ITAT Mumbai rules out Section 271(1)(c) penalty where reassessment accepts returned loss without variation

1. Background and procedural history

The Income Tax Appellate Tribunal, Mumbai Bench, in the case of Dwarka Cement Works Limited Vs ITO (ITAT Mumbai), set aside a penalty of Rs. 37,29,845/- imposed under Section 271(1)(c) of the Income Tax Act 1961 for Assessment Year 2015–16.

The assessee, Dwarka Cement Works Limited (later converted into Dwarka Cement Works LLP with effect from 15.09.2022), had:

  • Filed its original return under Section 139(1) on 29.09.2015,
  • Declared a loss of Rs. 1,15,25,958/-, and
  • Faced a scrutiny assessment under Section 143(3) completed on 28.12.2017, wherein the Assessing Officer accepted the loss as returned.

Subsequently, reassessment proceedings were initiated by issuing a notice under Section 148 on 29.07.2022.

In response, on 26.08.2022, the assessee filed a fresh return:

  • Voluntarily disallowing bad debts of Rs. 1.18 crores,
  • Comprising a loan of Rs. 1.13 crores to M/s Karnavati Securities Pvt. Ltd. and an advance of Rs. 5 lakhs towards a flat purchase, and
  • Consequently reducing the loss to Rs. (-) 30,057/-.

The reassessment was finalised on 02.05.2023 under Sections 143(3), 147 and 144B, with the Assessing Officer accepting the revised loss figure without making any additional disallowance or addition.

Despite the absence of any variation in the reassessment order vis‑à‑vis the return filed in response to Section 148, the Assessing Officer treated the reduction of loss (from Rs. 1,15,25,958/- to Rs. (-) 30,057/-) as concealment of income amounting to Rs. 1,14,95,901/-, and levied penalty of Rs. 37,29,845/- under Section 271(1)(c).

The CIT(A), National Faceless Appeal Centre, Delhi upheld this penalty. The assessee carried the matter in appeal to the ITAT.

2. Core facts relevant to penalty

2.1 Nature of business and bad-debt claim

As gathered from the assessment and penalty orders, the assessee was engaged in:

  • Commission agency activities,
  • Earning interest on fixed deposits, and
  • Earning capital gains from sale of investments.

For F.Y. 2014–15 (relevant to A.Y. 2015–16), the assessee had claimed bad debts of Rs. 1.18 crores, which comprised:

  • A loan of Rs. 1.13 crores to M/s Karnavati Securities Pvt. Ltd., and
  • An advance of Rs. 5 lakhs towards purchase of a flat.

The Assessing Officer took the view that:

  • The assessee was not in the business of money-lending,
  • These items did not represent normal trade debts, and
  • The amounts were capital in nature rather than allowable business expenditure.

During reassessment, once notice under Section 148 was issued, the assessee, in its return filed in response, disallowed the entire bad-debt claim of Rs. 1.18 crores on its own and reported a much lower loss.

2.2 Reassessment outcome and initiation of penalty

The reassessment order dated 02.05.2023 under Section 143(3) read with Sections 147 and 144B:

  • Accepted the revised loss of Rs. (-) 30,057/- exactly as returned in response to Section 148,
  • Did not make any independent addition or further disallowance.

Nonetheless, the Assessing Officer:

  • Considered the difference between the original loss and the revised loss (Rs. 1,14,95,901/-) as concealed income, and
  • Levied penalty at 100% of the tax allegedly sought to be evaded under Section 271(1)(c), vide order dated 04.01.2024, aggregating to Rs. 37,29,845/-.

3. Assessee’s submissions before CIT(A)

Before the CIT(A), the assessee advanced multiple lines of defence:

3.1 Full disclosure and voluntary withdrawal

  • The bad-debt claim of Rs. 1.18 crores, including the loan to M/s Karnavati Securities Pvt. Ltd. and the advance towards the flat, had been:
    • Properly reflected in the audited financial statements, and
    • Disclosed in the original return of income.
  • The earlier scrutiny assessment under Section 143(3) dated 28.12.2017 was completed after considering this claim, and the loss was permitted to be carried forward.
  • In response to the Section 148 notice, the assessee on its own:
    • Disallowed the bad debts,
    • Reduced the loss, and
    • Did so even before receiving the recorded reasons for reopening.
  • The assessee maintained that no business loss for A.Y. 2015–16 was actually carried forward or set off in later assessment years.

3.2 No concealment, no inaccurate particulars

The assessee argued that:

  • There was no concealment of particulars of income,
  • There was no furnishing of inaccurate particulars,
  • The entire bad-debt claim was transparently disclosed, and
  • Withdrawal of the claim in the reassessment return was voluntary.

3.3 Defect in penalty notice

The assessee further contended:

  • The penalty notice under Section 274 read with Section 271(1)(c) did not specify:
    • Whether the charge was “concealment of particulars of income” or
    • “Furnishing inaccurate particulars of income”.
  • The failure to clearly identify the relevant limb rendered the notice jurisdictionally defective.

3.4 Judicial precedents relied upon

The assessee supported its arguments with, inter alia, the following decisions: