TaxTMI 
TaxTMI 
2026 (10) TMI 603
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....penditure but was treated by the Assessing Officer as a capital loss. 2. The assessee is engaged in the business of cyber-security and software development solutions. The relevant facts emerging from the penalty order are that the assessee had filed its return of income for the year under consideration declaring total loss of Rs. 16,39,73,406/-. The assessment under section 143(3) of the Act was completed on 20.03.2025 and the Assessing Officer initiated penalty proceedings under section 270A on the ground of alleged under-reporting of income of Rs. 7,41,16,000/-. 3. The aforesaid amount of Rs. 7,41,16,000/- represented expenditure relating to software development projects. In the course of the assessment proceedings, the Assessing Officer treated the amount as capital loss instead of revenue expenditure and, consequently, disallowed the claim. The assessee, in response to the penalty proceedings, submitted that the claim had been made bona fide, on the basis of judicial precedents and CBDT Circular No.16 of 2015, and that all material facts relating to the claim had been fully disclosed during the assessment proceedings. It was further submitted that the question whether the....
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..../- towards impairment of the internally developed Saife IP asset and Rs. 1,52,76,000/- towards development cost of the Blackbox and Command Control Operating Platform, which continued to stand as capital work-in-progress. It was submitted that these particulars were duly disclosed in Notes 42 and 43 forming part of the audited financial statements. According to the learned counsel, the learned CIT(A) had proceeded on an incomplete appreciation of the factual position by treating the entire amount as relating to the completed Saife asset. The learned counsel therefore submitted that there was full and transparent disclosure of all material facts and that the dispute was only regarding the legal characterisation of the expenditure as capital or revenue. 7. The learned counsel further submitted that the statutory exclusion contained in section 270A(6)(a) was squarely applicable. It was contended that the assessee had offered an explanation, the explanation was bona fide and all material facts necessary to substantiate the explanation had been disclosed. It was emphasised that the learned CIT(A) himself had recorded that the assessee had disclosed the facts in its financial statemen....
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....inciple sought to be canvassed before us, namely, the distinction between a false factual statement and an unsuccessful claim based upon the legal treatment of disclosed facts. The assessee's case before us is not that any expenditure was fictitious or that any primary fact was concealed. The material placed before us shows that the expenditure and the manner in which it had been accounted for were disclosed in the audited financial statements. The written submissions of the assessee specifically refer to Notes 42 and 43, wherein the two components of the expenditure and their accounting treatment were disclosed. 11. Similarly, the decision in the case of Vijay Bhagwandas Raheja is relied upon by the assessee for the proposition that where the underlying transaction is correctly disclosed, an incorrect legal head or characterisation of the transaction does not, by itself, result in penal consequences. In the present case also, the assessee disclosed the expenditure and its accounting treatment. The dispute is as to whether, having regard to the nature and ultimate fate of the software development expenditure, the amount was allowable as revenue expenditure or was required to be ....
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....cability of section 270A(6)(a) and dealt with a situation where the material facts had been disclosed by the assessee and the claim was made under a bona fide belief supported by the then prevailing judicial position. The Hon'ble High Court held that where the issue is debatable and the explanation offered by the assessee is bona fide, the statutory exclusion under section 270A(6)(a) is attracted. The Hon'ble High Court also considered the principle laid down by the Hon'ble Supreme Court in Reliance Petroproducts in the context of penalty and held that merely because a claim is ultimately found to be unsustainable in law, it does not, by itself, justify penal consequences where the relevant particulars have been disclosed and the claim was made bona fide. 15. The principle laid down in G.M. Modular is directly applicable to the facts before us. In the present case, the assessee had disclosed the relevant expenditure in its audited financial statements and had also furnished an explanation during the assessment and penalty proceedings. The material on record does not indicate that the expenditure was fictitious, that the amount claimed was inflated, that any receipt or asset was ....
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....rning the distinction between disclosure of facts and the legal conclusion drawn from those facts is relevant while examining whether the statutory conditions of section 270A(6)(a) stand satisfied. 19. We further note that the learned CIT(A), while confirming the penalty, has himself recorded that the assessee had disclosed the facts in its financial statements and submissions. The learned CIT(A), however, proceeded to reject the assessee's explanation primarily because, according to him, the legal treatment adopted by the assessee was incorrect and the Saife asset had already been completed, capitalised, put to use and had generated revenue. The written submissions filed before us point out that the total amount of Rs. 7,41,16,000/- comprised two separate components and that the development expenditure relating to Blackbox and CCOP continued as capital work-in-progress. Therefore, the conclusion that the explanation was not bona fide merely because the legal claim was ultimately not accepted cannot, in our view, be sustained. 20. The statutory language of section 270A(6)(a) is also material. Where an assessee offers an explanation, such explanation is bona fide and all mater....