No Penalty for Disallowed Claim Based on Disclosed Facts and Accounting Policy Change, Rules High Court

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Case Name

Principal Commissioner of Income Tax vs. Taneja Developers and Infrastructure Ltd. (High Court of Delhi)

ITA 11/2019

Date: 24th March 2021

Key Takeaways

• Penalty Not Automatic: If a taxpayer makes a new claim in a return due to a change in accounting policy, and all facts are disclosed, penalty under Section 271(1)© of the Income Tax Act is not automatic—even if the claim is later disallowed.
• Disclosure Matters: The court emphasized that as long as the basic facts are disclosed and there is no concealment or furnishing of inaccurate particulars, penalty proceedings are not mandated.
• Change in Accounting Policy: Changing the method of accounting to align with Accounting Standard-7 (AS-7) and making claims accordingly is not penal if done transparently.
• Legal Precedents Affirmed: The court relied on Supreme Court and High Court precedents, notably Commissioner of Income-tax, Ahmedabad vs. Reliance Petroproducts (P.) Ltd., 322 ITR 158 (SC), to support its decision.

Issue

Can penalty proceedings under Section 271(1)© of the Income Tax Act be initiated against an assessee who makes a new claim in a fresh return due to a change in accounting policy, when all facts are disclosed and there is no concealment or furnishing of inaccurate particulars?

Facts

• Original Return: Taneja Developers filed its original tax return for Assessment Year 2007-08, declaring income and following the then-prevailing accounting policy (percentage of completion method).
• Search and Fresh Return: After a search under Section 132, proceedings under Section 153A were initiated, and the company filed a fresh return, this time claiming certain expenses (interest, brokerage, etc.) on an accrual basis, aligning with AS-7.
• Disallowance: The Assessing Officer disallowed these expenses, as they were not claimed in the original return.
• Appeals: The company appealed, but the disallowance was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The Assessing Officer then levied a penalty under Section 271(1)©.
• Further Appeals: The company appealed the penalty, and the CIT(A) deleted it. The Revenue appealed to the Tribunal, which upheld the deletion. The Revenue then appealed to the High Court.

Arguments

Revenue (Tax Department)

• Argued that the assessee made a “dual claim” for the same expenses in the fresh return.
• Claimed that making a new claim in the fresh return, which was disallowed, justified penalty under Section 271(1)©.

Assessee (Taneja Developers)

• Asserted that all facts and the basis for the claim were fully disclosed.
• The new claim was made due to a change in accounting policy to align with AS-7, not to conceal income or furnish inaccurate particulars.
• The claim was given up in the Tribunal based on legal advice, not because of any wrongdoing.

Key Legal Precedents

• Commissioner of Income-tax, Ahmedabad vs. Reliance Petroproducts (P.) Ltd., 322 ITR 158 (SC):
• Held that merely making a claim that is not sustainable in law does not amount to furnishing inaccurate particulars of income.
• Commissioner of Income-tax vs. Thakur Prasad Sao & Sons (P.) Ltd., 386 ITR 448
• Commissioner of Income-tax vs. Bhoj Raj & Co., 247 ITR 696
• Chandra Pal Bagga vs. Income-tax Appellate Tribunal, [2003] 128 Taxman 632
• CIT vs. Zoom Communication Pvt. Ltd. (2010) 233 CTR (Delhi) 465: Distinguished by the court as not applicable to the present facts, since that case involved a completely unsustainable claim.

Relevant Sections:

• Section 271(1)© of the Income Tax Act, 1961: Deals with penalty for concealment of income or furnishing inaccurate particulars.
• Section 153A: Deals with assessment in case of search or requisition.
• Section 132: Relates to search and seizure.

Judgement

• Decision: The High Court dismissed the Revenue’s appeal, upholding the Tribunal’s decision to delete the penalty.
• Reasoning: The court found that:
• The assessee had disclosed all relevant facts.
• The new claim was made transparently, based on a change in accounting policy to align with AS-7.
• There was no concealment or furnishing of inaccurate particulars.
• The mere fact that a claim is disallowed does not automatically attract penalty.
• Order: No substantial question of law arose; penalty proceedings were not justified in these circumstances.

