TaxTMI 
TaxTMI 
2026 (8) TMI 385
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....fied in deleting the penalty levied under section 271(1)(c) of the Income-tax Act, 1961, despite the assessee having furnished inaccurate particulars of income by claiming excessive depreciation of Rs. 102,86,27,689 in contravention of section 32 read with Appendix 1A and Rule 5(1A) and declaring incorrect taxable income resulting in willful concealment of income? ii. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in treating the excess claim of depreciation as a bona fide mistake, when the assessee failed to file a revised return and withdrew the excess claim only after detection during scrutiny proceedings? iii. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to apply the ratio laid down by the Hon'ble Supreme Court in K.P. Madhusudan v. CIT (251 ITR 99) while deleting the penalty under section 271(1)(c)? 2. The Ld. CIT (A)'s order is contrary in law and on facts and deserves to be set aside. 3. The appellant prays that the order of Ld. CIT (A) on the above ground be set aside and that of the AO restored. The appellant craves leave to amend or alter any gr....
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....laim of depreciation from Rs. 1,13,26,09,625/- to Rs. 10,39,81,936/- and, consequently, withdrew excess depreciation of Rs. 1,02,86,27,689/-. The assessee also furnished a block-wise revised computation of depreciation. It was submitted that both letters were furnished before the Assessing Officer issued the specific show-cause notice dated 14.12.2018 concerning the claim of depreciation. 3.4 The assessee further submitted that the time prescribed under section 139(5) for furnishing a revised return had already expired by the time the mistake was noticed. Therefore, the correction could only be made by furnishing a revised computation during the assessment proceedings. In response to the notice dated 14.12.2018, the assessee furnished its reply dated 22.12.2018 along with a revised statement of computation of total income. As a consequence of the withdrawal of excess depreciation of Rs. 1,02,86,27,689/-, the business loss of Rs. 1,11,27,97,212/- declared in the original return stood revised to Rs. 8,41,69,523/-. According to the assessee, the refund claimed at Rs. 54,922/- and the book loss computed under section 115JB at Rs. 3,27,47,892/- remained unchanged. 3.5 It was, acco....
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....rred an appeal before the CIT(A) on 16.01.2020. The CIT(A) issued notices under section 250 on various dates. In response, the assessee furnished written submissions and supporting documents. The detailed written submissions relevant to the controversy were filed on 23.06.2025. 5. Before the CIT(A), the assessee challenged the validity as well as the merits of the penalty. It was submitted that the show-cause notice did not contain a specific finding as to how the assessee had furnished inaccurate particulars of income and did not specify the amount in respect of which the penalty was proposed. It was contended that the Assessing Officer had not recorded proper satisfaction in the assessment order for initiating penalty proceedings and had not brought any material on record to establish that the assessee had furnished inaccurate particulars of income. 5.1 On merits, the assessee reiterated that the original depreciation of Rs. 1,13,26,09,625/- was claimed on the basis of the tax audit report and that the excessive claim resulted from the bona fide application of the rates prescribed in New Appendix I instead of the rates applicable to power-generating undertakings under Appen....
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.....2018 were furnished before issuance of the notice under section 142(1) dated 14.12.2018, through which the Assessing Officer first raised the issue relating to the claim of depreciation. In view of this chronology, the CIT(A) held that the observations of the Assessing Officer that the assessee had wilfully furnished incorrect particulars for evasion of tax and that the excess claim would have remained concealed but for scrutiny were not sustainable. 5.7 The CIT(A) also rejected the observation of the Assessing Officer that the assessee was unsure of the correct particulars merely because the letter dated 26.10.2018 superseded the earlier letter dated 11.07.2018. The CIT(A) observed that both communications were made before the Assessing Officer issued the specific notice dated 14.12.2018 concerning depreciation. The CIT(A), therefore, accepted that the correction was made suo motu and not after detection of the excess claim by the Assessing Officer. 5.8 Considering the voluntary withdrawal of the excess depreciation before issuance of the specific notice by the Assessing Officer and the judicial precedents referred to in the appellate order, the CIT(A) held that the case wa....
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....blish the bona fides of the original claim. 6.2 The learned DR also relied upon the observation in the order-sheet entry that, had the return not been selected for scrutiny, the excess depreciation of Rs. 1,02,86,27,689/- would have remained undisclosed. It was, therefore, submitted that the assessee had furnished inaccurate particulars of income and that the initial claim of depreciation lacked bona fides and attracted the penal consequences under section 271(1)(c). 6.3 Reliance was also placed upon the decision of the Hon'ble Supreme Court in K.P. Madhusudan v. CIT (251 ITR 99). The departmental order-sheet entry records the proposition relied upon in the following terms: "if the assessee fails to return the correct income due to willful negligence, he shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars thereof." The learned DR, accordingly, submitted that the CIT(A) was not justified in treating the excess depreciation as a bona fide mistake and deleting the penalty of Rs. 34,97,33,414/-. He prayed that the order of the CIT(A) be set aside and the penalty imposed by the Assessing Officer under section 271(1)(c) be....
