Declaring income under wrong head is an inaccurate claim but not malafide intent

If the assessee has declared his income under the wrong head which can be inaccurate claim but the same cannot be treated as inaccurate particulars of income

IN THE INCOME TAX APPELLATE TRIBUNAL

The Relevant Text of the Order as follows :

17. The effective issued raised by the assessee in all the grounds of appeal is that the learned CIT (A) erred in confirming the penalty of Rs.13,62,200/- imposed by the AO under section 271(1)(c) for furnishing inaccurate particular of income on account of disallowances of expenses of Rs. 14,26,813/- and disallowances of deduction for Rs. 26,18,000 claimed under section 24 of the Act.

18. At the outset, we note that the facts related to disallowances as discussed in the above issue of the assessee, have already been elaborated by us in somewhere in the preceding paragraph of this order in ITA No. 76/Ahd/2011. Therefore, we are not inclined to repeat the same for the sake of brevity and convenience.

18.1. We further note that there are two additions/disallowances which were made to the total income of the assessee in the quantum proceedings and the assessee further for such additions/disallowances was visited with the penalty under section 271(1)(c) of the Act by the authorities below.

No penalty for deduction of TDS at Lower Rate under wrong section

19. Regarding the penalty imposed on the addition/ disallowance of business expenses of Rs. 14,26,813/-, we note that the addition made by the AO has already been deleted by us vide paragraph No. 10 and 10.1 of this order bearing ITA no. 76/Ahd/2011. Accordingly in our considered view once the quantum addition itself stands deleted then there should not be any penalty on the assessee based on such addition/disallowance. Hence we direct the AO delete the penalty with respect to addition of Rs. 14 26,813/- on account of business expenses disallowed.

20. Coming to the next part of penalty imposed on addition of Rs. 26,18,000/- being disallowances of deduction claimed under section 24(a) and 24(b) of the Act. The first part of the penalty under section 24(a) of the Act represents the disallowance of the standard deduction claimed by the assessee against the rental income under the head house property.

20.1. The provisions of section 24(a) of the Act, mandates to allow the benefit of the standard deduction to the assessee on account of repair and maintenance expenses of the rented property from gross rental income taxable under the head house property. The standard deduction under section 24(a) of the Act, is being statutory in nature and has to be allowed irrespective of the actual expenses incurred by the assessee. In the present case the assessee has shown the income under the head house property and accordingly the deduction under section 2(a) of the Act was claimed. But the claim of the assessee was denied on the ground that the impugned rental income was taxable under the head income from other sources instead of income from house property. Accordingly, the deduction claimed against such rental income was denied automatically. Now the controversy arises whether the assessee has furnished inaccurate particular of income by treating the impugned income under the head house property.

20.2. There is no dispute to the fact that the assessee has earned lease rental and declared the correct rental income but the same was declared under the wrong head i.e. under income from house property instead of income from other sources. Thus, it is transpired that the assessee has declared his income under the wrong head which can be inaccurate claim but the same cannot be treated as inaccurate particulars of income. It is because the deduction under section 24(a) of the Act is automatic against the income chargeable to tax under the head house property. Thus, in our considered view a wrong claim by the assessee cannot tantamount as inaccurate particulars of income. In holding so we find support and guidance from the judgment of Hon’ble Supreme Court in the case of CIT vs. Reliance Petroproducts (P) Ltd. reported in 322 ITR 158 wherein it was held as under:

“Therefore, it must be shown that the conditions under section 271(1)(c ) exist before the penalty is imposed. There can be no dispute that everything would depend upon the return filed, because that is the only document, where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. [Para 8]

The word ‘particulars’ must mean the details supplied in the return, which are not accurate, not exact or correct, not according to truth or erroneous. In the instant case, there was no finding that any details supplied by the assessee in its return were found to be incorrect or erroneous or false. Such not being the case, there would be no question of inviting the penalty under section 271(1)(c). A mere making of the claim, which is not sustainable in law by itself will not amount to furnishing of inaccurate particulars regarding the income of the assessee. Such claim made in the return cannot amount to the inaccurate particulars. [Para 9]

The revenue contended that since the assessee had claimed excessive deductions knowing that they were incorrect, it amounted to concealment of income. It was 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. Such contention could not be accepted 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 attract the penalty under section 271(1)(c). If the contention of the revenue was accepted, then in case of every return where the claim made was not accepted by the Assessing Officer for any reason, the assessee would invite penalty under section 271(1)(c). That is clearly not the intendment of the Legislature. [Para 10]”

20.3. In view of the above, we hold that the assessee did not claim the deduction under section 24(a) of the Act with mala-fide /dishonest intent.

20.4. We further note that the issue involved in hand is debatable in nature and there can be dispute to classify the impugned rental income under the head house property/income from other sources. In holding so we draw support and guidance from the judgment of Hon’ble Gujarat High Court in the case of CIT vs. Sambhav Media Ltd. where it was held as under:

“It appears that the assessee made a claim of statutory deduction under Section 24 of the Act as well as also for depreciation. At the time of assessment, all relevant material facts were disclosed by the assessee and depreciation was also claimed on its business assets. Both Assessing Officer and CIT(A) found that assessee was dis-entitled to claim double deduction of depreciation as well as deduction under Section 24 of the Act. The Tribunal rightly held that there was no concealment of income nor was there any filing of inaccurate particulars of income. Thus, on finding the conduct of the assessee bona fide and this being a matter of bona-fide difference of opinion between the assessee and the department regarding allowability of the claim, it was justified in deleting the penalty imposed by both the authorities.”

