Penalty – Concealment – Section 271(1)(c): A. Y. 2003-04 – The rigors of penalty provisions cannot be diluted only because a small number of cases are picked up for scrutiny – No penalty can be levied unless assessee’s conduct is “dishonest, malafide and amounting to concealment of facts” – The AO must render the “conclusive finding” that there was “active concealment” or “deliberate furnishing of inaccurate particulars”

For the A. Y. 2003-04, the Assessing Officer disallowed the proportionate interest out ofthe interest paid for the interest free advances given to the sister concern, holding that the assessee had borrowed funds of which interest liability had been incurred. The Assessing Officer also levied penalty holding that the assessee concealed it’s income by furnishing inaccurate particulars. The Commissioner (Appeals) allowed the appeal and cancelled the penalty. The Commissioner came to the conclusion that merely because the claim made by an Assessee was disallowed, penalty cannot be levied, unless it is demonstrated that the Assessee had any malafide intention. The Tribunal accepted the reasoning of the Commissioner (Appeals) that the penalty cannot be levied merely because the claim of the Assessee is found to be incorrect. The Commissioner and the Tribunal relied upon the decision of the Apex Court in the case of CIT vs. Reliance Petroproducts Pvt. Ltd. [2010] 322 ITR 158 (SC):

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

“i) Section 271(1)(c) of the Act lays down that the penalty can be imposed if the authority is satisfied that any person has concealed particulars of his income or furnished inaccurate particulars of such income. The Apex Court in CIT vs. Reliance Petroproducts Pvt. Ltd. [2010] 322 ITR 158 (SC) applied the test of strict interpretation. It held that the plain language of the provision shows that, in order to be covered by this provision there has to be concealment and that the assessee must have furnished inaccurate particulars. The Apex Court held that by no stretch of imagination making an incorrect claim in law, would amount to furnishing inaccurate particulars.

ii) Thus, conditions u/s. 271(1)(c) must exist before the penalty can be imposed. Mr. Chhotaray tried to widen the scope of the appeal by submitting that the decision of the Apex Court should be interpreted in such a manner that there is no scope of misuse especially since a miniscule number of cases are picked up for scrutiny. Because small number of cases are picked up for scrutiny does not mean that rigors of the provision are diluted. Whether a particular person has concealed income or has deliberately furnished inaccurate particulars, would depend on the facts of each case. In the present case, we are concerned only with the finding that there has been no concealment and furnishing of incorrect particulars by the present assessee.

iii) Though the assessee had given interest free advances to it’s sister concerns and that it was disallowed by the Assessing Officer, the assessee had challenged the same by instituting the proceedings which were taken up to the Tribunal. The Tribunal had set aside the order of the Assessing Officer and restored the same back to the Assessing Officer. Therefore, the interpretation placed by Assessee on the provisions of law, while taking the actions in question, cannot be considered to be dishonest, malafide and amounting to concealment of facts. Even the Assessing Officer in the order imposing penalty has noted that commercial expediency was not proved beyond doubt. The Assessing Officer while imposing penalty has not rendered a conclusive finding that there was an active concealment or deliberate furnishing of inaccurate particulars. These parameters had to be fulfilled before imposing penalty on the Assessee.”