The Hon’ble Apex Court sets four Principles relating to levy of penalty under section 271(1) (c)

The Hon’ble Apex Court sets four Principles relating to levy of penalty under section 271(1) (c) of the Income Tax Act, 1961.

Principles relating to levy of penalty under section 271(1) as per Provisions of section 271(1) (c) of the Act:

Penalty under section 271(1(c) of the Income Tax Act, 1961 is levied  by the Assessing Officer , when at the time of making addition while computing total income of an assessee in an assessment proceeding under section 143(3)of the Act .

Penalty under section 271(1) not be imposed casually by Assessing Officer-

A proceeding under section 271(1(c) of the Income Tax Act is often challenged as while the additions are made on technical grounds , sometimes the Assessing Officer imposes the penalty casually and as a result of the addition made to the income of the assessee.

The Hon’ble Supreme Court through its various decisions related to penalty proceeding under section 271(1(c) Income Tax Act has laid down certain principles that have been enumerated below:

1. Penalty under section 271(1(c) is independent of return of income:

The Hon’ble Supreme Court in case of J.C.I.T., Surat vs. Saheli Leasing & Industries Ltd.  [2010] 191 TAXMAN 165 has held that even if return is zero and after addition, there no tax is found to be payable, the penalty under section 271(1(c) Income Tax Act can be levied.

2.The object of levying penalty under section 271(1) (c):

The Hon’ble Supreme Court has stated that the object behind section 271(1) (c) is to levy penalty against the assessee for concealing details of his income and/or furnishing incorrect details of his income. Whether income returned was a profit or loss, is not material. Even if no tax is payable, the penalty can be levied.

Even before the amendment, if no tax was payable by the assessee due to filing of the return that declared a loss, the assessee was not liable to pay penalty even if there was concealment of income on his part.

3. Penalty cannot be levied merely for making incorrect claim:

The Hon’ble Supreme Court in its judgment passed in the case of CIT vs. Reliance Petro products Pvt. Ltd. [2010] 322 ITR 158 has defined the meaning of “furnishing incorrect particulars of income” in connection with levy of penalty under section 271(1(c) Income Tax Act.

It has been laid down that the word ‘particulars’ should indicate the details furnished in the return, which are not correct or are erroneous.

In the present case, there was no observation that the details provided by the assessee in its return were incorrect or false. As such, there would be no question of imposing penalty under section 271(1) (c). A mere making of a claim by an assessee, though not later sustainable in law would not amount to furnishing of incorrect details relating to the income. Such claim made would not indicate inaccurate details or particulars.

4. “Mens Rea” not necessary for imposing penalty under section 271(1(c):

The Hon’ble Apex Court in Union of India vs. Dharmendra Textile [2008] 166 TAXMAN 65 (SC) held that the penalty under section 271(1) (c) is a civil liability and it is not necessary for the department to prove that the assessee has intentionally tried to evade income tax. In other words, the mental status of assessee is not to be proved by the department. This judgment also challenged its earlier order passed in the case of Dilip N. Shroff v. Jt. CIT [2007] 161 Taxman 218.

It was held that the judgment in the case of Dilip N. Shroff (supra) should be considered by the larger Bench of this Court when it has doubts regarding provisions of the Income Tax Act as well as the provisions of sections 3A and 11AC of the Central Excise Act and Rules.

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