ITAT quashes Penalty on Depreciation Claim: Section 271(1)(c) Not To be Applied for Honest Mistakes [Read Order]

The Surat bench of the Income Tax Appellate Tribunal (ITAT), in a recent ruling, gave relief to the assessee, setting aside a penalty imposed under Section 271(1)(c) of the Income Tax Act, 1961. This case is on a matter relating to the assessment year 2006–07.

The dispute lay in two primary issues: first, the incorrect claim of additional depreciation on machinery; second, the method adopted by the company in depreciating leasehold improvements. During assessment proceedings, it was discovered that the assessee had claimed 20% additional depreciation on plant and machinery purchased in the second half of the financial year, whereas, under the Income Tax provisions, only 10% was allowable if the asset was put to use for less than 180 days. Additionally, the company had amortised leasehold improvements over five years, claiming 20% depreciation instead of the standard 15%.

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These errors were not hidden or disguised. The assessee had disclosed the relevant facts in its tax computation and supporting documents. When the discrepancy was flagged, the company even suggested adjusting the depreciation in the subsequent year, highlighting that no tax advantage was gained overall. Their return of income was around ₹11 crore, while the questioned depreciation amounted to only ₹7.32 lakh, making it a minor component in the larger tax picture.

However, the Assessing Officer(AO) did not view the issue sympathetically and levied a penalty of ₹4.12 lakh under Section 271(1)(c), alleging the furnishing of inaccurate income particulars. The Commissioner of Income Tax (Appeals) [CIT(A)] further upheld this penalty, leaving the company with no option but to approach the ITAT.

Aggrieved by the order passed by the CIT(A), the assessee approached the ITAT where the authorised representative for the assessee leaned on several precedents, most notably the Supreme Court’s judgment in CIT v. Reliance Petroproducts Ltd., where it was held that mere disallowance of a claim does not amount to furnishing inaccurate particulars or concealment of income. It was also asserted that if full disclosure was made, no penalty was warranted when the issue is debatable or the mistake was inadvertent.

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The Tribunal noted that all facts were on record and no concealment occurred. The depreciation claim, though incorrect, came from a bona fide misinterpretation and not from an intent to mislead. The Tribunal further pointed out that the Revenue’s approach, if accepted, would mean penalties in every case where the assessee’s claim is not accepted—an outcome not in line with legislative intent.

The ITAT bench, consisting of Pawan Singh (Judicial Member) and Bijayananda Pruseth (Accountant Member), quashed the penalty, ruling in favor of the assessee. The tribunal further asserted that penalties are not automatic and should be levied only when there is deliberate concealment or misrepresentation, not for genuine mistakes.

To Read the full text of the Order CLICK HERE

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