NARAYANA HRUDAYALAYA LIMITED ,BENGALURU vs. ACIT, CIRCLE-2(3)(1), BANGALORE

Pursuant to the order of the coordinate Bench, the assessment order was passed u/s. 143(3) r.w.s. 254 r.w.s. 144B of the Act on 27.9.2022 determining the total income of the assessee at Rs.33,46.36,995. The ld. AO made the disallowance of unpaid amount of provision for leave salary amounting to Rs.81,87,015.

On this addition, show cause notice was issued u/s. 274 r.w.s. 271(1)(c) of the Act for furnishing of inaccurate particulars of income. Against this show cause notice, the assessee submitted 2 responses on 14.10.2022 and 19.11.2022. The ld. AO after considering the reply of the assessee held that assessee is liable for penal action because assessee did not disclose the true amount of income voluntarily and it was because of the efforts of the AO and staff of the income tax department that the aforementioned disallowance of leavy salary provision was detected. Had the same not been selected for scrutiny, the income would not have been assessed to tax. Further non levy of penalty would lead to injustice to the honest taxpayers. Accordingly minimum penalty of Rs.25,29,788 was levied for deliberately furnishing inaccurate particulars of income. Penalty order u/s. 271(1)(c) of the Act was passed on 21.2.2023. The assessee aggrieved with the same, preferred an appeal before the ld. CIT(A).

Assessee aggrieved with the penalty order u/s 271 (1) 9c) preferred appeal before the ld. CIT (A). The assessee contesting the penalty submitted that there is no furnishing of inaccurate particulars of income. Before the ld. CIT(A) it was submitted that the above provision was not disallowed based on the decision of Hon’ble Calcutta High Court in the case of Exide Industries and the decisions of the coordinate Bench, as those decisions were in favour of the assessee. Therefore, at the time of filing of return of income, there was a High Court decision in favour of the assessee and several decisions of the coordinate Bench. Thus, at the time of filing of return, the claim of the assessee was supported by judicial precedents, it was not disallowable, which cannot be said to be furnishing of inaccurate particulars of income. It was further stated that it was one of the plausible views. Even otherwise, it was a debatable issue and therefore disallowance was made on account of debatable issue, penalty could not have been levied. The assessee relied upon the decision of Hon’ble Supreme Court also.

The ld. CIT(A) held that there is an addition of Rs.81,87,015 on account of provision for leave salary which is hit by the provisions of section 43B(f). The assessee has made provision for leave salary to employees amounting to Rs.1,92,23,239 and has paid the leave salary of only Rs.1,10,36,224 leaving a sum of Rs.81,87,015 as unpaid. This itself shows that part of leave salary provision made by the assessee was not an allowable deduction. He further held that it is a settled issue against the assessee by the decision of Hon’ble Supreme Court in the case of UOI v. Exide Industries, 116 taxmann.com 378 wherein the constitutional validity of provisions of section 43B(f) of the Act was upheld. Thus, the contention of the assessee that it is a debatable issue is not acceptable. He further supported the reasons given by the AO for levy of penalty and accordingly the penalty levied of Rs.25,29,788 was confirmed. The assessee who aggrieved with that order is in appeal before us.

The ld. AR submitted a paperbook containing 195 pages and his contention was that assessee has claimed leave salary provision as allowable expenditure based on the decision of Hon’ble Calcutta High Court and several decisions of the coordinate Bench. Subsequently the Hon’ble Supreme Court reversed the decision of Hon’ble Calcutta High Court and that is how the disallowance is confirmed in the hands of the assessee. But when the return of income was filed, there were judicial precedents including the decision of Calcutta High Court in favour of the assessee along with the Tribunal decisions. Therefore, based on these decisions, the assessee has claimed the deduction. Merely because the deduction is denied to the assessee, there is no reason that penalty should have been levied u/s. 271(1)(c) for furnishing of inaccurate particulars. He further referred to the decision of Hon’ble Calcutta High Court in the case of Exide Industries v. UOI, 292 ITR 470 as well as the decision of the coordinate Bench in the case of Krishna Grameena Bank v. ACIT in dated 15.6.2012 and the decision in the case of Intervalve Poonawalla P. Ltd. v. DCIT in ITA No.637/PUN/2025. He further referred to the list of dates in Chronological Order at page 194-195 of PB to substantiate that as on the date of filing of return of income by the assessee on 29.9.2012 the decision of Hon’ble Calcutta High Court dated 27.6.2007 was in favour of assessee. The decision of Hon’ble Supreme Court was rendered on 24.4.2020 in UOI v. Exide Industries Ltd. [2020] 116 taxmann.com 378 (SC). Further the coordinate Bench also passed the order in the case of assessee on 24.8.2021. Thus, this date chart shows that as on the date of filing of return of income, the claim made by the assessee was sustainable, allowable and supported by judicial

