ST. PETER SCHOOL,DURGAPUR vs. ITO, WARD 2(1), DURGAPUR

This appeal of the assessee for the assessment year 2018-19 is directed against the order dated 26.02.2024 passed by the ld. Commissioner of Income-tax (Appeals), NFAC, Delhi, [hereinafter referred to as ‘the ld. CIT(A)’].

The sole ground involved in this appeal is the penalty was levied by the AO on alleged under-reporting of income due to mis- reporting specifically the disallowance of depreciation claimed by the assessee u/s. 11(6) of the Income Tax Act, 961 (hereinafter referred to as “the Act”).

Brief facts of the case are that assessee is a charitable institution engaged in providing education, filed its return of income on 23.08.2018 for AY 2018-19, declaring nil income. The assessee operates u/s. 10(23C)(vi) of the Act and enjoyed the status of an educational institution exempt from income tax with the approval validity upto the AY 2026-27. The assessee’s return was selected for scrutiny and notice u/s. 143(2) of the Act was issued. During the scrutiny proceeding, it was observed that assessee had claimed depreciation of Rs.31,56,450/- on assets for which the cost had already been treated an application of income in the earlier years. The Ld. AO disallowed the depreciation claimed citing the provisions of sec. 11(6) of the Act, which disallows depreciation of assets when their cost has already been allowed as an application of income for charitable purpose. Consequently, the AO passed an order u/s. 143(3) of the Act on 12.03.2021 disallowing alleged depreciation amounting to Rs.31,56,450/- holding that assessee had under- reported its income. Based on the disallowance of depreciation the Ld. AO initiated penalty proceeding u/s. 270A of the Act holding that assessee had misreported its income. The Ld. AO issued notice u/s. 274 of the Act. They penalty was determined at Rs.15,64,436/- representing 200% of the tax on the under-reported income. The assessee aggrieved by the imposition of penalty appealed to the Ld. CIT(A), where Ld. CIT(A) dismissed the appeal, leading to the present appeal before this Tribunal.

Ld. Counsel for the assessee contended that the penalty was wrongly imposed as disallowance of depreciation resulted from bona fide mistake. The assessee submitted that assessee inadvertently claimed depreciation in the return of income, which was a clerical error and not an attempt to evade tax or misreporting income and there is no mens rea in the mind of the assessee. The assessee had consistently followed the method of accounting and the error occurred due to oversight. It was further contended that error was rectified during the assessment proceedings and there was no revenue loss as the assessee is exempt/s. 10(23C)(vi) of the Act. It was argued that penalty was unjustified and assessee did not deliberately misreport its income. The Ld. Counsel submitted the claim of depreciation was based on bona fide interpretation of law and once the error was pointed out the assessee accepted the disallowance. The Ld. Counsel cited the judgment of the Hon’ble Supreme Court in the case of CIT Vs. Reliance Petro Products Pvt. Ltd. (2010) 322 ITR 158 (SC), wherein it was held that merely a making of incorrect claim does not amount to furnishing inaccurate particular of income. The Ld. Counsel argued the present case fall under the same principle, as the depreciation claim was made due to error without any intent to defraud the revenue. The Counsel also relied on the decision of the Hon’ble Supreme Court in the case of Price Water House Corporation P. Ltd. Vs. CIT (2012) 348 ITR 306 (SC) wherein it was held that no penalty could be imposed

On the other hand, the Ld. DR submitted that the assessee has misreported its income by claiming depreciation that was clearly disallowable u/s. 11(6) of the Act. The Ld. DR contended that the provisions of section 11(6) was unambiguous and the assessee being a charitable institution was fully aware that such depreciation could not be claimed. Therefore, the disallowance was not mere clerical error but a case of misreporting, justifying the imposition of penalty u/s. 270A of the Income Tax Act. The Ld. DR argued that the AO had correctly levied the penalty and the Ld. CIT(A) rightly uphold the same. Therefore, the Ld. DR prayed that Tribunal should not interfere with the findings of the lower authorities.

We after hearing the rival submissions and perusing the material available on record find that the main issue before us is as to whether penalty u/s. 270A(9) of the Act was rightly levied for the assessee’s claim of depreciation. It is an undisputed fact that assessee claimed depreciation on asset which had already been treated as an application of income in earlier years and such a claim was disallowed u/s. 11(6) of the Act. However, we note that the assessee a charitable institution enjoys tax exemption u/s. 10(23C)(vi) of the Act and this is the first instance of such an error in the return of income. The assessee has consistently followed its accounting method and the depreciation claim appears to have been made due to clerical mistake. The assessee accepted the issue during the scrutiny proceeding and cooperated with the AO. We further observe that assessee has not derived any personal benefit or tax advantage from incorrect claim of depreciation, as its income would still remained exempt u/s. 10(23C)(vi) after disallowance. The Hon’ble Supreme Court in CIT Vs. Reliance Petro Products Ltd. (supra) has held that making an incorrect claim in itself, does not amount to furnishing inaccurate particulars of income. Similarly, in the present case the assessee’s claim of depreciation although disallowed does not constitute misreporting within the meaning of section 270A(9) of the Act. The decision of the Hon’ble Supreme Court in Price Water House (supra) also supports the assessee’s case. In that case, the Hon’ble Supreme Court held that clerical error does not attract penalty. In the present case, the mistake was acknowledged during the assessment proceedings and there was no deliberate attempt to conceal the income or evade taxes. Section 270A(9) provides for the imposition of penalty for misreporting of income, however, the provisions are applicable only in the cases where there is deliberate misreporting, such as misrepresentation of fats or making false entries in the books of account. In the present case, the assessee’s error in claiming depreciation was neither intentional nor deliberate and, therefore, the imposition of penalty u/s. 270A(9) of the Act is not justified. In the light of the above findings and judicial precedence cited, we are of the view that the penalty imposed u/s. 270A(9) for misreporting of income is not sustainable. The disallowance of depreciation thereof, result in a bona fide mistake and there was no negligence on the part of the assessee to misreport its income or evade tax. Accordingly, we set aside the order of the Ld. CIT(A) and direct the AO to delete the penalty.

In the result, the appeal of the assessee allowed.