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....ion 32 of the Act in respect of depreciation of assets acquired on or after 1st day of April, 1997 shall be calculated at the percentage specified in the second column of the Table in Appendix IA of these rules on the actual cost thereof to the assessee as are used for the purposes of the business of the assessee at any time during the previous year: Provided that the aggregate depreciation allowed in respect of any asset for different assessment years shall not exceed the actual cost of the said asset: Provided further that the undertaking specified in clause (i) of sub-section (1) of section 32 of the Act may, instead of the depreciation specified in Appendix IA, at its option, be allowed depreciation under sub-rule (1) read with Appendix I, if such option is exercised before the due date for furnishing the return of income under sub-section (1) of section 139 of the Act." Referring to the second proviso, the learned AR submitted that an undertaking engaged in the generation or generation and distribution of power is permitted to opt for depreciation under rule 5(1) read with Appendix I instead of depreciation under Appendix IA. The only condition stipulated ....
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....e instant case, there is no dispute that the assessee had claimed depreciation in accordance with sub-rule (1) read with Appendix-I before the due date of furnishing the return of income. The view taken by the assessing officer as affirmed by the first appellate authority that the assessee should opt for one of the two methods is not a statutory requirement. Therefore, the revenue was not justified in reducing the claim of depreciation of the assessee on the ground that the assessee had not specifically opted for the WDV method." The learned AR particularly relied upon the principle enunciated in paragraph 44 of the judgment, which reads as under: "44. A similar issue was examined by this Court in CIT v. G.R. Govindarajulu [2016] 16 SCC 335/[2015] 61 taxmann.com 400/235 Taxman 199/378 ITR 1 (SC), wherein it has been held that the law does not mention any specific mode of exercising such an option. The only requirement is that the option has to be exercised before filing of the return. In that case, assessee had set apart a sum of Rs. 32 lakhs to be spent for charitable purposes in the following year and claimed deduction of the entire amount under section 11 of the Act ....
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....oviso to rule 5(1A), the claim made in the return itself constituted the exercise of that option. 7.8 The learned AR thereafter explained the chronology. The return was selected for complete scrutiny by notice dated 21.07.2017 issued under section 143(2). The said notice did not raise any specific query concerning depreciation, the applicable rate, or the exercise of the option under rule 5(1A). Mere selection of the return for scrutiny could not, according to him, be equated with detection of an incorrect claim by the Assessing Officer. 7.9 When the tax consultant initially entertained a doubt regarding the applicable rate, the assessee furnished the letter dated 11.07.2018, acknowledged by the Department on 16.07.2018. By the said letter, the assessee revised depreciation on additions to plant and machinery from Rs. 88,65,84,342/- to Rs. 16,62,34,564/- and withdrew excess depreciation of Rs. 72,03,49,778/-. The letter contained the cost of the additions, the rate originally applied, the rate subsequently considered applicable and the resulting revised computation. 8. Upon a further examination, the assessee furnished another letter dated 26.10.2018 in supersession of the....
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....ed a comprehensive re-computation under Appendix IA. Both letters disclosed the figures and the basis of computation. The departmental order-sheet entry, however, incorrectly recorded that the withdrawal under the first letter was Rs. 8,86,58,434/-, whereas the letter itself showed that the amount withdrawn was Rs. 72,03,49,778/-. 8.6 The learned AR reiterated that, on a correct interpretation of the second proviso to rule 5(1A), the original claim under Appendix I was legally permissible and was wrongly withdrawn. Nevertheless, even assuming that the claim was not ultimately allowable, it remained a bona fide claim because it was based on the tax audit report, supported by the statutory provision, fully disclosed in the return and voluntarily given up before any specific query was raised. 8.7 It was emphasised that the Department had not disputed any primary fact furnished by the assessee. There was no allegation that the assets were non-existent, that their actual cost was inflated, that the assets were not owned or used by the assessee, or that the entries in the books and Form No. 3CD were false. The dispute was confined to whether depreciation should be computed under Ap....