FAQs

Q1: Does making a new claim in a tax return due to a change in accounting policy attract penalty?

A: No, as long as all facts are disclosed and there is no concealment or furnishing of inaccurate particulars, penalty is not automatic—even if the claim is later disallowed.

Q2: What if the claim is found to be unsustainable in law?

A: The Supreme Court in Reliance Petroproducts (P.) Ltd. held that merely making an unsustainable claim does not amount to furnishing inaccurate particulars.

Q3: What was the main reason for deleting the penalty in this case?

A: The main reason was that the assessee had disclosed all facts, and the claim was made transparently due to a change in accounting policy, not to conceal income.

Q4: What is the significance of Accounting Standard-7 (AS-7) in this case?

A: The assessee changed its accounting method to align with AS-7, which permitted the new claim. The court found this to be a bona fide change, not a device to evade tax.

Q5: What does this judgment mean for other taxpayers?

A: Taxpayers who make claims based on disclosed facts and bona fide changes in accounting policy are protected from penalty, even if their claims are later disallowed.

1. This appeal is directed against the order dated 25.06.2018, concerning

the assessment year 2007-2008, passed by the Income Tax Appellate

Tribunal (in short 'Tribunal').

2. To adjudicate upon this appeal, the following facts are required to be

noticed.

2.1 The assessee had filed its original return on 15.11.2007 whereby

taxable income amounting to Rs.93,72,590/- was declared. This return was

processed under Section 143(1) of the Income Tax Act, 1961 (in short ‘the

Act’).

2.2 The record shows that the assessee’s case was picked up for scrutiny

and a notice under Section 143(2) of the Act was issued.

2.3 On 05.01.2009, search and seizure operations under Section 132 of

the Act were carried out qua the Taneja Puri Group.

2.4 This led to proceedings under Sections 132 and 153A of the Act

against the assessee. Consequently, the assessee filed a fresh return in which

a cumulative expenditure amounting to Rs.13,42,70,655/- comprising

interest paid on borrowings, brokerage and other expenses [hereafter

referred to as the "expenses"] was claimed, albeit, on an accrual basis.

2.5 It appears while processing the return; the assessing officer noticed

that the said expenses had not been claimed in the original return filed by the

assessee under Section 139 of the Act. The assessing officer, thus, while

framing the return under Section 153A/143(3) of the Act disallowed the

expenses claimed by the assessee.

2.6. Being aggrieved, the assessee preferred an appeal with the

Commissioner of Income Tax (Appeals) [in short ‘CIT (A)’]. The CIT (A)

vide order dated 17.02.2012 sustained the addition made by the assessing

officer.

2.7. It is because the CIT (A) had sustained the aforementioned

disallowances, the assessing officer, initiated penalty proceedings and went

on to levy penalty amounting to Rs.4,43,47,750/- under Section 271(1)(c) of

the Act.

2.8. In the meanwhile, the assessee had carried the quantum appeal to the

Tribunal. Before the Tribunal, the assessee gave up its challenge to the

disallowance of its claimed expenses by the assessing officer. Accordingly,

the net result was that the disallowance of the expenses ordered by the

assessing officer and sustained by the CIT(A), stayed put.

2.9 Insofar as the penalty order dated 28.03.2013 passed by the assessing

officer was concerned, the assessee preferred an appeal. The CIT (A), vide

order dated 21.10.2013, set aside the order passed by the assessing officer.

3. This time, the revenue was aggrieved and, hence, carried the matter in

appeal to the Tribunal. The Tribunal did not oblige and rejected the appeal

via the impugned order. In paragraph 40 of the impugned order, the Tribunal

made the following pertinent observations:

“We have carefully considered the rival contentions and the

orders of the lower authority of assessment as well as of penalty.

