SC judgement on s. 271 (1)(c) penalty in Dharmendra Textiles explained

Kanbay Software vs. DCIT (ITAT Pune)

In respect of AY 2002-2003, the assessee claimed by a revised return that the loss suffered in respect of one s. 10A unit was not liable to be set-off against the profits of another s. 10A unit. The AO rejected the claim and the assessee accepted the decision of the AO. On the question whether the assessee was liable for penalty u/s 271 (1) (c) for “furnishing inaccurate particulars of income”, especially in the light of UOI vs. Dharmendra Textile Processors 306 ITR 277 (SC), HELD allowing the appeal:

(1) On first principles, penalty u/s 271(1)(c) is not simply a consequence of an addition being made to the income of the assessee. Penalty u/s 271(1) (c), irrespective of whether it is a civil liability or a criminal liability can only be imposed when the scheme of the Act permits or requires so. It is not an automatic consequence of an addition being made to the income. An addition made during the course of assessment proceedings, by itself, cannot be enough to initiate, leave aside conclude, penalty proceedings u/s 271(1)(c).

(2) The judgement in UOI vs. Dharmendra Textile Processors has to be understood in the correct perspective. It does not make a radical change in the law nor does it affect the basic scheme of s. 271 (1) (c). Even in K P Madhusudanan vs. CIT 251 ITR 99, the assessee’s plea to the effect that ‘revenue was required to prove mens rea of a criminal offence’ before penalty u/s 271(1)(c) can be imposed was rejected. Penalty u/s 271 (1) (c) has been held to be ‘civil liability’ in contradistinction to prosecution u/s 276C. It is wrong to infer that because the liability is a “civil liability”, it ceases to be penal in character. There is no contradiction in a liability being a civil liability and the same liability being a penal liability as well, though a civil liability cannot certainly be a criminal liability as well. As observed in Om Prakash vs. UOI AIR 1984 SC 1194 @ 1209 “A penalty imposed by the sales tax authorities is a civil liability, though penal in character”.