ITAT Deletes Penalty; Disallowance of Section 54 Claim Not Concealment

Suma Narsimha Rao Bhandari, a non-resident Indian, sold her property in March 2015 and sought to save on taxes by reinvesting the proceeds into a new home. By April 2015, she had already funnelled roughly Rs 82 lakhs into the new purchase through official banking channels. However, due to various delays, the actual sale deed for the new house wasn’t signed until late 2020.

The tax department wasn’t patient. The Assessing Officer (AO) denied the Section 54 tax break, arguing the purchase wasn’t “completed” within the strict legal window. The taxpayer didn’t fight the tax demand and paid up. However, the department went a step further, slapping her with a penalty under Section 271(1)(c) for “concealing income” or providing “inaccurate particulars”.

Main Issue: Can the tax department penalise a taxpayer for a claim that was technically disallowed, even if the taxpayer was honest about all the facts?

Tribunal’s Decision: The Tribunal stepped in to scrap the penalty, offering a much-needed reality check to the department. It noted that the taxpayer hadn’t hidden anything; she had clearly disclosed the sale, the reinvestment, and the bank payments in her tax return.

The Judges highlighted that whether a 2015 payment followed by a 2020 deed qualifies for tax relief is a complex, “arguable” legal issue. Relying on the landmark Reliance Petroproducts case from the Supreme Court, the Tribunal reminded the tax office that simply making a claim that is eventually rejected isn’t the same as lying. Since her claim was made in good faith and based on real payments, it wasn’t a case of fraud or concealment. The penalty was deleted, and the taxpayer was cleared of the charge.

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