The Supreme Court on Penalty

Earlier posts had discussed the decision of the Supreme Court in Dharmendra Textiles, and its subsequent interpretation by the High Courts and Tax Tribunals. One of the most important reading downs was seen in the decision of Mumbai Bench of the ITAT, in ACIT v. VIP Industries. The Tribunal there considered a case where penalty was levied because of an increase in taxable income resulting from a deduction claimed by the assessee being disallowed by the Assessing Officer. The Tribunal held that in such a case, since there is no ‘undisclosed’ income, the decision in Dharmendra Textiles could not be interpreted to require the imposition of a penalty. Now, the Supreme Court, in Reliance Petroproducts has affirmed this interpretation.

Section 271(1)(c) provides for the imposition of penalty in cases where the assessee ‘has concealed the particulars of his income or furnished inaccurate particulars of such income’. On the facts of the case before the Supreme Court, there was no question of concealment, and the same was not contended by the Revenue either. However, the Revenue argued that the incorrect claim for a deduction made in the return amounted to furnishing ‘inaccurate particulars of income’. The Court unceremoniously rejected this contention, holding, “By any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing inaccurate particulars”.

The Court then examined the decisions in Dilip Shroff and Dharmendra Textiles, observing that the latter had only overruled Dilip Shroff on the limited question of whether mens rea was essential for penalty to be levied under section 271(1)(c). In the opinion of the Court, the meaning of ‘inaccurate particulars’ provided in Dilip Shroff continued to be good law. Before the Court in Reliance Petroproducts, there was no question of mens rea, with the controversy being limited to whether an incorrect claim amounts to the furnishing inaccurate particulars. On this issue, the Court followed Dilip Shroff and held that unless there was error, falsehood, or inaccuracy in the returns filed, “A mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such claim made in the Return cannot amount to the inaccurate particulars”.