Bona Fide and Debatable Claims No Ground for Penalty: ITAT Upholds Deletion of ₹271(1)(c) Levy on New India Assurance [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has dismissed the Revenue’s appeal against the deletion of penalty under Section 271(1)(c) of the Income Tax Act.

The Tribunal held that when the assessee’s claim is bona fide and arises from a debatable legal issue, particularly under special provisions governing insurance companies, a penalty for furnishing inaccurate particulars cannot be sustained.

The case arose from the assessment of The New India Assurance Co. Ltd., a public sector general insurance undertaking, for Assessment Year (AY) 2004-05. The Assessing Officer (AO) initially assessed the company’s income under Section 143(3) read with Section 263 at ₹5,22 crore as against the returned income of ₹42 crore.

The revision under Section 263 directed a de novo assessment applying Section 44 read with Rule 5 of the First Schedule, special provisions governing computation of profits for insurance companies.

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During quantum proceedings, certain additions and disallowances were confirmed by the ITAT, including ₹47.57 crore disallowed towards pension and gratuity provisions and ₹33.28 crore relating to income and expenditure not about the relevant year.

The AO subsequently levied a penalty under Section 271(1)(c) on grounds that the company had furnished inaccurate particulars of income in violation of the “basic tenet” of Section 44, read with Rule 5.

On appeal, the insurer contended that it had made full disclosure of all relevant particulars, and the disallowances merely reflected a difference in interpretation of law, particularly concerning the adjustments permissible under Section 44 and Rule 5. The assessee argued that no concealment or misrepresentation existed and pointed out that the Bombay High Court had already admitted a substantial question of law in its quantum appeal, confirming the issue’s debatable nature.

The Revenue, on the other hand, maintained that the assessee’s computation was not in accordance with the governing provisions and that ignorance of law or erroneous interpretation could not justify the claim. It argued that as a regulated public insurer, the company could not claim bona fide error in applying statutory provisions specifically tailored for its sector.

The Bench comprising Amit Shukla (Judicial Member) and Padmavathy S (Accountant Member) noted that the penalty was solely predicated on disallowances sustained by the Tribunal in the quantum appeal. It was observed that there was no allegation of misrepresentation, suppression of income, or falsification of particulars, and that the disallowances stemmed from a strict literal interpretation of Section 44 read with Rule 5.

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Relying on its coordinate Bench decision in Tata AIG General Insurance Co. Ltd. v. DCIT (2020), the ITAT stated that a purely literal reading of these provisions could lead to unintended double taxation, an outcome contrary to legislative intent.

It further held that when the issue involves an interpretational dispute, particularly one already admitted as a substantial question of law before the High Court, a penalty cannot be imposed for inaccurate particulars.

The Tribunal reiterated that Section 271(1)(c) applies only where there is conscious concealment or deliberate furnishing of inaccurate details, not where the claim arises from a plausible or debatable view of law.

The ITAT ruled that the company’s claims were bona fide and legally debatable, and that the penalty could not be sustained merely because the Revenue’s interpretation prevailed. It accordingly dismissed the Department’s appeal.

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