Mere Raising Of Claim Which Has No Basis Won’t Attract Penalty Provisions U/S 271(1) Of Income Tax Act: Bombay High Court

The Bombay High Court held that mere raising of a claim which has no basis would not attract penalty provisions under Section 271(1) of the Income Tax Act, 1961 (ITA).

The Court held thus in an Appeal filed by the Assessee company under Section 260A of ITA, which pertained to the Assessment Year (AY) 1984-85.

A Division Bench comprising Chief Justice Alok Aradhe and Justice Sandeep V. Marne observed, “… the Tribunal itself has gone into the merits of the claim raised by the Assessee and laid down ‘legal position’ that additional bonus cannot be claimed as a liability as the bonus was not actually paid to the employees in the relevant year. The Tribunal found the claim of the Assessee to be ‘baseless’. Mere raising of claim which has no basis, would not attract penalty provisions under Section 271(1) (c) of the I.T. Act. The Tribunal has recorded a finding that the case involves furnishing of inaccurate particulars of income. However for recording this findings, there ought to have been some material to indicate that any statement made in the return was false.”

The Bench said that the Tribunal grossly erred in setting aside Order passed by the Commissioner of Income Tax (Appeals) [CIT(A)] by recording an unsustainable finding that the claim made by the Assessee was ‘baseless’.

Advocate Aarti Sathe appeared for the Appellant while Advocate Shilpa Goel appeared for the Respondents.

Facts of the Case

The Assessee company was engaged in the business of manufacture and sale of footwear and it had filed the return of income for the AY 1984-85. A demand was raised by its employees’ union for increase in the bonus on August 26, 1983. A joint meeting of the representatives of the Trade Union and Assessee’s Management was held with the Labour Minister. In pursuance of the said demand and meetings, it was decided that till finalisation of quantum of bonus, the Assessee shall pay additional 2% bonus to the employees before Diwali. The final settlement with regard to bonus was reached with the Union and accordingly, additional bonus was paid to the employees. In September 1985, the Assesse filed return of income declaring loss of Rs. 77,92,340/-. Assessee filed revised return of income marking it as ‘Amnesty Return’ thereby declaring positive income of Rs. 60,93,750/-. The loss declared in the original return was converted into positive income by adding back unpaid sales tax liability of Rs. 43,99,601/- and incremental gratuity liability of Rs. 88,15,722/-.

The Assessee, however, did not add back the amount of ad-hoc bonus and continued to claim exemption in respect of amount of Rs. 22,21,123/- even under the Amnesty Return. The Assessing Officer (AO) issued noticed under Section 143(3) of ITA and accordingly, Assessee appeared before the AO. The AO passed the Order by adding back inter-alia the amount of ad-hoc bonus of Rs. 22,21,123/- which was not offered by the Assessee for taxation in the Amnesty Return. The AO recorded a finding that the case was fit for attracting Section 271(1)(c) for imposition of penalty on account of explanation of the Assessee in respect of the bonus amount not being found bonafide. Hence, the penalty of Rs. 12,82,700/- was imposed on the Assessee, against which an Appeal was filed before the CIT(A), which was allowed. The Revenue challenged this before the Income Tax Appellate Tribunal (ITAT), and its Appeal was allowed by setting aside CIT(A)’s Order. Hence, the Assessee was before the High Court.

Reasoning

The High Court in view of the above facts, noted, “Though the view expressed by the Apex Court in Bharat Earth Movers may have been relevant for the purpose of challenging the Assessment Order passed by the Assessing Officer disallowing the bonus claimed by the Assessee of Rs.22,21,123/-, it appears that the Assessee has not assailed the said order and has apparently paid tax on the disallowed amount of Rs. 22,21,123/- towards bonus claim. What is however relevant to note is that the claim raised by the Assessee for claiming deduction in respect of the crystalised liability towards additional bonus was a plausible claim.”

The Court said that what is relevant to note is the position that the claim made by the Assessee can, by no stretch of imagination, be treated as malafide act of concealment of income so as to attract the provisions of Section 271(1)(c) of the ITA.

“In our view, therefore the ingredients of Section 271(1)(c) of the I.T. Act are not satisfied in the present case. … It is not the case of the Revenue that the Assessee made claim of having actually paid the additional bonus during the relevant year. Assessee only raised the claim that the crystalized liability towards additional bonus could be claimed towards deduction, which is later found to be inadmissible in law”, it further noted.

The Court observed that the case does not involve making of any false statement in the return and therefore, the finding of the Tribunal that there is inaccurate furnishing of particulars cannot be sustained.

“The Assessee cannot be penalised for having raised a plausible claim. The essential ingredients of Section 271(1)(c) of the I.T. Act are not met with in the present case. The CIT (A) had rightly set aside the order of the Assessing Officer. The Tribunal has grossly erred in reversing the order of the CIT (A). For the aforementioned reasons, the substantial question of law is answered in the negative and in favour of the Assessee. In our view therefore, the order passed by the Tribunal is indefensible and liable to be set aside”, it concluded.

Accordingly, the High Court allowed the Appeal and set aside the ITAT’s Order.

Cause Title- M/s. Carona Limited v. Deputy Commissioner of Income Tax & Ors. (Neutral Citation: 2025:BHC-OS:9055-DB)

Appearance:

Appellant: Advocates Aarti Sathe and Aasavari Kadam.

Respondents: Advocate Shilpa Goel

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