ITAT highlighted that the imposition of penalties under Section 271(1)(c) should not be automatic, but rather based on a careful consideration of the circumstances.
ITAT Delhi Ruling: In a significant ruling, the Delhi Income Tax Appellate Tribunal (ITAT) emphasized that the mere disallowance of expenditure or enhancement of returned income does not inherently warrant the imposition of a penalty under section 271(1)(c) of the Income Tax Act. This crucial decision came as the ITAT deleted the penalty in a recent case of Dion Global Solutions Limited vs ACIT (Case Number: I.T.A. No.7789/DEL/2018).
The Bench, comprising Kul Bharat (Judicial Member) and Pradip Kumar Kedia (Accountant Member), underscored that the absence of specific allegations regarding the nature of default and the lack of satisfaction as contemplated under Section 271(1B) preclude the imposition of penalties. The ITAT observed that without firm satisfaction regarding the alleged default, the Assessing Officer (AO) cannot invoke Section 271(1)(c) of the Act.
Regarding the case’s particulars, the assessee contested the penalty imposed on the disallowance of expenses totalling Rs. 32,95,228/- and additions on account of unearned income amounting to Rs. 102,33,994/-. The AO imposed a penalty of Rs. 45,98,566/- on these additions.
Despite the additions being confirmed in the quantum proceedings, the ITAT stressed that such disallowances do not automatically render the issue non-arguable. Moreover, the explanation provided by the assessee, regarding the treatment of advances received as income accrued, was deemed plausible and broadly tax-neutral.
The Bench noted that the AO’s assessment order merely stated the initiation of penalty proceedings under section 271(1)(c), without providing substantial reasoning or satisfaction. This lack of detailed analysis and satisfaction undermined the basis for imposing penalties.
Furthermore, the ITAT highlighted that the imposition of penalties under Section 271(1)(c) should not be automatic, but rather based on a careful consideration of the circumstances. The assessee’s proper disclosure of relevant facts and plausible explanations warranted discretion in favour of the assessee.
In summary, the ITAT’s decision underscores the need for a nuanced approach in imposing penalties under Section 271(1)(c), emphasizing that penalties should not be imposed merely because it is legally permissible to do so. The ruling provides clarity and relief to taxpayers facing penalty assessments, promoting fairness and equity in tax administration.
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