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Before: SHRI SANDEEP GOSAIN & SHRI PRABHASH SHANKAR
PER PRABHASH SHANKAR [A.Μ.] :- The present appeal is preferred by the assessee against the order dated 24.12.2024 passed by the Learned Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)"] pertaining to a penalty order passed u/s. Section 271(1)(c) of the Income-tax Act, 1961 [hereinafter referred to as “Act”] dated 31.12.2021for the Assessment Year [A.Y.] 2019-20. 2. The grounds of appeal are as under:
In the facts and circumstances of the case and in law, the Ld. National Faceless Appeal Centre (NFAC), CIT(A) has erred that appellant has concealed any income or particular of income and passed a penalty order determining a penalty of Rs.16,97,141/-under section 271(1)(c).
On the facts and circumstances of the case, the penalty order passed by the learned AO under section 274 r.w.s Section 271(1)(c) is bad in law.
The learned CIT(A) has erred in law and on facts in not appreciating that penalty cannot automatically be levied when legally there are two views taken in the matter of your appellant.
The learned CIT(A) has erred in law and on facts in not appreciating that all facts were adequately disclosed and the only addition made by AO would not automatically lead to a levy of penalty.
Brief facts of the case are that the assessee company (formerly known as Essar Oilfield Services India Limited) is engaged in the business of oilfield services. The return of income for the year under consideration, disclosing a loss of (-) Rs.67,06,46,909/-, was filed by the assessee on 30.11.2013. Assessment was completed u/s. Section 143(3) of the Act determining the loss at (-) Rs.66,51,54,542/- after making addition of Rs.54,92,367/- to the total income disclosed on account of disallowance u/s. Section 43B of the Act. In this case, it was noticed by the AO during the course of assessment proceedings from the Tax Audit report filed by the assessee for the year under consideration that it had not paid Leave Encashment of Rs.54,92,367/- before the ‘due date' of filing of return. The AO disallowed this expense under section 43B of the Act which was upheld by the Ld.CIT(A) and the appeal filed by the company was dismissed. The AO subsequently passed penalty order u/s 271(1)(c) of the Act observing that the assessee had relied on the decision of the hon'ble Calcutta High Court in the case of Exide Industries Ltd. vs. UOI (2007) 292 ITR 470 and claiming that the provisions of section 43B(f) of the Act stood struck offin view of the decision of thehon Apex Court in the case of Bharat Earth Movers vs CIT (2000) 245 ITR 428.He opined that the hon'ble Apex Court had admitted SLP filed by the Revenue against the above decision of the hon'ble Calcutta High Court. In the interim order passed by the hon'ble Apex Court in this case, the assessee was directed to pay tax as if section 43B(f) is in the Statute book. Hence, in view of the interim order of hon'ble Apex Court, section 43B(f) was clearly applicable to the case of the assessee. As such, the unpaid Leave encashment was liable for disallowance. In respect of the argument of the assessee that that the said disallowance was already mentioned in the Tax Audit Report (TAR) filed u/s.44AB of the Act and the said TAR had been filed by it along with its ITR and that hence, there was no furnishing of inaccurate particulars of income, it is stated that the assessee ought to have disallowed this amount especially in light of the fact that the auditor had reported the amount ofunpaid Leave Encashment as disallowable. This meant that the assessee intentionally failed disallow this amount. The very fact that it failed to make the disallowance despite the Auditor having reported it, proved that the mistake was not bona fide and was liable for levy of penalty. The assessee failed to explain during the course of assessment proceedings that the unpaid Leave Encashment of Rs.54,92,367/- was allowable. The assessee again failed to do so even during the appellate proceedings or even during the instant penalty proceedings. The assessee did not furnish any argument to establish that there existed any reasonable cause for non-levy of penalty. Accordingly, it was held by him the assessee had furnished inaccurate particulars of the said income, within the meaning of clause (c) of subsection (1) of section 271 of the Act.
