2025 (5) TMI 710 - AT - Income Tax

Penalty under section 271(1)(c) not imposable when assessee voluntarily paid tax before section 148 notice issuance

ITAT Pune held that penalty under section 271(1)(c) was not imposable where the assessee had voluntarily paid tax and interest before issuance of notice ... Penalty u/s 271(1)(c) - assessee had under reported and mis reported his income - correct income was not returned voluntarily but only after issue of notice u/s 148 - HELD THAT:- As found that when the notice u/s 148 was issued the appellant has disclosed his correct income & paid the due tax before issue of notice. We also find that the AO has accepted the return as it is which was furnished by the appellant in response to the notice u/s 148. We cannot accept the contention of Ld. DR that the revised return was not voluntary therefore the penalty u/s 271(1)(c) of the Act is inevitable. In this regard, the contention of Ld. counsel is also important wherein he stated that the due tax along-with interest was already paid before the issue of notice u/s 148 of the IT Act & admittedly the return of income could not be filed as the due date was already over. We find force in the arguments of assessee that the amount of tax & interest was deposited voluntarily much prior to the issue of notice u/s 148 since the income tax with interest was deposited by the assessee on 27-05-2019 whereas the notice u/s 148 was issued on 03-03-2020. This is not a fit case to impose penalty u/s 271(1)(c) . Grounds of appeal raised by the assessee are allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal are:Whether the penalty under section 271(1)(c) of the Income Tax Act, 1961 for concealment or misreporting of income is justified where the assessee's underreporting was attributable to the wrongful actions of a tax consultant without the assessee's knowledge or intent.Whether the explanation offered by the assessee, supported by evidence including complaints filed against the tax consultant, suffices to negate the imposition of penalty under section 271(1)(c).Whether the bona fide reliance by a technically unversed salaried employee on a tax consultant absolves the assessee from penalty liability under section 271(1)(c) for incorrect returns filed through such consultant.Whether the penalty can be sustained when the assessee voluntarily paid the due tax along with interest prior to the issuance of notice under section 148, but the revised return could not be filed voluntarily due to expiry of the filing period.Whether the Assessing Officer's passing of order under section 250 without providing further opportunity to the assessee to produce explanation or documentary evidence violates principles of natural justice.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Justification of penalty under section 271(1)(c) for concealment or misreporting of incomeLegal framework and precedents: Section 271(1)(c) imposes penalty for concealment of particulars of income or furnishing inaccurate particulars. The imposition of penalty requires satisfaction of willful concealment or misreporting. Judicial precedents emphasize mens rea and voluntary nature of concealment as essential elements.Court's interpretation and reasoning: The Tribunal noted that the assessee was a salaried employee from a technical background, lacking knowledge of tax laws, and fully relied on a tax consultant for filing returns. The consultant fraudulently claimed excess deductions without the assessee's knowledge or consent. The Tribunal held that the concealment was not willful or deliberate on the part of the assessee.Key evidence and findings: Evidence included complaints filed against the tax consultant before the Economic Offence Wing of Police, media reports exposing the consultant's fraudulent activities, and the fact that multiple employees were similarly affected. The assessee promptly paid the correct tax and interest as soon as the fraud was discovered.Application of law to facts: The Tribunal applied the principle that penalty under section 271(1)(c) cannot be levied where the assessee's underreporting is due to actions of a third party without the assessee's knowledge and the assessee acts in good faith upon discovery.Treatment of competing arguments: The Revenue argued that the assessee did not file the correct return voluntarily and thus penalty was justified. The Tribunal rejected this, emphasizing that the assessee paid tax voluntarily before notice under section 148 and could not file revised return voluntarily due to time lapse.Conclusions: The Tribunal concluded that the penalty was not justified as the concealment was not willful and the assessee had taken remedial steps promptly.Issue 2: Sufficiency of explanation and evidence provided by the assesseeLegal framework and precedents: Explanation by the assessee supported by credible evidence can rebut presumption of concealment under section 271(1)(c). The burden lies on the Revenue to disprove bona fide explanation.Court's interpretation and reasoning: The Tribunal found the explanation credible and supported by documentary evidence, including complaints lodged against the tax consultant and media reports. The Tribunal observed that the assessee's explanation was not rebutted by the Revenue with any contrary evidence.Key evidence and findings: Complaints to Economic Offence Wing, survey under section 133A at the tax consultant's premises, and widespread media coverage of the fraud.Application of law to facts: The Tribunal applied the principle that bona fide