Penalty Provision Under Section 271 (1)(c) of Income Tax Act 1961

Section 271(1)(c) of Income Tax Act 1961(“The Act”), empower to Income Tax Authority to levy penalty under the Act, if the assessee officer or commissioner appeal or the principal commission during the any proceeding is satisfied that assessee has concealed the particulars of his income or furnished inaccurate particulars of income, he may direct to Assessee shall pay by way of penalty ,sum which shall not be less than but which shall not exceed three times amount of tax sought to be evaded by reason of the concealment of particulars of income or furnished inaccurate particulars of Income. In other words, Income tax authority may levy penalty, if any of the following conditions has satisfied.

1. Assessee has concealed the particulars of his Income.
2. Assessee has furnished inaccurate particulars of income.

Section 37 of the act define that any expenditure which is expended wholly and exclusively for the purpose of business or profession shall be allowed in computing the Income chargeable under head of profit and gains of business or profession whereas capital and personal nature expenditure shall not be allowed.

Applicability of Section 271 (1) (c) of Income Tax Act is always debatable. The precedent of relevant cases have been clarified the position that mere claim of assessee can’t be considered as concealment the particulars of his income or furnished inaccurate particulars of income. Hence mere difference in interpretation of expenditure can’t be consider as concealed the particulars of income or furnished inaccurate particulars of income It is a well-settled legal position relating to the exigibility of the penalty u/s 271(1)(c) of the Act that the assessment proceedings and penalty proceedings are different in nature. Hence findings are given in assessment proceeding, though may constitute good evidence whereas it is cannot constitute conclusive evidence for the purpose of levying penalty. Mere claim of expenditure can’t be considered as concealment or inaccurate particular of Income.

By now it is settle proposition of law, “merely making a claim, which is not sustainable in law, by itself, will not amount to furnishing of inaccurate particulars regarding the income of the assessee.”

Supreme court has delivered various judgments on levy penalty u/s 271(1)(c) of the act, landmark judgment relevant portion as under:-

In the case of Reliance Petro products Pvt. Ltd. reported in (2010) 322 ITR (SC), a similar 5 ITA 3719/Mum/2011 contention was raised on behalf of the Revenue by submitting that by making incorrect claim of expenditure on interest, the assessee had furnished inaccurate particulars of his income. The Hon'ble Supreme Court, however, did not accept the said contention holding that making an incorrect claim in law could not tantamount to furnishing of inaccurate particulars. It was held that merely making a claim, which is not sustainable in law, by itself, will not amount to furnishing of inaccurate particulars regarding the income of the assessee. It was held that when the assessee had furnished all the details of the expenditure as well as income in its return, which details, in themselves, were not found to be inaccurate nor could be viewed as the concealment of income on its part, penalty u/s 271(1)(c) of the Act was not attracted. It was held that merely because the assessee had made a claim which was not accepted or acceptable to the Revenue, that by itself could not attract the penalty u/s 271(1)(c) of the Act.

In the case of Shervani Hospitalities Ltd. Vs. CIT, Report om (2011), Delhi High Court, it was held by the court, Levy of penalty is not an automatic consequence when an addition is made by disallowing an expense and by not accepting the interpretation given by the assessee. Merely making a claim which is held as not sustainable under the law should not lead to penalization, when the assessee had furnished full details in the return itself and the claim is debatable, reasonably plausible or may well have been accepted.

Penalty u/s 271(1)(c) could not be levied.

No penalty can be impost u/s 271 (1) (c) of the act on the preponderance of probability that the claim of expenditure was concealment the particulars of his income or furnished inaccurate particulars of income. Therefore It was held that merely making a claim, which is not sustainable in law, by itself, will not amount to furnishing of inaccurate particulars regarding the income of the assessee.