Facts of the Case

The assessee filed its return for Assessment Year 2008-09 and claimed deduction towards liquidated damages amounting to ₹17,24,24,025.

The deduction arose from a contractual arrangement entered into with Golden World Enterprises Limited, Hong Kong, for supply of iron ore fines. Under the contract, the agreed quantity for supply was specified as 2,85,000 MT with a permissible variation.

During scrutiny assessment proceedings, the Assessing Officer found that the assessee computed liquidated damages by considering the agreed quantity as 3,00,000 MT rather than the contractual quantity of 2,85,000 MT, resulting in an excess claim.

Consequently, the Assessing Officer disallowed ₹1,30,53,263 and initiated penalty proceedings under Section 271(1)(c) for furnishing inaccurate particulars of income.

The assessee contended that the excess claim resulted from an oversight and computational error.

The Commissioner (Appeals) rejected the explanation and upheld the penalty. Subsequently, the Income Tax Appellate Tribunal deleted the penalty by treating the error as inadvertent.

The Revenue thereafter preferred an appeal before the Delhi High Court.

Issues Involved

  1. Whether the assessee furnished inaccurate particulars of income by claiming excess liquidated damages contrary to contractual terms.
  2. Whether the explanation of oversight or computational error constituted a bona fide explanation sufficient to avoid penalty under Section 271(1)(c) of the Income Tax Act, 1961.
  3. Whether the Tribunal erred in deleting the penalty imposed by the Assessing Officer.

Petitioner's Arguments (Revenue)

The Revenue argued that:

  • The contractual agreement clearly specified supply quantity at 2,85,000 MT and not 3,00,000 MT.
  • The assessee claimed deduction based on a quantity unsupported by contractual documents.
  • The explanation regarding moisture content and computational oversight was unsupported by evidence.
  • The assessee knowingly furnished inaccurate particulars while filing its return.
  • Such conduct squarely attracted provisions of Section 271(1)(c).

Respondent's Arguments (Assessee)

The assessee contended that:

  • The excess deduction arose due to an inadvertent computational mistake.
  • There was no deliberate concealment of income.
  • The mistake occurred by oversight while calculating liquidated damages.
  • Therefore, the claim was bona fide and should not attract penal consequences

Court Findings / Court Order

The Delhi High Court held that the Tribunal committed an error in accepting the assessee's explanation merely on the basis that a "silly mistake" could have occurred.

The Court observed that:

  • No material existed on record supporting the quantity of 3,00,000 MT.
  • The explanation concerning moisture content was unsupported by contractual terms.
  • The explanation provided by the assessee was not bona fide.
  • The incorrect claim amounted to furnishing inaccurate particulars of income.

Accordingly, the Court held that the assessee could not escape the applicability of Section 271(1)(c).

The order of the Tribunal deleting the penalty was set aside.

The substantial question of law was answered in favour of the Revenue and against the assessee.

The appeal was allowed.

Important Clarification

The judgment clarifies that merely describing an incorrect claim as an inadvertent error or oversight does not automatically protect an assessee from penalty under Section 271(1)(c). The assessee must establish that the explanation is genuine and supported by evidence.

Where a claim is contrary to documentary records and contractual terms, such explanation may not be treated as bona fide.

The decision reiterates that unsupported claims made in returns can amount to furnishing inaccurate particulars of income and attract penal provisions.

Sections Involved

  • Section 271(1)(c) of Income Tax Act, 1961
  • Section relating to assessment proceedings under Income Tax Act

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2014:DHC:3043-DB/SRB02072014ITA832014.pdf

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