The[sic: In the] present case the assessee has made a fresh

claim under section 153A of the income tax act of the

proportionate expenditure, which was originally claimed,

partly in the original return and the balance was claimed in

the return under Section 153A of the Income Tax Act.

Admittedly, the balance expenditure which is claimed by the

assessee in return filed under Section 153A of the Income Tax

Act was already shown in the project expenditure for that year at

the close of the year which carried forward in the next year as

opening project work in progress. Therefore, in the subsequent

year the same are also claimed as expenditure. We do not find

any infirmity in the order of the Ld. assessing officer to this

finding. However, with respect to the penalty the claim of the

assessee was rejected at the threshold itself based on the decision

of the Hon'ble Supreme Court in case of Sun engineering works

private limited (supra). The claim of the assessee was also

examined on merits of the case by the assessing officer as well as

by the 1st appellate authority. The Ld. CIT(A) held that the

claim of assessee was based on accounting principles

changing method of accounting. It was not acceptable to the

Ld. assessing officer and therefore it was rejected. Mere

rejection of the claim, which is found untenable, does not lead

to penalty for furnishing of inaccurate particulars. Even

otherwise the complete details of the expenditure, the

accounting policy followed by the assessee, the claim of the

assessee in the original assessment proceedings under section

143 (3) of the act were already before the Ld. assessing

officer. It was merely a claim that whether the expenditure

should be carried on in the project work in progress or

allowable as expenditure in the year in which it is incurred in

case of the developer. The Ld. departmental representative

could not controvert finding of the Ld. CIT – A that the claim

of the assessee is legal and based on the method of

accounting. On reading the various paragraphs of the order

of the Ld. CIT – A wherein he has given reasons for deletion

of the penalty, we do not find any infirmity in his order in

deleting the penalty. In view of this the order of the ld. CIT – A

is confirmed and appeal of the revenue is dismissed.”

[Emphasis is ours]

4. We have heard learned counsel for the parties and perused the record.

What is evident to us [and there are findings of fact returned, in that behalf,

by the authorities below], is as follows:

(i) The assessee brought about a change in the accounting policy vis-a-

vis the aforementioned expenses to align it with Accounting Standard-7 (in

short 'AS-7').

(ii) Before the Tribunal, in the quantum appeal, the assessee gave up its

claim qua the expenses which was made on an accrual basis as the

assessment qua the assessment year 2007-2008 (the assessment year-in-

issue) had been completed and the fresh return filed by the assessee,

pursuant to proceedings taken out under Section 132 read with Section 153A

of the Act, did not give the assessee, the leeway to sustain the said claim,

since no incriminating material was found during the search.

(ii)(a) It is not in dispute that assessment qua the assessment year 2007-2008

stood completed before the search, which, as indicated above, was carried

out on 05.01.2009.

5. Given the foregoing, the issue which the Tribunal was required to

consider, was: whether penalty could be imposed on the assessee only

because it had made a new claim [in line with the change in its accounting

policy] in its fresh return? Admittedly, [and there is no dispute about it] AS-

7 permitted the assessee to make the new claim qua the aforementioned

expenses, on an accrual basis, in the relevant assessment year 2007-2008.

However, the assessee had, in its original return, filed for the said

assessment year, i.e., 2007-2008, claimed deduction of a portion of the said

expenses based on an accounting policy [i.e., a percentage of completion

method] which was in vogue at that point in time.

6. There is also no dispute that these facts were in the knowledge of the

revenue and the aforementioned expenses which were sought to be claimed,

albeit on an accrual basis, constituted a fresh claim which was embedded in

the fresh return filed pursuant to the proceedings carried out under Section

153A of the Act.

