Loading judgment…
Facts
The Revenue appealed against the CIT(A)'s order deleting the penalty levied under Section 271(1)(c) for Assessment Year 2013-14. The additions that formed the basis of the penalty related to impairment loss on fixed assets, provision for service tax receivable, and unaccounted revenue.
Held
The Tribunal held that penalty under Section 271(1)(c) is not automatic and requires specific grounds for concealment or furnishing inaccurate particulars. The CIT(A) correctly deleted the penalty as the assessee demonstrated that the additions were either based on a suo moto disallowance, a misinterpretation of accounting entries, or a misunderstanding of advance revenue by the AO.
Key Issues
Whether penalty under Section 271(1)(c) is leviable when the additions are based on a misunderstanding of the assessee's accounting practices and disclosures, and not on proven concealment or inaccurate particulars of income?
Sections Cited
271(1)(c), 143(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, MUMBAI “B” BENCH : MUMBAI
Before: SHRI VIKRAM SINGH YADAV & SHRI SANDEEP SINGH KARHAIL
O R D E R PER VIKRAM SINGH YADAV, A.M : This is an appeal filed by the Revenue against the order of the Learned Commissioner of Income Tax (Appeals)-National Faceless Appeal Centre (NFAC), Delhi [„Ld.CIT(A)‟], dated 20-05-2025, pertaining to Assessment Year (AY) 2013-14, wherein the Ld.CIT(A) has deleted the levy of penalty u/s. 271(1)(c) of the Income Tax Act, 1961 („the Act‟).
Briefly the facts of the case are that the assessee-company has filed its return of income declaring a loss of Rs. 5,78,39,697/- which was subsequently, revised at a loss of Rs. 6,01,43,201/-. The return of income was selected for scrutiny and after issuance of notice and calling for the necessary information and documentation, the assessment proceedings were completed u/s. 143(3) of the Act on 28-03-2016, determining the total loss at Rs. 3,52,60,518/-. While completing the assessment, the AO made an addition on account of impairment loss on fixed asset at Rs. 1,66,90,983/-, provision for service tax receivable at Rs. 18,00,000/- and addition on account of unaccounted revenue at Rs. 63,91,700/-. Separately penalty proceedings u/s. 271(1)(c) of the Act were initiated.
The assessee-company did not file any appeal against the aforesaid order passed u/s. 143(3) of the Act. Therefore, as far as the quantum proceedings are concerned, the same has attained finality.
In the penalty proceedings, the AO issued show cause notice dt. 28-03-2016 and thereafter, further show cause was issued on 15-09-2016 wherein the assessee was asked to submit as to why the penalty u/s. 271(1)(c) of the Act should not be levied on various additions/disallowances made in the order passed u/s. 143(3) of the Act. There was apparently no compliance on the part of the assessee and the AO thereafter passed the penalty order u/s. 271(1)(c) of the Act dt. 30-09-2016, levying penalty of Rs. 80,73,186/-.
The assessee carried the matter in appeal before the Ld.CIT(A). The Ld.CIT(A) after considering the submissions so filed by the assessee, has deleted levy of penalty u/s. 271(1)(c) of the Act and against the said order, the Revenue is in appeal before us.
During the course of hearing the Ld.DR submitted that the Ld.CIT(A) erred in deleting the penalty without appreciating that the assessee furnished inaccurate particulars of income resulting in an overstated loss and understated taxable income. The assessee‟s claims were not mere errors, but involved incorrect treatment of material items, as evidenced by lack of substantiation during the assessment proceedings. It was submitted that the AO has duly recorded his satisfaction and penalty has been rightly warranted being a civil liability. It was submitted that the Ld.CIT(A) gave undue weight to assessee‟s plea of „oversight by consultant‟, treating it as bonafide without scrutinizing the magnitude of over 2.48 crores in aggregate additions or the assessee‟s failure to furnish explanations despite multiple opportunities, such significant inaccuracies cannot be dismissed as inadvertent, especially for a company with professional advisors. The assessee‟s revised return also failed to correct these, indicating deliberate inaccuracy.
