Bombay & Delhi High Courts hold that Ignorance of law amounts to ‘bona fide belief’ and hence no Penalty for Concealment of Income can be levied

CIT vs. Societex – ITA 1190/2011  Delhi HC

No s. 271(1)(c) penalty if wrong claim caused by “bona fide mistake”

 The AO levied s. 271(1)(c) penalty in respect of two issues: (i) claim of depreciation in respect of properties that were assessed under the head “house property” and (ii) claim of deduction in respect of provision for income-tax. The CIT (A) & Tribunal deleted the penalty on the ground that the claim for deduction in respect of income-tax was a “human bonafide clerical mistake” as the assessee was a firm not having expert chartered accountants on its payroll. In appeal before the High Court, the department relied on Zoom Communication 327 ITR 510 and Escorts Finance 328 ITR 44 where it was held that as under no circumstances could an assessee have claimed provision for tax as a deduction, penalty was imposable. HELD by the High Court dismissing the appeal:

 As regards depreciation, the property was let out for the first time in the latter part of the AY. As such, thebenefit of inadvertence or mechanical or repetitive claim being made can be given to the assessee. As regards the provision for taxation, the assessee made a claim for deduction of the provision for the first timein the year under appeal. There was no history of furnishing such accurate particulars by the assessee for the previous years. Accordingly, s. 271(1)(c) penalty is not leviable.

 

CIT vs. Hans Christian Gass –  ITA 2209/2010 Bombay HC

Ignorance of law caused by complicated provisions amounts to “bona fide belief”

 The assessee, a foreign national, was an employee of Sandvik AB, Sweden. He was deputed to India and appointed Managing Director of Sandvik Asia Ltd. In addition to the salary from Sandvik Asia, he received an amount from Sandvik AB, Sweden, being the difference between the tax rates in India and Sweden. In the ROI, the assessee did not offer the amount received from Sandvik AB to tax even though it was taxable in India. On being asked by the AO, the assesseeoffered the same to tax and paid tax thereon for all years including the earlier and subsequent AYs. The AO levied penalty on the ground that the assessee was assisted by tax experts and so ignorance of the law was no excuse. However, the Tribunal deleted the penalty on the ground that (i) there were multiple amendments to the statutory provisions (s. 10(b)(vii)) and the concept of grossing-up embedded therein is of a technical nature and out of the scope of common knowledge of the tax payers, (ii) the possibility of mistake by even tax experts cannot be ruled out; (iii) the assessee relied on the tax experts and signed the ROI, (iv) the conduct of the assessee in paying up the taxes for all the years including those that were beyond reassessment showed his bona fides, (v) the claim of bona fide belief need not be substantiated with documentary evidence but can also be substantiated by circumstantial evidence; (vi) penalty is not an automatic consequence of addition to income; (vii) concealment implies that the person is hiding, covering up or camouflaging an income; penalty is not leviable in case where assessee is able to provide a ‘bona fide’ explanation; penalty is not leviable in cases where assessee made errors ,under bona fide beliefs. On appeal by the department to the High Court, HELD dismissing the appeal:

 In the ROI, the assessee had not offered the above reimbursed amount to tax under the bonafide beliefthat the same were not taxable. However, when a query was raised by the AO during the assessment proceedings, the assessee immediately offered that amount to tax for all the years. The penalty imposed u/s 271(1)(c) by the AO was deleted by the ITAT after recording detailed reasons that it was a case ofbonafide mistake and that there was no intention to evade tax. The discretion exercised by the ITAT in accepting the explanation given by the assessee is reasonable and we see no reason to interfere with the decision of the Tribunal which is based on finding of facts.


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