Landmark Judgment by Supreme Court On Penalty

u/s 271(1)(c) in Favour Of Taxpayers !

Very recent judgment of Supreme Court in CIT vs Reliance Petroproducts Pvt Ltd
delivered on 17/3/2010, is a great relief to taxpayers as it has cleared the confusion
in minds of Authorities regarding the imposition of penalty. In fact the decision of
Apex Court in Dharmendra Textile embolden Authorities to the extent that penalty
proceeding was turned into just a procedure contrary to the scheme framed by law
makers. In the very recent judgment, the facts of the case was as under

The assessee is a company and the relevant Assessment Year is 2001-02. The
Return was filed on 31.1.2001 declaring loss of Rs.26, 54,554/-. This assessment
was finalized under Section 143(3) of the Act on 25.11.2003 whereby the total
income was determined at Rs.2,22,688/-. In this assessment the addition in respect
of interest expenditure was made. Simultaneously penalty proceedings under
Section 271(1)(c) of the Act were also initiated on account of concealment of
income/furnishing of inaccurate particulars of income. The said expenditure was
claimed by the assessee on the basis of expenditure made for paying the interest on
the loans incurred by it by which amount the assessee purchased some IPL shares
by way of its business policies. However, admittedly, the assessee did not earn
any income by way of dividend from those shares.

The company in its Return claimed disallowance of the amount of expenditure

for Rs.28,77,242/- under Section 14A of the Act.

By way of response to the Show Cause Notice regarding the penalty in its reply
dated 22.3.2006, the assessee claimed that all the details given in the Return were
correct, there was no concealment of income, nor were any inaccurate particulars of
such income furnished. It was pointed out that the disallowance made by the
Assessing Authority in the Assessment Order under Section 143(3) of the Act were
solely on account of different views taken on the same set of facts and, therefore,
they could, at the most, be termed as difference of opinion but nothing to do with the
concealment of income or furnishing of inaccurate particulars of such income. It was
claimed that mere disallowance of the claim in the assessment proceedings could
not be the sole basis for levying penalty under Section 271(1)(c) of the Act

The Supreme Court made following observation while dismissing the petition by
Income Tax Department.

1. For every penalty u/s 271(1)(c) , one of the two conditions must be satisfied

• There must be concealment ; or

• Assessee must have furnished inaccurate particulars of income.

If none of these are alleged by A.O vide his order of assessment, penalty u/s 271(1)
(c) can not be imposed.

2. The decision of Supreme Court in Dharmendra Textile Processors &

Others [2008] 306 ITR 277 merely overrules the decision of Dilip N Shroff vs JCIT
 [2007] 291 ITR 519 (SC) related to mines rea i.e A.O need noot prove that the
concealment or inaccurate particluars of income was done by assessee with an
intention to evade tax and in guilt mind. The decision in Dharmendra Textile does not
make the penalty proceeding a mere procedure, but the two conditions given in
section 271(1)(c) are fundamental for imposing penalty.

3. The word “inaccurate particulars” must mean the details supplied in the Return,
which are not accurate, not exact or correct, not according to truth or erroneous.

4. Most important was this observation

It was, therefore, reiterated before us that the Assessing Officer had correctly
reached the conclusion that since the assessee had claimed excessive deductions
knowing that they are incorrect; it amounted to concealment of income. It was tried to
be argued that the falsehood in accounts can take either of the two forms; (i) an item
of receipt may be suppressed fraudulently; (ii) an item of expenditure may be falsely
(or in an exaggerated amount) claimed, and both types attempt to reduce the taxable
income and, therefore, both types amount to concealment of particulars of one’s
income as well as furnishing of inaccurate particulars of income. We do not agree, as
the assessee had furnished all the details of its 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. It was up to the authorities to
accept its claim in the Return or not. Merely because the assessee had claimed the
expenditure, which claim was not accepted or was not acceptable to the Revenue,
that by itself would not, in our opinion, attract the penalty under Section

271(1)(c). If we accept the contention of the Revenue then in case of every

Return where the claim made is not accepted by Assessing Officer for any
reason, the assessee will invite penalty under Section 271(1)(c). That is
clearly not the intendment of the Legislature.

Hence, readers in opinion of taxworry, in every case of initiation of penalty

proceeding u/s 271(1)(c) , make use of the aforesaid observation and file appeal
before A.O or CIT (u/s 273A) or CIT(A) or ITAT .
Income Tax - 2010 TMI - 76690 - SUPREME COURT OF
INDIA - Commissioner Of Income Tax, Gujarat Versus M/S.
Saurashtra Cement Limited