Coming to specific additions made by the AO and which form the subject matter of penalty, it was submitted that the assessee wrongly claimed impairment loss on fixed asset amounting to Rs. 1,66,90,983/- as a deductible expense under AS-28. However, under the Income Tax Act, such losses are not allowable unless they qualify as depreciation or actual write-off. It was submitted that the AO rightly disallowed it. Further the assessee failed to explain recoverability or provide necessary evidence and thus, it constitute furnishing of inaccurate particulars of income. It was submitted that the Ld.CIT(A) accepted the assessee‟s plea of „oversight by consultant‟ as bonafide, ignoring that the assessee admitted the amount „remained to be added back‟ only after deduction. It was submitted that the inaccuracy overstated loss, evading tax on potential income and further, the assessee‟s response to notice dt. 06-01-2016 citing, „recoverability of useful life‟, but provided no documentary proof, rendering the claim unsubstantiated.
It was further submitted that the assessee debited CENVAT input credit to Profit & Loss Account as an expense, whereas it is an asset adjustment, which is not deductible u/s. 37 of the Act. The AO disallowed it after no response to notice dt. 22-12-2015, holding it inflated expenses and understated income. It was submitted that the Ld.CIT(A) overlooked that CENVAT credit is not an expense, but a recoverable credit, treating it as such was a deliberate inaccuracy, not bonafide. And the assessee did not provide any evidence of irrecoverability and write-off claims are allowable only if unutilizable.
It was further submitted that the assessee treated the advance revenue of Rs. 63,97,700/-, but the AO held that it pertained to the current year income after no explanation to notice dt. 23-02-2016. It was submitted that the Ld.CIT(A) failed to appreciate this factual finding by the AO. It was also submitted that the classification of the revenues being in the nature of advance revenues classification was unsupported, indicating evasion, magnitude suggests no oversight, but intent to defer tax.
It was accordingly submitted that the order of the Ld.CIT(A) is legally unsustainable and factually erroneous. It prioritizes procedural hyper- technicality over substantive justice and misapplies judicial precedents on bonafide mistake. It was submitted that the assessee, a limited company with access to professional expertise, furnished a return of income that contained significant inaccuracies across multiple heads, culminating in a substantial overstatement of loss and also submitted that this constitutes furnishing of inaccurate particulars of income within the meaning of section 271(1)(c) of the Act. It was accordingly submitted that the penalty so levied be sustained and the order passed by the Ld.CIT(A), NFAC be set aside.
In his submissions, the Ld.AR submitted that it is a settled legal proposition that quantum and penalty proceedings are separate proceedings. As far as levy of penalty is concerned, the provisions have to be strictly construed. It was further submitted that Ld.CIT(A) has rightly taken into consideration the entire gamut of the penalty proceedings right from the issuance of show cause notice which is not just a technical but a substantive requirement, the basis of various additions made by the AO, the charge of levy of penalty and after taking into consideration the submissions filed by the assessee during the appellate proceedings, has rightly deleted the levy of penalty.
Our reference was drawn to the findings of the Ld.CIT(A), wherein he has referred to the penalty notice u/s. 28-03-2016 issued by the AO and has returned a finding that the notice so issued to the assessee doesn‟t specify as to which limb of section 271(1)(c) of the Act, the penalty proceedings have been initiated, whether for concealment of particulars of income or for furnishing of inaccurate particulars of income and thereafter, he has relied on the decision of the Hon‟ble Supreme High Court in the case of CIT vs. SSA‟s Emerald Meadows [2016] 73 taxmann.com 248 (SC) and following the same, it has held that on this ground itself, the penalty order requires to be quashed. It was submitted that non-issuance of a specific show cause is a illegal infirmity, which cannot be cured and which reflects non-application by the AO in terms of substantial and specific charge against the assessee before levy of penalty. It was submitted that the same proposition has been reiterated by various Hon‟ble Courts including Hon‟ble Supreme Court in the case of PCIT vs. Shyam Sunder Jindal [2024] 164 taxmann.com 503 (SC), the Hon‟ble Bombay High Court in the case of CIT vs. Samson Perinchery [2017] 88 taxmann.com 413 (Bombay), which has been consistently followed by various Benches of the Tribunal. It was submitted that the Revenue has not challenged the said findings of the Ld.CIT(A) and hence, on this ground itself, the order of the Ld.CIT(A) should be sustained in absence of the challenge by the Revenue to the findings so recorded by the Ld.CIT(A).
