By TIOL News Service

NEW DELHI, JULY 13, 2018: THE ISSUE BEFORE THE BENCH IS - Whether penalty u/s 271(1) (c) is not automatic in nature and therefore, mere claim of an expenditure, which is not acceptable to the Revenue, will not attract penalty. AND THE HC VERDICT IS YES.

Facts of the case

The assessee-company was engaged in manufacturing of 'black and white' picture tubes for use in televisions. However, as the market for black and white televisions declined sharply in the year 1995-96 the assessee was forced to shut down the manufacture of B&W picture tubes in financial year 2005-06. Thereafter, during the FY 2007-08, in order to continue in the business, the assessee decided to set up another project for manufacture of 'metal parts' for which the company purchased some machinery to the tune of Rs 3.34 cr. However, the Company was unable to mobilize funds for the machinery and as a result the machinery could not be removed from the port.

However, due to weak financial position, the assessee dropped the idea of putting up the new project and the management decided to write off the machinery so purchased after retaining estimated scrap value of the machinery in the books of account. The decision of the management to write off the project was disclosed in the Annual Accounts of the company, and was approved by the assessee's directors and shareholders in the AGM.

Thereafter, the assessee filed return for the relevant AY. During the course of assessment proceedings, it was submitted by the assessee that "the capital work in progress" was written off during the year as 'Metal Part Project' had become unviable. It was contended that the machinery purchased for metal project had not been capitalized and was shown under the head 'Fixed Assets' as capital work in progress and also no depreciation was ever claimed. According to the assessee, since the machine was not capitalized and had to be eventually written off, the assessee claimed the loss as a revenue loss. The AO also accepted that there was a loss but declined to accept it as a revenue loss. On assessee's appeal, the CIT(A) upheld the decision of the AO.

Subsequently penalty proceedings u/s 271(1)(c) were initiated on the issue of the writing off of capital work-in-progress, i.e. the subject matter of disallowance, which was taxed for the relevant assessment year. The assessee again approached the CIT(A), who confirmed the penalty by holding that on the facts of the case it was clear that the claim was made by the assessee with an intention to reduce tax incidence. On further appeal by the assessee, the Tribunal set aside the penalty order, relying on the decision in CIT vs Reliance Petroproducts Pvt Ltd.

The High Court held that,

++ the provision of the Act is penal, and not akin to those in statutes that impose strict liability; consequently, the Revenue has the responsibility of establishing intentional wrongdoing. It was further held that the conditions under Section 271(1) (c) must exist before the penalty is imposed. Thus, the penalty under section 271(1) (c) is not automatic in nature;

++ a glance at the Section 271(1)(c) presents two essentials "concealment" and "furnishing inaccurate particulars of income". The current appeal is, however, only concerned with the interpretation of the phrase "furnishing inaccurate particulars of income." The Revenue claims that by furnishing a wrong claim the assessee has "furnished inaccurate particulars of income."The meaning of the phrase "furnishing inaccurate particulars of income" was explained by the Supreme Court in the case of Commissioner of Income Tax vs Reliance Petroproducts Pvt Ltd by bifurcating "particulars" and "inaccurate" where particular was explained to include the details of a claim, or the separate items of an account;

++ the word "inaccurate" was explained as "not accurate, not exact or correct; not according to truth; erroneous; as an inaccurate statement, copy or transcript." When these words are read in conjunction with each other then it may seem that the details supplied in the Return are not accurate, not exact or correct, not according to truth or erroneous. No doubt, the effect of that judgment has been explained in a later decision; yet its emphasis on the literal interpretation of the word "inaccurate" has not been diluted;

++ the intention of the Parliament cannot be taken to have been to penalize everyone who makes a wrong claim for deduction. The legislature does not intend to penalize every person whose claim is disallowed. This is not the aim of the legislature. The Tribunal in the facts of this case, therefore, correctly reached this conclusion.

(See 2018-TIOL-1339-HC-DEL-IT)