Friday, 26 April 2013

Section 271(1)(c) - A recent derangement?

Section 271(1)(c) -                                                      Sahil Garud
A recent derangement?                                              [B.com, A.C.A]

Is the recent Judgment in matter of Amruta Organics Pvt Ltd. Vs, DCIT, Circle 1 (ITA No. 1121/PN/2011) of the Hon’ble Pune ITAT “A” Bench, a sign of derangement of law governing section 271(1)(c) of the Income Tax Act and the purpose for which it was brought ? This particular case is largely different from the case of PWC Pvt. Ltd. Vs. CIT, Kolkata in which the Hon’ble Supreme Court allowed the appeal of the Assessee and set aside Calcutta High Court’s Decision upholding the penalty levied u/s 271(1)(c) of the Income Tax Act, on the basis of peculiar and unique circumstances existing in the evidences placed on record.
The Hon’ble Pune ITAT “A” Bench has gone a step forward to set and accomplish a new precedent on lower authorities which might prove adverse for the Income tax Department. In this instant case, the assessee was admittedly guilty of incorrect claim of Depreciation which had resulted in increase of his Loss for that year. The Hon’ble Pune ITAT allowed the Appeal of the Assessee in its 2 page order saying that “The wrong claim of depreciation in the present case cannot be said to be made with an intention to evade taxes in as much as even after the disallowance of depreciation, the resultant income of the assessee remains a loss. In fact, the assessee had pointed out before the Assessing Officer that it has been incurring losses since the year 2003 due to the market forces”.
            Firstly, there is a settled position in law on intention of tax evasion in penalty proceedings, after the Judgment of Hon’ble Supreme Court of India in the case of Dharmendra Textiles [(2007) 295 ITR 244 SC] which said that ‘for violation of rules, there is no implied requirement of mens rea or culpable mental state.’ The Hon’ble Supreme Court has again in its landmark Judgment in case of Reliance Petroproducts [322 ITR 158] explained the Dharmendra Textiles Judgment, saying that “decision is an authority only for the proposition that element of mens rea stands excluded from the scope of the provisions of section 271(1) and it is only to this extent the decision in the case of Dilip N shroff stands overruled. It is further held that conditions of that section must exist before levy of penalty. It is for revenue to establish that such conditions exist. It is only the element of mens rea which is not required to be proved by the revenue”. Thus the Justification of the Hon’ble Pune ITAT in instant case is erroneous to the extent it talks about the intention of the Assessee to evade taxes.
The term “amount of tax sought to be evaded” present in the provisions of penalty u/s 271(1)(c) cannot be ignored. The position with regard to incorrect claim of depreciation of Rs.2 lacs (approx) was an admitted position and also there were no peculiar and unique facts present which could prove that it was just a mistake on the part of the Assessee, unlike those in the case of PWC Pvt. Ltd Vs. CIT [Civil Appeal No. 6924 of 2012 SC]. The fact that ‘Assessee had been incurring losses since few years due to market forces and wrong Depreciation claim would only further add to losses’, can’t be conclusive argument to prove the mistake of the Assessee as a bonafide one. Rather it can be said that if market forces favour the Assessee in near future, he would have claimed the excess loss of Rs. 2 lacs (approx) due to depreciation had the Assessing Officer not nipped him into the bud.

The instant Judgment might result in a situation where unscrupulous Assessees might claim incorrect deduction on basis of some supporting documents, and try and take a chance that the case is not selected for Scrutiny / Regular Assessment thereby evading the eyes of Income tax Department. Even if such Assessees are subsequently caught during Regular Assessment, the instant Judgment might pose as a helping hand for them.

This truly is a Landmark Judgment! 

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