On the merits of deletion of penalty, it was submitted that as far as the addition on account of impairment loss on fixed asset amounting to Rs. 1,66,90,983/- is concerned, though the assessee‟s plea before the Ld.CIT(A) was in terms of oversight by consultant while filing the return of income, however, on subsequent examination of the return of income, it was found that the assessee has infact suo moto disallowed the said amount of Rs. 1,66,90,983/- while filing the return of income. In this regard, our reference was drawn to the copy of return of income which was filed during the course of hearing and our reference was drawn to the Schedule-BP (computation of income from business or profession), wherein the assessee has shown a figure of Rs. 7,97,42,464/- being the loss before tax as per the Profit & Loss Account and thereafter, the assessee has shown a figure of Rs. 1,67,10,114/- which is the expense debited to Profit & Loss Account. It was submitted that such amount involves a figure of Rs. 1,66,90,983/- being the impairment loss on fixed asset and Rs. 19,131/- being loss on sale of fixed assets. Further, our reference was drawn to the depreciation figure debited to Profit & Loss Account amounting to Rs. 75,48,840/- and thereafter allowing depreciation as per Income Tax Act, Rs. 46,59,691/- and the Profit & Loss Account has been computed at a loss of Rs. 6,01,43,201/-. It was submitted that the said figure was taken as a base figure by the AO while completing the assessment and in spite of the fact that the assessee has suo moto disallowed the amount on account of impairment loss on fixed assets, the AO went on and made further disallowance of Rs. 1,66,90,983/-. It was accordingly submitted that the assessee has suo moto made disallowance while filing the return of income, has not claimed impairment loss on fixed asset and hence, there is no question of making the addition in the hands of the assessee and thereby the question of levy of penalty thereon does not arise for consideration. It was further submitted that even though the assessment proceedings have attained finality, however, the same cannot be lead to automatic levy of penalty, wherein the assessee has duly demonstrated before the Bench that the assessee itself has disallowed the amount suo moto and further addition is unsustainable in the eyes of law.
Further regarding deleting of levy of penalty on the CENVAT credit of Rs. 18 lakhs and advance revenues of Rs. 63,91,700/-, our reference was drawn to the finding of the Ld.CIT(A), which are contained in paras No. 9 & 10 of the impugned order, which reads as under:
“9. As regards the addition of Rs. 18,00,000/-, the appellant submitted that services being rendered by the appellant company were liable to service tax, based on the same, the expenses incurred by the appellant company for Professional Services, Telephone Expenses, Internet charges on which the Service Provider were billing to appellant company for service tax since as per Service Tax Rules, the appellant company is entitled to receive the CENVAT Credit for the services availed and the same could be set off against the Output Services being rendered by appellant company. It was further submitted that during the Assessment Year i.e. F.Y. 2012-13, the CENVAT Input available on the expenses paid by the appellant company was to the extent of Rs.21,28,193/-which was not debited to Profit & Loss Account but was separately shown under Balance Sheet head under the Service Tax Receivable on expenses paid, however, during the year end, due to the Non- viability of the business and the appellant company being not as a going concern, it was decided that Service Tax Input credit availed on expenses would be charged off to expenses instead of carrying it forward as an asset in the Balance Sheet of the Company. Thus based on the same, the amount of Rs. 18,00,000/- was reversed back to Expenses. It was further submitted that the Company being in defunct state, the Quantum Appeal was not filed in view of heavy Carried Forward Losses since the appellant company was sure that the Carried Forward Losses would not be utilized by the company. After considering the nature of this addition, I am inclined to agree with the appellant's argument. The penalty u/s 271(1)(c) is attracted only if any person has concealed the particulars of its income or has furnished inaccurate particulars of such income. This addition was made because the AO considered the same as provision. Whereas the fact is that these were expenditures for the current year charged to P&L a/c at the year end instead of charging to the expenses on day to day basis. The Hon'ble Pune ITAT in the case of Envair Electrodyne Ltd. vs. DCIT (ΑΥ 2004-05) considered a similar issue of penalty u/s 271(1)(c) in respect of disallowance u/s. 43B of the Act and held that when the particulars are available in the returns and its enclosures say Audit Report filed u/s. 44AB of the Act and failure to make additions on account of 43B of the Act and the inclusion of excise duty, freight etc do not attract penalty u/s. 271(1)(c) of the Act in view of Pune Bench decision in the case of Kanbay Software P. Ltd. In the case of Indian Aluminum Co. Ltd. vs. ACIT, (AY 1989-90), the following ground of appeal was raised before the Honb'ble Mumbai ITAT-
