Penalty under section 271(1) (c) cannot be levied for a claim which was fully disclosed but was subsequently disallowed

The Bombay High Court in the case of CIT Vs. S. M. Construction, Income Tax Appeal No. 412 of 2013, by a judgment dated 03.03.2015 held that a penalty under section 271(1) (c) of the Income Tax Act cannot be levied for a claim which was fully disclosed but was subsequently disallowed.

Background of the case:

This was an appeal filed by the Revenue under Section 260A of the Income Tax Act challenging the order dated 22.7. 2012 passed by the Income Tax Appellate Tribunal.
The respondent assessee entered into a Development Agreement with the owners in connection with a piece of land at Pune on 27.1.1995 by paying an earnest money of Rs.54 Lakhs. During the previous year in connection with the Assessment Year 2005 – 06 the agreement dated 27.7. 1995 was cancelled and the owners of the land paid a sum of Rs.1.65 Crores to the respondent assessee which was inclusive of the amount of Rs.54 Lakhs paid by the assessee.
The respondent¬ assessee considered that the amount of Rs.1.11 Crores was not income but was merely a capital receipt which is not chargeable to tax under the head “capital gains”. The said view was stated in the notes forming part of the Accounts and in the covering letter dated 29.10.2005 along with its filed return.
The Assessing Officer did not agree with the contention of the respondent assessee and held that the receipt was taxable under the head “Capital Gains” and after allowing expenses charged a tax amount of Rs.69.92 Lakhs as Capital Gains.
The respondent assessee being dissatisfied with the order of the Assessing Officer preferred an appeal relating to the matter before the CIT (A) but the said appeal was dismissed. Thereafter, the respondent assessee accepted the order passed by the Assessing Officer regarding the tax amount of Rs.69.92 Lakhs under the head “Capital Gains”.
Thereafter, penalty proceedings were initiated by the Assessing Officer under Section 271(1) (c) of the Act against the respondent assessee. The Assessing Officer did not accept the assessee’s contention that all facts were totally disclosed and the claim was bonafide, as such no penalty should be imposed as per the judgment of Hon’ble Supreme Court in CIT Vs. Reliance Petro products Pvt. Ltd. reported in 322 ITR 158.
The Assessing Officer held that the respondent assessee had furnished incorrect details of income and was guilty for which penalty of Rs.13.13 Lakhs was imposed under Section 271(1) (c) of the Act.

The view of the CIT (A):

In appeal, the CIT (A) recorded his finding that the assessee has disclosed the receipt of the said amount of Rs.1.11 crores and a claim though not sustainable in law cannot amount to furnishing of inaccurate particulars. It further held that the Assessing Officer had not stated that the receipt of the said amount was not informed to the Assessing Officer.
The CIT (A) held that the decision of Apex Court in Reliance Petro products Pvt. Ltd. was rightly applicable to the present facts and accordingly the penalty under Section 271(1) (c) of the Act was deleted by the CIT (A).

The judgment passed by the Tribunal:

The Revenue preferred a further appeal before the Tribunal. The Tribunal upheld the order of the CIT (A). The Tribunal in its order held that the petitioner had disclosed that an amount of Rs.1.11 Crores was received for a project and it was not considered as taxable as the same was a receipt on capital account which was beyond the scope of Section 45 of the Act.
The Tribunal also observed that there was a letter following the return of income wherein all facts in connection with the said receipt was stated including the fact that an amount of Rs. 54 Lakhs was paid to the vendor as per the development agreement in the year 1995 and upon cancellation of agreement, the original vendor returned to the respondent assessee Rs.1.65 Crores including the amount of Rs.45 Lakhs which was originally paid by the assessee.
The Tribunal also mentioned that the Assessing Officer was aware of the said letter and the Note to Account which was a part of the balance sheet of the assessee. In the circumstances, the Tribunal held that the decision of the Apex Court in Reliance Petro products Pvt. Ltd. (supra) was applicable and held that all facts had been disclosed by the respondent assessee in its return of income including its claim of not being chargeable to tax.
The Tribunal also held that the decision of the Delhi High Court in the case of CIT vs. Zoom Communication P. Ltd. reported in 327 ITR 510 as sited by the Revenue was inappropriate as in that case the assessee had willfully debited the amount to Profit and Loss Account though the same was unlawful and the conduct of petitioner was held to be malafide. The Tribunal upheld the order of the CIT (A).

Arguments of the Revenue:

Mr. P.C. Chhotaray appeared on behalf of the Appellant, whereas Mr. K. Gopal along with Mr. Jitendra Singh represented the Respondent.
The Revenue was aggrieved by the impugned order as there had been an error that complete disclosure had been made on the part of the respondent assessee. The Revenue pointed out that the disclosure was only of Rs. 1.11 Crores and not of Rs.1.65 Crores that was the amount received by the respondent assessee on surrendering its rights over the immovable property. It was further contended by the Revenue that the decision of Delhi High Court in Zoom Communication Pvt. Ltd. was fully applicable to the present circumstances and the appeal should be allowed.

The judgment passed by the Hon’ble High Court:

The Hon’ble High Court observed that the respondent assessee had paid an amount of Rs.54 Lakhs as an earnest money as per the development agreement in 1995. In the previous year relevant to assessment year, the respondent assessee received Rs.1.65 Crores from the said vendor which included the amount of Rs.54 Lakhs originally paid in 1995 by the assessee. Therefore, only an amount of Rs.1.11 Crores which was received in excess by the respondent assessee could be a subject matter of taxation. It was found that the disclosure of Rs.1.11 Crores which was made by the petitioners in the notes to accounts and also in the letter dated 29 .10.2005 along with its claim of not being taxable was filed along with the its return .
It was found that there has been a total disclosure of all facts as held by the CIT (A) and the Tribunal. The claim made by the respondent assessee of not being taxable was found to be bonafide. As held by the Apex Court in Reliance Petro products Pvt. Ltd. making of an incorrect claim would not be treated as furnishing inaccurate details of income.
In this case, the assessee bonafide considered that the difference of Rs.1.65 Crores and Rs.55 Lakhs was not chargeable to tax and stated the same before the Assessing Officer. The fact that the explanation of assessee was not accepted in the subsequent proceedings would not put the assessee into penalty if the claim is held to be not bonafide. The decision of the Delhi High Court in Zoom Communication P. Ltd. (supra) cannot be applied in the present facts for the reason that in the instant case, the contention of the respondent was bonafide.
In the instant case the Revenue did not contend that the claim made by the petitioner was not the basis of a bonafide opinion. On the facts the Hon’ble High Court observed that two authorities have concurrently come to finding that there was a total disclosure of facts and the claim made by the assessee though not found acceptable was bonafide as such, no penalty could be levied on the respondent assessee. It was held that there was no substantial question of law for consideration. Accordingly, the appeal was dismissed.