed under section 143(3) on 26-3-03 at. a total income of Rs. 24,42,91,550/-. This shows that the company was carrying activities in large scale and was equipped with many experts. Besides it had advantages of PWC, CA as an associate.
It cannot be doubted that there was gross negligence, and such negligence continued even at the time of scrutiny assessment, when assessee should have come-forward to offer a disallowance, but that was not done and may be assessee took advantage of negligence or oversight of the AO. The representative of assessee ignored that there is a system of revenue audit, and also supervision by senior authorities and apparently took a chance that the required disllowance may not surface.
At reassessment stage not at the time of notice but even during hearing any effort was not made to make out a case of deduction of gratuity. Depending on facts, probabily a claim could be made that inspite of report in TAR about disallowance, subsequent event entitle assesee to get deduction of gratuity provided as on closing day of PY.
During reassessment on receiving reasons for reopening the assessment, assessee realized that a mistake had been committed and accordingly by a letter dated 20-1-2005 the Assessing Officer was informed that there was no wilful suppression of facts by the assessee but that a genuine mistake or omission had been committed which also appears to have been overlooked by the Assessing Officer before whom the Tax Audit Report was placed. Accordingly, the assessee filed a revised return on the same day. A reassessment was passed on the same day and the assessee then paid the tax due as well as the interest thereon.
Thus assessee could not detect mistake until reasons for reopening were received.
One important aspect which need further consideration is that assessment year involved was AY 2000-01, by that time provisions of S.40A (7) were quite old however, before and some High Courts disputes were pending on the issue that what is dis allowable u/s 40A (7) can still be allowed u/s 28 read with S. 145. However, assessee had not raised this aspect in the reply to the AO.
In fact assessee could have contended that assessee had expected compliance with S. 40A (7) soon and that the sum could be allowed u/s 28 read with S.145 and on such issue two views are possible. however, that was not contended.
Thus the omission to disallow can be called a mistake committed by concerned persons, however, till which stage it can be considered as a permissible mistake is an important aspect? Further why alternate contentions to claim deduction were not made is a surprising point.
In this case there was concurrent finding of the AO, the CIT(A) , the Tribunal and the High Court that there was case for penalty. the AO ad CIT(A) considered 300% penalty the Tribunal reduced it to 100% of tax.
The Supreme court observed and held ” The caliber 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 assessed is guilty of either furnishing inaccurate particulars or attempting to conceal its income.”
The reasoning of the Supreme court is correct, in light of fact that assesses is a body corporate and dependent on concerned person. A concerned person may be a CA or other expert, mistake can take place, however, the fact that the mistake continued very long and at various stages, and any attempt for a review was not made by assesses and its concerned persons. This is unfortunate.
Mistakes of concerned persons, can in case of corporate assessee can be a reasonable ground to get relief.
The decision reflects on our ‘slave’ attitude. Anyway I am happy. one ‘big’ has admitted that it is ‘silly’. So, its clients ‘Beware’, from such Supreme Court acknowledged ‘silly’.
To err is Humane .So PWC is not an exception – be high their reputation and charges
Satyam auditor learn lesson
More than anything else, it is bad publicity that CAs do not bother to verify their own tax returns and that too by one of the biggest firms in the world. If such be the position of bigger firms, what about smaller firms of CAs.
To err is human, but to err again cannot be excused. To err a second time probably is on account of over confidence.
The firm has no doubt won the case in the Supreme Court and in a way has done a yeoman service to all the assessees who are slapped with penalty notice for every addition made in the assessment order. But, I would have pondered over:
a) The total cost spent by the firm in the litigation (supreme court & high court representation is really very prohibitive) vis a vis the amount of penalty levied and further the matter did not involve any prestige issue;
b) The likely bad publicity the firm would get for themselves;
c) The likely bad publicity for the CA fraternity as a whole;
d) Compared to the millions of dollars paid world over by various accounting firms in penalty for ‘mistakes’, this penalty was very miniscule
The view expressed by Mr. V Swaminathan Iyer is correct. I totally agree with him that the Honorable Supreme court has taken a lenient view in the matter. It is completely incorrect for a CA firm to get away by saying that this was an innocent silly error. Can a doctor committing a silly error leading to the death of a patient be pardoned totally. Being a CA i feel these large firms are using their clout to get away with murder and I feel this is not good for the country or for the profession.