5. On the facts and circumstances of the case and in law, the learned Commissioner of Income Tax (A) has grossly erred in affirming the decision of the AO for imposing penalty u/s. 271(1)(c) on disallowance of Rs. 48,30,254/-us. 438 of the Income Tax Act, 1961" The Hon'ble Court held that the ambiguity with regard to the year of allowability of expenses for such a transition period should not be adversely viewed for the purpose of levy of penalty and more over all the particulars of payment and claim have been reported in the Audit report filed along with the return of income, thus, under the peculiar facts and circumstances of the case, we are unable to confirm the penalty on the ground that the assessee had furnished any inaccurate particulars of income. The various judicial precedents cited by the appellant also support its case. The case of CIT V/s Reliance Petro Products Pvt. Ltd. 322 ITR 158 (SC) strongly supports the case of the appellant, the ratio of which has already been reproduced in earlier part of this order. In view of the above, penalty levied in respect of addition of Rs. 18,00,000/- on account of disallowance of provision for Service Tax Receivable stands deleted.
10. As regards the addition of Rs. 63,91,700/-, the appellant has submitted that it maintained books of accounts on Mercantile system of accounting, it raised the Invoices for various durations ranging from one month to one year as and when the contract for services is entered by appellant company and thus as and when the Invoices were raised by the appellant company, the amount pertaining to next financial year was accounted as Subscription Received in advance since the services would be rendered in the next financial year. It was further submitted that due to the fact that the Invoice was raised for one year, any period after the end of 31st March was accounted as Subscription Received in advance and shown as was subsequently reversed next year. It was pointed out that during the year, the Opening Balance of Rs. 14,98,446/-which were shown as Subscription Received in advance was transferred to current year's income and from current year's billing for current year's Invoices raised, the amount pertaining to period after 31.3.2013 was transferred to Subscription Received in advance amounting to Rs.63,91,700/- and the Closing Net Balance for advance received was of Rs.46,28,029/-, thus after passing the entry of Rs.63,91,700/-, certain income which pertains to current year amounting to Rs. 17,63,671/- was shown as current year's Revenue and the balance amount of Rs. 46,28,029/- was shown as Advance Subscription under the Liability code of the Balance Sheet. The appellant contended that the AO without appreciating the concept of business model of the appellant company came to a conclusion that the amount of Rs.63,91,700/- received as Subscription Money was not offered for tax and made an addition to the income of the appellant company whereas the AO at Para 7.0.1 of the Assessment Order given a break up wherein it is clearly shown as current year subscription advance received. The appellant also clarified that the net Advance Income shown by the appellant company amounted to Rs.46,28,029/- only and NOT at Rs.63,91,700/-. Considering the facts of the case and appellant's submissions, I am inclined to agree with its claim that the addition of Rs. 63,91,700/- does not attract penalty provisions. It is a fact that the appellant followed mercantile system of accounting and the Advance Revenue pertaining to next year was shown as Subscription Received in advance and it cannot be thus treated or considered as Current Year's Income. The Hon'ble Karnataka High Court in the case of CIT V/s Manjunath Cotton and Ginning Factory 92 DTR 0111 (Kar.) discussed the provisions of Section 271(1)(c) in detail. In para 36, the Court discussed as below: "NOT AUTOMATIC 36. The levy of penalty is not a matter of course. It has to be found that the assessee concealed any income. Where there is no concealment, or no material for concealment, no penalty can be imposed. But where the assessee has