2025 (8) TMI 1498 - AT - Income Tax

Penalty under s.271(1)(c) deleted where s.35(2AB) deduction was supported by auditor and AO failed to prove inaccuracy

ITAT held that penalty under s.271(1)(c) must be deleted. AO's reduction of the s.35(2AB) weighted deduction from Rs.78.32 lakh to Rs.76.50 lakh based on ... Levy of penalty u/s 271(1)(c) - AO has relied on the subsequent certificate in Form 3CL submitted by the DSIR to DGIT for restricting the claim of deduction u/s 35(2AB) - HELD THAT:-During the course of assessment proceedings, mere restricting the quantum of the deduction from Rs 78.32 lacs to Rs 76.50 lacs by the AO cannot lead to a situation where the assessee is held guilty of furnishing inaccurate particulars of the income. Assessee has explained that the claim has been made basis the auditors certificate where on the capital expenditure, the weighted deduction has been determined at the rate of 200% as so provided in Section 35(2AB) of the Act and the said explanation has not been rebutted by the AO. Given that the quantum and penalty proceedings are separate proceedings, merely the fact that the assessee has not challenged the findings of the AO in the quantum proceedings, the same cannot form the basis to fasten the charge against the assessee and held it liable for penalty and the assessee has all the rights under the law to put forward its case against levy of penalty and which assessee has duly explained and demonstrated. Penalty so levied and sustained u/s 271(1)(c) is hereby directed to be deleted. Appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether levy of penalty under section 271(1)(c) for furnishing inaccurate particulars of income is sustainable where the assessee claimed deduction under section 35(2AB) based on an auditor's certificate and approval from the competent scientific authority, but the Assessing Officer subsequently restricted the deduction amount in assessment proceedings. 2. Whether an assessee's failure to challenge the computation in the assessment (quantum) proceedings constitutes an admission amounting to furnishing inaccurate particulars of income warranting penalty under section 271(1)(c). 3. Whether reliance on an auditor's certificate and statutory approval (DSIR) for claiming weighted deduction under section 35(2AB) negates the mens rea or culpability required for imposing penalty under section 271(1)(c). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Sustainment of penalty under section 271(1)(c) where deduction under section 35(2AB) was claimed based on auditor's certificate and DSIR approval but later restricted by AO Legal framework: Section 35(2AB) permits weighted deduction (including 200% treatment of specified capital expenditure) subject to conditions; section 271(1)(c) penalises furnishing of inaccurate particulars of income where there is culpable conduct. Penalty requires proof that the taxpayer furnished inaccurate particulars knowingly or without reasonable cause. Precedent Treatment: The appellant relied on the Supreme Court authority cited in the record (Reliance Petro), and the Tribunal invoked principles from that line that penalty cannot be imposed where claim is bona fide and supported by available certification/authority. The Court treated the precedent as supportive of the proposition that bona fide claims supported by documentation repel penalty liability. Interpretation and reasoning: The Court examined whether the assessee's original return claiming Rs. 78.32 lakh deduction was an inaccurate particular. It found undisputed facts that: (a) the assessee incurred Rs. 76.50 lakh on scientific research; (b) the auditor, after verification of books, issued a certificate determining the eligible deduction as Rs. 78.32 lakh (reflecting 200% treatment on capital component); and (c) the assessee possessed DSIR approval dated 29/03/2016. The AO's subsequent reliance on a DSIR Form 3CL submitted to the DGIT to restrict the claim to Rs. 76.50 lakh post-return did not, in the Court's view, convert the originally filed return into one furnishing inaccurate particulars. The Court emphasised that the assessee's position was explained and documented during assessment and that the AO did not rebut the assessee's explanation that the weighted treatment on capital expenditure produced the higher figure. The Court also noted that penalty proceedings are distinct from assessment and require independent establishment of culpability. Mere restriction of deduction in assessment without a finding that the assessee knowingly or deliberately furnished incorrect particulars is insufficient to sustain penalty. Ratio vs. Obiter: Ratio - Where a deduction claim is supported by contemporaneous auditor certification and statutory approval and the assessee provides a reasonable explanation for the claimed amount, mere subsequent restriction by the AO does not establish furnishing of inaccurate particulars warranting penalty under section 271(1)(c). Obiter - Reference to procedural niceties about timing of DSIR communication and form submission, insofar as not essential to the penalty conclusion, are ancillary observations. Conclusion: Penalty under section 271(1)(c) was not sustainable and was directed to be deleted on the facts that the deduction claim was bona fide, supported by auditor certificate and DSIR approval, and not rebutted by the AO as amounting to deliberate inaccuracy. Issue 2 - Effect of not challenging the assessment order on imposition of penalty under section 271(1)(c) Legal framework: Appeal or challenge to assessment (quantum) and penalty proceedings are separate remedies; absence of appeal against assessment does not automatically amount to admission for the purpose of penalty imposition unless there is clear evidence of mens rea or admission of incorrectness. Precedent Treatment: The Court followed established principles that discontinuance of further litigation on the quantum does not equate to a judicial or factual admission for penalty purposes; reliance placed on higher court authority in the record indicating the same principle. Interpretation and reasoning: The Court considered the assessee's inaction in not appealing the assessment quantum and found that such inaction, given the relatively small quantum and commercial considerations, cannot be equated with admission of guilt or furnishing inaccurate particulars. The Tribunal underscored that penalty proceedings require independent proof of culpability and that strategic non-appeal does not supply that proof. Ratio vs. Obiter: Ratio - Non-challenge of an assessment order, standing alone, does not establish the mental element or requisite culpability for levy of penalty under section 271(1)(c). Obiter - Observations on taxpayer's motives for not appealing (e.g., quantum/expense considerations) are incidental. Conclusion: The fact that the assessee did not challenge the assessment order cannot be used to fasten penalty liability; penalty cannot be sustained on that ground alone. Issue 3 - Whether auditor certification and DSIR approval negate culpability required for penalty under section 271(1)(c) Legal framework: Penal provision requires the Department to show that the taxpayer furnished inaccurate particulars voluntarily, knowingly, or without reasonable cause. A bona fide claim supported by professional certification and statutory approvals constitutes reasonable cause unless shown to be otherwise. Precedent Treatment: The Court relied on jurisprudence endorsing that claims made in good faith with professional and statutory support negate the presumption of culpability for penalty imposition and followed that principle in the present facts. Interpretation and reasoning: The Court found the auditor's certificate (verifying books and computing weighted deduction) and the DSIR approval to be objective indicia of a bona fide claim. The AO failed to rebut the explanation that weighted treatment on capital expenditure produced the claimed figure. Consequently, the required element of wilful or negligent furnishing of inaccurate particulars was not established. Ratio vs. Obiter: Ratio - Where a deduction claim is made in bona fide reliance on an auditor's certificate and a statutory approval, and the assessing authority does not rebut that bona fides, the element of culpability necessary for section 271(1)(c) penalty is lacking. Obiter - Comments on the sufficiency of specific documentary items in other factual matrices are not determinative here. Conclusion: Auditor certification and DSIR approval, uncontroverted by the AO, provided reasonable cause for the deduction claimed and negated the basis for penalty; deletion of penalty was warranted. Cross-references Issues 1-3 are interrelated: the Court's conclusion on penalty (Issue 1) rests on the uncontroverted auditor certificate and DSIR approval (Issue 3) and is reinforced by the principle that non-challenge of quantum cannot by itself supply culpability for penalty (Issue 2).