In the subsequent appeal, the ld.CIT(A) upheld the penalty agreeing with the findings and observation of the AO. He observed that in the case under consideration, the appellant had made wrong claim. The said disallowance was duly reflected in the Tax audit report and the same was filed by the assessee along with return of income. It is proved by the assessment proceedings that all the facts material to the computation of income were not disclosed by the assessee. Hence, the conditions stipulated in the provisions u/s.271(1)(c) were fulfilled in the instant case. In the case of CIT vs. Zoom Communication (P) Ltd. 327 ITR 510 (Del) it has been held that if assessee makes a claim which is not only incorrect in law, but is also wholly without any basis and explanation furnished by him for making such a claim is not found to be bonafide, Explanation 1 to Section 271(1)(c) would come into play and assessee will be liable to penalty. He placed reliance on certain judicial decisions as well.
Before us,the ld.AR has submitted that as on 27.06.2007,the hon'ble High Court of Calcutta in the case of Exide Industries Ltd. vs. UOI (supra) held that the provisions of section 43B(f) were unconstitutional. The matter was then subjudice before the hon'ble Supreme Court. The auditor in Form 3CA-3CB (tax audit report) had stated [in clause 26(i)(B)(b)] that an amount of Rs.54,92,367/- was unpaid as on the ‘due date' of furnishing the return of income. However, the assessee claimed deduction for Leave Enmeshment payable to its employees for AY 2013-14 based on the judgement of Calcutta High Court the case of Exide Industries Ltd. vs. UOI(supra).It is argued that penalty cannot be imposed based on a bona fide claim. Admittedly, it is a case where at the time of filing the return of income there was judgement of hon'ble Calcutta High Court (supra) which had struck down the provisions of section 43B(f) for being unconstitutional. Moreover, the AO in the order of assessment had made addition by invoking the provision of section 43B(f) onlybecause the revenue had filed SLP against the said order of Hon'ble Calcutta High Court. Thus, as on the date of furnishing the return of income there was a bonafide claim on the part of the assessee which was based on the decision of hon'ble Calcutta High Court. Reliance is placed on CIT vs. Reliance Petro products (P) Ltd (2010)-322 ITR 158(SC).It is also pleaded that the assessee had not furnished any inaccurate particulars of income. Form 3CA is the report of the auditor and Form 3CD is statutory form wherein the statement of particulars as required to be furnished u/s.44AB is reported by the assessee and the auditor is required to give his opinion whether the prescribed particulars furnished by the assessee. Reliance in this regards is placed on the decision of hon'ble Supreme Court in the case of Price Waterhouse Coopers (P.) Ltd. v. CIT [2012] 348 ITR 306 (SC)wherein it was held that where in tax audit report filed by assessee, it was indicated that provision towards payment of gratuity was not allowable but assessee failed to add said provision to total income, no penalty could be imposed as it was a bonafide mistake.
We have perused the records and considered the matter carefully. The dispute herein is regarding allowability of deduction on account of Unpaid leave encashment in the accounts and the consequent levy of penalty u/s 271(1)© of the Act. The AO, while making assessment in this case disallowed the claim on the ground that leave encashment has to be allowed on payment basis u/s 43 B (f) of the Act. The assessee has argued that hon'ble High Court of Calcutta in case of Exide Industries (Supra) had struck down the provisions of section 43 B (f) and therefore, the said provisions were not applicable and claim has to be allowed.In this regard the AO has pointed out that the Department has filed a Special Leave Petition before the hon'ble Supreme Court against the decision of the Calcutta High Court in the case of Exide Industries Ltd &Anr (supra). Thus, it was clear that the issue had not attained finality.However, we note that the judgment of hon'ble High Court had been challenged by the revenue before the hon'ble Supreme Court which had stayed the operation of judgment and has held that during the pendency of the appeal, the assessee had to pay tax as if section 43B(f) was on statute book. Therefore, claim of the assessee could not be allowed on the basis of judgment of Calcutta High Court in case of Exide Industries Ltd. (supra). In view of the judgment the Supreme Court (supra), the provisions of section 43B(f) have to be taken as part of the statute while considering the claim of deduction on account of leave encashment. We, therefore, see no infirmity in the order of CIT(A) confirming the disallowance made by AO in the quantum appeal.
