Penalty under section 271(1)(c) for additions under section 68: no penalty where assessed income equals returned income

Whether tax was "sought to be evaded" by additions as unexplained cash credits was tested by comparing assessed income with returned income; because the second addition under consideration reduced assessed income to equal the returned income, the tax sought to be evaded was nil and penalty was not leviable by virtue of the applicable explanation. Whether the assessee furnished inaccurate particulars was tested by reference to audited books showing sales; because sales were fully disclosed in the books and not disputed, no penalty arose on account of inaccurate particulars.

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Issues: (i) Whether penalty under section 271(1)(c) is leviable where amounts (sales) were recorded in books and offered to tax but subsequently treated as unexplained cash credits under section 68 leading to an addition; (ii) Whether penalty under section 271(1)(c) is leviable in respect of disallowance of delayed PF and ESI payments under section 36(1)(va); (iii) Whether penalty under section 271(1)(c) is leviable where additions (including disallowance under section 40A(7) and unexplained loan under section 68) are based on facts fully disclosed in books and audited statements.

Issue (i): Whether section 271(1)(c) penalty can be imposed where income has been disclosed in books and the assessing officer subsequently treats the same receipts as unexplained cash credits under section 68, effectively taxing the same income again.

Analysis: Explanation 4 to section 271(1)(c) defines "sought to be evaded" as the difference between tax on assessed total income and tax that would have been chargeable had the total income been reduced by the amount in respect of which particulars are alleged to be concealed or inaccurate. Where the same receipts were shown in books and offered to tax, and the assessing officer merely recharacterises or reclassifies those receipts under section 68 without increasing the net taxable income for tax computation, the difference contemplated by Explanation 4 is nil. Established principles against double taxation and authorities treating disclosure in books as negating concealment inform this analysis.

Conclusion: Penalty under section 271(1)(c) is not leviable on amounts that were disclosed in books and offered to tax but subsequently treated as unexplained cash credits under section 68 where Explanation 4 yields no tax difference; conclusion is in favour of the assessee.

Issue (ii): Whether penalty under section 271(1)(c) is sustainable for disallowance of delayed PF and ESI payments under section 36(1)(va) when the expenditures were disclosed in books and audited accounts.

Analysis: Furnishing inaccurate particulars requires particulars supplied in the return to be incorrect, erroneous or false. Where the expense relating to delayed PF and ESI payments was fully disclosed in the books of account and audited financial statements, mere non-acceptance of the claim in law does not constitute furnishing inaccurate particulars. Jurisprudence holds that a claim made in return which is not sustainable in law does not automatically attract penalty under section 271(1)(c) absent concealment or inaccurate particulars.

Conclusion: Penalty under section 271(1)(c) is not leviable for disallowance of delayed PF and ESI contributions where the amounts were disclosed in books and audited statements; conclusion is in favour of the assessee.

Issue (iii): Whether penalty under section 271(1)(c) is leviable where additions (such as under section 40A(7) or unexplained loans under section 68) are made despite full disclosure in books and audited statements.

Analysis: When particulars of transactions are reflected in the assessee's books and audited financials, and explanations are furnished to the assessing authority, penal consequences under section 271(1)(c) cannot be sustained merely because the assessing officer does not accept the explanation or because inquiries (e.g., to third parties under section 133(6)) go unanswered. Precedent supports that disclosure in accounts precludes penalty where no inaccurate particulars or concealment are found.

Conclusion: Penalty under section 271(1)(c) is not leviable on additions based on transactions fully disclosed in books and audited statements; conclusion is in favour of the assessee.

Final Conclusion: The appeals are allowed and the penalty orders under section 271(1)(c) are set aside because the impugned additions and disallowances arose from amounts and particulars that were disclosed in books and audited financial statements, resulting in no tax difference as contemplated by Explanation 4 and no furnishing of inaccurate particulars.

Ratio Decidendi: Where amounts are disclosed in the assessee's books and offered to tax, penalty under section 271(1)(c) cannot be imposed if Explanation 4 to section 271(1)(c) yields no difference in tax chargeable and there is no furnishing of inaccurate particulars or concealment.

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