Facts

The Assessee, being a company, filed its return of income (ROI) on 31.01.2001, declaring a loss of Indian Rupees Twenty-six Lakh Fifty-four Thousand Five Hundred and Fifty-Four. Scrutiny under section 143(3) of the Income Tax Act, 1961 (Act) was conducted whereby an addition in respect of interest expenditure was made. Consequently, penalty proceedings under section 271(1)(c) of the Act were initiated against the Assessee company by reason of concealment of income/ furnishing of inaccurate particulars of income. The justification for this interest expenditure claimed by the Assessee company in its ROI was that the expenditure was incurred towards making payment of interest on loans borrowed by the Assessee company for purchase of IPL shares in light of its businesspolicies.

The Assessee company received a notice to show cause why such penalty proceedings should not be initiated against it, to which it respondent by the way   of its reply dated 22.03.2006 asserting that the details mentioned in its ROI were correct and that neither was there any concealment of income nor were inaccurate particulars furnished. The  Assessee company contended that the  disallowance of the expenditure was made only due to a difference of  opinion and further that only disallowance of an expenditure could not  be  the  premise for  levying  of penalty under the Act. It  was  the  submission of  the  Assessee company that in its own case in the Assessment Year 2000-2001 (A.Y.),  the CIT(A) had deleted  the disallowance of interest expenditure, the same being upheld by the ITAT on appeal. However, this was disputed by the learned Additional Solicitor General since an appeal against the order of the ITAT for A.Y.2000-2001 was pending before the Hon’ble High Court. For the present A.Y. 2001-2002, the CIT(A) deleted the penalty amount of Indian Rupees Eleven Lakh Thirty-seven Thousand Nine Hundred and Forty-nine under section 271(1)(c) of the Act. The revenue department being aggrieved by the order of the CIT(A), filed an appeal before    the ITAT, which upheld the order passed by the CIT(A). the order of  the  ITAT  was appealed against in the High Court by the revenue department wherein once again, the appeal wasdecided in favour of the Assessee company.

Issue

Whether the Assessee company is liable to pay the penalty amounting to Indian Rupees Eleven Lakh Thirty-seven Thousand Nine Hundred and Forty-nine under section 271(1)(c) of the Act?

Views

Section 271(1)(c) of the Act is only applicable when the conditions precedent stated therein are fulfilled, i.e., the Assessing Officer (AO) must be satisfied that an Assessee has concealed income or furnished inaccurate particulars of income and only then can penalty be levied. A mere making of a claim, which      by itself, is not sustainable under law would not amount to furnishing of inaccurate particulars of income. Therefore, as a matter of fact, since there was     no finding by any authority that the details submitted by the Assessee company were erroneous or false, no question of initiating penalty proceedings against the Assessee company would arise. Only the act of the Assessee company in claiming an expenditure in its ROI, whether such claim was acceptable or not to the revenue department, would, in isolation, not invite penalty under the provisions   of section 271(1)(c) of the Act.

Held

Dismissing the appeal, the court held that the CIT(A), the ITAT and the High Court had correctly reached the conclusion that the Assessee company had fully furnished all relevant details of its income and expenditure in its ROI, which were in themselves, not found to be incorrect and therefore could not be viewed as inaccurate or a concealment. The words used under section 271(1)(c)     of the Act are plain and simple, and unless the case of the Assessee is strictly covered by words in this provision, no penalty can be invoked. By any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing     in accurate particulars. Merely because the Assessee claimed of deduction of interest expenditure has not been accepted by the Revenue, penalty under section 271(1)(c) is not attracted. If the contention of the  revenue is  accepted,  the Assessee would be liable to penalty under section 271(1)(c) in every case where the claim made by the Assessee is not accepted by the AO for any reason. The court held that this cannot be the intention of the legislature. (AY. 2001-02)  (CA No. 2463 of 2010 dt. 17-3-2010)

Editorial: In CIT v. Khody Eswarsa & Sons (1972) 83 ITR 369 (SC), where the Court held that findings given in assessment proceedings would be relevant and admissible materials in penalty proceedings, but those findings cannot operate  as res judicatabecause the two are independent proceedings and considerations

arising in two proceedings are different. In Price Waterhouse  Coopers Pvt. Ltd.    v. CIT (2012) 348 ITR 306/253 CTR1/77 DTR 153/211 Taxman 40 (SC) the court

held that inadvertent human error occurred due to a bonafide mistake. Therefore, penalty held not to be leviable. The Hon’ble Bombay High Court in CIT v. Shri Samson Perinchery 2017 SCC OnLine Bom 7579/(2017) 392 ITR 4 held that the show case notice served upon the Assessee must indicate whether the penalty would be initiated for either concealment of income or furnishing of inaccurate particulars of income.

“Freedom is not worth having if it does not include the freedom to make mistakes.”

– Mahatma Gandhi