The Supreme Court in a recent judgment held that the income tax department cannot levy penalty only due to the reason that the authorities and tax payers have different views regarding the calculation of income. The Apex Court clearly stated that penalty can be levied only if concealment of income is proved.
The Supreme Court held that the department cannot levy penalty upon an assessee if the claim for deduction made by him does not appear to be justified to the tax authorities.
Law relating to penalty for concealment of income:
Under the provisions of section 271(1) (c) of the Income Tax Act if any person has concealed his income or has intentionally furnished incorrect particulars of his income, the tax authorities may impose a penalty up to a sum equal to three times the amount of tax sought to be evaded by him through concealment of income or through furnishing incorrect particulars of his income. But the amount of such penalty shall not be less than the total amount of tax sought to be evaded by the assesee.
The penalty proceedings for concealment of income are initiated by the department after issuing a show cause notice by the Assessing Officer to the assesee before the completion of the assessment.
However to levy a penalty for concealment of income, the order has be passed by the authority who is competent to levy the said penalty. In other words penalty for concealment of income can be levied only by the Assessing Officer or by the authorities such as the Commissioner (Appeal) or by the Commissioner of Income Tax.
Brief facts of the case:
In the instant case, the Income Tax officials had rejected the claim made by Reliance Petro Products for deduction on its interest expenses and imposed a penalty due to furnishing incorrect particulars of income. According to the opinion of the department, making false claims is similar to furnishing inaccurate details of income.
According to the department, the interest expenses did not qualify for deduction as the income tax laws allow deduction only for interest paid towards the capital borrowed for business or profession. The interest payments made by the company did not belong to the category, as such was not deductible. For the said reason, the claim for deduction made by the company was considered to be incorrect.
Reliance Petro products argued that the tax laws do not require levy of penalty unless there is actual concealment of income or one has furnished incorrect details of income. The company also stated that its interpretation regarding the same was already accepted by the appellate commissioner and the Appellate Tribunal.
The ruling passed by the Apex Court:
The Supreme Court ruled in favor of Reliance Petro Productsstating that the department cannot initiate penalty proceedings unless concealment of income on part of the assesee is proved.
The Supreme Court in the ruling given in favor of the company observed “furnishing inaccurate particulars of income” has nowhere been defined in the Income Tax Act. As such, the Apex Court held that Reliance Petro Products has furnished the required details of its income for which they were not liable to pay penalty.