ITAT holds Penalty u/s 271(1)(c) Unjustified in Absence of Malafide Intent, rejects Precedent [Read Order]

In a recent ruling, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) held that the penalty under Section 271(1)(c) of the Income Tax Act, 1961, was not sustainable as the omission of foreign dividend income was voluntarily rectified, and the case did not involve concealment or furnishing of inaccurate particulars.

The appeal was filed by Sanjay Kumar, an individual employed with Johnson & Johnson Pvt. Ltd., challenging the order of the Commissioner of Income Tax (Appeals) [CIT(A)] confirming a penalty of ₹1,89,887 under Section 271(1)(c). The Assessing Officer (AO) levied the penalty for the Assessment Year 2016–17 on the grounds that the assessee had filed inaccurate particulars of income by omitting to disclose foreign dividend income of ₹6,14,521.

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The assessee had filed his original return declaring an income of over ₹5.65 crore. Upon being pointed out during scrutiny, he revised his computation that the foreign dividend from Johnson & Johnson (P) Ltd. had not been included. A revised return was filed without protest or delay, disclosing the income and offering it to tax.

Despite the cooperation and lack of concealment, the AO invoked Explanation 1 to Section 271(1)(c) and imposed a penalty equivalent to 100% of the tax sought to be evaded. The CIT(A) upheld the penalty, relying heavily on the Supreme Court ruling in Mak Data (P) Ltd. v. CIT.

Aggrieved by both orders, the assessee approached the ITAT, where the authorised representative for the assessee contended that there was no intention to conceal income or furnish inaccurate particulars. The AR also held that the omission occurred in the first year of the assessee becoming a resident but not an ordinary resident. The dividend was not credited into any bank account but was reinvested by the broker. It was submitted that foreign tax had already been paid on the same income in the USA, and a Foreign Tax Credit of ₹1,53,630 was available under Section 90. The net additional tax payable by the assessee was only ₹59,043 – negligible compared to the overall returned income.

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The tribunal, after observing the submissions made by both parties, held that the CIT(A) erred in mechanically applying the Mak Data ruling. Unlike in the case of Mak Data, it was held that there was no survey operation or detection of undisclosed income through external means.
It was noted that the assessee voluntarily admitted the mistake and cooperated fully with the tax authorities. Further, it was held that the facts reflected an omission, not deliberate concealment.

The ITAT bench, comprising Narender Kumar Choudhry (Judicial Member) and Omkareshwar Chidara (Accountant Member), concluded that the penalty was unwarranted, stating: “What is to be seen is not just the text, but also the context.” As the facts of the case were materially different, the tribunal ruled that the reliance on Mak Data was misplaced. As a result, the ITAT Mumbai bench deleted the penalty levied under Section 271(1)(c), holding that the appellant had acted in good faith, immediately corrected the mistake, and was entitled to foreign tax credit. The appeal was allowed in favor of the assessee.

To Read the full text of the Order CLICK HERE

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