If a taxpayer does not disclose part or whole of his income, or provides inaccurate details of his income in his returns, he can be penalised. However a mere change in head of income does not attract any penalty.
Recently, Bombay High Court, in the case of CIT vs. Shri. Hiralal Doshi, held that where complete disclosure of income had been made in the return of income and head of the income undergoes a change, the Assessing Officer would not by itself justify the imposition of penalty under Section 271(1) (c).
This decision serves an excellent precedent for cases of penalty levied on taxpayers even when they have provided complete disclosure of facts in their return of income and backed it with proper documents and basis for opinion. In the case, the noteworthy fact is that the taxpayer was absolved from paying penalty even though the said income was recharacterised from tax-free to taxable.
Penalty provisions are widely contested as tax officers have been found to levy penalty on additions made to income on the basis of change of opinion or re-classification of heads of income.
Case Summary: CIT vs. Shri. Hiralal Doshi (Bombay High Court)
The taxpayer had declared his total income at Rs 9.69 lakh. Further, the assessee had also disclosed an amount of Rs.1.62 Crores in the original return by crediting the same to its capital account being Long Term Capital Gain on the sale of share. Thus, the assessee was under belief that the income from long term capital gain was exempt from tax under Section 10(38).
During assessment, the taxpayer filed a revised return of income wherein the amount of Rs 1.62 crore was offered as taxable income. While concluding the assessment proceedings, the tax officer also initiated penalty proceedings for claiming incorrect exemption. He imposed a penalty of Rs 55.79 lakh on the taxpayer for having concealed particulars of income and for furnishing inaccurate particulars thereof.
Held by CIT (A)
CIT (A) deleted the penalty on the ground that the amount of Rs.1.62 Crores had been declared as capital gains in the original return of income. Besides inter-alia noting in the order that It is also pertinent to note that all details relating the transactions have been duly disclosed in the return of income.
Held by ITAT
ITAT upheld the findings of the CIT (A) holding the same to be reasonable. In particular, the impugned order records the fact that the assessee had disclosed its income of Rs.1.62 Crores but had claimed the same to be a capital gain which is exempt. The impugned order further holds that as the particulars of income had been disclosed in the return of income, the levy of penalty under Section 271(1) (c) was not justified.
Held by High Court
The high court, while dismissing the tax officer’s argument, held that the taxpayer was under the bonafide belief that income from long-term capital gain is exempt from tax and had accordingly disclosed the said amount as tax-free income in his return of income. The court observed that all the lower appellate authorities had consistently concluded that the taxpayer had not concealed his income or filed inaccurate particulars attributable to capital gain in his return of income. It, therefore, found no reason to interfere with their decisions. The high court hence dismissed the case.