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....of his income." 10.1 The learned AR submitted that the aforesaid reasoning concerning the meaning of "concealment" and "inaccurate particulars" continued to hold the field. He referred to CIT v. Reliance Petroproducts (P.) Ltd. [2010] 322 ITR 158 (SC), wherein the Hon'ble Supreme Court clarified the extent to which Dilip N. Shroff had been overruled: "However, it must be pointed out that in Dharamendra Textile Processors' case (supra), no fault was found with the reasoning in the decision in Dilip N. Shroff's case (supra), where the Court explained the meaning of the terms 'conceal' and 'inaccurate'. It was only the ultimate inference in Dilip N. Shroff's case (supra) to the effect that mens rea was an essential ingredient for the penalty under section 271(1)(c) that the decision in Dilip N. Shroff's case (supra) was overruled." (para 8) The learned AR particularly relied upon paragraph 9 of Reliance Petroproducts (supra), which reads as under: "9. We are not concerned in the present case with the mens rea. However, we have to only see as to whether in this case, as a matter of fact, the assessee has given inaccurate particulars. In Webster's Dictionary, the....
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....d. Therefore, the only dispute was the year in which these expenses should have been allowed. Considering the facts of the case in totality, we do not find any reason to interfere with the findings of the Ld. CIT(A)." 10.4 Drawing an analogy from the aforesaid decision, the learned AR submitted that depreciation was otherwise allowable to the assessee and no factual component of the claim was doubted. The dispute concerned only the applicable method and rate of depreciation. A difference concerning the manner or quantum of an otherwise admissible deduction did not warrant penalty under section 271(1)(c). 10.5 The learned AR thus summed up his submissions by contending that the original depreciation claim was legally sustainable under the second proviso to rule 5(1A); the claim was wrongly withdrawn under an erroneous understanding of the provision; the withdrawal was nevertheless made suo motu before the Assessing Officer raised any specific query; and all material facts were fully disclosed and remained undisputed. Even if the original claim were treated as having been given up, its bona fides stood established by the tax audit report, the statutory option, the contemporaneo....
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....rm or particular mode for exercising the option. The assessee claimed depreciation under Appendix I in the return of income itself and disclosed the corresponding computation in Form No. 3CD. The assessee commenced commercial generation of power during the relevant previous year and exercised the option through the return furnished for the corresponding assessment year. 12.4 The issue is directly covered by the decision of the Hon'ble Supreme Court in CIT v. Jindal Steel & Power Ltd. [2023] 157 taxmann.com 207 (SC)/[2024] 460 ITR 162 (SC). The relevant para is reproduced earlier. In view of the said exposition, the original claim under Appendix I could not have been characterised as a claim wholly unknown to law. The claim made in the return itself constituted the exercise of the option contemplated by the second proviso to rule 5(1A). The subsequent withdrawal proceeded on an erroneous understanding that depreciation under Appendix IA was mandatory for the assessee. 12.5 We are presently concerned with the levy of penalty and not with recomputation of the assessed loss. Nevertheless, the statutory basis of the original claim is directly relevant for examining whether the ass....
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.... a revised return, when the statutory period had already expired, cannot by itself establish that the assessee lacked bona fides. 13.1 The two letters also cannot be regarded as inconsistent disclosures. The first letter corrected the rate applied to additions put to use for less than 180 days. The second letter made a comprehensive re-computation of depreciation under Appendix IA. Both letters disclosed the basis and figures of the respective computations. They represent successive stages of reconsideration of a legal claim and not concealment of any factual particular. 13.2 The claim of depreciation was based on the computation certified by the tax auditors under clause 18 of Form No. 3CD. The ratio of the decision of the Hon'ble Supreme Court in Dilip N. Shroff v. Joint CIT [2007] 291 ITR 519 (SC) is that, where the disclosure made by an assessee is founded upon the opinion of a qualified expert appointed under a statutory scheme, the mere non-acceptance of such opinion or adoption of a different opinion does not, by itself, establish that the assessee furnished inaccurate particulars. 14. In the present case, the tax auditors disclosed the complete basis of the depreci....
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....s on which the transactions occurred. When confronted, the assessee claimed that the transactions had been financed through hand loans obtained from friends. The assessee was unable to furnish any evidence in support of the alleged loans and thereafter offered the amount of Rs. 93,000/- as additional income. 14.6 In those circumstances, the Assessing Officer found the explanation concerning the hand loans to be unacceptable and applied Explanation 1(B) to section 271(1)(c). The principal issue before the Hon'ble Supreme Court was whether the Explanation to section 271(1)(c) could be applied without being expressly invoked in the penalty notice. The Hon'ble Supreme Court held: "No express invocation of the Explanation to section 271 in the notice under section 271 is, in our view, necessary before the provisions of the Explanation therein are applied." 14.7 The factual and legal setting of K.P. Madhusudhanan is materially different. In that case, transactions had not been contemporaneously entered in the books, the omission was detected by the Assessing Officer, the explanation of hand loans was unsupported by evidence, and the amount was offered only after the assess....