2014 (1) TMI 495 - HC - Income Tax

Court affirms penalty deletion under Income Tax Act, stresses mens rea requirement

The Commissioner of Income-tax, Jalandhar Versus P. Ram Chand & Co., Basti Nau, Jalandhar

The High Court upheld the decision of the Income Tax Appellate Tribunal to set aside the penalty imposed under Section 271(1)(c) of the Income Tax Act, ... Penalty u/s 271(1)(c) - Held that:- The respondent had disclosed the assets under consideration, and the interest income accruing on fixed deposit receipts, in its books of accounts - The Tribunal has held that explanation proferred by the assessee that they were advised to directly credit interest in the name of the partners, which was later found to be legally impermissible, is logical and, therefore, does not attract penalty under Section 271(1)(c) of the Act or fall within the mischief of furnishing incorrect particulars or concealment of income, so as to invite a penalty - Following CIT versus Reliance Petro Products Pvt. Ltd. [2010 (3) TMI 80 - SUPREME COURT] - It is not every infraction or denial of claim for deduction or exemption that invites penalty - A penalty would follow only where inaccurate particulars have been furnished with mens rea to evade tax - An assessee is entitled, by provisions of the Act, to claim deductions or exemptions and to present his income in such a manner as he may deem beneficial to his business/interest - Where an assesse has exercised a bona fide right but the deductions or exemptions so claimed are found to be incorrect, penalty would follow only if the claim is raised with intent to furnish incorrect particulars and to evade tax – Decided against Revenue. Issues:- Appeal against the correctness of order passed by the Income Tax Appellate Tribunal setting aside penalty imposed under Section 271(1)(c) of the Income Tax Act, 1961.- Justification of the Tribunal's decision in allowing the appeal of the assessee by deleting the penalty.- Assessment of penalty under Section 271(1)(c) for furnishing inaccurate particulars with intent to evade tax.- Interpretation of the legal advice given to directly credit interest in the name of partners.- Application of the principle that penalty follows only if inaccurate particulars are furnished with mens rea to evade tax.Analysis:The High Court addressed the appeal challenging the correctness of the order passed by the Income Tax Appellate Tribunal, which set aside the penalty imposed under Section 271(1)(c) of the Income Tax Act, 1961. The appellant contended that the penalty was justified as the assessee furnished inaccurate particulars with intent to evade tax. The Tribunal's decision to delete the penalty was based on the argument that not every infraction of the Income Tax Act warrants a penalty, emphasizing that penalties are applicable only when incorrect particulars are provided with mens rea to evade tax.The Tribunal's reasoning for setting aside the penalty was that the assessee had regularly shown the assets and interest income in its books of accounts. The Tribunal accepted the explanation that the assessee was advised to credit interest directly in the name of partners, which was later found to be legally impermissible. This explanation was deemed logical and did not attract penalty under Section 271(1)(c) or constitute furnishing incorrect particulars or income concealment for penalty imposition.Referring to the Supreme Court's decision in CIT versus Reliance Petro Products Pvt. Ltd., the High Court reiterated that penalties are not imposed for every denial of a claim for deduction or exemption. Penalties are applicable only when inaccurate particulars are furnished with intent to evade tax. The High Court concluded that the Tribunal's decision was reasonable and legally sound, dismissing the appeal against the deletion of the penalty. The judgment emphasized that penalties should only follow when there is a deliberate attempt to provide incorrect particulars to evade tax, maintaining the importance of mens rea in penalty imposition under the Income Tax Act.