20.5. In the light of the above stated discussion and after considering the facts in totality, we hold that there cannot be any penalty on account of disallowance of the deduction claimed by the assessee under section 24(a) of the Act.

21. Now coming to the 2nd part of the dispute whether the assessee has incurred interest expenses in the earning of impugned rental income, in this regard we note that the penalty proceedings are distinct from the assessment proceedings. Therefore the addition made during the assessment proceedings does not authorize the AO ipso facto to levy the penalty under section 271(1)(c) of the Act. As such the AO is under the obligation to carry out the necessary verification before reaching to the conclusion that the assessee has furnished any inaccurate particular of income or concealed the particulars of income.

22. In the instant case, the penalty was initiated on account of the disallowance of the interest expenses against the impugned rental income. However, the assessee claimed that the interest was paid on the money borrowed which was invested in the impugned property from where he was getting the rental income. The assessee has also furnished the details of the parties from whomhe has borrowed fund which was utilized for the purpose of the investments. However the AO without verifying the genuineness of the details furnished by the assessee has levied the penalty merely on the ground that such interest expenses was disallowed during the quantum proceedings. As such the penalty proceedings being distinct and separate from the assessment proceedings, the AO is under the obligation to carry out the fresh verification as held by the Hon’ble Gujarat High Court in the case of National Textiles Vs. CIT reported 249 ITR 125. The relevant extract of the judgment is extracted below:

“In the instant case, the cash credits were not satisfactorily explained by evidence and documents. The parties who had advanced the alleged temporary loans were neither disclosed with their particulars nor any supporting documents were on record. Only two entries were explained. The accountant who had arranged the loan was not produced stating that he had left the service and relations with him were strained. On this state of accounts and evidence in the quantum proceedings, the department was justified in treating the cash credits as income of the assessee but merely on that basis by recourse to Explanation 1, penalty under section 271(1)(c) could not have been imposed without the department making any other effort to come to a conclusion that the cash credits could in no circumstances had been amounts received as temporary loans from various parties. The assessee in the quantum proceedings failed to produce the accountant but the department also in penalty proceedings made no effort to summon him. Applyingthe test (ii) discussed above, therefore, it was a case where there was no circumstance to lead to a reasonable and positive inference that the assessee’s case, that the cash credits were arranged as temporary loans, was false. The facts and circumstances were equally consistent with the hypothesis that it could have been sundry loans in small amounts obtained from different parties. Therefore, even taking recourse to Explanation 1, the circumstance or state of evidence on which the cash credits were treated as income, could not by themselves justify imposition of penalty without anything more on record produced by the assessee or the department. It was, accordingly, held that the Tribunal was not justified in law in confirming the penalty levied under section 271(1)(c).”

22.1. In view of the above, we hold that the AO cannot just levy the penalty merely on the ground that the additions were made during the quantum proceedings. As such the AO has to carry out necessary verification by issuing the notice to the parties before levying the penalty. In view of the above, we are of the opinion that no penalty can be levied under section 271(1)(c) of the Act for the reasons as stated above. Hence the ground of appeal of the assessee is allowed.

Coming to ITA No. 2493/Ahd/2012 for AY 2009-10

23. The assessee has raises following ground of appeal.

1.1. The order passed u/s.250 on 21.8.2012 for AY 2009-10 by CIT(A)-XVI, Abad, upholding the partly the disallowances made by AO is wholly illegal unlawful and without jurisdiction.

2.1. The ld.CIT(A) has grievously erred in law and on facts in upholding the disallowance of expenses to the extent of Rs.10.0 lacs.

2.2. That in the facts and circumstances of the case, the ld.CIT(A) ought not to have upheld the disallowance of expenses to the extent of Rs.10 lacs nor held that the appellant had failed to demonstrate that the said expenses were incurred for business purposes.

3.1. Theld.CIT(A) had grievously erred in law and on facts in upholding the disallowance of interest paid of Rs.7,99,137.

24. The interlinked issue raised by the assessee vide ground nos. 1 and 2 is that the learned CIT (A) erred in law and in confirming the part disallowances of business expenses of Rs. 10 lakhs.

25. At the outset, we note that the similar identical raised by the assessee in ITA No. 76/AHD/2011 which has been decided by us in favour of the assessee vide paragraph No. 10 and 10.1 of this order. For the detail discussion please refer the relevant paragraph as discussed above. Therefore respectfully following the same and to maintain parity with the findings, we allow the ground raised by the assessee in his favour.

26. Second issue raised by the assessee is that the learned CIT (A) erred in confirming the disallowances of interest expenses of Rs. 7,99,137/-.

27. At the outset, we note that the identical issue raised by the assessee in ITA No. 76/AHD/2011 which has been decided by us in favour of the Revenue vide paragraph No. 15 of this order. For the detail discussion please refer the relevant paragraph as discussed above. Therefore respectfully following the same and to maintain parity with the findings, we dismiss the ground raised by the assessee in his favour.

28. In the result, appeal of the assessee is partly allowed.

29. In the combined result, all the three appeals of the Assessee are partly allowed.

This Order pronounced in Open Court on 02/03/2020