No penalty under section 271(1) (c) can be levied if assessee discloses his income in notes to accounts

The Delhi High Court in the case of Karan Raghav Exports vs. the Commissioner of Income Tax, ITA 1152 of 2011 dealt with the substantial issue whether the Income Tax Appellate Tribunal was justified in confirming penalty under Section 271(1) (c) of the Income Tax Act, 1961 against the assessee where the assessee has disclosed its income in the notes to accounts.

No penalty under section 271(1) (c)

Facts of the case:

The instant appeal was filed under Section 260A of the Income Tax Act, 1961 relating to the assessment year 2005-06 against the order dated 28.2.2011 passed by the Income Tax Appellate Tribunal dismissing ITA No. 5053/Del/2010 preferred by the assessee wherein the penalty under Section 271(1)(c) was confirmed.
The appellant was a company which filed its return of income tax for the assessment year 2005-06 and had claimed depreciation on a building being used by the partnership firm wherein the assessee was a partner.
The total claim for depreciation amounted to Rs.41, 62,650/-. It was well accepted that in the proceedings relating to amount of depreciation it has been held that the assessee was not entitled to depreciation on the building as it was used by the partnership firm but not by the assessee company. The said disallowance made by the Assessing Officer was confirmed by the High Court by a decision dated 1.11.2010 in ITA No. 955/2010. The said decision was referred before the Hon’ble High Court.
The assessee company enjoyed profit from the partnership firm namely Ms. Gaurav International as one of the partners by virtue of a Deed of Partnership dated 02.04.2004. The copy of the Partnership Deed was enclosed.
The assessee company as owner had claimed depreciation on building being No.225, Udyog Vihar, which was used for the purpose of business according to the terms of the Partnership Deed of 2.4.2004. Depreciation relating to the said building was claimed under section 32 of the Income Tax Act, 1961 by the assessee.
Moreover the company had earned an interest amounting to Rs.2, 52,000/- from the said firm which was liable to assessment as per section 28(v) of the Income Tax Act, 1961. The assessee had filed a table disclosing its income from business.

Conditions for imposing penalty under section 271 (c) of the Act:

Section 271(1) (c) mandates imposition of penalty for concealing income or filing incorrect particulars of income.
The Supreme Court in many cases has held that when an assessee proves that he had acted bonafide and has disclosed all material, penalty should not be imposed.

Arguments made by the assessee:

The counsel for the appellant contended that in the instant case, the assessee was inducted as a partner in a firm known as Gaurav International by virtue of a partnership deed dated 1.4.2001. It was agreed that the factory premises located at Gurgaon would be used by the partnership firm for their partnership business. The appellant was the owner of the property but the ownership of the property was not transferred to the said firm. The appellant gave only the right to use the same to the partnership firm.
According to Section 28(v) of the Act, any remuneration received from the partnership firm should be assessed under the category “income from business”. In the instant case, the assessee received interest which was assessed as per Section 28(v) of the Act. The assessee believed that it can claim depreciation on the building being used by the partnership firm.
It was observed that the depreciation was claimed for land and building. The assessee had claimed depreciation on land which is not a depreciable asset. Learned counsel for the appellant, pointed out that the assessee had claimed depreciation on the building being used by the partnership firm. The appellate authorities in their order did not record that the assessee had claimed depreciation on land.
It was pointed out that “inaccurate particulars” has nowhere been defined in the Act and it was held that furnishing an assessment of the value of the property cannot be considered as furnishing inaccurate particulars which results in imposition of penalty under section 271(c). It was argued that a mere making of a claim though not sustainable in law cannot amount to furnishing incorrect details of the income of the assessee.

The judgment:

The judgment of the Delhi High Court in Devsons P. Ltd. vs. CIT [2010] 329 ITR 483 (Del) was taken for consideration. In view of the above contentions the appeal was disposed in favour of the appellant.