explanation backed by evidence exempts the assessee from penalty liability.Treatment of competing arguments: Revenue's failure to rebut the explanation was noted, undermining the justification for penalty.Conclusions: The explanation was accepted as sufficient to negate penalty.Issue 3: Effect of bona fide reliance on tax consultant by a technically unversed salaried employeeLegal framework and precedents: Courts have recognized that bona fide reliance on tax consultants by laypersons, especially salaried employees unfamiliar with tax laws, can negate mens rea required for penalty under section 271(1)(c).Court's interpretation and reasoning: The Tribunal emphasized the assessee's technical background and lack of tax knowledge, highlighting complete reliance on the tax consultant. The consultant's fraudulent acts were unknown to the assessee.Key evidence and findings: Testimony regarding reliance, common practice among employees, and absence of any knowledge or complicity by the assessee.Application of law to facts: The Tribunal applied the principle that absence of knowledge and reliance on expert advice absolves the assessee from penalty.Treatment of competing arguments: Revenue's argument that the return was not correct was countered by the assessee's lack of knowledge and prompt rectification.Conclusions: Reliance on the tax consultant was bona fide and negated penalty liability.Issue 4: Voluntariness of payment of tax and filing of revised return prior to issuance of notice under section 148Legal framework and precedents: Voluntary payment of tax and filing of correct return prior to notice under section 148 is a mitigating factor against penalty under section 271(1)(c). However, if the return cannot be filed voluntarily due to expiry of time limits, payment of tax and interest alone may suffice to negate penalty.Court's interpretation and reasoning: The Tribunal noted that the assessee paid the due tax and interest on 27-05-2019, well before the notice under section 148 dated 03-03-2020. The revised return could not be filed voluntarily as the due date had passed.Key evidence and findings: Payment records showing tax and interest paid prior to notice issuance; timing of notice under section 148.Application of law to facts: The Tribunal held that voluntary payment of tax and interest before notice issuance demonstrated bona fide conduct, despite inability to file revised return voluntarily.Treatment of competing arguments: Revenue's contention that revised return was not filed voluntarily was rejected as the assessee was prevented by law from filing after due date.Conclusions: Voluntary payment of tax and interest prior to notice negated penalty liability.Issue 5: Procedural fairness in passing order under section 250 without further opportunity to produce explanation or evidenceLegal framework and precedents: Principles of natural justice require that an assessee be given adequate opportunity to present explanation and evidence before adverse orders are passed.Court's interpretation and reasoning: The Tribunal noted the assessee's grievance that the order under section 250 was passed without granting further opportunity to produce explanation or documentary evidence.Key evidence and findings: Record of proceedings and submissions indicating lack of opportunity to supplement explanation.Application of law to facts: Although not extensively elaborated, the Tribunal implicitly acknowledged procedural infirmity by setting aside penalty imposed by the Assessing Officer and CIT(A).Treatment of competing arguments: No explicit counter-argument from Revenue recorded on this procedural aspect.Conclusions: Procedural fairness was compromised, contributing to the Tribunal's decision to set aside penalty.3. SIGNIFICANT HOLDINGS'Considering the totality of the facts of the case, we are of the considered opinion that this is not a fit case to impose penalty u/s 271(1)(c) of the IT Act.''The assessee, being from technical background, does not understand ABCD of Income Tax & therefore completely relied on the above named tax consultant, who without informing him & others, claimed excess deduction in their returns without informing them for his own benefit.''As soon as the fact of excess deduction claimed, came to the knowledge of the assessee he immediately paid the due tax with interest, even before the issue of notice u/s 148 of the IT Act.''We cannot accept the contention of Ld. DR that the revised return was not voluntary therefore the penalty u/s 271(1)(c) of the Act is inevitable.''The amount of tax & interest was deposited voluntarily much prior to the issue of notice u/s 148 of the IT Act.''The order passed by Ld. CIT(A)/NFAC is set-aside & the Assessing Officer is directed to delete the penalty of Rs. 56,350/- imposed u/s 271(1)(c) of the IT Act.'Core principles established include:Penalty under section 271(1)(c) requires willful concealment or misreporting by the assessee, which cannot be imputed where the error arises due to fraudulent acts of a tax consultant unknown to the assessee.Bona fide reliance on a tax consultant by a technically unversed salaried employee negates mens rea for penalty.Voluntary payment of tax and interest prior to issuance of notice under section 148 is a significant mitigating factor against penalty.Procedural fairness and opportunity to present explanation are essential before imposing penalty.The final determination was to allow the appeal, set aside the penalty order, and direct deletion of the penalty imposed under section 271(1)(c) of the Income Tax Act.