7. Therefore, to our minds, since this was not a case where the assessee

had either concealed particulars of its income and/or furnished inaccurate

particulars of its income which are the prerequisite for imposition of penalty,

the conclusion reached by the Tribunal that the penalty imposed by the

assessing officer was correctly cancelled, by the CIT (A), cannot be found

fault with. Where basic facts are disclosed1 or where a new claim is made

because of a change in accounting policy, albeit in a fresh return, and given

up because the law, as declared, did not permit such a claim, in such

circumstances, initiation of penalty proceedings against the assessee, in our

view, is not mandated in law. [See: Commissioner of Income-tax,

Ahmedabad vs. Reliance Petroproducts (P.) Ltd., 322 ITR 158 (SC)2

;

Commissioner of Income-tax vs. Thakur Prasad Sao & Sons (P.) Ltd., 386

ITR 448, and Commissioner of Income-tax vs. Bhoj Raj & Co., 247 ITR

696].

8. We may indicate that Mr. Abhishek Maratha, who appears for the

revenue, had relied upon the affidavit dated 27.01.2020 filed by Mr. Adarsh

Kumar Modi, Principal Commissioner of Income Tax, pursuant to a

direction issued by this Court, vide order dated 11.01.2019, to demonstrate

that the assessee had made a "dual claim" qua the aforementioned expenses

while its return filed under Section 153A of Act.

8.1 In this behalf, Mr. Maratha drew our attention to the three tabular

charts outlined in the said affidavit. These tabular charts pertain to the

expenditure incurred on account of brokerage and commission, interest and

other expenditure.

8.2 We have perused the figures given in the chart concerning the

assessment year in the issue, i.e., the assessment year 2007-2008. We find

that, contrary to the revenue’s assertion, it does not appear that the assessee

had claimed the said expenses twice over in the assessment year in issue.

8.3 Besides this, Mr. Maratha also sought to place reliance upon the

1 See: Chandra Pal Bagga vs. Income-tax Appellate Tribunal, [2003] 128 Taxman 632.

2

"9. ... 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.

10. ... Merely because the assessee had claimed the expenditure, which claim was not

accepted or was not acceptable to the revenue, that by itself would not, in our opinion,

attract the penalty under section 271(1)(c). If we accept the contention of the revenue

then in case of every Return where the claim made is not accepted by Assessing Officer

for any reason, the assessee will invite penalty under section 271(1)(c). That is clearly not

the intendment of the Legislature."

judgment of a Division Bench of this Court in CIT vs. Zoom

Communication Pvt. Ltd. (2010) 233 CTR (Delhi) 465.

8.4 We have perused the said judgement. In our view, the facts obtaining,

in that case, are distinguishable from those existing in the instant case. That

was a case where the assessee, i.e., Zoom Communication Pvt. Ltd. [Zoom]

had filed a return wherein it had, inter alia, debited its profit and loss

account to extent of Rs.1,00,000/- qua income tax paid by it. This figure

was shown in the schedule appended to the profit and loss account under the

heading "Administration and other Expenses". The explanation given by

Zoom was that, due to oversight, the said amount was not added, as it ought

to have while computing its taxable income.

8.5 It is in this backdrop that the Court reversed the view of the Tribunal

whereby penalty had been deleted and answered the question of law framed

in favour of the revenue given the fact it was a completely unsustainable

claim.

9. In the facts of the instant case, as noticed above, the assessee

attempted a change in the method of accounting, concerning the

aforementioned expenses. The method of accounting, as noticed by us, was

in line with the AS-7. The only reason that the assessee in the quantum

appeal preferred before the Tribunal gave up its claim was on account of the

fact that it was a new claim which was sought to be incorporated in the fresh

return filed by it in pursuant to the proceedings carried out under Section

153A of the Act - which, as per the advice received, could not have passed

muster given the state of law, unless incriminating material had been found

qua the assessee in the course of the search. Therefore, we are unable to

agree with Mr. Maratha that the judgment rendered in Zoom

Communication Pvt. Ltd. applies to the facts obtaining in the present case.

10. Thus, for the foregoing reasons, we are of the view that the appeal

does not raise any substantial question of law and is, accordingly, dismissed.