Penalty u/s 271(1)(c) not sustainable where loss claim is revenue-neutral and voluntarily withdrawn

The Mumbai bench of the Income Tax Appellate Tribunal has once again clarified that penalty under Section 271(1)(c) cannot be sustained where the assessee’s claim ultimately leads to no tax advantage and is voluntarily withdrawn before any benefit is derived. In Synergy Art Foundation Ltd. Vs DCIT, the Tribunal deleted a penalty of ₹8.44 lakh that had been levied on an allegedly wrong claim of capital loss, holding that the circumstances did not justify the imposition of concealment penalty.

This decision is significant for assessees who have made bona fide claims for loss or deductions that are later withdrawn during assessment, particularly in situations where the assessment year itself results in a loss and no actual tax reduction occurs.

Background of the case

Nature of business and return filing

  • The assessee, Synergy Art Foundation Ltd., is a resident company engaged in the business of trading in artworks and paintings.
  • For the assessment year 2012-13, the assessee filed its return of income on 30.09.2012, declaring a loss of ₹34,84,139.
  • The computation of income reflected, inter alia, a capital loss of ₹26,06,892 in relation to an investment identified as Yatra Art Funds.

Assessment proceedings and withdrawal of claim

During the course of scrutiny assessment, the Assessing Officer (A.O.) noticed that the assessee had debited a capital loss of ₹26,06,892 on closure of an investment in Yatra Art Funds and had sought to carry forward this loss.

  1. The A.O. issued a query calling upon the assessee to:

    • Furnish detailed particulars of the loss, and
    • Justify the allowability of the capital loss claim.

  2. In response, through a communication dated 11.03.2015, the assessee withdrew the capital loss claim in entirety.

  3. Based on this withdrawal:

    • The A.O. disallowed the loss and added back the amount of ₹26,06,892 to the assessee’s income.
    • Since the original return was a loss return, the ultimate position remained a loss, albeit a reduced figure.

Initiation and levy of penalty u/s 271(1)(c)

Penalty proceedings triggered on allegation of concealment

Following the addition, the A.O. initiated penalty proceedings under Section 271(1)(c) on two possible grounds:

  • Concealment of particulars of income, and/or
  • Furnishing of inaccurate particulars of income.

Despite the assessee’s explanation that:

  • The loss was claimed in good faith,
  • The claim related only to carry forward and not to reduction of tax in the year under consideration, and
  • No real tax advantage had accrued,

the A.O. proceeded to levy a penalty of ₹8,44,632 u/s Section 271(1)(c).

The allegation in essence was that the assessee had made an untenable claim and only withdrew it after being confronted, which, according to the A.O., amounted to furnishing inaccurate particulars.

First appellate authority’s view

Aggrieved by the penalty order, the assessee approached the National Faceless Appeal Centre (NFAC), challenging the imposition of penalty.