concealed income, any subsequent act of voluntary disclosure would not affect the imposition of penalty. The mere addition to the taxable income would not automatically lead to an order of penalty. Further, the levy of penalty is not an automatic concomitant of the assessment. Therefore, safeguards have been provided for in the Act itself to see that penalties are levied only in appropriate cases. The Apex Court in the case of SURESHCHANDRA MITTAL reported in 251 ITR 9, held that higher income offered after search would not lead to levy of penalty automatically. The Apex Court in the case of DILIP SHROFF reported in 291 ITR 529, at Page 547 at para 62 has observed that finding in assessment proceedings cannot automatically be adopted in penalty proceedings and the authorities have to consider the matter afresh from different angle. This Court in the case of VASANTH K HANDIGUND reported in 327 ITR 233, has held that when addition has been accepted to buy peace and avoid litigation and the explanation was found reasonable by the appellate authorities the cancellation of penalty was justified. This Court in the case of BHADRA ADVANCING PVT LIMITED reported in 210 CTR 447, held that merely because the assessee has filed a revised return and withdraw some claim of depreciation penalty is not leviable. The additions in assessment proceedings will not automatically lead to inference of levying penalty. This Court in the case of GUJAMGADI reported in 290 ITR 168, has held that every addition to income by the Income Tax Officer will not automatically attract levy of penalty. Similar view has also been taken by this Court in the case of BALAJI VEGETABLE PRODUCTS PRIVATE LIMITED reported in 290 ITR 173. The facts of the addition has to be looked into and the conduct of the assessee may also be taken into consideration. Merely because addition has been accepted and taxes paid along with interest should mitigate the attitude of the Assessing Officer in not levying penalty rather than levy of penalty. The Punjab and Haryana High Court in the case of SURAJ BHAN reported in 294 ITR 481, has held that when an assessee files revised return showing higher income penalty cannot be imposed merely on account of the higher income. There is no deeming fiction for survey similar to explanation 5 or 5A which are in respect of search action only. There is no deeming fiction for higher income declared during survey and the assessing authorities cannot levy penalty automatically in case of survey cases where higher income is declared after survey. The Punjab and Haryana High Court in the case of, has held that additional income offered after survey cannot lead to imposition of penalty. In cases where the assessee have accepted the view of the department and have either filed revised return or letters accepting the addition and offered the additional income to tax and have not filed appeal or revision, the Assessing Officers are duty bound in law to take these factors and also the facts leading to addition and use the discretion vested in them in the main provision of the Section." I may also refer to the decision of the Hon'ble ITAT Delhi 'B' Bench in the case of Greenwoods Govt. Officers Welfare Society vs. DCIT [2024] 160 taxmann.com 237 (Delhi - Trib.) wherein it was held that where fact of earning interest income and miscellaneous income had been duly disclosed by assessee in its accounts and in original return with full details, it could not be alleged that assessee was guilty of under-reporting and/or misreporting of income and penalty under section 270A was not exigible. The Hon'ble Delhi High Court in the case of CIT vs. Auric Investment & Securities Ltd. [2007] 163 Taxman 533 (Delhi) observed that "So, it is clear from the record that all the requisite information as required by the Assessing Officer, was furnished by the assessee. There is nothing on record to show that in furnishing its return of income, the assessee has either concealed his income or has furnished any inaccurate particulars of income. The mere treatment of the business loss as speculation loss by the Assessing Officer does not automatically warrant inference of concealment of income. The assessee did not conceal any particulars of income, as he filed full details of the sale of shares. In any case, it cannot be said that the assessee has concealed any particulars so far as its computation of income is concerned and as such provisions of section 271(1)(c) of the Act are not attracted in this case and we do not find any infirmity in the reasoning given by the Tribunal." In view of the above, penalty levied in respect of addition of Rs. 63,91,700/- on account of Unaccounted Revenue stands deleted.”
