2010 (8) TMI 18 - HC - Income Tax

Court upholds ITAT decision, ruling for assessee with full disclosure. Penalty deleted; unsustainable claim not inaccurate particulars.

The High Court upheld the decision of the ITAT, ruling in favor of the respondent-assessee. It found that the assessee had made full disclosure in the ... Penalty u/s 271(1)(c) – deliberate attempt to reduce statutory liability – wrong claim of deduction of expenditure related to exempted income – failure to apply provisions of section 14A - It was tried to be argued that the falsehood in accounts can take either of the two forms; (i) an item of receipt may be suppressed fraudulently; (ii) an item of expenditure may be falsely (or in an exaggerated amount) claimed, and both types attempt to reduce the taxable income and, therefore, both types amount to concealment of particulars of one’s income as well as furnishing of inaccurate particulars of income. We do not agree, as the assessee had furnished all the details of its expenditure as well as income in its return, which details, in themselves, were not found to be inaccurate nor could be viewed as the concealment of income on its part. It was up to the authorities to accept its claim in the return or not. 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, in our opinion, attract the penalty under section 271 (1)(c). Issues Involved:1. Whether the respondent-assessee furnished inaccurate particulars of income with deliberate intent to reduce its statutory liability.2. Whether making a provision for encashment of leave amounted to furnishing inaccurate particulars of income.3. Applicability of the Supreme Court judgment in Union of India vs. Dharamendra Textile Processors.4. Interpretation of Section 271(1)(c) of the Income Tax Act, 1961, regarding the imposition of penalty for inaccurate particulars or concealment of income.5. Whether the explanation provided by the assessee was bona fide.Detailed Analysis:1. Furnishing Inaccurate Particulars of Income:The Revenue argued that the respondent-assessee had furnished inaccurate particulars of income with deliberate intent to reduce its statutory liability. The ITAT found that the respondent-assessee had made full disclosure in the income tax return about the method of accounting employed for the subsidies. The ITAT noted that the assessee's provision for encashment of leave, per se, cannot be said to be mala fide. The ITAT observed that the method of accounting was disclosed in the return of income, and there was no diversion of income or suppression of facts.2. Provision for Encashment of Leave:The Revenue contended that making a provision for encashment of leave amounted to furnishing inaccurate particulars regarding the income of the respondent-assessee. However, the ITAT found that the provision made on a reasonable basis in respect of liability incurred by the assessee should be allowed as a deduction. The ITAT referred to the Supreme Court's decision in Apollo Tyres Ltd. vs. CIT, which held that accounts drawn in accordance with the Companies Act and certified by a Chartered Accountant could not be reopened by the AO for computing book profits. The ITAT concluded that the claim for leave encashment was bona fide.3. Applicability of Dharamendra Textile Processors Judgment:The Revenue relied on the Supreme Court judgment in Union of India vs. Dharamendra Textile Processors, which held that mens rea is not essential for imposing a penalty for breach of civil obligations. The ITAT clarified that the Supreme Court did not stipulate that merely making an unsustainable claim would amount to furnishing inaccurate particulars within the meaning of Section 271(1)(c) of the Act. The ITAT emphasized that the issue of penalty must be decided based on the provisions contained in the Explanation to Section 271(1)(c).4. Interpretation of Section 271(1)(c):The Supreme Court in Commissioner of Income Tax v. Reliance Petroproducts Pvt. Ltd. observed that the conditions under Section 271(1)(c) must exist before imposing a penalty. The Court explained that inaccurate particulars must be shown in the return for the liability to arise. The Court held that a mere making of a claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. The ITAT applied this interpretation and found that the assessee's explanation was bona fide.5. Bona Fide Explanation:The ITAT concluded that the assessee had furnished a reasonable explanation in respect of both the items (accounting of subsidy on a cash basis and provision for encashment of leave), which met the requirement of the provision contained in Explanation-1 to Section 271(1)(c) of the Act. The ITAT found that the assessee's perception regarding the accounting method was not wholly unjustified and the explanation was bona fide. Consequently, the ITAT deleted the penalty.Conclusion:The High Court dismissed the appeal, finding it devoid of merit. The Court upheld the ITAT's decision, concluding that the assessee had made full disclosure in the return of income and provided a bona fide explanation. The Court reiterated that merely making an unsustainable claim does not amount to furnishing inaccurate particulars of income. The appeal was dismissed in limine.