2025 (10) TMI 430 - AT - Income Tax

Penalty under section 271(1)(c) deleted where assessing officer's disagreement over bad-debt claim and liquidation barred appeal

DCIT 3 (3) (1), Mumbai Versus World Series Hockey Private Limited

ITAT upheld CIT(A)'s deletion of penalty under section 271(1)(c), dismissing the revenue's appeal. The AO had levied penalty for alleged furnishing of ... Penalty u/s. 271(1)(c) - assessee could not produce adequate supporting evidence with regard to the bad debts and efforts made to recover these debts before the write off, the ld. AO had disallowed the claim - HELD THAT:- Due to liquidation process being underway, no appeal could be filed against the assessment order within the prescribed time period and, therefore, AO levied the penalty u/s. 271(1) of the Act. CIT(A), for deleting the penalty, has relied on in the decision of Reliance Petroproducts Pvt. Ltd. [2010 (3) TMI 80 - SUPREME COURT] and Bennett Coleman & Co. Ltd. [2013 (3) TMI 373 - BOMBAY HIGH COURT] to hold that disagreeing of the AO with the claim of assessee cannot be the reason for levy of penalty. We uphold the decision of ld. CIT(A) of deleting the penalty u/s. 271(1)(c) of the Act for furnishing inaccurate particulars of income. Appeal of the revenue is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether levy of penalty under section 271(1)(c) for furnishing inaccurate particulars of income is justified where a taxpayer, in its first year of filing return, claims bad debts written off which the assessing officer disallows for want of satisfactory supporting evidence. 2. Whether mere disagreement of the assessing officer with a claim (here, bad debts written off) can constitute furnishing of inaccurate particulars of income attracting penalty under section 271(1)(c), particularly where the taxpayer maintained books and recorded the write-offs and where appeal against assessment could not be prosecuted in time due to insolvency/liquidation proceedings. 3. Applicability of higher judicial pronouncements holding that assessment disallowance alone does not automatically sustain penalty under section 271(1)(c), and whether those precedents are followed on the facts. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legality of penalty under section 271(1)(c) where bad debts claimed in first year are disallowed for insufficient evidence Legal framework: Section 271(1)(c) penalizes furnishing of inaccurate particulars of income. Liability under the provision requires a finding that the taxpayer furnished inaccurate particulars or was guilty of concealment or furnishing inaccurate particulars knowingly or wilfully. The validity of a claim (e.g., bad debts) on merits is distinct from the question whether particulars furnished were inaccurate or amounted to concealment. Precedent treatment: The Tribunal applied higher court precedents which establish that mere disagreement of the assessing officer with the taxpayer's claim does not ipso facto amount to furnishing inaccurate particulars; penalty requires something more (e.g., mala fide, suppression of material facts, misrepresentation). The decision under review follows those pronouncements. Interpretation and reasoning: The Tribunal noted that the taxpayer had recorded the bad debts in its books and in the computation of income and had furnished details to the assessing officer. The assessing officer disallowed the claim because he was not satisfied with the evidence and the taxpayer, owing to liquidation proceedings, could not pursue an appeal to challenge the assessment within prescribed time. The Tribunal characterised these facts as 'peculiar' and emphasized that absence of satisfaction of the AO on adequacy of proof does not, by itself, demonstrate that the particulars furnished were inaccurate or that there was intentional concealment. Ratio vs. Obiter: Ratio - On these facts, disallowance of bad debts for want of satisfactory proof, without evidence of dishonest intent or deliberate misrepresentation, is insufficient to sustain penalty under section 271(1)(c). Obiter - Observations regarding the impact of insolvency/liquidation on appeal timeline are factual; the broader proposition that any failure to produce evidence due to insolvency excuses penalty is contextual and not elevated to a general rule beyond these facts. Conclusions: Penalty under section 271(1)(c) could not be sustained where the taxpayer had recorded the write-offs, furnished details, and the assessing officer merely disagreed; deletion of penalty on these facts is justified. Issue 2 - Effect of first year of business and insolvency/liquidation on penalty assessment Legal framework: The assessment of penalty must consider the taxpayer's conduct, availability of records, and ability to substantiate claims; procedural or factual constraints (e.g., liquidation) that impede contesting assessment may bear on intent and voluntariness required to attract penalty. Precedent treatment: The Tribunal relied on higher court authority that rejects a mechanical imposition of penalty where the only basis is disagreement on claim; the judgment treats facts such as first year of operations and liquidation as relevant contextual factors. That approach follows precedent emphasizing enquiry into the nature and quality of inaccuracy and taxpayer's bona fides. Interpretation and reasoning: The Tribunal observed that the company was in its first year of filing returns and had subsequently entered liquidation by orders of a competent court, which prevented timely prosecution of appeal against assessment. These circumstances limited the taxpayer's ability to produce further evidence or to contest disallowance within statutory timelines. Given that books recorded the write-offs and details were furnished, the Tribunal found absence of culpable intent requisite for penalty. Ratio vs. Obiter: Ratio - Financial distress and procedural disability (liquidation) that prevented appeal and additional proof were material in assessing whether particulars were inaccurate; such circumstances can negate the inference of deliberate inaccuracy for penalty purposes. Obiter - The specific interplay between first year filing and quality of evidence is factual and cannot be universally applied without regard to circumstances. Conclusions: The taxpayer's first year filing status and liquidation proceedings materially affected its ability to substantiate claims and to prosecute appeals; these factors support deletion of penalty where no clear evidence of intentional inaccuracy exists. Issue 3 - Reliance on higher court pronouncements that mere assessment disallowance does not sustain penalty (precedent application) Legal framework: Judicial doctrine requires that imposition of penalty under section 271(1)(c) be predicated on more than an adverse assessment result; courts examine whether there was suppression, misstatement, or deliberate default beyond honest differences of opinion on facts or law. Precedent treatment: The Tribunal expressly followed controlling judicial pronouncements to the effect that mere disagreement of the assessing officer with the assessee's claim is not a ground for levy of penalty. Those precedents were applied rather than distinguished or overruled. Interpretation and reasoning: The Tribunal found the present facts align with the situations contemplated by those precedents - taxpayer recorded claim, furnished particulars, and any deficiency in proof did not, in the Tribunal's view, evidence mens rea for penalty. Therefore, the Tribunal endorsed the principle that penalty cannot rest solely on assessment disallowance. Ratio vs. Obiter: Ratio - Established precedents that assessment disallowance alone does not justify penalty were followed and constituted the legal foundation for deleting the penalty in this matter. Obiter - Any ancillary remarks distinguishing cases where penalty would be proper (e.g., deliberate suppression or fabrication) are contextual and do not alter the binding proposition applied. Conclusions: The Tribunal correctly applied higher court principles that a mere difference of opinion between the assessing officer and taxpayer on a claim (without evidence of intentional inaccuracy or concealment) cannot sustain penalty under section 271(1)(c); reliance on those authorities warranted deletion of the penalty on the facts. Cross-reference See Issue 1 and Issue 3: The conclusion that disallowance alone cannot support penalty is the principal legal reasoning; Issues 1 and 3 are interlinked where factual particulars (books, computations, furnished details, liquidation constraints) determine whether the statutory threshold for penalty (intentional furnishing of inaccurate particulars) is crossed. Final Conclusion (ratio of the judgment) The Court upheld deletion of the penalty under section 271(1)(c) because, on the facts - first year filing, recording of bad debts in books and computation, provision of particulars, and inability to prosecute appeal due to liquidation - the assessing officer's disagreement and subsequent disallowance did not establish furnishing of inaccurate particulars or culpable intent required to sustain penalty; established precedents to the same effect were followed.