Making a Wrong Claim would not attract Penalty: Delhi HC [Read Judgment]

The Delhi High Court recently held that the penalty under Section 271(1)(c) of the Income Tax Act cannot be automatically levied when the assessee makes a claim of write off which consequently reduces the tax incidence to be borne by the assessee.

Assessee-Company was primarily engaged in manufacturing of ‘black and white’ picture tubes for use in televisions. For the relevant assessment year, the assessee made a claim for deduction in respect of write off a liability which was subsequently denied by the Revenue by holding that the same amount to revenue loss. The department also initiated penalty under Section 271(1)(c) of the Income Tax Act, 1961.

The bench comprising Justices Ravindra Bhatt and A K Chawla observed that “A plain reading of the provision shows that the penalty under Section 271(1)(c) is levied only on an assessee who either “conceals” or if it/he/she “furnishes inaccurate particulars of his income”. At the outset it is necessary to mention that even though the AO did not decide the character of the loss occurred, he conceded to the fact that the company has indeed suffered a loss. The controversy arose because the assessee claimed the amount as written off by mentioning the same in the revenue expenditure which consequently reduced his tax incidence.”

The bench also relied on the decision of the Supreme Court in Shri T. Ashok Pai v. Commissioner of Income Tax, Bangalore wherein it was 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 wrong-doing. 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.

“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,” the bench added.