Tribunal upholds deletion of penalty for timing dispute on leave encashment claim under Income Tax Act

The Tribunal upheld the Commissioner of Income Tax (Appeals) decision to delete the penalty imposed under section 271(1)(c) of the Income Tax Act, 1961. The penalty was initially levied by the Assessing Officer for a claim of leave encashment allowable in a different assessment year. The Tribunal ruled that genuine expenses, even if disallowed due to a timing dispute, do not warrant a penalty under section 271(1)(c). The appeal by the revenue was dismissed, confirming the deletion of the penalty.

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Issues Involved:
1. Deletion of penalty levied under section 271(1)(c) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deletion of Penalty under Section 271(1)(c):

The appeal by the revenue is against the order of the Commissioner of Income Tax (Appeals) [CIT(A)], which deleted the penalty imposed by the Assessing Officer (AO) under section 271(1)(c) of the Income Tax Act, 1961. The penalty was levied for the claim of leave encashment, which was allowable in AY 2009-10 instead of AY 2008-09.

Facts:
- The assessee filed a return declaring a loss under the normal provisions and under section 115JB of the Act.
- The AO initially allowed the deduction for leave encashment in the regular assessment.
- The assessment was reopened under section 148, and the AO disallowed the claim for leave encashment under section 43B.
- The assessee accepted the reassessment and did not appeal against the quantum addition.
- The AO initiated penalty proceedings under section 271(1)(c) for furnishing inaccurate particulars of income.

AO’s Observation:
- The AO concluded that the assessee was guilty of concealment of income and furnishing inaccurate particulars within the meaning of section 271(1)(c) because the assessee did not properly disclose the income in the return and did not submit any note claiming the amount as exempt.

CIT(A)’s Observation:
- The CIT(A) deleted the penalty, noting that the materials and facts were clearly disclosed in the audited financial statements.
- The claim for leave encashment was based on an actuarial valuation report and certified by the tax auditor.
- The issue was covered by the decision in the case of Rama Newspaper and Paper Ltd Vs DCIT, where the ITAT observed that the claim could not be substantiated in law but was otherwise allowable as a deduction.
- The CIT(A) followed the decision and canceled the penalty order.

Tribunal’s Analysis:
- The Tribunal noted that the assessee had made a provision for leave encashment, which was debited to the profit & loss account, and the genuineness of the expenses was not doubted by the AO.
- The AO disallowed the expenses solely because they were not allowable under section 43B in the year under consideration but were allowable in the subsequent year.
- The Tribunal held that when the expenses are genuine and allowable but disallowed due to a dispute regarding the year of allowability, no penalty under section 271(1)(c) can be levied.
- The Tribunal emphasized that mere making of a claim, which is not allowed by the AO, does not amount to furnishing inaccurate particulars of income.
- The Tribunal referred to the Supreme Court decision in CIT v Reliance Petroproducts Pvt. Ltd., which held that making an incorrect claim in law does not tantamount to furnishing inaccurate particulars of income.

Conclusion:
- The Tribunal confirmed the CIT(A)’s order deleting the penalty, stating that the assessee had made full and complete disclosure of the claim for leave encashment.
- The appeal by the revenue was dismissed.

Order Pronounced:
- The order was pronounced in the open court on 21-03-2018.

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