Facts of the Case

The present appeal pertains to Assessment Year 2014–15, wherein the Revenue challenged the order passed by the Income Tax Appellate Tribunal deleting penalty imposed under Section 271(1)(c) of the Income Tax Act, 1961.

The Assessing Officer had levied a penalty of ₹14.31 crores on account of disallowance made under Section 43B of the Act.

The assessee company had suffered heavy losses due to floods in Himachal Pradesh and underwent Corporate Debt Restructuring (CDR). Consequently:

  • Working capital loans were converted into Working Capital Term Loan (WCTL)
  • Accrued interest was converted into Funded Interest Term Loan (FITL)

The assessee initially filed its Return of Income (ROI), which was later revised based on a revised tax audit report.

  • Original disallowance under Section 43B: ₹6.08 crores
  • Revised disallowance: ₹48.18 crores

The revision was carried out suo motu by the assessee before any specific query was raised by the Assessing Officer.

Issues Involved

  1. Whether penalty under Section 271(1)(c) can be imposed when disallowance under Section 43B is enhanced voluntarily by the assessee.
  2. Whether such voluntary disclosure can still be treated as concealment or furnishing inaccurate particulars.
  3. Whether the Tribunal was justified in deleting the penalty.

Petitioner’s (Revenue’s) Arguments

  • The Revenue contended that the disallowance was not truly voluntary, but was triggered due to notices issued under Sections 143(2) and 142(1).
  • It argued that the Tribunal erred in deleting the penalty despite clear concealment.
  • Reliance was placed on judicial precedents including:
    • Gangotri Textiles Ltd. v. DCIT
    • CIT v. Gujarat Cypromet Ltd.
    • MAK Data (P) Ltd. v. CIT
  • The Revenue asserted that mere voluntary disclosure does not absolve penalty liability. 

Respondent’s (Assessee’s) Arguments

  • The assessee contended that the enhancement of disallowance was done suo motu through a revised tax audit report.
  • It emphasized that:
    • The revision occurred before any specific query regarding Section 43B was raised by the AO.
    • The action was bona fide and voluntary.
  • The assessee further relied on earlier judicial precedents which supported its position at the relevant time, including:
    • CIT v. Gujarat Cypromet Ltd. (Gujarat HC)
    • CIT v. Bhagwati Auto Gas Ltd.
  • It was argued that the conduct did not amount to concealment.

Court Findings / Order

The Delhi High Court upheld the Tribunal’s order and held:

  • The enhancement of disallowance under Section 43B was voluntary.
  • The revised return was filed prior to any specific query by the Assessing Officer.
  • At the relevant time, judicial precedents existed in favour of the assessee, indicating bona fide conduct.
  • The judgments relied upon by the Revenue were factually distinguishable.

Accordingly:

No substantial question of law arose
Penalty under Section 271(1)(c) was rightly deleted
Revenue’s appeal was dismissed

Important Clarification

  • Voluntary disclosure before detection by the Assessing Officer can negate penalty under Section 271(1)(c).
  • Bona fide reliance on prevailing judicial precedents is a relevant factor in penalty proceedings.
  • Each case must be examined based on timing and intent behind disclosure.

Sections Involved

  • Section 271(1)(c), Income Tax Act, 1961 – Penalty for concealment of income
  • Section 43B, Income Tax Act, 1961 – Certain deductions on actual payment basis
  • Section 142(1) – Inquiry before assessment
  • Section 143(2) – Scrutiny notice

Link to download the order -  https://delhihighcourt.nic.in/app/showFileJudgment/RAS18072023ITA9132019_193525.pdf

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