We have carefully considered the rival contentions and perused the orders of the ld. lower authorities. The assessee filed its return of income on 29.9.2012 wherein the provision for leave encashment was not disallowed u/s. 43B(f) of the Act. As on that date assessee was supported by the decision of the Hon’ble Calcutta High Court in the case of Exide Industries Ltd. v. UOI wherein it has been held that the provisions of section 43B(f) are arbitrary, unconscionable and de hors the Apex Court decision in the case of Bharat Earth Movers v. CIT, 245 ITR 428. This was in the case of a Writ Petition filed by that assessee contending that the provisions of section 43B(f) are ultra vires. In that case the Single Judge dismissed the Writ Petition of the assessee whereas the Division Bench allowed the Writ Petition of the assessee and held that section 43B(f) is struck down being arbitrary, unconscionable and de hors the Apex Court decision in the case of Bharat Earth Movers (supra). Thus, the Writ Petition was allowed.

Subsequently the above decision of the Hon’ble Calcutta High Court was challenged before the Hon’ble Supreme Court. The Hon’ble Supreme Court in 116 taxmann.com 378 wherein the above decision of the Calcutta High Court was reversed. Whether on these facts, penalty u/s. 271(1)(c) of the Act can be levied on the assessee or not?

Identical issue arose before the coordinate Bench in Intervalve Poonawalla Ltd. v. DCIT in for AY 2014-15 dated 4.6.2025. Vide para 10 to 12 of that order the coordinate Bench has cancelled the penalty levied relying on the decision of the Supreme Court in the case of CIT v. Reliance Petroproducts Ltd. 322 ITR 158 (SC). Therefore, the issue is squarely covered in favour of the assessee by that decision. The coordinate Bench has considered the whole issue as below: -

It was tried to be suggested that Section 14A of the Act specifically excluded the deductions in respect of the expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. It was further pointed out that the dividends from the shares did not form the part of the total income. It was, therefore, reiterated before us that the Assessing Officer had correctly reached the conclusion that since the assessee had claimed excessive deductions knowing that they are incorrect; it amounted to concealment of income. It was tried to be argued that the falsehood in accounts can take either of the two forms; (i) an item of receipt may be suppressed fraudulently; (ii) an item of expenditure may be falsely (or in an exaggerated amount) claimed, and both types attempt to reduce the taxable income and, therefore, both types amount to concealment of particulars of one's income as well as furnishing of inaccurate particulars of income. We do not agree, as the assessee had furnished all the details of its expenditure as well as income in its Return, which details, in themselves, were not found to be inaccurate nor could be viewed as the concealment of income on its part. It was up to the authorities to accept its claim in the Return or not. Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the Revenue, that by itself would not, in our opinion, attract the penalty under Section 271(1)(c). If we accept the contention of the Revenue then in case of every Return where the claim made is not accepted by Assessing Officer for any reason, the assessee will invite penalty under Section 271(1)(c). That is clearly not the intendment of the Legislature.

When assessee filed ROI, the claim was allowable as it supported by the decisions of Honourable High court and coordinate benches that there cannot be any disallowance u/s 43B (f) in case of unpaid leave salary as the above provision was held to be unconstitutional. Subsequently, the decision of Honourable high court was reversed by the Honourable supreme court. Based on decision of Honourable Supreme court , the disallowance was upheld. On this disallowance penalty is levied. Thus, the issue is definitely debatable in nature. On debatable issues assessee cannot be said to have furnished inaccurate particulars. Further at the time of filing of the ROI, the issue was covered in favour of the assessee. The issue of furnishing of inaccurate

In view of the above facts, we direct the ld. AO to delete the levy of penalty of Rs.25,29,788 on disallowance of leave encashment provision u/s. 43B(f) of the Act as there are no inaccurate particulars were filed by the assessee at the time of filing of Return of Income. The orders of the ld. lower authorities are reversed and the appeal of the assessee is allowed.

In the result, the appeal by the assessee is allowed.