Liquidated damages – revenue receipt versus capital receipt – capital employed for the
purpose of section 80J – delay in delivery of machinery - As per the agreement, in the event
of delay caused in delivery of the machinery, the assessee was to be compensated at the
rate of 0.5% of the price of the respective portion of the machinery for delay of each month
by way of liquidated damages by the supplier, without proof of actual loss. - The supplier
defaulted and failed to supply the plant and machinery on the scheduled time and, therefore,
as per the terms of contract, the assessee received an amount of Rs.8,50,000/- from the
supplier by way of liquidated damages. – AO and CIT(A) included Rs. 8,50,000 in the total
income as revenue receipt– According to the Tribunal, the payment of liquidated damages to
the assessee by the supplier was intimately linked with the supply of machinery i.e. a fixed
asset on capital account, which could be said to be connected with the source of income or
profit making apparatus rather than a receipt in course of profit earning process and,
therefore, it could not be treated as part of receipt relating to a normal business activity of
the assessee. The Tribunal also observed that the said receipt had no connection with loss
or profit because the very source of income viz., the machinery was yet to be installed – HC
confirmed the view of the ITAT – Held that: The afore-stated amount received by the
assessee towards compensation for sterilization of the profit earning source, not in the
ordinary course of their business, in our opinion, was a capital receipt in the hands of the
assessee. We are, therefore, in agreement with the opinion recorded by the High Court and
hold that the amount of Rs.8,50,000/- received by the assessee from the suppliers of the
plant was in the nature of a capital receipt.
Income Tax - 2010 TMI - 75437 - SUPREME COURT - OIL & NATURAL GAS
CORPORATION LTD., DEHRADUN THROUGH MANAGING DIRECTOR Versus THE
COMMISSIONER OF INCOME TAX
Fluctuation of rate of exchange – deduction u/s 37 on account of additional liability –
adjustment with the cost of imported capital asset – (i) when the Assessee maintained their
accounts on mercantile system of accounting and there was no finding by the Assessing
Officer on the correctness or completeness of the account and that the Assessee had
complied with the accounting standards, laid down by the Central Government, can the
“loss” suffered by it on account of fluctuation in the rate of foreign exchange as on the date
of balance-sheet be allowed as expenditure under Section 37(1) of the Act notwithstanding
the fact that the liability had not been actually discharged in the year in which the fluctuation
in the rate of foreign exchange had occurred and (ii) whether on account of fluctuation in the
rate of exchange at the end of the previous year, the Assessee is entitled to adjust the actual
cost of imported assets acquired in foreign currency? - held that - We are of the opinion that
the ratio of the decision in the matter of Commissioner of Income-Tax Vs. Woodward
Governor India P. Ltd. [2009 -TMI - 32906 - SUPREME COURT] with which we are in
respectful agreement, squarely applies to the facts at hand and, therefore, the loss claimed
by the Assessee on account of fluctuation in the rate of foreign exchange as on the date of
balance-sheet is allowable as expenditure under Section 37(1) of the Act - all the
assessment years in question being prior to the amendment in Section 43A of the Act with
effect from 1st April, 2003 the Assessee would be entitled to adjust the actual cost of the
imported capital assets, acquired in foreign currency, on account of fluctuation in the rate of
exchange at each of the relevant balance-sheet dates pending actual payment of the varied
liability.

Income Tax - 2010 TMI - 75701 - SUPREME COURT - COMMISSIONER OF INCOME-TAX

Versus RELIANCE PETROPRODUCTS FVT. LTD.
Penalty under section 271(1)(c)– Concealment of Income –In this case Supreme Court held
that Tribunal, as well as, the Commissioner of Income-tax (Appeals) and the High Court
have correctly reached this conclusion as where there is no finding that any details supplied
by the assessee in its return are found to be incorrect or erroneous or false there is no
question of inviting the penalty under section 271(1)(c). A mere making of a claim, which is
not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding
the income of the assessee. Such a claim made in the return cannot amount to furnishing
inaccurate particulars. The appeal is dismissed. – Decision in favor of assessee – against
the revenue

Landmark Judgment by Supreme Court while deciding the matter

 "Whether Accounting Standard 22 (AS 22) inconsistent with and ultra
vires the provisions of the Companies Act, 1956?" - Accounting for
Taxes on Income
November 25, 2007

Honorable Supreme Court has delivered a landmark judgment

recently (Reported in 2007 TMI - 2160 - Supreme Court) while deciding the
following question:

"Whether Accounting Standard 22 (AS 22) entitled (accounting for taxes on

income) insofar as it relates to deferred taxation is inconsistent with and ultra
vires the provisions of the Companies Act, 1956 (the Companies Act), the
Income-tax Act, 1961 (I.T. Act) and the Constitution of India?"

Before concluding the matter the following issues have bee discussed
in details:

- Meaning and purpose of AS

- Reasoning of Introduction of AS - 22

- Analysis of "Accounts" within the Companies Act, 1956

- Analysis of "Schedule VI" of Companies Act, 1956

- Analysis of "Audit" within the Companies Act, 1956

- Analysis of the Companies (Accounting Standards) Rules, 2006.

- Analysis of AS-22

- Doctrine of Ultra Vires

- Various concepts of Accounts and Taxes

- Concept of Timing Difference, Tax Expense, Fair Market Value etc. etc.

After considering the various issues, honorable Supreme Court has

upheld the existence of AS 22 by stating:

- We hold that the impugned Rule which adopts AS 22 neither suffers from
the vice of excessive delegation nor is the said Rule incongruous/inconsistent
with the provisions of the Companies Act, 1956.

- deferred tax is nothing but accrual of tax due to divergence between

accounting profit and tax profit. This difference arises on two counts, namely,
different treatment of items of revenue/expense as per profit and loss
account and as per the tax law. It also arises on account of the difference
between the amount of revenue/expense as per profit and loss account and
the corresponding amount considered for tax purposes, e.g., depreciation

On the Issue of Constitutional Validity, honorable Supreme Court has

held that:

- However, we need to comment on one aspect. Before the Calcutta High

Court, the impugned Notification adopting AS 22 was also challenged on the
ground that the provisions of AS 22 insofar as it relate to "deferred taxation"
is violative of Articles 14 and 19(1)(g) of the Constitution of India. ………….
In the circumstances, we do not wish to express any opinion on the
constitutional validity of the said AS 22. Whether the said Standard
constitutes a restriction on the rights of the appellants to carry on business
under Article 19(1)(g) or whether the said Standard is violative of Article 14
are questions on which we express no opinion. We keep those questions
open. Suffice it to state that, in the present case, we are of the view that the
said AS 22 is neither ultra vires nor inconsistent with the provisions of the
Companies Act, including Schedule V