2025 (9) TMI 1250 - AT - Income Tax

Penalty under s.271(1)(c) unsustainable where taxpayer produced vouchers and AO failed to challenge or disprove deductions

Sureshkumar Prabhulal Thakkar Versus The Deputy Commissioner of Income Tax, Circle – Gandhinagar

ITAT held that penalty under s.271(1)(c) could not be sustained where the assessee produced vouchers for cost of improvements and details of commission ... Penalty u/s 271(1)(c) - assessee had claimed deduction for transfer expense in respect of sale of land, of which the assessee was only 1/7th owner but AO found that no such expense was claimed by another co-owners on account of cost of improvement or for transfer expense - HELD THAT:-The assessee had furnished vouchers for cost of improvement undertaken by him and also furnished the name of person to whom commission was paid. AO did not make any enquiry in this regard and no evidence was brought on record to establish that the material or evidence as brought on record by the assessee was incorrect. In the absence of any evidence on record to controvert the materials brought on record by the assessee in support of the deductions as claimed, it cannot be held that the assessee had furnished any inaccurate particulars of income. No material was brought on record by the AO to establish that the particulars of income/expense as claimed by the assessee was inaccurate. Thus, no justification for imposing penalty u/s 271(1)(c) for furnishing inaccurate particulars of income by the assessee. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under Section 271(1)(c) of the Income Tax Act is leviable where the Assessing Officer disallowed claimed deductions (transfer expense and cost of improvement) on the basis that co-owners did not claim similar expenses, without independent inquiry or contrary evidence. 2. Whether the existence of vouchers and particulars produced by the assessee, without rebuttal or contrary material from the Assessing Officer, sustains the conclusion that the assessee furnished inaccurate particulars of income within the meaning of Section 271(1)(c). 3. Whether mens rea (intention to furnish inaccurate particulars) or other culpable state of mind is a necessary element for imposing penalty under Section 271(1)(c) in the facts of this case. 4. Ancillary issues raised but not determinative of the outcome: (a) alleged failure of the first appellate authority to consider the assessee's written submissions; (b) contention that penalty was imposed under a different limb than that in which proceedings were initiated; and (c) contention that any confirmatory penalty could not exceed the amount levied by the Assessing Officer. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Levy of penalty under Section 271(1)(c) where AO disallowed deductions based on absence of similar claims by co-owners Legal framework: Section 271(1)(c) penalises furnishing of inaccurate particulars of income. The Assessing Officer must establish that particulars furnished by the assessee were inaccurate; mere disallowance in assessment does not ipso facto prove inaccurate particulars unless supported by evidence. Precedent Treatment: No specific precedents were cited by the Court/Tribunal in the order. The Tribunal applied statutory principles and evidentiary standards as reflected in the record. Interpretation and reasoning: The Assessing Officer rejected claimed expenses solely because co-owners did not claim similar expenses. The assessee produced vouchers for cost of improvement and identified the person to whom commission was paid. The Assessing Officer did not make enquiries or produce material to controvert the vouchers or particulars furnished by the assessee. The Tribunal held that the disallowance was founded on circumstantial reasoning rather than positive evidence contradicting the assessee's record. Ratio vs. Obiter: Ratio - where an Assessing Officer disallows claimed deductions but fails to bring any evidence to controvert vouchers/particulars produced by the assessee, penalty under Section 271(1)(c) for furnishing inaccurate particulars cannot be sustained. Obiter - the order contains observations on the impropriety of mechanically levying penalty when quantum additions are not challenged, which are supportive but ancillary. Conclusion: Penalty under Section 271(1)(c) cannot be sustained on the facts; the penalty imposed is cancelled. Issue 2 - Sufficiency of assessee's documentation and burden of proof to establish inaccuracy Legal framework: The burden lies on the revenue to establish that particulars furnished are inaccurate. Production of documents/vouchers by the assessee imposes on the Assessing Officer a duty to investigate or produce contradictory material before invoking penal consequences. Precedent Treatment: Not expressly relied upon; treated as a matter of evidentiary principle and statutory burden. Interpretation and reasoning: The Tribunal emphasised that the assessee furnished vouchers and identified the broker/recipient of commission. In absence of any contradictory material or enquiry, the mere fact that co-owners did not claim similar expenses does not discredit the assessee's documents. The AO's reliance on circumstantial evidence (other co-owners' filings) without further probe was inadequate to establish inaccuracy. Ratio vs. Obiter: Ratio - production of uncontroverted vouchers by the assessee precludes imposition of penalty unless revenue adduces contrary evidence showing those particulars are false or inaccurate. Conclusion: Vouchers and particulars produced by the assessee, uncontroverted by the Assessing Officer, demonstrate that the particulars were not shown to be inaccurate; penalty cannot be levied. Issue 3 - Requirement of mens rea or culpability for penalty under Section 271(1)(c) Legal framework: Section 271(1)(c) targets furnishing of inaccurate particulars; the question of mens rea is relevant in assessing whether the inaccuracy was deliberate or whether there was an innocent mistake. The statutory provision does not themselves expressly require proof of criminal intent but penal liability is not to be mechanically imposed where lack of culpability is apparent. Precedent Treatment: No precedent was cited; the Tribunal addressed mens rea conceptually in submissions and reasoning. Interpretation and reasoning: The assessee's case showed documentation supporting the claimed deductions and no evidence of deliberate falsification. Since the Assessing Officer did not show that the particulars were false or that the assessee acted with an intent to furnish inaccurate particulars, the element of culpability necessary to justify penalty was not established on the record before the Tribunal. Ratio vs. Obiter: Ratio - where an Assessing Officer has not established inaccuracy or culpable conduct, the element of mens rea (or equivalent culpability) for imposing penalty under Section 271(1)(c) is not satisfied. This forms part of the decisive reasoning cancelling the penalty. Conclusion: No mens rea or culpable state of mind was established; therefore penalty cannot be sustained. Issue 4 - Ancillary procedural/contention points (failure to consider written submissions; initiation under one limb and imposition under another; excess penalty amount) Legal framework: Procedural fairness and congruity between show-cause notice and penalty order are relevant to validity of penalty proceedings; quantum of confirmed penalty is limited to that sustainably imposed following correct procedure and jurisdictional limits. Precedent Treatment: The Tribunal did not refer to or decide these ancillary contentions by detailed legal precedent in its order; the decisive outcome was reached on the substantive lack of evidence to sustain penalty. Interpretation and reasoning: These grounds were raised by the assessee (alleged non-consideration of written submission, mismatch between limb under which proceedings were initiated and limb under which penalty was ultimately imposed, and contention as to maximum levy). The Tribunal's order proceeds to cancel the penalty on substantive grounds (absence of evidence of inaccuracy and culpability) and does not base its decision on these procedural/contention points. Cross-reference: substantive cancellation renders it unnecessary to adjudicate these ancillary grounds. Ratio vs. Obiter: Obiter - the ancillary points were noted but not necessary to the decision; the Tribunal's cancellation on substantive evidentiary grounds is the operative ratio. Conclusion: Because the penalty was cancelled on substantive evidentiary and culpability grounds, ancillary procedural/contention points were not adjudicated as determinative; however, the Tribunal's reasoning implicitly obviates the need to uphold any increased penalty amount or validate procedural deficiencies.