2025 (8) TMI 1670 - AT - Income Tax

Penalty under s.271(1)(c) set aside where incorrect legal claim corrected and not concealment of income

Brizo Reality Company Private Limited Versus NFAC Delhi Maharashtra.

ITAT held that an incorrect legal claim in the original return, later corrected, did not amount to concealment of income or furnishing of inaccurate ... Penalty u/s 271(1)(c) - in the original return of income the assessee considered the entire lease rent as business income claiming full depreciation on the assets, including building and equipment for the entire year whereas in the revised return, the assessee claimed lease and receipt as income from house property to claim 30% standard deduction u/s 24 and also the depreciation on fixed assets on building and equipment for the entire year CIT(A) has justified the penalty levied by the AO on the ground that assessee filed inaccurate particulars of income and sought to evade tax and confirmed the penalty order of AO. HELD THAT:- What is concealment of income or inaccurate particulars of such income as contemplated by Section 271(1)(c), has been explained in the case of the CIT Vs. Reliance Petro Products (P.) Ltd [2010 (3) TMI 80 - SUPREME COURT] It is evident from the above judgment that making an incorrect claim in law cannot tantamount to furnishing inaccurate particulars. In the case in hand, the assessee has made an incorrect claim while filing the return of income which was subsequently corrected and modified. We are of the considered opinion that the revenue has failed to show that the assessee has concealed the particulars of income or has furnished the incorrect particulars of such income and the case of the assessee is not covered u/s. 271(1)(c) - we delete the penalty imposed in this case and confirmed by the impugned order. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under section 271(1)(c) can be levied where adjustments made in assessment arose from an incorrect legal claim in the return that was later revised during assessment proceedings, without any factual concealment or knowingly furnishing inaccurate particulars. 2. Whether initiation and confirmation of penalty under section 271(1)(c) is sustainable where the assessee voluntarily revised the computation of income during scrutiny/assessment and the dispute concerns classification/characterisation of receipts (legal position) rather than suppression of factual particulars. ISSUE-WISE DETAILED ANALYSIS Issue 1: Applicability of section 271(1)(c) where claim in return was incorrect in law but there is no factual concealment Legal framework: Section 271(1)(c) penalises a person for concealment of particulars of income or furnishing inaccurate particulars of income. The provision imposes civil liability and requires demonstration of either concealment of particulars or furnishing of inaccurate particulars. Precedent treatment: The controlling judicial principle from the Apex Court holds that an incorrect claim in law, without any factual inaccuracy in particulars furnished in the return, does not amount to furnishing inaccurate particulars or concealment for the purpose of invoking section 271(1)(c). The principle establishes that mere non-acceptance of a claim by the Assessing Officer is not by itself sufficient to attract penalty unless the twin requirements of concealment/inaccurate particulars are satisfied. Interpretation and reasoning: The Court examined whether the facts showed factual misstatement or deliberate concealment. The assessee filed a return claiming a particular classification (rental income and deduction under section 24), then revised the computation during scrutiny to alter the classification and reduce claimed deductions. The Court found no material indicating facts in the return were false or any particulars were factually incorrect; the dispute related to legal characterisation and quantification subject to assessment scrutiny. Given that the revision occurred in the course of assessment and there is no evidence of intentional suppression or falsification, the Court applied the precedent that legal error in claim does not equate to misrepresentation of particulars within section 271(1)(c). Ratio vs. Obiter: Ratio - Penalty under section 271(1)(c) cannot be sustained where the error is one of law (incorrect claim/classification) and there is neither factual inaccuracy in the particulars of the return nor evidence of concealment; mere failure of the Revenue to accept the claim does not attract penalty. Obiter - Observations on the beneficial effect of allowing an assessee to make plausible claims during assessment proceedings and on the chilling effect of penalty initiation, while persuasive, are ancillary to the holding. Conclusion: The Court concluded that the requirements of section 271(1)(c) were not satisfied on the facts because there was no concealment of particulars nor furnishing of inaccurate particulars in the factual sense; the penalty was therefore unsustainable and deleted. Issue 2: Initiation of penalty where revision/offer was made during assessment - standard for 'voluntary' correction and the assessor's burden Legal framework: The statutory text and judicial gloss require that for civil liability under section 271(1)(c) to arise, the Revenue must demonstrate either concealment of particulars or furnishing of inaccurate particulars; the existence of an honest or arguable claim that is subject to scrutiny militates against imposing penalty absent proof of mala fide or deliberate concealment. Precedent treatment: Tribunal authorities have taken the view that when an assessee makes a claim that is arguable and subsequently amended in the course of assessment, penalty should not ordinarily be imposed unless there is evidence of concealment or deliberate provision of false particulars. The Court relied on this line of authority in granting relief. Interpretation and reasoning: The AO characterized the liability as civil and concluded willful concealment is not required. The Court rejected the AO's approach insofar as it conflated rejection of a legal claim with furnishing inaccurate particulars. The Court emphasised that during scrutiny the assessee revised the computation and offered additional tax; this conduct indicated correction rather than concealment. The Court further observed that the threat of penalty should not chill legitimate claims that are open to legal debate and examination during assessment. Ratio vs. Obiter: Ratio - The assessor bears the burden of proving concealment or furnishing of inaccurate particulars; initiation of penalty solely because a particular claim was not accepted is not sufficient. Obiter - Policy considerations about encouraging taxpayers to advance arguable claims without fear of automatic penalty are persuasive but secondary to the holding. Conclusion: The Court held that initiation and confirmation of penalty in such circumstances was improper; the AO/CIT(A) failed to establish the necessary elements under section 271(1)(c), and the penalty was deleted. Cross-reference and cumulative conclusion Where an assessed adjustment arises from a change in legal characterisation of receipts or from correction of an arguable claim made in the return, and there is no material showing factual misstatement, suppression, or deliberate inaccuracy in the particulars furnished, the twin conditions of section 271(1)(c) are not satisfied (see Issue 1 and Issue 2 analyses). Consequently, penalty under section 271(1)(c) cannot be sustained and must be deleted.