2023 (8) TMI 1256 - AT - Income Tax

ITAT Hyderabad: Penalty overturned as claimed capital loss does not warrant penalty under section 271(1)(c) of Act.

M/s. Soft Point Technologies Pvt. Ltd., (Earlier known as M/s. Color Chips Animation Park Ltd.), Hyderabad Versus Income Tax Officer, Ward-3 (3), Hyderabad

The Appellate Tribunal, ITAT Hyderabad, allowed the appeal of the assessee in a case involving the treatment of a claimed amount as capital loss and the ... Penalty u/s 271(1)(c) - AO treated amount shown under the head ‘decrease in value of investment’ as ‘capital loss’, declined to allow the same and added it back to the income of the assessee - HELD THAT:- Hon'ble Delhi High Court in the case of CIT vs. DCM Limited [2013 (9) TMI 760 - DELHI HIGH COURT] wherein held that law does not bar or prohibit an assessee for making a claim, which he believes may be accepted or is plausible; that when such a claim is made during the course of regular or scrutiny assessment, liberal view is required to be taken as necessarily the claim is bound to be carefully scrutinized both on facts and in law; that full probe and appraisal is natural and normal; that threat of penalty cannot become a gag and/or haunt an assessee for making a claim which may be erroneous or wrong, when it is made during the course of the assessment proceedings; that normally, penalty proceedings in such cases should not be initiated unless there are valid or good grounds to show that factual concealment has been made or inaccurate particulars on facts were provided in the computation. Law does not bar or prohibit a person from making a claim, when he knows the matter is going to be examined by the AO. In the case of CIT vs Reliance Petroproducts Pvt Ltd [2010 (3) TMI 80 - SUPREME COURT] held that when the assessee preferred a claim, it was up to the authorities to accept its claim in the Return or not, but merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the Revenue, that by itself would not attract the penalty u/s 271(1)(c) - As further held that if the contention of the Revenue is accepted, then in case of every return where the claim made is not accepted by the AO for any reason, the assessee will invite penalty u/s 271(1)(c) of the Act and that is clearly not the intendment of the Legislature. On a consideration of the material before us, we are of the considered opinion that the above decisions are applicable to the facts of the case on hand. Merely because the assessee preferred a claim which was not acceptable to the Revenue, the assessee cannot be visited with the proceedings u/s 271(1)(c) unless and until the twin requirements u/s 271(1)(c) are satisfied. Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under Section 271(1)(c) can be levied where an assessee claims a deduction/loss (here, Rs. 50 lakhs shown as decrease in value of inventories/investment) that the Assessing Officer treats as a capital loss and disallows-i.e., whether mere disallowance/difference of opinion amounts to furnishing inaccurate particulars or concealment of income. 2. Whether the record discloses facts constituting 'furnishing of inaccurate particulars' or 'concealment of income' (the twin conditions in Section 271(1)(c)) such as would justify imposition of penalty where no finding of falsification, fabrication or deliberate concealment was made by the assessing authority. 3. Whether established judicial principles (as laid down by higher courts) preclude initiation/sustenance of penalty proceedings in circumstances where a bona fide claim is made and scrutinised in regular assessment proceedings. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legality of levying penalty under Section 271(1)(c) for disallowed claim/difference of opinion Legal framework: Section 271(1)(c) penalises furnishing inaccurate particulars of income or concealment of income; Explanation 1 contemplates that amounts added/disallowed resulting from an unsubstantiated explanation may be deemed to represent concealed income if the assessee fails to prove the explanation bona fide and that all material facts were disclosed. Precedent treatment: The Tribunal applied binding precedents holding that mere disallowance of a claim by the revenue does not automatically attract penalty under Section 271(1)(c). Authorities considered require satisfaction of the twin conditions (inaccuracy/concealment) and caution against penalising bona fide claims subject to scrutiny. Interpretation and reasoning: The Tribunal examined the assessment record and observed that the Assessing Officer, on examining books of account, treated a debit entry as capital loss-a classification issue susceptible to difference of opinion between revenue and assessee. There was no finding of fabricated or bogus entries. The Tribunal emphasised that if every disallowed claim attracted penalty, many legitimate but disputed claims would lead to unwarranted penal consequences, contrary to legislative intent. Ratio vs. Obiter: Ratio - Mere non-acceptance of an assessee's claim by the Assessing Officer does not per se constitute furnishing inaccurate particulars or concealment; penalty under Section 271(1)(c) requires independent satisfaction of the statutory twin conditions. Obiter - Remarks on policy that penalty cannot be used as a gag against making claims in assessment proceedings. Conclusion: Penalty imposed solely because a claim was disallowed as a result of a bona fide difference of opinion is unsustainable. The penalty was directed to be deleted. Issue 2 - Whether facts on record satisfy the statutory twin conditions for penalty (inaccuracy/concealment) Legal framework: For levying penalty under Section 271(1)(c), authorities must demonstrate that the assessee furnished inaccurate particulars of income or concealed particulars of income; Explanation 1 requires failure to substantiate and disclose material facts to treat disallowance as concealment. Precedent treatment: The Tribunal relied on higher court authorities which require evidence of factual concealment or provision of inaccurate particulars beyond mere assertion or disagreement on legal characterisation (capital vs. revenue) of entries. Interpretation and reasoning: The Tribunal found no material showing falsification, bogus expenditure, suppression of facts, or deliberate concealment. The books were produced and examined; the Assessing Officer's view was a tax-characterisation conclusion. The Tribunal noted the assessee advanced a contention (speculation loss/revaluation) which was contested and examined-a situation where liberal treatment is appropriate and where penalty should not normally be invoked absent demonstrable concealment or inaccurate particulars. Ratio vs. Obiter: Ratio - Absence of finding of falsification or concealment means the twin conditions for penalty are not satisfied; penalty cannot be sustained. Obiter - The observation that claims made during regular assessment should not invite penalty unless valid grounds for concealment/inaccuracy exist. Conclusion: The record does not satisfy the statutory twin conditions required to levy penalty under Section 271(1)(c); the penalty must be deleted. Issue 3 - Application of judicial principles on claims made in assessment proceedings Legal framework: Taxpayers are entitled to make claims in returns and during assessment; assessment is the forum to test such claims on facts and law. Penalty law must be applied consistently with the principle that bona fide claims subject to scrutiny should not be penalised absent concealment or misrepresentation. Precedent treatment: The Tribunal applied established decisions holding that if an assessee makes a claim, mere non-acceptance by the revenue does not automatically attract penalty; penalties are reserved for cases of concealment or furnishing inaccurate particulars after considering bona fides and disclosure. Interpretation and reasoning: The Tribunal stressed that the assessee's contention was arguable and was considered in assessment; threat of penalty cannot deter legitimate claims or revaluation adjustments advanced for examination. The Tribunal treated the cited authorities as directly applicable and decisive on the point. Ratio vs. Obiter: Ratio - Established judicial precedent governs that penalties under Section 271(1)(c) cannot be mechanically imposed where the issue is one of difference of opinion on admissibility of a claim. Obiter - Comments underscoring the protective function of such precedents to prevent penalising contentious but bona fide positions. Conclusion: The Tribunal applied these judicial principles to allow the appeal against penalty and set aside the levy, directing deletion of the penalty amount.