Penalty u/s 271(1)(c) is not Leviable when a Bonafide Claim of the Assessee gets Rejected: ITAT [Read Order]

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The Mumbai bench of the ITAT, in M/s. Buildbyte.com v. ACIT, held that penalty under section 271(1)(c) of the Income Tax Act cannot be levied in a case where the assessee made a bonafide claim and the Department rejected the same.

Assessee, in the instant case, is engaged in the business of website and software development and other information technology related activities. Assessee declared the expenses incurred towards development of the said website/portal as revenue expenditure in its return.

The above assessment was re-opened by the Assessing Officer by stating that the above expenses are ‘capital’ in nature. Further, penalty proceedings under section 271(1)(c) were initiated against the assessee for furnishing inaccurate particulars of income.

The bench noted that in this case the AO initiated penalty for furnishing inaccurate particulars of income which means that the AO has not applied Explanation 1 so that the deeming provision for concealment of particulars of income could have been applied.

It noted that the assessees’ claim that the above expenditure constitutes revenue expenditure was on the basis of the ratio laid down by the Delhi High Court in CIT vs. Amway India Enterprises. “Therefore, the claim made by the assessee as revenue expenditure was a bonafide claim. The assessee has declared all the particulars while making the claim in the return. It cannot be said that the assessee has not furnished all the details whatever was required for making the claim.

The bench noticed the decision of the Supreme Court in CIT vs. Reliance Petroprodcuts Pvt. Ltd. wherein the court held that “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 attract the penalty under section 271(1)(c)”. The Hon’ble Supreme Court in the said decision has clearly laid down that by any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing inaccurate particulars.

Following the above decision, the bench noted that the assessee has made a claim and has furnished all the details in respect of the expenses which have been claimed as revenue expenditure but the Revenue treated that to be a capital expenditure which means the Revenue did not accept the claim made by the assessee. “Merely the Revenue has disallowed the claim made by the assessee by itself will not mean that the assessee had furnished inaccurate particulars of income. On this basis, in our view, no penalty under section 271(1)(c) can be levied. We, therefore, delete the penalty levied by the AO under section 271(1)(c).”

Read the full text of the Order below.