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Facts
The assessee claimed remuneration to partners in its original return, which was disallowed by the lower authorities as there was no provision for it in the partnership deed. A penalty of Rs. 1,54,500/- was levied under Section 271(1)(c) for furnishing inaccurate particulars of income/loss. The assessee argued that a revised computation showed a loss, and the disallowance only reduced the loss, not evaded tax.
Held
The tribunal held that the disallowance of remuneration to partners, in this case, reduced the carry-forward loss rather than increasing it or evading tax. Therefore, the assessee's action was beneficial to the revenue, and the penalty levied under Section 271(1)(c) was not justified and was deleted.
Key Issues
Whether a penalty under Section 271(1)(c) is attracted when the disallowance of a claim reduces the carry-forward loss, rather than increasing it or leading to tax evasion. Whether claiming remuneration to partners without a corresponding clause in the partnership deed constitutes furnishing inaccurate particulars of loss.
Sections Cited
Section 271(1)(c), Section 139(4), Section 153A, Section 144, Section 113, Section 40(b)
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Income Tax Appellate Tribunal, JODHPUR BENCH, JODHPUR
ORDER DR. MITHA LAL MEENA, A.M.: The appeal is filed by the assessee against the order of the Commissioner of Income Tax, Appeal [hereinafter referred to as the CIT(A)] Udaipur dated 19.03.2024 for the Assessment Year 2011-12 challenging therein confirmation of penalty of Rs. 1,54,500/- levied u/s 271(1)(c) by the AO.
Having heard both the sides and perusal of record, we find that the appellant assessee has claimed remuneration to partners in the original return of income which was not found allowable as per the lower authorities. The Ld. CIT(A) observed that the argument tendered by the AR was that as per revised Asst. Year: 2011-12 2 computation of income, the total income resulted in reducing the loss. However, after making disallowance remuneration of partners, the loss is reduced. Accordingly, he has held that it was a case of furnishing inaccurate particulars of loss in confirming the penalty. The Ld. Counsel for the assessee submitted that assesses has filed its original return of income u/s 139(4) on 31st March, 2012 declaring total income of Rs. 79,24,080/- and subsequently filed return of income in compliance to notice u/s 153A on 11th October, 2013, declaring Rs. 81,14,470/- as its total income. Assessment was completed u/s 144 read with Section 113 of the Act vide order dated 16th March, 2014 with the addition of Rs. 5,00,000/- by disallowing remuneration paid to partners.
In the present case thus, the penalty proceedings u/s 271(1)(c) was initiated for disallowance of remuneration of Rs. 5,00,000/- as there was no clause in the partnership deed for remuneration and it was confirmed by Ld. CIT(A). The Ld. AR argued that as per revised computation of income the total income is loss i.e. (Rs. Book profit u/s 40(b) is loss and no remuneration to partners are allowable and no tax was evaded at all. It was stated that as per provision of Section 40(b) no amount is payable as remuneration to partners in view of negative income. The appellant had claimed the remuneration to partners in the original return of Income which is not found allowable as per provisions of Income Tax Act. No argument is made to justify the claim made in Asst. Year: 2011-12 3 the return of Income. Only argument made was that as per revised computation of Income the total income is loss. However after making disallowance of remuneration of partners, the loss is further reduced. The furnishing inaccurate particulars include furnishing inaccurate particulars of loss. Thus, the claim of the appellant is found to be justified.
Thus, the penalty u/s 271(1)(c) was levied for disallowance of claim of Rs. 5,00,000/- as remuneration to partners on the basis of original return of income. However, on rectification of the mistake which was allowed by the Tribunal, the computation of income of the firm stands as under:
1. Income from Business or Profession (Chapter IV D) (Maximum Salary Rs.-68,966 nil) Profit as per profit and loss A/c -5,18,966 Add:- Remuneration Paid to Partners 5,00,000 Total -18,966 Profit before Remuneration -18,966
From the computation of income, it is apparently clear that the appellant assessee has reduced his carry forward loss by Rs. 5,00,000/- and not income. In the present case, it is not the issue that assessee has increased its carry forward loss by way of claiming the remuneration. Meaning thereby that the action taken by the assessee has been rather beneficial to the interest of Revenue.
Asst. Year: 2011-12 4 6. In our view, on the issue of reduced losses due to revised computation of income furnished by the assessee, the penalty u/s 271(1)(c) of the Act would not get attracted to the given set of facts of the present case. Accordingly, the penalty levied u/s 271(1)(c) based on false and non-existent facts is not maintainable.
Therefore, the penalty of Rs. 1,54,500/- levied by AO u/s 271(1)(c) is not justified and it is as such deleted.
In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 28/01/2026.