1 However, in so far as levy of penalty u/s 271(1) of the Act in respect of the above disallowance is concerned, we do not find any merit therein as the penalty has been levied solely on account of disallowance made in the assessment without establishing any concealment of income on the part of the assessee. The AO has not appreciated the fact that the assessment and the penalty proceedings are two separate proceedings. The findings given in the assessment proceedings cannot be conclusive in the penalty proceedings. Merely, because certain amounts have been disallowed and added to the total income of the assessee and no appeal has been preferred against this action such income will not ipso facto amount to concealment of income attracting penalty u/s 271(1)(c) of the Act. The authorities below have not taken due note of the fact that the assessee had duly disclosed the impugned sum in the books of account and the TAR No. disallowance was made as the issue at the time of filing of the return of income was basically covered in its favour by the decision of hon'ble Calcutta High Court in the case of Exide Industries Ltd(supra).Moreover,even while passing the impugned penalty order, as admitted by the AO the SLP was still pending before hon'ble Supreme Court. There was the action of the assessee cannot be considered malafide or blatantly against the provisions of law which was not settled at the relevant time.It was rightly submitted that the hon'ble Calcutta High Court in the case of Exide Industries Ltd. vs. Union of India (supra) hadstruck down the provisions of section 43B(f) of the Act as being arbitrary and ultra vires. He submitted that in light of the above decision the assessee has made a claim. Apparently, since the matter was sub judice before the hon'ble Supreme Court, the assessee made the claim and all the disclosures in audited accounts etc were made. Under these circumstances, we find merit in the submission of the ld. Counsel that since the matter was in favour of the assessee till the reversal of the decision by the hon'ble Supreme Court, the assessee made the claim.
2 The reliance placed by the assessee on the judgment of hon'ble Apex Court rendered in the case of Price Waterhouse Coopers (supra) appears to be relevant to the facts of the case. In the present case also, in our considered opinion, the assessee has definitely committed a mistake of not disallowing the amount in respect of unpaidleave encashment and the information is very much available in the audited accounts and tax audit report and therefore, in our considered opinion, even after disallowance, it cannot be considered a concealment or filing of inaccurate particulars of income but the same has to be accepted as a bona fide mistake. Therefore, the judgment of hon'ble Apex Court rendered in Price Waterhouse Coopers (supra), is squarely applicable.
3 We further find that the above disallowance was confirmed by ld. CIT(A) and accepted by the assessee. But, we are unable to accept the contention of the authorities below that mere addition/ disallowance warrant the imposition of penalty u/s 271(1)(c) of the Act. The assessee cannot be said to have furnished inaccurate particulars of his income or concealed any income, as all the facts were disclosed truly and fully. In this regard, ld. AR relied on the judgement passed in the case of CIT vs. Reliance Petroproducts in 322 ITR 158 (SC)which to our mind is also applicable to the facts of the instant casewherein, it was held that a claim which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars of income by the assessee. We find the hon'ble Supreme Court in the case of CIT vs. Reliance Petroproducts Pvt. Ltd. (supra) has held that a mere making of claim which is not sustainable in law, by itself, will not amount to furnishing of inaccurate particulars regarding the income of the assessee. Such a claim made in the return cannot amount to furnishing of inaccurate particulars of income.
4 In view of the above discussion,we find force in the arguments of the assessee on this count as well andaccordingly, we set aside the impugned appellate order and direct the AO to delete the penalty levied u/s 271(1)(c) of the Act. Thus, the grounds of appeal filed by the assessee are allowed.
In the result, the appeal is allowed. Order pronounced in the open court on 04.08.2025. SANDEEP GOSAIN (न्यायिक सदस्य /JUDICIAL MEMBER) Place: मुंबई/Mumbai दिनांक / Date 04.08.2025 Lubhna Shaikh / Steno PRABHASH SHANKAR (लेखाकार सदस्य/ACCOUNTANT MEMBER) आदेश की प्रतिलिपि अग्रेषित/