Penalty u/s 271(1)(c) Deleted When Incorrect Claim Voluntarily Withdrawn as Bonafide Mistake During Assessment: ITAT Mumbai - 2025-08-29

ITAT Deletes Rs 2.28 Cr Penalty, Rules Voluntary Withdrawal of Incorrect Claim is a Bonafide Mistake

Mumbai: The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, has delivered a significant ruling by deleting a penalty of Rs. 2.28 crore levied on Ms. Ila Jitendra Mehta. The Tribunal held that an incorrect claim made in a tax return, if voluntarily withdrawn during assessment proceedings due to a bonafide mistake, does not warrant a penalty under Section 271(1)(c) of the Income Tax Act, 1961.

The bench, comprising Judicial Member Shri Narender Kumar Choudhry and Accountant Member Smt. Renu Jauhri, also quashed the penalty on legal grounds, noting a fatal discrepancy between the charge for which penalty proceedings were initiated and the charge on which the penalty was ultimately imposed.

Case Background

The case pertains to the Assessment Year 2014-15. The assessee, Ms. Ila Jitendra Mehta, had filed a belated income tax return declaring a total income of Rs. 17.78 lakhs. In her return, she claimed a substantial deduction of Rs. 6.72 crore under Section 54F on account of long-term capital gains.

When her case was selected for scrutiny, the Assessing Officer (AO) questioned the claim. Shortly after the scrutiny notice was issued, the assessee submitted a letter on August 16, 2016, stating that the deduction had been "incorrectly" and "inadvertently" claimed. She filed a revised computation of income to rectify the error, explaining that she could not file a revised return as the original one was belated.

The AO, however, disallowed the deduction and initiated penalty proceedings for "concealment of income," ultimately imposing a penalty of Rs. 2.28 crore for "furnishing of inaccurate particulars of income." The Commissioner of Income Tax (Appeals) [CIT(A)] later upheld this decision.

Arguments Presented

Assessee's Arguments: -

The assessee contended that the incorrect claim was a genuine, inadvertent mistake made by her accountant who filed the return using her digital signature. -

She argued that she had acted in a bona fide manner by voluntarily rectifying the mistake at the beginning of the assessment proceedings, before the AO could point it out. -

Citing the Supreme Court's landmark judgment in CIT vs. Reliance Petroproducts Ltd. , her counsel argued that merely making an incorrect claim in law does not automatically amount to furnishing inaccurate particulars.

Revenue's Arguments: -

The Revenue maintained that the assessee was a "habitual offender," pointing to a similar incorrect claim made in the previous assessment year (2013-14). -

It was argued that the withdrawal of the claim was not voluntary but a result of "plethora of notices and follow up scrutiny action." -

The department contended that since only a small fraction of returns are selected for scrutiny, such claims, if not detected, would lead to significant revenue loss, indicating a deliberate attempt to evade tax.

Tribunal's Analysis and Key Precedents

The ITAT conducted a thorough analysis of the facts and legal precedents to arrive at its decision. The Tribunal distinguished the facts of the case from those relied upon by the Revenue.

1. Bonafide Mistake vs. Deliberate Act: The Tribunal noted that the assessee had rectified her mistake by filing a revised computation immediately after receiving the scrutiny notice. This demonstrated a bona fide intention. The bench cited the Bombay High Court's decision in CIT vs. Somani Evergreen Knits Ltd. , where a penalty was deleted because the assessee had realized and pointed out its own mistake during assessment proceedings, even though a revised return could not be filed.

2. Incorrect Claim Not Tantamount to Inaccuracy: Reinforcing the principle laid down by the Supreme Court in Reliance Petroproducts , the Tribunal observed: > "By any stretch of imagination, making an incorrect claim in law, cannot tantamount to furnishing of inaccurate particular of income."

3. Habitual Offender Argument Dismissed: The Tribunal dismissed the Revenue's argument that the assessee was a habitual offender, noting that the penalty for the previous year (AY 2013-14) had not attained finality and was still pending in appeal. It relied on the Supreme Court's ruling in Pullanguode Rubber Produce Company Ltd. vs. State of Kerala , stating that an admission is not conclusive and the assessee can show it was incorrect.

Fatal Legal Flaw in Penalty Proceedings

The Tribunal also identified a critical procedural error that rendered the penalty order invalid. - The AO initiated penalty proceedings in the assessment order for "concealment of income." -

However, the show-cause notice issued to the assessee was for "furnishing of inaccurate particulars of income." -

Ultimately, the penalty order was passed for "furnishing of inaccurate particulars."

The ITAT highlighted that "concealment of income" and "furnishing of inaccurate particulars" are two distinct and separate limbs under Section 271(1)(c). Citing the Jurisdictional High Court's judgment in CIT vs. Samson Perinchery , the Tribunal held:

"The penalty levied for 'furnishing of inaccurate particular of income' as determined by the AO in the penalty order, instead of, on the limb of 'concealment of income' on which the penalty proceedings were initiated, is not sustainable and liable to be deleted."

Final Decision and Implications

Based on both merits and legal grounds, the ITAT allowed the assessee's appeal and deleted the entire penalty of Rs. 2.28 crore. The ruling reinforces the legal principle that a penalty for furnishing inaccurate particulars requires a deliberate act or mens rea (guilty mind) and cannot be imposed for a bona fide, inadvertent error that is promptly corrected by the taxpayer. Furthermore, it serves as a crucial reminder for tax authorities to maintain consistency and clarity in the charges while initiating and levying penalties.