We have heard the rival contentions and perused the material available on record. The matter under consideration relates to levy of penalty u/s 271(1)(c) on account of disallowance of impairment loss on fixed asset at Rs. 1,66,90,983/-, provision for service tax receivable at Rs. 18,00,000/- and addition on account of unaccounted revenues at Rs. 63,91,700/-.
As far as impairment loss on fixed assets is concerned, the ld AR during the course of hearing has duly demonstrated through the return of income and the financial statements that the assessee has suo-moto disallowed the same while filing its return of income and therefore, the question of further disallowance thereof doesn‟t arise for consideration. The fact that the quantum proceedings have attained finality doesn‟t automatically lead to levy of penalty where the assessee has duly demonstrated before us that there was no basis for the AO to make further disallowance where the assessee has already made a disallowance while filing a return of income. For the aforesaid reasons, we agree with the contentions of the Ld.AR that there is no basis for levy of penalty as far as impairment loss on fixed assets is concerned.
Now, coming to levy of penalty on provision for service tax receivable of Rs. 18,00,000/-, we find that the Ld.CIT(A) has taken note of the factual position that the same relates to service tax on the expenses incurred by the appellant company for availing professional services, telephone expenses, internet charges on which the service provider were billing to appellant company for service tax and as per Service Tax Rules, the appellant company is entitled to receive the CENVAT Credit for the services availed and the same could be set off against the Output Services being rendered by appellant company. The Ld.CIT(A) has further taken note of disclosure in the financial statements that the CENVAT Input available on the expenses paid by the appellant company was to the extent of Rs.21,28,193/-which was not debited to Profit & Loss Account but was separately shown under Balance Sheet head under the Service Tax Receivable on expenses paid, however, during the year end, due to the non-viability of the business and the appellant company being not as a going concern, it was decided that Service Tax Input credit availed on expenses would be charged off to expenses instead of carrying it forward as an asset in the Balance Sheet of the Company and based on the same, the amount of Rs. 18,00,000/- was reversed back to expenses. The Ld.CIT(A) accordingly held that the addition was made because the AO considered the same as provision whereas the fact is that these were expenditures for the current year charged to P&L a/c at the year-end instead of charging to the expenses on day to day basis. The said findings have remained unrebutted before us. We therefore find that unlike the assessment proceedings, where the AO has made the addition going by the nomenclature and in absence of any explanation/submission by the assessee, during the penalty proceedings, the ld CIT(A) has rightly analysed the transaction, referred to disclosure in the financial statements and held that the service tax receivable is on the input services and infact, part of the expenses which have been rightly charged to the Profit & Loss Account and claimed as an allowable expense for tax purposes.
Now coming to addition on account of unaccounted revenue at Rs. 63,91,700/-, we again find that the Ld.CIT(A) has rightly taken note of the factual position that the appellant followed mercantile system of accounting and as per the billing undertaken by the assessee, the advance revenue pertaining to next year was duly shown as subscription received in advance and it cannot be treated or considered as current year's income and thus, there is no basis for levy of penalty.
The fact that the quantum proceedings have attained finality doesn‟t automatically lead to levy of penalty where the assessee has made the necessary disclosure and duly demonstrated that there was no basis for the AO to make disallowance/addition and hence, levy of penalty has been rightly deleted by the Ld.CIT(A) and we affirm his findings.
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 17-11-2025