2006 (9) TMI 104 - HC - Income Tax

Revised return withdrawing expenditure claims after disclosure doesn't constitute concealment under section 271(1)(c)

HC dismissed the department's appeal challenging deletion of penalty under section 271(1)(c) of Income Tax Act. The assessee filed a revised return ... Imposition of penalty u/s 271(1)(c) - concealment of income or furnishing inaccurate particulars of income - disallowances made by the AO in the relevant assessment year and also as because assessee had filed revised return of income deleting some of the losses/ expenditure - HELD THAT:- In the present case assessee had explained all the expenditure and had actually incurred the expenditure but the expenditures were disallowed because of difference of opinion between the assessee and the Assessing Officer. This is not a case where revised return was filed as a result of discovery of some facts by the Assessing Officer or inability of the assessee to explain the expenditure. The revised return was filed because some of the expenditure were disallowed by the CIT (A) appeal for year 1998-99 although the expenditure were not doubted. There are cases where an expenditure is disallowed by the Assessing Officer and it is allowed by the CIT (A). It is again disallowed by the ITAT and in appeal allowed by the High Court and may be disallowed by the Supreme Court. Merely because there is difference of opinion for allowing or disallowing the expenditure between the assessee and Assessing Officer, it cannot be said that assessee had intention to conceal the income. The filing of the revised return excluding some of the disallowed expenditure and claiming expenditure of Rs. 2 crores which was actually spent by the assessee in the relevant assessment year as deduction, does not amount to concealment or furnishing inaccurate particulars. The assessee had given all particulars of expenditure and income and had disclosed all facts to the Assessing Officer. It is not the case of the Assessing Officer or the appellant that in reply to the questionnaire of the Assessing Officer, some new facts were discovered or Assessing Officer had dug out some information which was not furnished by the assessee. We find that appellant's contention of concealment of income by the assessee or furnishing of false particulars by the assessee has no basis. There is no force in the appeal and the appeal deserves to be dismissed and is hereby dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court in this appeal are:(a) Whether the imposition of penalty under section 271(1)(c) of the Income Tax Act, 1961 is justified where the assessee files a revised return reducing the loss originally declared, particularly when the revised return deletes certain expenditures previously claimed.(b) Whether the filing of a revised return withdrawing certain expenditure claims amounts to concealment of income or furnishing inaccurate particulars of income under section 271(1)(c).(c) Whether the Assessing Officer (AO) had recorded the requisite satisfaction as mandated under law before initiating penalty proceedings under section 271(1)(c).(d) Whether a difference of opinion between the AO and the assessee on the allowability of certain expenditures can constitute concealment of income or inaccurate particulars.(e) The relevance of the assessee's bonafide intention and disclosure of material facts in the return and supporting documents in determining the applicability of penalty.(f) The legal effect of judicial precedents on the interpretation of concealment and penalty under section 271(1)(c), including the requirement of mens rea (intention) for concealment.2. ISSUE-WISE DETAILED ANALYSISIssue (a) and (b): Justification of penalty for filing revised return reducing loss and deleting expenditure claimsThe legal framework revolves around section 271(1)(c) of the Income Tax Act, which empowers the AO to impose penalty if the assessee is found to have concealed income or furnished inaccurate particulars. The Supreme Court has held that concealment inherently requires a deliberate act or mens rea to evade tax liability.The AO imposed penalty on the assessee on the ground that the revised return was filed only after issuance of a questionnaire, and that deletion of certain expenditures amounted to concealment of income. The expenditures deleted included advertisement expenses, compensation paid to a third party, depreciation, and foreign exchange loss.The CIT (A) and the ITAT both held that mere reduction of loss in a revised return does not amount to concealment or furnishing inaccurate particulars. The Tribunal emphasized that the assessee had disclosed all material facts in the return and accompanying documents, including self-explanatory notes and judicial precedents supporting the claimed expenditures. The revised return was filed not merely due to the questionnaire but also in consequence of adverse appellate orders in earlier assessment years, demonstrating bonafide intention to comply with law.The Court referred to the principle that mere difference of opinion on allowability of expenditure does not amount to concealment. The assessee's claim of Rs. 2 crores as compensation expenditure was accepted as bonafide, with the AO's disallowance representing a difference of opinion, not concealment.Issue (c): Requirement of AO's satisfaction before initiating penaltyThe Court examined whether the AO had recorded satisfaction as required before initiating penalty proceedings. The AO's assessment order indicated penalty proceedings were being initiated, but there was no explicit satisfaction recorded.The Tribunal relied on authoritative precedents holding that in absence of recorded satisfaction, penalty proceedings are bad in law. The Court concurred, noting that the AO's satisfaction must be recorded, and mere inference from the assessment order is insufficient unless clearly discernible.Issue (d): Difference of opinion on expenditure and concealmentThe Court analyzed whether a difference of opinion between the AO and the assessee on disallowance of expenses can amount to concealment. It was held that such difference, especially when the assessee has disclosed all particulars and the expenditures are genuinely incurred, cannot be equated with concealment or furnishing inaccurate particulars.It was noted that disallowance of expenditure often arises from conflicting views and does not ipso facto imply concealment. The Court distinguished this from cases where the assessee fails to explain entries or admits undisclosed income, which are not applicable here.Issue (e): Bonafide intention and disclosure of material factsThe Court emphasized the significance of the assessee's bonafide intention demonstrated by voluntary rectification of returns following appellate decisions adverse to the assessee, and the detailed disclosure of facts and judicial precedents in the returns and notes.This was contrasted with cases where concealment involves deliberate suppression or nondisclosure. The Court held that the assessee's conduct showed an intention to furnish correct particulars rather than to evade tax.Issue (f): Mens rea and legal precedents on concealmentThe Court relied on Supreme Court precedents clarifying that concealment requires conscious intention to evade tax. Mere omission or difference of opinion does not suffice. The Court cited the definition of concealment as 'intentional suppression of truth or fact known, to the injury or prejudice of another'.In the present case, the Court found no evidence of such intention. The filing of revised returns was a corrective measure following appellate decisions and not an admission of concealment.3. SIGNIFICANT HOLDINGSThe Court held:'Concealment inherently carries with it the element of mens rea. It is implied in the word 'concealment' that there has been a deliberate act on the part of the assessee.''Mere omission from the return of an item of receipt does neither amount to concealment nor deliberate furnishing of inaccurate particulars of income, unless and until there is some evidence to show or some circumstances found from which it can be gathered that the omission was attributable to an intention or desire on the part of the assessee to hide or conceal the income so as to avoid imposition of tax thereon.''It cannot be said that the view of the assessee claiming the expenditure in the initial return was due to lack of bonafide or it was bereft of logic. The difference of opinion was not because of any deliberate or concealment on the part of the assessee.''In absence of satisfaction recorded by the AO, the penalty proceedings are bad in law.''Filing of a revised return excluding some of the disallowed expenditure and claiming expenditure which was actually spent by the assessee as deduction does not amount to concealment or furnishing inaccurate particulars.''The assessee had disclosed all particulars of expenditure and income and had disclosed all facts to the Assessing Officer.'The Court dismissed the appeal, affirming the deletion of penalty, and held that the assessee did not conceal income nor furnished inaccurate particulars with intent to evade tax. The difference of opinion on expenditure disallowance and the filing of revised return in light of appellate decisions did not justify penalty under section 271(1)(c).